The debate surrounding free trade versus fair trade encompasses a wide array of issues that culminate to manifest a potentially very hostile international trade environment for countries in the developing world. First, this paper will introduce an abbreviated historical account of the emergence of the two trade regimes (Fair Trade and Free Trade), the ensuing debate between them and other relevant considerations. Then this paper will attempt to examine this debate by focusing on the experiences of fair and free trade in the production of bananas in order to present a concrete example of the theory that was first presented. Lastly, the conclusion of this paper will also be supported by a brief review of three interrelated trading case studies: first, general trade figures in Costa Rican agricultural production after free trade policy was implemented; second, more recent trends in the demand for international trade of organic agricultural food products; and third, the trading statistics of Latin American countries.
As a response to the financial ruin that many Latin American countries faced after the oil shock of 1979, part of the proposed method of helping these countries to service their debt and restructure their economies was outlined by orthodox neoliberal free trade theory. This theory “promotes that the elimination of trade barriers will offer a combination of static and dynamic gains that permit the introduction of new goods, new technologies, and new production methods [that will allow] the expansion of existing markets and penetration into new markets.”i Furthermore, it was argued that more open economies tend to experience faster rates of total factor productivity growth than those that imposed any restrictions on international trade. Total factor productivity growth are the effects in total output not caused by inputs or productivity; advances in technology and efficiency are the most significant contributors to increased total factor productivity. This was how neoclassical free-trade theory was first proposed to Latin America.
However, free trade’s historical application throughout the international economy is not actually free. At its best the world’s existing free-trade commerce is negotiated through international trade agreements that can bemore appropriately described along the lines of managed trade. Managed trade is characterized by “governments allowing extensive international trade [that also] seek to intervene through tariffs, subsidies, and other polices to make domestic products more attractive at home, to nurture new industries, and to stimulate domes of research and development.”ii Thus the form of “free trade” that any individual country undertakes will depend greatly on the power and influence of political-economic internal and external forces upon that nation’s economy to bargain for favorable terms of trade.
In respect to the viability of actual free trade amongst the emerging countries which may lead to possible subsequent fair trade with the developed world, one of the most important advancements is the emergence of international trade agreements that have fostered greater regional economic integration and cooperation via the establishment of common markets such as NAFTA, EU, MERCOSUR, ASEAN and CACM. These markets could conceivably provide a safe harbor in which free trade can stimulate competition amongst Latin American countries; and possibly eventually develop the properly functioning markets that could later on compete freely with the rest of the world; while also keeping in mind the social, economic, and environmental concerns of participating countries. Ideally, until greater global competition is undertaken by Latin America, fair trade with the outside world could greatly help in building the capacity of these countries to form properly functioning markets.
A comprehensive definition of fair trade can begin by explaining it as a multifaceted approach toward development that economically “incorporates a commitment to equity, implying a commitment not simply to the creation of wealth and the conservation of resources, but their fair distribution.” Fair trade also takes into account “non-economic trading criteria such as ethical dimensions, environmental criteria, and quality of life issues.” It “epitomizes the partnership approach to sustainable development formulated by green researchers and focuses on cooperation, not competitive win/lose relationships, it believes that the developed world must be prepared to transfer both financial resources, new technologies and equal trading principals in business transactions with the less developed world.”iii
Although fair trade offers a possible avenue toward greater economic, social, and political equality, it still must encounter a gauntlet of obstacles toward achieving its goals. The idealistic proposals of fair trade are far from the reality that Latin American agricultural production faces. In addition, further progress in Latin America toward fair trade principles will confront a lot of entrenched international and national interests. It can also be argued that agricultural commodity production also has its limits and should not be the type of development that should be pursued in order to achieve real developmental gains. Other point of views contend that industrial or structural changes in the economy or government institutions are needed to achieve greater efficiency or higher levels of economic growth. However, these arguments do not take into account that “more than two and half billion people depend on commodity production for their livelihood.”iv The great majority of these commodity-dependent people can be found in developing countries.
