Why Free Trade Is Better Than Fair Trade - Research Paper Example

In the new era of globalization, the majority of economists have agreed that free trade offers many benefits. Nations will produce their distinct commodities and then exchange with commodities produced by other countries. As countries trade internationally, some countries will gain more than others while others will lose. The losing countries will always complain about unfair trade in the process of international trade. In the context of worldwide economic crisis, some trade players advocate for fair trade promotion while other players advocate for trade liberations. Trade liberations aim at discouraging monopoly by encouraging competition amongst producing countries. Those opposing trade liberations argue that by promoting fair trade, producers are protected from developing nations. However, producers and other corporations have since used fair trade for unintended reasons such as a disguise for their less than fair practices.

Just like economists, politicians debate the relative merits and demerits of both free and fair trade. Despite the fact that both trade concepts refer to a comprehensive strategic approach to business activities, players often favor one approach over the other depending on their ideological concerns that influence the political control of trade activities. Both concepts of free trade and fair trade address the same trade issues and concerns but from completely different views (Bhagwati, 2003). Due to the difference in opinions between international trade players, economists try to answer the question whether it is more important to pursue the fair trade or to promote free trade. This paper seeks to critically determine why free trade is better than free trade by outlining the pros and cons of free trade and fair trade.

Free Trade

As a form of international policy, free trade plays significant trade policies within a country and across the global trading systems. Local governments cannot interfere with the overseas trade operations involving both exports and imports. Currently, free trade is prevalent and widely spread across free trade zones. Trade partners have benefited from the long-term economic vision following the opening of the foreign market for the nations domestic absolute advantages commodities (Bhagwati, 2003). Government policies, agreements, and contracts are the guiding principles of free trade. An example of the free trade agreement is the transnational trade agreement between the Americas and 12 Asian-Pacific countries. Free trade and free trade agreements aim at removing all trade boundaries for all involved parties. Trade barriers between nations include domestic regulatory barriers, tariffs, workers protection, minimum wages, and taxes. Proponents of free trade argue that a business must be allowed to succeed or fail based on its ability to respond to open and free markets without having the government protecting it or its employees.

Fair Trade

Fair trade is a development approach in which artisans and farmers partner with industries to create equitable business relationships. Principles guiding fair trade seeks to empower marginalized producers by improving their living standards. The fair trade approach aim at driving change in marginalized regions of the globe by providing safe working conditions for employees, paying living wages and empowering communities with long-term projects, commitments, and relationships (DeCarlo, 2011). Fair trade advocate for business activities that must meet the demands of justice. Advocates of fair trade argue that business partnerships should be based on respect, transparency and dialogue as players in this network seek equality in the international trade.

Consumers support fair trade corporations which support farmers from developing nations and ensure equitability in the making of international trade rules. Fair trade advocates for voluntary exchanges between businesses and their workers as well as customers to yield fair results where all parties feel respected and valued (Ruben, 2008). Fair trade ensures that business activities are ethically practiced. Advocators of fair trade believe that trade between the developed and third world countries are designed in favor of the developed nations contrary to how they believe that businesses should be conducted. The trading process should yield mutual benefits to both parties involved in a trade on equitable terms. Fair trade believers argue that free trade is about profits while fair trade is about people.

Fair trade was a counter approach to the free trade approach. As a result, commodities in fair trade corporations are priced above the average prices with the help of the government so that farmers, manufacturers, and businesspeople can yield greater returns. Fair trade eliminates the brokers from the supply chain enabling the producers in the developing nations to directly reach their consumers and sell their produce. The governments of countries exercising this approach provide extension support services such as technologically advanced equipment and machinery, financial support through credit, and training (Ruben, 2008). Ultimately, fair trade has tried to bring a balanced trade between developed, developing and underdeveloped nations across the globe. Proponents of free trade especially producers from developed countries oppose fair trade arguing that it promotes unfairness of trade.

