Free Trade Vs. Fair Trade and the Race to the Bottom Theory: All You Need to Know!
The theories of free trade and fair trade are very complex. It is essential to begin at the basics in order to comprehend these economic foundations. Investorwords.com states that free trade is “international business not restrained by government interference or regulation, such as duties.”1 On the other hand, fair trade is defined by the authors of The Ethical Consumer as “products purchased under equitable trading agreements, involving cooperative rather than competitive trading principles, insuring a fair price and fair working conditions for producers and suppliers.”2
Although the definition of free trade may sound ideal, in reality, free trade agreements have regulations. Often times, free trade still involves duties and quotas, although they are usually reduced. Further explanation and examples of such free trade agreements will be discussed later.
Fair trade can be a very controversial topic and is a relatively new idea. However, it is gaining acceptance in the mainstream as a result of increased awareness of its benefits and ethical consumer behavior.
The History of Trade
In order to fully understand the situation today, it is necessary to briefly look back at where trade came from and how it has developed. The history of trade can be traced back to its prehistoric roots before the creation of a monetary system of currency.
Long-range trade routes, what is called international trade today, first appeared in the 3rd millennium BC, when Mesopotamian Sumerians traded with the Harappan civilization of the Indus Valley. This was the first time that goods were put on board for travel.
One of the first milestones in trading came with the establishment of the Dutch East India Company on March 20, 1662. Also known as the VOC, Vereenigde Oostindische Compagnie, it was created by a group of Dutch merchants and independent trading companies that at the time, were growing impatient with the monopoly the Portuguese had established over the spice trade with East Asia at the end of the fifteenth century. It was also a way for them to keep the British imperial merchants in check by setting up six chambers in the port cities of Amsterdam, Delft, Rotterdam, Enkhuizen, Middelburg and Hoorn. The extensive information network that the VOC built up for its business operations is impressive, to say the least, with much of their documentation still intact and archived by the US government3.
A monumental figure in economic history and trade was Adam Smith, who installed himself as the fountainhead of contemporary economic thought after producing his most significant work, The Wealth of Nations, at the end of the 18th century, which is the culmination of his ideas on the free market. His reputation rests on his explanation of how rational self-interest in a free-market economy leads to economic well-being. He explained the importance to society of self-interest in which someone earning money by his own labor benefits himself and unknowingly, also benefits society, because to earn income on his labor in a competitive market, he must produce something others value. Smith emphasized the importance of a specialized and divided work force which are the fundamentals of trade today.4
Another crucial voice in the history of trade was David Ricardo in the beginning of the 19th century. Ricardo also opposed the protectionist Corn Laws, which restricted imports of wheat. In arguing for free trade, Ricardo formulated the idea of comparative costs, today called comparative advantage. Comparative advantage is the main basis for most economists' belief in free trade today. The idea is that a country trades for products that it can get at lower cost from another country is better off than if it had made the products at home. This fundamental idea shaped the way people were viewed trading and the free market was beginning to emerge.5
Today, there is a growing demand for fairer trade, as the race to the bottom theory (discussed later) is pushing labor costs and inputs way down to a point where it is unsustainable. Free trade cannot be supported this fully while maintaining fair working conditions and addressing all environmental concerns.
As defined earlier, the goal of fair trade is to create fair and equal international trade.6 Awareness of fair trade is increasing in both the United States and throughout the world.
Jack Davis, a Democrat who ran for Congress in the 26th District of New York in 2006, supports the fair trade movement. On a website for Right Democrats, he makes the argument that after 30 years of free trade agreements the U.S. economy is not better off. The U.S. trade deficit has risen; many cities and localities are running deficits; and family debt is rising very quickly as well. According to him, “A good economy for the majority of Americans is employment, a living wage, a possibility for advancement, affordable housing, affordable medical care, funded retirement, and a stable currency.” From his point of view, free trade is not creating a “a good economy” for the U.S., and that the economic theory of trade should change in order to help build a good economy that helps all classes of Americans.7 From the international perspective, the arguments for fair trade are very similar.