It is important to note that fair trade does not necessarily present a direct challenge to free trade because it still works within the same dominant political-economic ideology as free trade: that is, democratic market capitalism. In fact, an argument can be made that fair trade serves as a more effective means of meeting market conditions because it incorporates the environmental, social, and economic externality costs inherent in the conventional agricultural production scheme. More specifically, the economic risks that emerging country farmers take on by investing their time, effort and money into producing a single product with a highly variable yield is taken into account into the premium price at which organic fair-trade food products are sold.
However fair trade does complicate the viability of more liberalized markets by requiring more demanding environmental, financial, and social standards for the production and commerce of very important internationally traded commodities. In it is this light that fair trade can be viewed upon as an impediment to a properly functioning market. Classical neoliberal economic ideology can be used to argue that fair trade incorporates costs which do not materially or directly benefit consumers and attaches unnecessary rents to the prices of agricultural commodities.
C.L. Harper explains two ways in which the consideration of environmental concerns complicates the political process of attaining more liberalized trade. The “first is the problem of veto states and veto coalitions,” that may easily arise because “the actual costs and risks of environmental protection are not equally distributed among nations.” The complicated instances that arise when considering the benefits and costs of environmental protection transcend nation boarders and requires consensus on many unprecedented and ill-defined situations. For example, the fact that Canada suffers air pollution created by United States industries blown across the border is a very delicate environmental problem to resolve. How can international pollution be measured in order to understand its costs to another country? Who should pay for the costs of this international infraction? A myriad of very complicated and political charged questions come to mind. It should not be surprising that multiple international trade discussions break down and do not resolve the issues at hand.
The “second kind of difficulty has to do with problems of competition, conflict, and overlapping jurisdictions between public agencies dealing with environmental issues.”v The clash that occurs between these organizations could cancel out their efforts and make them ineffective instead of cooperating toward the same goals. Thus the reconciliation required when considering both fair trade and free trade within the same country, and even more so in the more political and economically complicated sphere of a common market, is definitely a fine, arduous, and complicated task.
Until 1991 there existed three very strong political-economic impediments to cooperation and consensus between and within Latin American governments in negotiating advantageous terms of trade with multi-national corporations, each other or with international finance institutions. First, the political-economic strength of multinational corporations in determining the terms of establishing operations in a country make it significantly difficult for any developing country’s governments to demand human, social, environmental or economic concessions. Secondly, already existing political, economic and class divisions amongst and within Latin American nations did not provide for a strong sense of solidarity against any international economic or political force. Lastly, the economic programs proposed to service debts by organizations like the World Bank, UN and IMF in many cases resulted in governments losing control over their economies’ exchange rates, monetary policy, social services and in some cases public infrastructure, natural resources and other powers or abilities that a state needs in order to govern properly.vi These three reasons culminate to impose huge obstacles to any ideas of a common market or negotiations that would produce advantageous terms of trade for a collective of Latin American countries.
The preceding explanation of fair trade and free trade and the subsequent debate has a historical example in the production of bananas. The experience of the fifth most important agricultural commodity in world trade, the banana, has many important lessons and insights to understanding the plight of fair trade. Banana farming suffers from severe political-economic inequities of international agricultural production. The industry can be characterized by the high external inputs model of conventional agriculture and inequitable primary commodity trade. In 1992, an 18.4 kilogram case of bananas paid only $3.86 to a farmer and then was sold to European wholesalers for around $26. Three firms in 1995 had oligopolistic control over international sales and distribution of bananas.vii During the last 15 years the mobilization of forces against the overwhelming political and economic power that these corporations hold in this industry (Unions, Farmer’ Organizations, NGO’s, International and National Companies, Government and Inter-government Institutions) are important pieces to understanding what the fair trade movement has confronted in banana production.
Unions in the banana context were initially seriously weakened by management-friendly worker association movements called solidarismo. In reaction, Unions took on a process of unification on national levels in order to coordinate a new approach deemed un nuevo sindicalismo (a new trade unionism) in order to counteract solidarismo. Farmers’ Organizations underwent an alliance with a new confederation of Central American small and medium scale farmer’s organization representing over 600,000 producers from fifteen organizations operating in seven countries. NGO’s formed EUROBAN, the European Banana Action network, “to provide information flow and examine the potential for an informal alliance of European NGO’s seeking real solidarity action with the most vulnerable and exploited actors in the banana chain.”viii Another development in the banana market was that international and national companies (specifically Chiquita, Dole and Fyffes) began to free themselves from direct ownership and liability of plantations.
