Fair Trade (Part 2)

First, some clarifications. My argument is not against trade or free trade. From the outset I noted the potential benefits and advantages of trade and stressed the perils of protectionism. My argument is that trade liberalisation is not the simple remedy it sounds. Equally importantly, government should aim to do more than ensure an efficient allocation of resources globally. Taken together, these arguments point to the greater urgency of making trade fairer rather than freer.
What is free trade? I think we all agree that free trade is a theory. The theory is that the most efficient allocation of resources, globally, would be achieved if governments were to stay out of trade. If governments did not intervene, by using tariffs, subsidies, or regulations to increase the prices of goods paid by their consumers for things made in other countries, the result would be what economists describe as "Pareto efficient".

We disagree about how this theory translates into the real world and with what implications for policy. For Professor Bhagwati, free trade is the best practical guide we have to policy: if in doubt, liberalise, even if no other government is doing the same. By contrast, I stress that free trade only produces efficient outcomes if other necessary conditions are in place such as (near) perfect competition and information. To this end, governments must intervene to prevent monopolies, negative externalities, and market failures.

At the global level, competition among producers in different countries requires carefully negotiated rules among countries (the GATT, the WTO, exchange-rate rules) and their effective monitoring and enforcement. It requires access to accurate and available information, and genuine competition (as opposed to monopolies, oligopolies, and monopsonies among global producers and intermediaries). Without these conditions, trade quickly becomes inefficient and unfair.

What is fair trade? Fairer trade is not necessarily an argument against free trade (although doubtless it is sometimes used as such). "Fairness" has two dimensions. The first is procedural: are the rules fair, and are the processes used to monitor and enforce the rules fair? The second dimension of fairness is substantive: are the outcomes of trade fair? I will deal with each in turn.

For Professor Bhagwati the current state of the rules is "fair enough" for free trade to unleash efficiency-maximising global competition. On this I disagree. Taken as a whole the trading system has been shaped by the mercantilist interests of the largest and wealthiest countries. Liberalisation has taken place in a series of agreements, originally among a small group of industrialised countries who opened their markets to one another in a reciprocal way, creating a premier league of trading nations. Relegated to lower leagues, developing countries were long denied access to markets for their textiles and garments. The MultiFibre Agreement and its successor were finally phased out in 2005. Developing countries are still denied access (except through special discretionary agreements) to markets for their agricultural goods and commodities. This does not make freer trade a bad idea, it forces us to consider practicalities.

Our moderator, Saugato Datta, says surely I am arguing that the solution is to remove the protectionism in industrialised countries—to make trade freer. Yes, but the nub of this debate is how is this most likely to occur? Two means have been proposed. First, Professor Bhagwati argues that developing countries should liberalise unilaterally. My retort is that this will not induce industrialised countries to dismantle their protectionism. The invisible hand of free trade will not displace the deeply rooted lobbyists and agri-business interests in Brussels, Washington DC, and Tokyo.

~ Ngaire Woods, http://www.economist.com/debate/days/view/515

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 

There Is More To Human Motivation Than Profit-Maximization (Part 2)

The trouble for our purposes is that Motivation 2.0 assumes we’re the same robotic wealth-maximizers I was taught we were a couple of decades ago. Indeed, the very premise of extrinsic incentives is that we’ll always respond rationally to them. But even most economists don’t believe that anymore. Sometimes these motivators work. Often they don’t. And many times, they inflict collateral damage. In short, the new way economists think about what we do is hard to reconcile with Motivation 2.0.

~ Daniel H. Pink

There Is More To Human Motivation Than Profit-Maximization

In 2002, the Nobel Foundation awarded its prize in economics to a guy who wasn’t even an economist. And they gave him the field’s highest honor largely for revealing that we weren’t always rational calculators of our economic self-interest and that the parties often didn’t bargain to a wealth-maximizing result. Daniel Kahneman, an American psychologist who won the Nobel Prize in economics that year for work he’d done with Israeli Amos Tversky, helped force a change in how we think about what we do. And one of the implications of this new way of thinking is that it calls into question many of the assumptions of Motivation 2.0. Kahneman and others in the field of behavioral economics agreed with my professor that economics was the study of human economic behavior. They just believed that we'd placed too much emphasis on the economic and not enough on the human. That hyperrational calculator-brained person wasn't real. He was a convenient fiction.

~ Daniel H. Pink