Fair trade organizations are designed to help impoverished workers and producers attain economic stability and self-sufficiency through building transparent relationships. The market size of fair trade has been growing. Currently there are more than 800,000 small-scale producers who are working in almost 3,000 grassroots organizations around the world. In 2002, members of the European Fair Trade Association had a turnover of around 150 million Euros.6
The benefits of fair trade are numerous. It encourages equality in international trade through encouraging relationships and partnerships within the supply chain, the development standards, and helping companies comply with international agreements such as the UN Universal Declaration of Human Rights. These organizations “take a pro-active approach to socially responsible business practices, focusing on the positive benefits of sustainable business practices for all.”6
It is important for fair trade organizations to stay focused on the goals and purpose of fair trade. If it is mismanaged, fair trade will not help those in poverty and it can discredit the movement. Because it is a newer movement, there is not one international organization to define and approve fair trade labels or products. Some organizations have taken advantage of this fact to sell and market products as fair trade products even though they are not. According to economists in favor of free trade, fair trade causes prices to rise without benefiting the poor in the long term because it disrupts the free-market economy.8
International Labor Standards
One of the main arguments that advocates of fair trade use against free trade is that it ignores labor issues, and thus ends up hurting the workers.The International Labor Organizations, founded in 1919, is a UN specialized agency that is responsible for labor issues and standards. It currently has 179 member states.
The goals of the organization are to protect and strengthen workers’ rights, create employment, protect and create safe working and living conditions, and provide education and technical training for workers around the world.It provides technical assistance in the following fields: vocational training and rehabilitation, employment policy, labor administration, labor law and industrial relations, working conditions, management development, cooperatives, social security, and occupational safety and health.9
In 1998 the ILO adopted the Declaration on Fundamental Principles and Rights at work which covers four areas, freedom of association and the right to collective bargaining, elimination of forced and compulsory labor, abolition of child labor, and elimination of discrimination in the work place. It requires that member states promote and protect the rights listed in the Declaration.The ILO and the Declaration on Fundamental Principles and Rights cover labor standards that address wages, freedom of association and collective bargaining, forced labor, child labor, occupational safety and health, and maternity protection.9
Wages are not guaranteed in many countries and are sometimes given in the form of bonds, manufactured goods or alcohol.The ILO standards require the regular payment of wages, fix the minimum wage levels, and set a process for the settlement of unpaid wages if an employer should go bankrupt.9
The ILO places an emphasis on the importance of the freedom of association and collective bargaining.They believe that these rights are essential to efficiently negotiate work relations and that both the employer and employees have an equal voice in the negotiations.They have found research that shows that countries that allow effective “collective bargaining tend to have less inequality in wages, lower and less persistent unemployment, and fewer and shorter strikes” than countries that do not allow collective bargaining.9
Forced labor, as well as traditional slavery, is found all over the world and approximately 12.3 million people around the world are victims of this.Workers are exploited by private agents as well as the State and military groups.The reasons that cause forced labor are varied and complex, but the goal of the ILO conventions are to prevent it and help alleviate the associated poverty.Some example conventions are Forced Labor Convention, 1930 and Abolition of Forced Labor Convention, 1957.Both condemn forced labor under any condition and are explicitly against forced child labor.9
Under ILO standards and conventions, child labor is a direct violation of human rights.Research has shown that there is a direct link between the continuation of poverty and child labor.Child labor causes physical and psychological damage to children and prevents them from furthering their education.Education is a critical part of eliminating poverty and encouraging upward class growth.ILO conventions establish age limits and define what unacceptable labor is for children.9
The ILO Constitution and numerous conventions address the issue of occupational safety and health and state that workers should be protected from diseases and injuries related to their employment.However, this is not the case in many places around the world.Millions of people are injured or killed each year while performing their job duties.Many of these deaths and injuries could be prevented by implementing stricter safety standards.In 2003 a “global strategy to improve occupational safety and health” was adopted by the ILO and it contains three key points which are: preventive safety and health culture, the promotion and development of relevant instruments, and technical assistance.9
ILO also has standards to ensure that expectant and nursing mothers have their rights protected.It is important that they have protection to prevent harm to themselves or their infants as well as protection to make sure that they will have a job to return to after their pregnancy or maternity leave.These standards protect a woman’s equal access to employment and vital income to her family.9
Environmental standards can also affect how a company does business and its labor standards.An example of a recent agreement addressing the issue of the environment is the Kyoto Protocol which is an amendment to the UN Framework Convention on Climate Change.It was entered into force February 16, 2005 after Russia ratified it in October 2004 and assigns mandatory targets for reductions of greenhouse emissions by countries that have signed and ratified it.
