Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Make Trade Fair, Set it Free!

Written by johnleemk on 1:57:31 pm Jun 10, 2007.
Categories: ,

There has been a great hubbub about this campaign for "Fair Trade", to buy from companies which intentionally buy their raw materials at higher than market prices so as to give farmers and labourers in developing exporters a better deal.

There's nothing wrong with this per se — if people perceive the going price of coffee or what-have-you to be excessively low, the sound economic decision is to raise the demand of coffee, and for consumers to insist on paying more for it.

Of course, how effective this campaign actually is is rather questionable. Economist Tim Harford pointed out in his book The Undercover Economist (an easy introduction to economics for the layman) that most of the price differential between fair and "unfair" trade coffee actually goes to the bottom line of the coffee franchise, rather than that of the coffee farmers who are supposedly underpaid.

That isn't to say Fair Trade isn't a good idea, or that its ideals are in the right place. At least it is trying to use the market mechanism to set things right, as opposed to economically unsound measures like government intervention.

However, one of the things Fair Trade campaigners could do that would make more difference to developing farmers than trying to raise the prices of agricultural goods (which are notoriously unstable anyway — but more on that later) is to write to their Congressmen and Members of Parliament to lift the immense subsidies and tariffs implemented by most developed countries on agricultural goods.

This isn't the sexiest thing in the world to do — who can host celebrity concerts or get people sparked up about a campaign to lift subsidies and tariffs? Nevertheless, however boring it may be, this is the right thing to do.

The developed countries are massively distorting both their domestic and the global markets for agricultural goods by taxing imports of these items and subsidising local producers.

This negates the principle of comparative advantage, which is the underpinning of international trade. You want to know why trade isn't fair? Because it isn't free.

In a free market, you can bet more money would be flowing to near-subsistence farmers in the developing world, and less money would be flowing into the pockets of people who don't need it and strain the environment through their aggressive and unsustainable farming practices. As more than a few have pointed out, many members of the British royal family receive tens of thousands of pounds worth of subsidies every year just for happening to own farms.

In the European Union, farmers are paid dozens of euros just for owning livestock. It's a similar story in the United States, where one joke has it that every time a farmer dies, two or three bureaucrats at the Department of Agriculture are in mourning.

This sort of economic inefficiency is a major contributor to the problem of farmers in developing countries, because their prices are undercut by farmers in the developed world.

There is some economic justification for these measures — arguably domestic production of food should be subsidised because a security emergency would require self-sufficiency in food, and the unstable price of agricultural goods means producers and/or consumers should be given some certainty in their purchasing and production decisions.

For the first argument, though, if you can't buy food from anywhere in the world, no matter how much food you can grow locally, in layman's parlance, you're fucked. There may be issues with bioterrorism — a terrorist could very easily poison much of the American population because of lax security at the moment — but this calls for subsidising the requisite security measures, which would still probably cost less than the immense farm subsidies.

As for the price stability argument, it has its merits, but the government is not going to be able to do much about extreme price swings in any event. It should try to dampen price swings, but not eliminate them altogether — and really, does this argument justify the immense subsidies that the developed world has in place, whose only purpose in reality is to serve the strong agricultural lobby?

It's not sexy to fight tariffs and subsidies, but it's the right thing to do. If we want to make trade fair, we must first set it free.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

Infernal Ramblings is run by John Lee. For more, see the About section. If you have any questions or comments, do drop him a line.

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