Johannes Kepler University

Free Trade versus Fair Trade

by

 Elisabeth Luger

Table of Content

Abstract 4

1. Global Free Trade and its obstacles 4

2. Trade not Aid 5

3. Fair Trade: Only a PR Initiative of the First World 7

Conclusion 8

Bibliography 9

Keywords 10

Abstract

This article examines the question if global Free Trade is worth being expanded or if we better should tend to protectionism also called Fair Trade. The author argues that although free trade is said to cause some unintentional side effects it is the better way of achieving economic and social development. Therefore, problem areas are identified and suggestions are presented in this article in order to make the reader sensitive about the impact the existing system has on developing countries.

1. Global Free Trade and its obstacles

The mercantilist idea was already represented by the rulers of the 18th century and is still gaining more and more popularity in our times. With the signing of the first free-trade treaty in 1860 between the UK and France (Mègrelis, 1978, p.15) these two countries set the starting point for tendencies towards barriers surrounding the industrialized nations. The broad hypothesis underpinning this article is " Most of the problems concerning free trade only exist due to the fact, that protectionist barriers set up by Northern countries still disturb an actual free trade system."

Basically free trade has to lead to international division of labour and therefore to interdependence between countries. According Kohlehammer (1993), a defender of the free trade concept, "national customers can gain from it by choosing the cheapest products from all over the world" (p.45). According to this view the foreign supplier can increase in turnover and is able to expand the production. Due to the fact that foreign producers use a part of their proceeds on imports from their customers′ countries, they also promote the domestic economy. Exports should be supported as they mean more jobs to the exporting country.

What happens is that all countries try to follow the same idea of reducing their imports and maximising their exports. Blanchard (1997) describes that a too high number of imports from foreign countries endangers domestic jobs and is therefore controlled through customs duties and other trade barriers. (pp.243-245) If customers could decide between domestic and imported products, some domestic suppliers would not be competitive anymore and would not be able to sell their products, because they either are too expensive or of low-quality. They would only be able to survive, if they lowered their costs of production with no consideration for social and economical losses. Thus, the author points out that free trade between the northern countries can only work with barriers that have existed over a long time. Sadly enough, Bhagwhati (1995) puts it a more general way, protectionists fear that "trade with countries with paupers will produce paupers in our midst" (p.2). However, this pressure of competition can also be seen in the case of domestic trade. Every day, businesses have to close down due to the fact that customers prefer other brands out of the same country. Bhagwhati (1995) sums up by asking, "Why should suppliers be more protected in foreign trade than in domestic trade? Isn′t the reason for unemployment in Northern countries rather technical change than trade with the South?"(p.45f). Furthermore, what′s called trade is not trade in any sense of the term. Taking a closer look the reader will discover that much of what is called trade is very often an interaction inside big companies. Nevertheless enormous transactions are made between developing countries that provide cheap labour and industrial countries providing the know-how to reach the lowest production costs possible. Apparently 80% of all trades is just done between countries of the first World and 40% of the worldwide trade is internal business which organizations like the WTO and GATT are definitely reinforcing (Österreichischer Entwicklungsdienst, 1999, p.5).

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