Fair Trade

The world expects trade outcomes to be somewhat unequal. But when Oxfam reported back in 2002 that 97% of the income generated by international trade benefits rich and middle-income countries, while 3% flows to poor countries, it made a stir. Standards of fairness had been breached.

Fairer trade rather than freer trade could change some of these outcomes. A persuasive case is made by my Oxford colleagues, Paul Collier and Tony Venables. Carefully deployed special preferences and protectionism could be used intelligently to help to catalyse growth in African countries, and to improve the lives of the bottom billion. Conversely, the dismantling of special preferences has levied some high costs.

Fairness is also important in the governance of trade. International trade negotiations have resulted in rules which open up markets mostly for the goods and services exported by rich and emerging economies, while keeping markets closed in agriculture and other goods which are the main produce of poorer countries. The rules are made in negotiations in which the powerful call the shots, and do not always do so in good faith. In the Uruguay Round of negotiations industrialised countries were perceived to have exacted precise and far-reaching commitments from developing countries, in exchange for vague promises, such as to liberalise agriculture, which they have not kept. The Doha Round keeps failing to restart, in large part because there is too little trust in the fairness of its likely outcomes, as well as the fairness of the negotiating process, something Pascal Lamy, Director-General of the WTO, is trying valiantly to change.

The enforcement of trade rules is also unfair. When countries break trade rules, they are not systematically policed. They will be caught when their actions affect countries in which business groups are organised and well resourced enough to play a key role in gathering information and financing the preparation of the case against the offender. For most small countries, bringing a case against an important trade partner is unthinkable. They could lose discretionary trade access, aid or geostrategic assistance. Were they to win, they would secure the right to apply retaliatory measures which might have little effect—a pyrrhic victory for many.

Trade needs saving. But freer trade will not do the trick. The perceived unfairness of trade leads people to press for less trade not freer trade. Fairer trade, by contrast, would bolster public support, allow a better reconciliation with national priorities such as environment and development, and could offer a more level playing field to ensure more open and vibrant competition.

~ Ngaire Woods, http://www.economist.com/debate/days/view/508