Free Trade Vs. Fair Trade
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
June 8, 2022
Free Trade Vs. Fair Trade
The regulation of commercial activity across countries is the focus of free trade and fair
trade policies, but both address the topic from different perspectives. Free trade focuses on the
reduction of barriers and policies that favor certain countries or industries. Fair trade, however,
favors the rights of workers, improved working conditions and seeks to eliminate pay
discrepancies from country to country.
Free Trade and the Reduction of Barriers
Proponents of free trade emphasize the reduction in barriers between countries and the
elimination of preferential policies that favor countries or specific industries. Free traders
believe that a business should succeed or fail based on its ability to respond to the free and
open market, without needing special governmental protections to protect the industry or its
workers. Many free trade advocates advocate for the elimination of tariffs and subsidies, and
oppose regulations that force companies to pay extra for doing business in foreign markets.
Fair Trade Focus on Working Conditions
Fair trade advocates focus on the wages and working conditions of labor in developing
markets. For example, a fair trade activist will fight to increase the wage rates of workers and
improve their working conditions, especially when a large multinational corporation chooses to
pay pennies per hour for labor in one country instead of dozens of dollars per hour elsewhere.
Fair traders suggest that companies and governments should regulate trade to ensure that
workers receive a just level of compensation and a safe working environment.
"Fair trade" as a term is sometimes used to refer specifically to policies that provide a
living wage to farmers for their crops, usually above market prices, because local and small-hold
farmers often cannot compete on price with large-scale factory farms.
Free Trade and Fair Trade Policies
Almost no government takes a purely free trade or fair trade approach to its commercial
policy. Instead, countries blend policies in various ways. For example, the United States, Mexico
and Canada are members of the North American Free Trade Agreement, which slashed
protectionist barriers among the three countries. However, the U.S. also supports certain fair
trade policies.
For example, the U.S. Trade Representative works with the United Nations to provide
preferential access to business resources to women and minorities in markets around the
world.
Differences in Political Ideology
Free trade advocates are usually conservative or libertarian; their support for smaller
government and less regulation, in general, leads them to be skeptical of government programs
to redistribute wealth or income. Fair trade advocates, by contrast, tend toward a
communitarian outlook that favors equality of outcome, and they are more willing to embrace
government action to improve people's quality of life. These differences in political outlook
often make trade policy a matter of considerable debate within national legislatures.
Economic Theory Differences
In general, economists recognize that free trade provides the least amount of overhead
during the production of goods and services, so a free trade economist will emphasize the
lower end-price for consumers that results from trade policies that do not have government-
mandated price minimums. However, some economists believe that fair trade policies help to
add more consumers to an economy and that the additional price for "fair" labor is outweighed
by the net economic benefit that comes from adding more consumers with disposable wages
into the marketplace.
Carbon Tariff Economic Analysis
Carbon tariffs involve issues of climate change, carbon emissions and international trade.
Advocates claim tariffs will force the world's leading polluters to reduce emissions of
greenhouse gases by raising the price of their products. Opponents counter that the tariffs are
too costly relative to their benefits, too complicated to implement and violate principles of free
trade.
Identification
A carbon tariff is a tax imposed on imported goods from countries that do not curb their
emissions of greenhouse gases. The tariff can take different forms, such as a direct tax that
reflects the "carbon footprint" of the good's production or a requirement that the exporting
nation purchase emissions credits from the importing nation under a cap and trade system.
French President Nicolas Sarkozy favors a system for the European Union that requires
countries with fewer restrictions on carbon emissions to purchase EU emissions credits.
Proponents' Claims
Proponents of carbon tariffs contend the measures are needed in the absence of a global
agreement to reduce emissions of greenhouse gases. Industries in nations with laws and
regulations to reduce emissions face higher production costs. However, those regulations do
not apply to foreign producers of the same goods. This inequity could lead domestic producers
to move their operations to countries with lax emissions controls. Advocates say carbon tariffs
will level the playing field by imposing higher costs on imported goods from countries that do
not curb their greenhouse gas emissions.
Negative Effects
The title of a report by the Institute for Public Affairs (IPA), a research organization based
in Australia, branded carbon tariffs as "costly, ineffectual and protectionist." The report's
authors pointed out that carbon tariffs could harm the domestic industries the tariffs are
designed to protect, by making imported materials used by domestic producers more
expensive. The authors also stated that carbon tariffs are unlikely to create incentives for other
countries to reduce their carbon emissions. Overall, the IPA report concluded that the costs of
carbon tariffs far exceed their benefits.
Potential Trade Violations
The IPA report stated that carbon tariffs may violate World Trade Organization rules
designed to promote free trade among the world's nations. The authors further suggested that
the introduction of tariffs could trigger retaliatory trade sanctions. The Council on Foreign
Relations echoed the IPA's concerns about a possible trade war resulting from carbon tariffs.
Considerations
The authors of the IPA report on carbon tariffs observed that determining the amount of
carbon input used in the production of a particular product is highly complex. Goods
manufactured with parts from multiple countries make the task even more complicated. The
authors cited as an example a Mexican-made car with parts produced in Japan and Brazil.
Carbon tariffs, the report concluded, could require a complex regulatory system.