The protocol now covers over 160 countries which are responsible for 55% of all the world’s greenhouse emissions.The Kyoto Protocol has not been ratified by the United States and Australia who disagree with the lax treatment of China and India and say that it will be harmful to their economies.10These labor and environmental standards are one way to protect the rights of workers and to encourage fairer trade.
The Race to the Bottom Theory
Another argument that advocates of fair trade will use against free trade is the race to the bottom theory. As more and more free trade agreements open up the world’s market to the freer movement of not only goods but labor and currency, economic analysts are forced to look more and more towards the coming world economy. This world economy with free movement of resources, especially labor, presents a potential problem that could occur and potentially devastate not only the economy but the environment as well. The race to the bottom theory presents the worries that some economists are seeing as a very real danger.
The American Friends Service Committee’s Glossary of International Trade Terms states the definition of the race to the bottom theory as
“the constant search for cheaper wages, lower taxes and weaker environmental and other regulations, produces a downward spiral in socio-economic conditions in the United States and in countries around the world. For example, jobs moved from Detroit to Mexico in pursuit of lower wages, and now jobs are being moved from Mexico to China.”11
A basic view of this theory is that when there are no regulations on trade and no regulatory standards, companies will move from country to country searching for cheaper resources with less environmental regulations until they devastate the economies of the entire world in their quest for cut costs.
This type of phenomenon could only occur in the absence of strong regulations regarding trade and the actions that companies can legally take to lower their operating costs. Races to the bottom could also occur between the administrative regions within nations, but this is limited by the power of central national governments to act against them. These races to the bottom seem to be occurring less frequently than some critics had previously speculated. This is possibly due to the fact that some federal governments have recourse to enact legislation that works to slow or halt these races before their effects can become too detrimental.12
In its early stages a race to the bottom can appear to be beneficial to the parties involved as one country sees the benefit of lowered costs and another sees the benefit of increased foreign investment. However, the process of competition involved in a race to the bottom serves to undermine the ability of governments to improve living and working conditions through the enforcement of labor standards or the raising of taxation for funding social services. This is because these multi-national corporations have the freedom to move their operations from country to country, seeking less regulation and lower wages. This has an effect on countries’ abilities to pass labor laws, particularly developing countries. The effect is usually lower minimum wages, below standard overtime pay, if it exists at all. All this is because higher wage rates, etc, would create a barrier to low-cost labor and drive these companies to other labor sources, taking the potential investment elsewhere. A writer for the Conjecture Corporation, Brendan McGuigan states that “the race to the bottom… dictates that more and more nations (again, particularly in the developing world) will eliminate their labor laws.”12
The idea that corporations and governments lower their costs by reducing environmental protection, wages, salaries, health care, and education is referred to as a “downward leveling” of labor, social and environmental conditions. This “downward leveling” is something that greatly concerns economists, especially when the potential damage to the environment is considered.
Downward leveling is such a concern to workers, consumers, farmers, and citizens that they are organizing themselves into groups in order to encourage governments to pass environmental, social, and labor policies that will block this negative sloping of economical trends. However, the corporations responsible can avoid these regulations and government controls by simply relocating their facilities around the world.13
Some believed that companies relocating their facilities into other nations with less expensive labor and more relaxed regulations would be beneficial for these countries. There have been studies done in third world nations that are proving the opposite. The Boston Globe found that “rather than raising the standards of living, American firms are more likely to be paying no better than local minimum wages.” This was in a study of U.S. corporate behavior abroad.13
Race to the bottom may also be contributing to environmental destruction worldwide. The leading sources of greenhouse gases, ozone-depleting chemicals, and toxic pollutants are now located all over the world and with decreased environmental regulations their effects are becoming more and more potent.13
Combatting the Race to the Bottom
There are several responses to the negative effects of the races to the bottom. One of which is utilizing international organizations powerful enough to make environmental and labor rules on a global level, such as the World Trade Organization (WTO).
Another method for avoiding races to the bottom is moral purchasing. This process can involve forbidding or applying heavy tax, tariff and trade sanctions to nations that permit the export of offensive goods. This process can redirect the revenues raised from taxes and tariffs to combat abuses.
