Montana Model UN High School Conference General Assembly Second Committee Topic 2: Free Trade vs. Fair Trade with Developing Countries 1 1 October 2016 There are two basic approaches to international trade. The first approach, free trade , is the idea that government intervention and protectionist methods such as tariffs and import controls should be limited, allowing prices to be set by supply and demand and, therefore, to be as low as possible. The second approach, fair trade , is the idea that free market prices fail to provide for worker security in countries where labor is in abundance and wages are often inadequate to support workers’ most basic needs. Fair trade advocates argue that prices should be set to take such situations into account. The emphasis in free trade then, is on low prices, while the emphasis in fair trade is on fair prices. Those in favor of free trade argue that states should take several actions to reduce protectionism. First, states should reduce or eliminate tariffs (also known as customs duties), which are taxes on imports. 2 An example of a tariff is the US tariff on imported steel from China, which was set at 265.79% in March of 2016 to protect the US steel industry from the low prices that were accompanying a large “influx of foreign steel.” 3 Second, reducing protectionism calls for limiting subsidies. Subsidies are the financial assistance paid to support domestic businesses to make them artificially competitive against imports. In the European Union (EU) for example, domestic wheat farmers are being paid $200 per ton of wheat; however, outside of the EU, wheat can be purchased at $150 per ton, showing that EU farmers are being subsidized by $50 per ton. 4 Third, reducing protectionism calls for reducing quotas. Quotas are ceilings on how many goods can be imported; they are used by governments to restrict the growth of imports. 5 For example, to protect the American textile industry, in 2005 the US instituted a quota on the import of cotton shirts, trousers and underwear from China. 6 Advocates of free trade argue that reducing protectionist measures increases the supply of goods and therefore lowers their prices, which is good for consumers. But critics of free trade argue that free trade is unfair to producers, especially in developing countries, which typically produce similar items and therefore see falling prices for the goods they produce. Falling prices for developing country exports translates into low wages for workers, lack of environmental regulation, and low tax revenues for governments to invest in development. Thus free trade is often charged with making wealthy countries wealthier, while worsening—or at least failing to improve—the living conditions of the poor in developing nations. Proponents of fair trade see fair trade as the solution to these problems. Their goal is to eliminate poverty in developing countries by empowering producers. Oxfam, an influential non-governmental organization involved in 1 This document was written by Karen Adams, faculty advisor, with contributions from Owen Javins, Kedra Hildebrand, Samantha Stephens, and Dani Howlett. Copyright 2016 by Karen Ruth Adams. 2 Joshua Goldstein and Jon Pevehouse, International Relations , 4 th edition (Pearson and Longman, 2008), p. 176. 3 John W. Miller and William Mauldin, “U.S. Imposes 266% Duty on Some Chinese Steel Imports,” Wall Street Journal, 1 March 2016, Available at http://www.wsj.com/articles/u-s-imposes-266-duty-on-some-chinese-steel- imports-1456878180 . 4 John Lingard, “Agricultural Subsidies and Environmental Change,” Wiley.co.uk ; [article online]; available at http://eu.wiley.com/legacy/wileychi/egec/pdf/GB403-W.PDF . 5 Goldstein and Pevehouse, International Relations, pp. 176-77. 6 Elizabeth Becker, “U.S. Moves to Limit Imports From China,” The New York Times 14 May 2005; [article online]; available at http://www.nytimes.com/2005/05/14/business/worldbusiness/14textiles.html . Montana Model UN High School Conference development, defines fair trade as “paying poor producers a fair price and helping them gain the necessary skills and knowledge to develop their businesses and work their way out of poverty.” 7 The fair trade movement focuses on setting fair prices for exports from developing countries, with the fair price determined by what is a fair wage in the local context and with importers purchasing as directly as possible from fair trade farmers and firms to maximize the income that producers make (instead of money going to middlemen). In addition, proponents of fair trade seek to improve the working conditions of people in the developing world by making sure that people are working under fair labor conditions; that their cultural identity is being respected; that fair trade producers invest in their community with their fair trade premiums; and that environmental sustainability is ensured. 