Instead these corporations favored guaranteed supply contracts with medium and large-scale producers in the countries where they used to directly operate plantations. This economic setup ensured that these three powerful companies received the cheap product they demanded while enduring none of the high risks inherit to agricultural production. Governments of banana producing countries have found themselves with limited options to use macro-economic and macro-political tools in order to help this market or any of their markets because key institutional actors, namely the WTO, GATT and the World Bank have gained enormous influence in the macroeconomic sphere of these countries. In addition, outside help from international organizations is also limited in capacity since the arms of the UN, such as at the ILO, International Labor Organization, or the Commission for Sustainable Development (CSD) both suffer from serious institutional weaknesses and a lack of credibility with the most powerful governments of the world. Subsequently, their ability to offer any favorable leverage to any agricultural industry of a developing country falls short of the demands of the political-economic situation.
Banana production provides a much more concrete example of the debate between fair trade and free trade. It is evident that for just one product many interests, organizations, and powers have much at stake in the 8 billion dollars of banana revenues which flow throughout international commerce. With so many different agents working toward conflicting interests, it is in the best interest of fair trade proponents to turn to strategic solutions and further collaboration amongst themselves. This coordination requires great efforts to ensure that various factors come into play. These include first a board-based international network where control and power over the practical evolution of common or coordinated activities is shared as widely as possible among actors (farmers, buyers, etc.) closest to the core of the agricultural production process. Secondly, information flow must be unlimited and accurate between the major organizations involved (in this case, NGO’s, unions and farmer’s organizations). Lastly, transparency of meetings, structures, finances and the collective decision-making process that leads to concerted action must never be compromised by unequal participation.
Subsequently, a logical extension of the conditions and requirements necessary to result in increased coordination and mobilization of pro-fair traders would include aims toward institution building and capacity strengthening. Already, various structures that enable international regional coordination and two new national coordination structures have already emerged. There existed several strategies which governments can take in order to resolve the inherent environmental and economic conflicts between fair trade and free trade paradigms.ix However one of the latent arguments of this paper is that since the implementation of liberalization policy was more historically prevalent and feasible; fair trade proponents resorted to advancing their cause by using more informal non-governmental avenues. This civil mobilization within individual countries and at the international level was fomented to confront the environmental, social, economic and political ramifications necessary for a country to compromise between increased global trade and sustainable development. Costa Rica, one of the main historical producers and exporters of bananas, is a prime example of a country whose participation in the free trade movement offers important lessons and results of the theories found in the debate between these opposing trade regimes.
Costa Rica presents an instance in which free trade theory was implemented as part of an initiative toward increased economic growth and has been shown to have failed.x In particular, the export-led growth hypothesis (ELGH) was tested on data that documents Costa Rican agricultural exportation from the years 1950 to 1997. The ELGH contends that export expansion is one of the main determinants of growth and can in turn perform as an “engine of growth” for an economy. The results of this study revealed that supply side evidence implies that growth was driven by traditional factors of production and, although exports acted as an additional engine of growth, the impact specifically from exports was relatively small in amount and limited in scope. The study affirmed the importance of investment and in particular capital accumulation, but the results expressed serious reservations about the ELGH in general and supports to a less extent the so-called new-fashioned economic wisdom represented by advocates of free trade and the ELGH. Although this case sends good news to fair traders by offering an example in which the free trade argument is defeated, the fact that fair trade is still a form of trade implies that even fair trade agriculture may have its own limits toward significant sustained economic growth. In terms of developmental aims, the results of this ELGH study suggests that fair trade provides a better immediate outcome by virtue of its social, political, and economic accommodations while revealing that in the Costa Rican Case, any emphasis on agricultural exportation and expansion should not be depended on for any significant sustained economic growth.