Another strong combatant of these races to the bottom are standard-based tariffs. Standard-based tariffs are designed to protect country-wide standards. With these tariffs, a product imported from a country with low labor and environmental standards will face a higher tariff upon entry and a product imported from a country with equal or higher domestic environmental and labor standards will face no tariff. This removes the incentive for a producer to move their factory to another country with a lower minimum wage and maintains environmental and labor standards that are better for the overall economy. However, there is another important factor to note when considering these tariffs. Standard-based tariffs encourage free trade between the world’s wealthiest nations while restraining exports from poorer countries to wealthier countries.13
While there is much debate concerning the race to the bottom theory there is little proof that these races to the bottom are affecting the global scale of the economy to the extent that some economists have claimed. While there are companies moving their operations to other countries to lower their costs, it is not yet occurring on such a wide scale as to completely destroy their domestic economy. The race to the bottom theory can only occur in an instance of completely free trade, with little to no regulations or control mechanisms from the government.
The main way to avoid the race to the bottom is the use of fair trade with strong regulations and controls set in place meant to protect the economy and encourage the world market. However, fair trade is still very controversial and the form of free trade employed by some nations already creates the kinds of standards needed to prevent against the race to the bottom.
The best method to evaluate free trade is to look at a few examples of free trade agreements. Assessed here include The Association of Southeast Asian Nations (ASEAN), The North American Free Trade Agreement (NAFTA) and the Southern African Customs Union (SACU).
The ten nations included in ASEAN are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.Established with the signing of the Bangkok Declaration on August 8, 1967, with the last accession of Cambodia in April of 1999, ASEAN has enjoyed many years of increased trade, output, per capita income, and total wealth, as seen by the world’s predecessors in free trade areas.
One major reason for this success can be attributed to the creation of the ASEAN Free Trade Area (AFTA) whose main goals are to increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariff barriers, and to attract foreign direct investments to the region.In January of 1992, ASEAN nations made it a goal through the signing of the Singapore Declaration, that AFTA would eventually be formed through a comprehensive program to be carried out in phases over the next 15 years.14
Over a 5 year period from 2000-2005, ASEAN experienced nearly a 10% percent increase in exports of merchandise; 3 times that of the U.S. over the same time period.15Even before then, current account balances for each member country as a percent of gross domestic product had shown significant increases from 1996-2001.16
Accounting for over 96% of all ASEAN trade, the first six signatories of the primary mechanism for achieving ASEAN’s goals, known as the Common Effective Preferential Tariff (CEPT), have reduced their tariffs on intra-regional trade to no more than five percent for almost all products on the Inclusion List or removed them altogether.
The current average tariff on goods traded under the AFTA plan is about 3.8%.14This reduction in tariffs served as a catalyst for greater efficiency in production and long-term competitiveness.Similar to the creation of other free trade areas, the ASEAN nations can now enter the market as a fairly dominant force and compete with world economic leaders such as the U.S. and E.U.
ASEAN’s efforts have been directed at the simplification and harmonization of customs procedures to reduce the costs of business, specifically through developing the ASEAN Harmonized Tariff Nomenclature and through the accelerated implementation of the WTO Valuation Agreement.The total “freeing” of this trade area is still under construction with recently amended plans to eliminate all import duties by 2007 for the six original members of ASEAN and by 2012 for the new members.17
A direct result of the successful CEPT implementation can be seen through the increase in trade among ASEAN countries, which escalated from $44.2 billion in 1993 to over $95 billion in 2000.This represents an average annual increase of 11.6%.Since 2000, intra-regional exports made up about 23.3% of total ASEAN exports.Before the financial and economic crisis struck in mid-1997, intra-ASEAN exports had been increasing by 29.6%.This is significantly higher than the rate of increase of total ASEAN exports, which grew at 18.8% during the same period.18
ASEAN’s progress as a free trade area is not only beneficial to the area itself, but globally as well.The U.S. is very interested in its development, with U.S. Trade Representative Charlene Barshefsky stating in June 2000:
“With an economy now nearly $1 trillion, ASEAN is a market for American exports larger than all but three countries and nearly equal to China, Hong Kong, Taiwan and Macao together, with more than $1 billion worth of semiconductor chips, 200,000 tons of wheat and 400,000 computers crossing the Pacific to Southeast Asia every single month.It is also the recipient of $42 billion in American investment.”