Differences between Free Trade and Fair Trade

The scope of free trade is a conventional market mechanism whereas the scope of fair trade is voluntary engagement. The objective of free trade is to maximize profits by increasing sales while decreasing overheads whereas the objective of fair trade is to provide financial stability to producers from vulnerable global regions such as the developing nations (Bhagwati, 2003). Free trade encourages innovations and inventions while fair trade protects the rights and promotes respect for vulnerable business parties. Free trade facilitates the exchange of human resources with technology while fair trade seeks to uphold human rights. In a free trade, demand, supply, and prices are determined by the market forces whereas prices of commodities in fair trade industries are usually slightly above average. Free trade focuses on trade policies between nations while fair trade focuses on trade amongst businesses and individuals.

The major actions in free trade involve removal or reduction of trade barriers between countries with measures such as lowering of a nations tariffs and quotas being implemented. The major actions in fair trade involve establishing partnerships between businesses and farmers and artisans to ensure that their welfare is safeguarded by providing them with all necessary support. Free trade approach influences change through both government and market policies whereas fair trade influences change through community empowerment and improving living standards by ensuring a constant and reliable living wage. Companies, corporations, and businesses are the major beneficiaries in free trade while small-scale farmers and artisan who lack both the social and economic opportunities are the main beneficiaries in fair trade. There is a complex supply chain involving many levels of the producers and consumers encouraging intermediaries in free trade (Bhagwati, 2003). On the contrary, fair trade encourages direct links and partnerships between the producers and consumers. Free trade is guided by agreements and trade policies while fair trade while fair trade is guided by principles such as dialogues.

The Significance of Free Trade

Just like a double-edged sword that cut on both edges, free trade carries both advantages and disadvantages to players. The losing parties will endure the disadvantages while winning parties will enjoy its advantages.

Merits

There are several benefits, which produce many different winners in the free trade global market. Free trade limits interferences on import and export trade by local governments and causes a variety of privileges of the local trade. As a result, importers are guaranteed many advantages from the free trade.

Different countries across the globe have some absolute advantage which could be different from country to another. Absolute advantage includes the availability of adequate raw materials, skilled labor, and factors of production. Countries can specialize in the production of those commodities they have an absolute advantage and then trade them for commodities they produce least (Dunkley, 2003). In such a situation, both countries are going to benefit from each other in a win-win situation. Free trade approach presents opportunities for effective exploitation and utilization of resources. Countries with great reserves of certain natural resources such as oil would not benefit much from the oil unless they trade for other commodities. For instance, most Middle East countries with oil reserves have achieved in balancing their economy by trading their oil for other commodities such as technologies with countries like Japan who lack oil resources but have surplus technologies.

Free trade lowers the cost of living and ensures product diversification in the market. Citizens of a republic are also gainers in free trade. Availability of diverse products in the market gives consumers an opportunity to choose the superior and high-quality products. Therefore, producers must ensure that they produce high-quality products for them to gain competitive advantage. Consumers are the biggest winners in such a situation as they are guaranteed quality goods and services. Also, product diversification leads to an expanded market which creates enough demand and thus enables producers and companies to realize the economics of scale. In a small market, only limited product brands are produced denying consumers varieties from which they can choose (Dunkley, 2003). Citizens also enjoy reduced product prices since the free trade system can significantly avoid selling commodities at high prices from local protectionism. Low prices in commodities ensure affordability and thus lead to reduced cost of living.

The ultimate advantage of free trade is its ability to tap into the efficiency and success of global markets and therefore result in great economic growth while reducing the prices of commodities making them affordable.

Demerits

As discussed above, Free trade presents many opportunities. However, it also creates great competition for the developing and under-developed countries. Most startups industries in these developing and under-developed nations are not sufficiently strong to survive in a market dominated by giant companies from developed countries which established earlier in the international markets (Irwin, 1998). As a result, local governments exercise their mandate to protect local companies by setting some protective measures such as import tariffs. However, after the local industries have gained the stamina to compete in the global markets, the local government must remove those protective measures to avoid a monopoly situation in the country and other adverse effects on the global market.

Although, reduced commodity prices resulting from free trade positively impacts residents of a country, less expensive products could harm the jobs of countries producing similar commodities (Zeiler, 1999). For instance, the building of solar panels in China would be cheaper than building them in the United States which is quite good since we all would want to own solar panels at low prices. The reason for their low prices could be the case since labor is cheaper in China than it is in the United States. Therefore, importing solar panels at affordable prices from China would be equivalent to exporting affable American employment opportunities. In...