What’s the Difference Between Free Trade and Fair Trade?

August 6, 2011 @

Fair trade vs free trade

Free trade advocates and fair trade advocates share some common goals. Both emphasize the need to assist producers and workers in obtaining access to the global market and to improve wages. Their ideologies when compared closely, however, show some differences.

Free trade dates back to ancient times from the Phoenicians to the Greeks and Romans to Western European empires. The expanding trade of the late 19th century saw a precursor to free trade and globalization. The term “laissez-faire” (“leave it be” or “let do”) was common in political writings throughout the 18th and 19th centuries and transformed into a school of thought calling for less regulation particularly in international trade. Around World War I, free trade  policies were revised in favor of protectionism policies, which lasted until the end of World War II until the Breton Woods system standardized trade policies and exchange rates. This accelerated trade not under the Communist bloc. When the Soviet Union fell in 1989, remaining closed markets opened. Free trade increased in the 1990s and early 2000s into the global economy we have today.

Free trade relies on government tax or monetary gifts/tariffs, subsidies, politics or price controls. Free trade advocates believe that a leveled trading system among producers around the world matches the global supply chain to demand, while indirectly creating prosperity for everyone involved. Free trade purports an advantage but actually creates a disadvantage in developing countries for producers and workers who lack the safety nets from social programs found in developed nations. Producers end up losing more when prices are low because they must sell quickly, unlike producers in wealthier nations who can wait to sell their products.

Fair trade has been around for approximately 40 years according to FINE, an informal association of the four main trade networks. After World War II, Fair Trade Organizations (FTOs)–called Alternative Trade Organizations in their first years–started buying handcrafts from impoverished Puerto Ricans and Europeans and later developing nations. Most FTOs began as missionary projects, humanitarian efforts or activists’ statements. The concept gained support from non-governmental organizations that worked with FTOs to support producers and workers in developing countries. Then in 1969, Oxfam (Dutch division) started selling fair trade goods made by cooperatives in developing regions to build awareness and campaign for trade reform, which led to over 1000 Third World shops in the UK and Switzerland. Producers together with Max Havelaar later introduced the first fair trade product certification system and label. By the 1980s to the 2000s, FTOs grew rapidly in response to the hardships in poorer countries and economic unfairness, and saw the creation of networks and associations. Sales topped $2.5 billion worldwide by 2007. In 2009, over 65,000 people participated in World Fair Trade Day–the largest fair trade event in North America.

According to the Fair Trade Resource Network:

“Free trade is a market model in which trade in goods and services between or within countries flow unhindered by government-imposed restrictions. Fair Trade is an organized social movement and market-based approach to alleviating global poverty and promoting sustainability. The Fair Trade movement promotes the payment of a fair price as well as social and environmental standards in areas related to the production of a wide variety of goods.”

“Fair Trade is not an attempt to erase all principles of Free Trade, or to reverse the global nature of the business environment today. A common misconception is that Fair Trade is the opposite of Free Trade, and the two are often confused. According to Paul Rice of TransFairUSA, “Fair Trade makes globalization and ‘free trade’ work for the poor” (TransFair USA, 2005 Shareholder Report).”

 

Fair trade encourages that rules are needed in order to protect disadvantaged producers. The rules are set to help producers in emerging countries have better trading conditions and awards producers who implement sustainable practices. Rather than leaving wages and environmental standards up to the market, fair trade advocates lobby for higher prices and social and environmental standards for producers.

It is not unusual to think that free trade and fair trade are opposing ideas. It is important to understand, however, that government actions and transnational corporations influence the market and that prices respond to weather activities, natural disasters and any existing trade agreements. Due to these uncertainties, the price of goods can fluctuate. As a result, the wages of producers and workers fluctuate. Additionally, there is a supply chain between the producer and the consumer, causing additional loss to intermediaries, even when higher prices are in play.

The table below outlines some differences between fair trade and free trade.

Fair Trade Certification

Conventional Trade

Price setting

Minimum price or market price

Market price (not guaranteed)

Supply chain

Fair Labeling Organization (FLO) monitors and evaluates entire supply chain.

Consists of importers, exporters and brokers.

Environmental Standards

FLO, WFTO or IMO standards

Subject to domestic law (not guaranteed)

Child Labour

U.N. ILO standards strictly enforced

Subject to domestic law (not guaranteed)

Community premiums

Per box or pound of goods.

None

Pre-harvest credits

Available

None

Right to unionize and decide scale of harvests

Yes

Subject to agreements between landowners and buyers

For more key differences, visit the Fair Trade Resources Network or read Fair Trade: A Beginners’ Guide by Jaqueline DeCarlo.

 

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