ASEAN is historically, culturally, and quantitatively the most trade focused region in the world.In dollar terms, trade is actually greater than ASEAN’s GDP of approximately US$700 billion.The U.S. alone exports $40-50 billion in goods and services to the ASEAN nations annually.18
The ASEAN nations serve more than just to support and promote trade within the area and with other major trading countries, but also help open the door to others to trade with China, Japan, and the Republic of Korea; all of which are countries that the U.S., for one, has had difficulty in sustaining constructive relationships with.The ASEAN Plus Three cooperation began in December 1997 with the convening of an informal Summit among the Leaders of ASEAN and their counterparts from East Asia.In 2003, a plan of action was concluded in Tokyo between ASEAN and Japan that included $3 billion in development assistance over three years and an agreement to move towards a comprehensive economic partnership.18
There are many social issues that can be addressed and resolved through the use of free trade agreements.Specifically within AFTA, Vietnam is one region that has been plagued by poverty in the past with 75% of the population living in poverty in 1990.Just 8 years later in 1998, the number was dramatically reduced to 37.5%.19In 2004, the percentage of the population under the poverty line fell even further to 19.5%.32One of the major changes during this time period was the inclusion of Vietnam into the ASEAN Free Trade Area in 1995.Vietnam has maintained developmental objectives for the future to be rapid, sustainable and have equitable growth.With the continued support of AFTA, this seems like a task that is not only possible, but once achieved will help contribute to the world’s market as Vietnam represents a potentially large market with many countries interested in pursuing trade negotiations.
On December 11, 1997, the 30 year anniversary of the ASEAN, a vision for 2020 was drafted in Kuala Lumpur by the member nations to lay out the plans and goals to be attained within the next two decades.They explicitly mentioned that they will “use the ASEAN Foundation as one of the instruments to address issues of unequal economic development, poverty and socioeconomic disparities”.These are all issues the ASEAN Free Trade Area wishes to address and will continue to pursue remedies for, without abandoning the idea of free trade for a fair trade approach.14
The Free Trade Area being established and expanded within the ASEAN countries has been highly beneficial to the region itself as well as other countries involved in trading with them.There has been a continuous increase over time of the current account balance, with exports increasing more and more over imports.The economies of each individual member have been stimulated by the overall effects of the Free Trade Area and as a result the standard of living has been able to increase as well for several members.The ASEAN Free Trade Area has established the Pacific Rim as a valuable asset to the global economy and has opened the door for negotiations with the East Asian nations.14
The United States’ interest in free trade agreements began on September 1, 1985 when the very first United States FTA went into effect with Israel. The next FTA that was signed was with Canada, on January 1, 1989. Five years later, the North American Free Trade Agreement (NAFTA) was signed by the Clinton Administration, encompassing the United States, Canada and Mexico.20
Upon formation in 1994, NAFTA called for an immediate release of tariffs on half of all US goods that are shipped to Canada and Mexico. Gradually, over the next 15 years, tariffs on other goods including motor vehicles, computers, textiles and agriculture will phase out.21
The main objectives of NAFTA are to:
“a) eliminate barriers to trade in, and facilitate the cross-border movement of, goods and
services between the territories of the Parties;
b) promote conditions of fair competition in the free trade area;
c) increase substantially investment opportunities in the territories of the Parties;
d) provide adequate and effective protection and enforcement of intellectual property
rights in each Party's territory;
e) create effective procedures for the implementation and application of this Agreement,
for its joint administration and for the resolution of disputes; and
f) establish a framework for further trilateral, regional and multilateral cooperation to
expand and enhance the benefits of this Agreement.”22
NAFTA does not work on its own. Environmentalists were concerned that the integration of the United States and Mexico, and thus the relocating of companies from the former to the latter, would lower their standards on the environment. Therefore, the North American Agreement for Environmental Cooperation (NAAEC) was formed.The agreement created a basis for better protection, conservation and enhancement of the environment in North America.23
This then created the North American Development Bank (NADBank). The NADBank is a financial institution that works to finance environmental projects certified by the Border Environment Cooperation Commission (BECC). These two work collaboratively with communities and projects in order to ensure a clean and healthy environment along the border of the U.S. and Mexico.24
Besides environmental, other issues such as labor, have been covered by supplements to NAFTA. The North American Agreement on Labor Cooperation (NAALC) was created. The main objects of the NAALC are:
1. “To improve working conditions and living standards in each Party's territory.
2. To promote, to the maximum extent possible, the labor principles set out in the
3. To encourage cooperation to promote innovation and rising levels of productivity and quality.
4. To encourage publication and exchange of information, data development and coordination, and joint studies to enhance mutually beneficial understanding of the laws and institutions governing labor in each Party's territory.