Even in the face of a conclusion that writes off agricultural trade as the proper industry to focus on for major economic progress, some hope for the fair trade movement can still be found in recent economic trends that describe the demand for fair trade organic products. Another studyxi on the demand for organic food presents very promising rates between 10% and 20%. However, this growth is overshadowed by the fact that at the time of the study, the size of the market for organic food production composed a very small percentage of total agricultural production. This figure was 1-8 % in Europe, only .2% in the US and less than .1% in most developing countries. Estimates of the total sales of organic food production from developing countries are almost $21 billion in 2000. All of these figures represent just how recently this movement has gotten off the ground. Thus the organic trade and fair trade movement have yet to really make an impact on the production of agriculture. The study also points out that Latin America still has a high potential for agricultural production, as it is home to 23% of the world’s arable land and has cultivated only 4.8% of that total land and of that 4.8% only 19% is irrigated. Ultimately all these figures point to the growth potential for organic agricultural production and its implications for the prospects of increased fair trading between Latin America and its partners.
In conclusion, within the context of the arguments presented above by proponents of fair trade and defenders of free trade, the political economic argument constructed in this paper reveals how the discourse surrounding this topic may be interpreted and applied to Latin American organic agricultural production. Working backwards, the major points addressed in this essay are the following:
-The production of and international demand for organic agriculture has an enormous potential for expansion in Latin America.
-If undertaken, this expansion may lead toward an optimistic future for the conversion of agricultural production away from its conventional form and toward more organic and socially responsible production and possibly invite more opportunities for fair trading.
-The historical the case study of Costa Rican agricultural exportation explains that free-trade policy did not produce a leading economic engine for significant economic growth. While this policy implementation cannot conclude the same outcome if fair trade practices were implemented, the relative ineffectiveness of free trade does not imply that there is much hope for the prospects for fair trade since the study concluded that leading engines of economic growth depended upon increasing accumulated capital; not trade.
-Regardless of the prospects of trade as a major economic developmental force, the enormous political and economic obstacles that the fair trade movement combated in the banana industry reflects a serious need for further institution building and capacity expansion. Further political and economic collaboration amongst pro-fair trade partners must continue in order to have any chance at defeating the greater forces that are entrenched against them in the current political economic system.
-For the proponents of fair trade, much has been achieved, yet more still remains for this international development effort to succeed in the debate against them. Thus, within a political economic framework, the debate surrounding free trade and fair presents a complicated, dynamic, and mostly hostile international trade environment for Latin American countries that are attempting to pursue development through the exportation of agricultural products.
i Taylor, R. and A Thorpe. 2001 Trade reform in Central America and the Caribbean: Will liberalization resolve the problem of structural imbalances?
ii IBID
iiiAll quotes from this paragraph are from: C Strong, 1997. The role of fair trade principles within sustainable development. Sustainable Development 5: 1-10
iv TRADE AND DEVELOPMENT BOARD COMMISSION ON TRADE IN GOODS AND SERVICES, AND COMMODITIES First session, Second part Geneva, 19 February 1997
v Taylor, R. and A Thorpe. 2001 Trade reform in Central America and the Caribbean: Will liberalization resolve the problem of structural imbalances?
vi Argument taken from lecture of Political Science 138C, Political Economies of Development, lectured by Kiren Chaudry, Spring 2005, University of California, Berkeley, CA
vii Blauert J Zadek S., Markets as Mediation: Growing Policy From the Grassroots, Smith Alistair Moving Beyond Banana Trade Wars 1993-96 Kumarian Press, 1998
viii IBID
ix Taylor, R. and A Thorpe. 2001 Trade reform in Central America and the Caribbean: Will liberalization resolve the problem ofstructural imbalances?
x All results from this case are from: IS THE EXPORT-LED GROWTH HYPOTHESIS VALID FOR DEVELOPING COUNTRIES? A CASE STUDY OF COSTA RICA by Emilio J. Medina-Smith, UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, 2001
xi TRADING OPPORTUNITIES FOR ORGANIC FOOD PRODUCTS FROM DEVELOPING COUNTRIES STRENGTHENING RESEARCH AND POLICY-MAKING CAPACITY ON TRADE AND ENVIRONMENT IN DEVELOPING COUNTRIES, United Nations Conference on Trade and Development, January 2004
The Multifaceted Market Researcher 