Fair Trade, Its Factors and Economic Arguments Essay

Introduction

In economics, trade infers to the buying and selling goods and services where the buyer makes compensation by paying the seller. A trade could also entail the transfer of goods and services from one party to another. Economists argue that liberalism is integral for the realization of growth and development in various economies situated globally. Notably, as Matsushita reveals, the World Trade Organization (WTO) supports the “Free Trade” concept to enhance international trade growth.¹

The organization pursues the establishment of structures that facilitate fair trade at the global scale by overseeing the sealing and implementation of trade pacts. The body also curtails the emergence of trade barriers and acts as an arbitrator in conflict situations as Dragusanu, Giovannucci, and Nunn reveal.² Mainly, the violation of international trade bargains undermines the creation of economies characterized by fair trade. Thus, as Bagwell and Staiger assert, global bodies such as WTO need to facilitate the successful implementation of global trade agreements.³ In this respect, economists underline that fair trading environments offer the participants an array of benefits at the international level.

Economic Argument for Trade

Fair trade provides the involved parties a comparative advantage by offering opportunities to specialize in the goods and services associated with a low opportunity cost in their respective countries. According to the lecture notes by W. Seay, capitalism drives fair trade, a case that results in freedom among the parties concerned.⁴ As such, the elimination of trade tariffs creates freedom. According to Jorgenson and Rice, the efficiency characterized by the decrease of duties influences the expenditure trends, which change from expensive to discounted manufacturers, thus resulting in fair trading opportunities.⁵ Additionally, fair trade bolsters the increase in exports due to the opportunities created by comparative advantages gained by reducing tariffs. In line with promoting the success of the export-oriented sector, Dragusanu, Giovannucci, and Nunn reveal how fair trade provides economies of scale to players in sectors that require high investment levels.⁶

The establishment of fair trade environments is instrumental in the utilization of surplus raw materials. According to the lecture notes, developing countries, including the ones in West Africa, trade their gold with developed economies such as China, among others, thereby using it to back up their paper money.⁷ Middle Eastern countries provide another example of how the economies use their surplus oil production capacities to trade beyond the domestic boundaries. Thus, they realize the growth of their economy by trading with other countries at the global level. Further, economists argue that fair trade bolsters competition between domestic and foreign industry players in ways that inhibit consumers from being subjected to high prices by domestic monopolies. According to Johnson, the establishment of free trade areas (FTAs) has been the engine for free trade since 1945 by facilitating an annual growth of 7% in global trade.⁸ As such, economists also argue that fair trade contributes to the elimination of extreme poverty in the various economies in the entire world. Hence, it is crucial for parties interested in establishing fair trade to enforce the various factors that enforce fair trade.

Factors That Enforce Fair Trade

Several factors contribute to the effective enforcement of fair trade in different economies. Importantly, as Johnson reveals, production factor endowments, including land, capital, and labor, contribute significantly to the enforcement of fair trade in a particular economy (80). Differences in the labor characteristics possessed by trading parties influence the realization of fair trade since the workforce is an essential aspect of production. In line with Jorgenson and Rice’s views, the availability of natural resources in different countries is also crucial for streamlining the flow of inputs required to produce goods and the offering of services.⁹ Infrastructure development and the production capacity of a given party also encourage countries to participate in trade fairly. Political stability is one of the key triggers of fair trade in contemporary business environments.

Politically stable countries encourage investors from foreign countries to inject capital into the domestic economy, thus contributing to the parties’ economic growth. Also, De Janvry, McIntosh, and Sadoulet assert that investments geared towards improving physical infrastructures in a given economy encourage the entrance of new players in the international supply chains.¹⁰ Technological developments also offer equitable opportunities to organizations in diverse sectors to engage in sophisticated research and development initiatives that improve the quality of their offerings in the market. Technology influences the management of knowledge among trading partners, thereby fostering the efficiency of decision-making processes as Dragusanu, Giovannucci, and Nunn confirm.¹¹

Also, policy actions at the national and multilateral stages play an integral role in facilitating fair trade. Particularly, policy actions regarding improving trading relations and transportation cost reduction create many opportunities that enhance innovation as an integral element of fair trade. Institutional quality improvements also determine the fairness of trading encounters between different parties. As Zartman asserts, the efficiency of political institutions streamlines the implementation of trading contracts, and the reduction of trading costs.¹²

Factors That Hinder Fair Trade

On the other hand, several factors hinder the creation of economies dominated by fair trade. Notably, some players’ manipulation of international trade arrangements creates unfair trading relations where some economies benefit more than others (Johnson 112). The case prompts welfare and distributional consequences. Thus, some countries are poor relative to others, despite trading pacts such as the Reciprocal Trade Agreements Act that seek to protect them. Further, inherent power conflicts among the different players involved in a trade agreement necessitate integrating dispute resolution mechanisms to settle international trade controversies.