5. To pursue cooperative labor-related activities on the basis of mutual benefit.
6. To promote compliance with, and effective enforcement by each Party of, its labor law.
7. To foster transparency in the administration of labor law.”25
Contrary to opponents of NAFTA, this free trade agreement was able to incorporate environmental and labor standards into the terms by creating these separate entities. The NAALC encourages same pay between men and women, the right to strike, prohibition of forced labor, labor protection for children, protection of migrant workers and the freedom of association and organizing among others.25
Within the past five years, the United States’ initiative and pursuit of FTAs has intensified. The U.S. has since signed bilateral agreements with such countries as Australia, Bahrain, Chile, Jordan, Morocco, Oman and Singapore. Although the US has had much success in negotiating agreements with these countries, it isn’t easy to come to terms with others, such as the Southern African Customs Union (SACU).
SACU is the world’s oldest Customs Union, founded in 1910 as the Customs Union Agreement. It is comprised of five member states; South Africa, Botswana, Lesotho, Swaziland and Namibia. The goal of the SACU, as is for many unions and FTAs is to
“maintain the free interchange of goods between member countries. It provides for a common external tariff and a common excise tariff to this common customs area. All customs and excise collected in the common customs area are paid into South Africa’s national Revenue Fund. The Revenue is shared among members according to a revenue-sharing formula as described in the agreement.”26
This shared revenue creates a vital source of income for the smaller countries in the Union such as Lesotho and Swaziland, which are imbedded in South Africa’s territory.27
Since June 2003, the United States has persistently been attempting to create an FTA with SACU. The latest failed attempt took place on April 18, 2006. SACU continues to reject negotiations with the US due to a number of reasons.
One of the main reasons as to why SACU is hesitant in signing an agreement with the U.S. is that once signed, they will lose all the revenues from tariffs that the U.S. once supplied from their imports into the territory.27 However, the United States Trade Representative (USTR) does not see this reason as a viable one for not agreeing to the FTA. According to the opinion of David Walters on behalf of the USTR, raising revenues in a country by tariffs is a horrible way to increase the economy and well-being of member states. Although SACU will lose revenues from no longer having tariffs on U.S. goods, they will have an alternative source of revenue from their overall gains of trade, as U.S. companies will be more willing and eager to export goods into SACU countries without having to pay a duty.28
South Africa is still going through a healing process after the horrors of apartheid that ended less than 15 years ago. All the text and talks on this agreement have been held in secret, which South Africa has seen as a threat to their new form of democracy. Because secrecy in the negotiations must be kept, democratic discussion is thus impossible. The agreement is to include an “investor-state” clause that allows foreign investors to directly sue any SACU country governments if public-interest laws result in a loss of potential future profits. These cases would be held in a secret, ad-hoc international tribunal, also hindering democracy and openness.27
Other hesitations include threats to public health and biodiversity if the FTA were to be signed. In a land where one out of four is infected with HIV/AIDS (South Africa specifically), and many others are infected with a seemingly endless list of other life-threatening illnesses, there is a great need for affordable medicines. There are already restrictions at the WTO level on producing, importing and exporting these medicines. SACU is afraid that they could be subject to even more restrictions for their vital medicines. On an agricultural perspective, SACU may have to give up the right to refuse and not allow genetically modified organisms (GMO), which the United States have been developing rapidly, to enter into their country. The introduction of GMOs into the countries will release protection of “their own crops that are vital to their farmers’ livelihoods, rural development, and food security.”27
Despite all this, the U.S. continues to fight. The government of the U.S. wants to combat and level the playing field in the areas where U.S. exporters are disadvantaged due to the European Union’s FTA with South Africa. They also believe that concluding an FTA with SACU “can expand market access, further link trade to southern Africa’s economic development strategies, encourage greater foreign investment, and promote regional economic integration and growth.”29
The United States hopes to build off of the success of the African Growth and Opportunity Act (AGOA) that is due to expire in 2015.27 The AGOA allows more than 92% of imports from the sub-Saharan AGOA countries to enter into the U.S. duty free.30 Even though all of the SACU countries are beneficiaries to this treatment, they continue to not agree with complying in a reciprocal free trade agreement. They find the United States’ “one-size-fits-all” FTA model to be inappropriate for their poor condition, stricken with the AIDS pandemic and high levels of poverty.27
The Case for More Free Trade
After analyzing the pros and cons of both free and fair trade, it appears that free trade is the better option. Daniel T. Griswold, on behalf of Cato, a non-profit public policy research foundation, wrote in a 2001 Policy Report, an article titled Seven Moral Arguments for Free Trade.