8 Just as there are critics of free trade, there are critics of fair trade. The main criticism revolves around market intervention. Fair trade requires oversight to ensure that requirements are being met, and it is often criticized for setting a floor price on goods that is several times above the market price. 9 The fair trade floor price for coffee in 2004, for example, was $1.26 per pound, while over the last several years the market price for coffee had been between $.40 and $.60 per pound. 10 Furthermore, in 2004 The Wall Street Journal reported that retailers were inflating the price of fair trade foods and failing to pass the profits back to the growers. 11 In one case, the retail price of fair trade bananas was more than 16 times what the growers received. Some suggest that fair trade proponents allow this to occur because if they were to criticize retailers about pricing, retailers would stop selling fair trade products. 12 Another criticism of fair trade is the potential impact it can have on economic and food security in developing nations. Because one of the conditions in producing fair trade items is often that no synthetic fertilizers or pesticides be used, some argue fair trade may decrease yields and hinder food production. Also, rising prices of a particular luxury good such as coffee (due to demand in the fair trade market) may reduce demand for and therefore production of necessary food crops, as well as overproduction of the fair trade item. Additionally, some economists argue that the guarantee of a “price minimum” gives fair trade farmers no incentive to diversify or improve quality. 13 The UN has done a great deal of work to promote free trade and little direct work to promote fair trade. 14 Yet, although there are few instances in which the UN explicitly discusses fair trade, many UN Member States and UN agencies support fair trade practices. In 2006 for instance, the UN Environment Program's World Conservation Monitoring Center (UNEP-WCMC) reported that development aid should be used to improve the business skills of 7 Susan Ariel Aaronson and Jamie M. Zimmerman, “Fair Trade?: How Oxfam Presented a Systemic Approach to Poverty, Development, Human Rights, and Trade,” Human Rights Quarterly 28, no. 4 (2006), p. 1017. 8 The Fair Trade Federation, “Frequently Asked Questions,” available at http://www.fairtradefederation.org/become- a-member/frequently-asked-questions/ . 9 The floor price is the lowest price that that fair trade item can be sold at. Goldstein and Pevehouse, International Relations, p. 187. 10 Valerie Orth, “World Fair Trade Week: Fair Trade Action and Justice. Celebrate it by Shopping!,” Corporate Social Responsibility, 4 May 2004, available at http://www.csrwire.com/press_releases/20468-World-Fair-Trade- Week-Fair-Trade-Action-and-Justice-Celebrate-it-by-Shopping-, 11 Steve Stecklow and Erin White, “What Price Virtue? At Some Retailers, `Fair Trade' Carries A Very High Cost,” Wall Street Journal 243: 111, 8 June 2004. 12 Stecklow and White, “What Price Virtue?,” Wall Street Journal . 13 “Food Politics: Voting with your trolley,” The Economist, 7 December 2006, http://www.economist.com/node/8380592 . 14 United Nations, “Millennium Development Goals and Beyond 2015, Goal 8” available at http://www.un.org/millenniumgoals/global.shtml . 2 Montana Model UN High School Conference rural communities to help them avoid exploitation by entrepreneurs and middlemen. 15 Furthermore, the UN commended the Rwandan coffee industry for rebounding after the 1994 genocide by forming collectives that “effectively cut out the middlemen in the coffee trade, while using sustainable methods to conserve the environment and developing the community in the process.” 16 Reaction to both free trade and fair trade has been mixed. Free trade supporters argue that it helps to provide jobs in the developing world and provides global consumers with lower priced goods. By contrast, fair trade advocates argue that lower priced goods come at the expense of fair wages, employment practices, and living standards. In addition, they point out the double standard being practiced by developed countries themselves who often violate free trade principles by protecting their own markets in certain key goods. History and Current Events In the 19 th century, trade was considered the engine of national economic growth. As countries developed, they dropped many import restrictions to take advantage of the lower prices that come from specialization. Most countries did not pursue this path until they were quite developed and therefore competitive in international markets, however. Britain, France, Germany, and the US all developed behind protectionist walls before becoming free trade advocates. By the first decade of the 20 th century, there was a great deal of trade even among rivals such as Britain and Germany, as well as within the British and French empires. But World War I brought this to a screeching halt. Once it was at war with Germany, Britain refused to honor the international gold standard it had set up to facilitate trade by making it easy for countries to deal with currency conversion.