Mostly, the unfairness created by veto players infringes on the rights of the affected populations by barring them from enjoying the benefits of balanced reciprocity in international trade.¹³ The conflicts arise between developing and developed countries where the latter countries perceive the trade agreements as working against economic growth and development. Besides creating conflicts, unfair regulations cultivate the emergence of corrupt ruling administrations that curb innovative trade ideas. The corrupt ruling administrations discourage foreign investors from allocating their resources for commercial purposes in a particular country. Furthermore, rampant deregulation is a hindrance to the attainment of fair trade since it infringes the basic social and human rights besides causing the degradation of the environment.

Conclusion

Conclusively, trade is essential for bolstering uniform growth and development between the parties involved. The comparative advantage realized through trade is accountable for the changing trends of consumption showcased by high-cost producers. Besides cutting barriers, fair trade allows countries with surplus natural resources to benefit from trading with other states with a scarcity of such resources. Nonetheless, fair trade hindrances, including power differences, corrupt administrative regimes, and rampant deregulation, undermine the realization of uniform economic growth and development globally.

Bibliography

Bagwell, Kyle, and Robert Staiger. “The World Trade Organization: Theory and Practice.” Annu. Rev. Econ 2, no. 1: 223-256.

De Janvry, Alain, Craig McIntosh, and Elisabeth Sadoulet. “Fair Trade and Free Entry: Can a Disequilibrium Market serve as a Development Tool?” Review of Economics and Statistics 97, no 3: 567-573.

Dragusanu, Raluca, Daniele Giovannucci, and Nathan Nunn. “The Economics of Fair Trade.” The Journal of Economic Perspectives 28, no. 3: 217-236.

Johnson, Harry. Money, Trade and Economic Growth (Collected Works of Harry Johnson): Survey Lectures in Economic Theory. Oxford, UK: Routledge, 2013.

Jorgenson, Andrew, and James Rice. “Structural Dynamics of International Trade and Material Consumption: A Cross-National Study of the Ecological Footprints of Less-Developed Countries.” Journal of World-Systems Research 11, no. 1: 57-77.

Matsushita, Mitsuo. The World Trade Organization: Law, Practice, and Policy. Oxford, UK: Oxford University Press, 2015.

W. Seay, The Origins of Political Economy, Virginia Commonwealth University, 2016.

Zartman, William. Politics of Trade Negotiations between Africa and the European Economic Community: The Weak Confronts the Strong. Princeton, NJ: Princeton University Press, 2015.

Footnotes

1. Mitsuo Matsushita, The World Trade Organization: Law, Practice, and Policy (Oxford, UK: Oxford University Press, 2015), 12.
2. Raluca Dragusanu, Daniele Giovannucci, and Nathan Nunn, “The Economics of Fair Trade,” The Journal of Economic Perspectives 28, no. 3: 218.
3. Kyle Bagwell, and Robert Staiger, “The World Trade Organization: Theory and Practice,” Annu. Rev. Econ 2, no. 1: 224.
4. W. Seay, The Origins Of Political Economy, Virginia Commonwealth University, Spring 2016.
5. Andrew Jorgenson, and James Rice, “Structural Dynamics of International Trade and Material Consumption: A Cross-National Study of the Ecological Footprints of Less-Developed Countries,” Journal of World-Systems Research 11, no. 1: 60.
6. Dragusanu, Giovannucci, and Nunn, “The Economics of Fair Trade,” 226.
7. W. Seay, The Origins of Political Economy.
8. Harry Johnson, Money, Trade, and Economic Growth (Collected Works of Harry Johnson): Survey Lectures in Economic Theory (Oxford, UK: Routledge, 2013), 76.
9. Jorgenson Rice, “Structural Dynamics,” 57.
10. Alain De Janvry, Craig McIntosh, and Elisabeth Sadoulet, “Fair Trade and Free Entry: Can a Disequilibrium Market serve as a Development Tool?” Review of Economics and Statistics 97, no 3: 570.
11. Dragusanu, Giovannucci, and Nunn, “The Economics of Fair Trade,” 225.
12. William Zartman, Politics of Trade Negotiations between Africa and the European Economic Community: The Weak Confronts the Strong (Princeton, NJ: Princeton University Press, 2015), 53.
13. Zartman, Politics of Trade Negotiations, 127.