One of his arguments states that “free trade restrains the power of the state.” Free trade allows people to fulfill their creative and productive potential, by creating what Adam Smith described as “the natural system of liberty”, instead of having a man-centered centralized industrial policy. “There is no compelling moral reason why a small group of politicians should decide, on the sole basis of where things are produced, what goods and services an individual can buy with his earnings” he says. For two centuries, economists have been studying the fact that the gains that protectionism and trade restrictions give to the government and producers is always outweighed by the losses imposed on the consumers and citizens. This can be seen specifically in the case of SACU, and is further confirmed by the USTR as mentioned earlier.31
Another strong argument of his is that “free trade encourages other basic human rights.” As a general rule, when a nation is more economically open, they also tend to be more open politically and have more liberties as well. The wealth that is created due to free trade can be used to help create and maintain civil institutions outside of the government, creates better access to alternative sources of information and thus enhances education, and creates a more independent middle class that can change the government into a more representative one.31
Alongside human rights, free trade also “feeds and clothes the poor”, he argues. An excellent example of this is the one discussed previously of Vietnam joining ASEAN and drastically decreasing the level of citizens under the poverty line. Free trade empowers the poor and allows them the opportunity to create their own wealth to support themselves and their families. The economic power will thus become more widely dispersed, which will lessen the power of the upper class to take advantage of the poor in their own country.31
According to a study done by James Gwartney and Robert Lawson called Economic Freedom of the World, between 1980 and 1998, the nations that were more open to free trade grew almost five times as fast as those who were closed. This can be seen in the contrast between the growth levels of SACU and Vietnam. Just like cities on coastlines and rivers are wealthier compared to those who are inland in more remote places, such are nations that are more open to trade wealthier than those who close themselves off through restrictions and quotas.31
As the world moves more towards a global economy, trade has evolved into a complex system that is increasingly important to all global citizens. The issues of free trade versus social and environmental concerns are constantly being reprioritized. Countries need to put their own personal agendas aside and concern themselves more with the welfare of the overall global economy. Unless advocates of free trade can look more internally, and advocates of fair trade can look more externally to form a compromise for the betterment of society as a whole, nothing can ever really change. The goal should be for a “fairer free trade,” rather than constantly battling between the two extremes.
Resources and Additional Readings!
1. Investor Words. 2006.
2. Harrison, Rob, Terry Newholm and Deirdrew Shaw. The Ethical Consumer. Sage Publications, London: 2005.
3. The Dutch East India Company. 2006.
4. Dr. Adam Smith. Adam Smith Institute. 2006.
5. Biography of David Ricardo. The Concise Encyclopedia of Economics. 2006.
6. Fair Trade Lessons for CSR. The Corporate Social Responsibility Magazine in Europe. September 2003.
7. Jack Davis Makes The Case Against Free Trade. 18 November 2006.
8. Free marketeers attack Fairtrade principle. 16 March 2004.
9. International Labour Organization. 2006.
10.Kyoto Protocol on Climate Change. Encyclopedia Britannica Online. 1998.
11. American Friends Service Committee.
12. McGuigan, Brendan. What is a Race to the Bottom? 2006.
13. The Race to the Bottom. Third World Traveler. 1994.
14. Association of Southeast Asian Nations. 2006.
15. World Trade Organization. 2006.
16. Southeast Asian: A Free Trade Area. 2006.
17. Asean Speeds Up Free Trade Move. BBC News. 29 November 2004.
18. US-ASEAN Business Council. 2006.
19. Vietnam poverty analysis: Prepared for the Australian Agency for International Development by the Centre for International Economics. 9 May 2002
20. The Pros and Cons of Pursuing Free-Trade Agreements. 31 July 2003.
21. NAFTA Agriculture Fact Sheet: Tariff Elimination. 18 November 2005.
22. North American Free Trade Agreement. US Customs and Border Protection. 2006.
23.North American Agreement on Environmental Cooperation. 20 January 2006.
24. North American Development Bank. 2006.
25. Commission for Labor Cooperation. 2006.
26. South African Customs Union. Department of Foreign Affairs: Republic of South Africa. 26 April 2004.
27. South African Customs Union. American Friends Service Committee. 2006.
28. Walters, David. Briefing at USTR. 9 November 2006.
29. United States and Bahrain Sign Free Trade Agreement. United States Trade Representative. 14 September 2004.
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