Sunday, July 17, 2005

Fair trade and protectionism

A staggering number of people I interact with seem to be in the grip of the myth that free trade is the source of all evil - a cruel Anglo-Saxon plot to subjugate the world - that it is bad for developing countries and therefore should be opposed at all costs. What is needed, they seem to believe, is fair trade (also known as trade justice).
This idea is unbelievably stupid, ensures that it will take longer than is necessary for developing countries to emerge from poverty and is evidently put forward by people who haven't the foggiest idea of how the global economy works. See an excellent explanation from Tech Central Station, a thorough analysis from the Globalization Institute and comments from the Adam Smith Institute blog. Christian Aid, a large NGO, has been at the forefront of this despicable battle on free trade. Stephen Pollard says it like it is in the (London) Times, and see a related analysis by UPI. This Foreign Policy article (which requires subscription) ably explains the advantages of free trade and the costs of protecionism, and so does this website run by the Cato Institute.
In fact, insisting on fair trade (or trade justice) is just as stupid and damaging as insisting on protectionism. The main reason for this is extremely simple: fair trade seeks to protect the producers in developing coutries (just like Western protectionism does for Western producers), which distorts the market and raises prices therefore significantly damaging the consumers in those same developing countries. If fair trade and protectionism were substituted with free trade, prices would fall (or rather, return to normal), allowing people in poor countries to spend a smaller proportion of their income on food. It is true that lower prices may not be able to support all the current producers in the developing world, but that's totally beside the point. Why would one condemn hundreds of millions of poor people to malnurition and starvation (because of higher food prices), just to protect a special interest group (producers)? The idea is simply absurd - if not worse, and what is worrying is that so many people don't seem to realize it.
The way forward is clear: the fastest and best solution to the poverty in the developing world is free trade. Let's hope people smarten up.

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