The U.S. Must Redefine "Fair Trade"

Feb 9, 2007

Globalization is again under attack. Commentators from many perspectives have argued recently that globalization has reached a turning point and will never recover. Global inequities, failures of international institutions, and resentment of American power, they say, will usher in worldwide protectionism, threatening to end the current era of globalization.

An end to the current state of globalization doesn't have to lead to conflict, however, as did the pre-1914 era. Indeed, Washington's new political makeup provides an opportunity to shape a globalization that benefits all. In the realm of international trade, a starting point may be to reconcile the free and fair trade.

After all, while the freest economies tend to be the richest, trade isn't an end in itself. Rather it is a tool to help increase living standards, lower poverty, and advance political freedom and human rights. U.S. Congressman Sandy Levin, the new trade subcommittee chairman, recently issued a statement to this effect, adding that the terms of international competition must be shaped to achieve both growth and equity.

The concept of freedom seems pretty straightforward, but fairness means different things to different people. Fair trade is often depicted as antithetical to free trade, or as protectionism in disguise. Nevertheless, freedom and fairness are decent principles to guide an ethical U.S. economic policy, and reconciling the two would help restore American moral leadership. Fairness in economics is often concerned with offsetting "unfair" advantages created by lower wages in trading partners, but this notion incorrectly views the global economy as a zero-sum game.

A new, fairer U.S. trade policy would aim to give more people the opportunity to enjoy the benefits from world trade flows. Although Congress may attempt to use the term fairness to protect vulnerable domestic industries, doing so would be a mistake. As Treasury Secretary Henry Paulson recently said: "Giving in to protectionist sentiment would send a terrible signal. We would be telling developing nations that while we have benefited from increased trade, we aren't going to allow them the same opportunity to develop." He concluded that such a direction would be "morally wrong."

Adam Smith showed that economic freedom allows people to maximize their potential to the benefit of all society. But total freedom, as Thomas Hobbes argued, leads to a short and nasty life. The Aristotelian notion of moderation might help reconcile this paradox: Trade should be neither too free nor too regulated.

This is the puzzle a group of philosophers, economists, and practitioners tackled last month at the Carnegie Council. The question posed was, is it possible to fashion a free and fair trade policy that will build a more sustainable and equitable trading system? And, how can the principles of a more moral trade policy be applied to extractive industries? Three "freedoms" are worth examining here.

  • Freedom to trade anything: As philosopher Christian Barry has noted, some goods are unfit for trade. For example, it is widely maintained that some services, such as those offered by an assassin, should not be traded. Goods obtained through coercion may also be deemed unfit for trade. When it comes to the trade in natural resources, it is not always clear that the sellers are the rightful owners of the goods as they may have obtained them through bullying. The issue of rightful ownership pertains also to trade in intellectual property. One question under debate is how to protect cultural intellectual property. For example, Ghana imports traditional African textile prints from China. Exacerbating tensions over Chinese textiles in Africa and the resulting loss of African jobs, some scholars have begun to question the fairness of trade in another country's cultural goods. The answer may lie in determining whether these vendors are the rightful owners of this property. The process of producing goods traded should respect human rights and a country's labor and environmental laws. Slavery, poor working conditions, and environmental degradation are particularly problematic in illegal mining and logging operations. As a result, multinational corporations have started carefully scrutinizing their supply chains. Ford Motor and General Motors, for example, recently stopped using Latin American pig iron produced by slave labor. DaimlerChrysler, Ford, GM, and Honda joined together last month to train suppliers to avoid buying materials made by slaves.
Freedom to trade with anyone: Makers of a decent trade policy should remember the premise that trade is meant to improve peoples' lives, and they should deliberate when considering the use of trade barriers, sanctions, and embargos. The record shows that these tools are blunt and inaccurate in achieving broad security goals. Policy toward North Korea, for example, is often thought to be a choice between advancing human rights or a proliferation regime—or both. Instead, we have witnessed nuclear proliferation and mass famine on the Korean Peninsula despite a politically gratifying U.S. trade embargo. The other side of the coin concerns trading partners that fail to enforce their own labor, human rights, and environmental standards, jeopardizing another kind of security. Part of the problem is simply keeping tabs on corporate behavior and publicizing the findings. Oxfam and the Business & Human Rights Resource Centre have excelled in this area. A country's human rights record may matter little if the trading partner feels that the exported good, for example oil, is vital to its national security. The United States must do its part to lower oil demand and invest in renewable energies, helping oil-exporting nations to shed the resource curse. Freedom to trade with impunity: As the greatest beneficiary of globalization, the United States has a responsibility to give back to the system from which it benefits. In practical terms, this means the United States has an interest in working toward nurturing freedom and fairness not only at home but also in the global economy. It can do so by promoting fair and ethical trade practices, socially responsible business models, expanded stakeholder rights, and a stronger global civil society. The responsibility is great but fair for the biggest consumer of the world's recourses. These limits on free action can guide a fairer trade policy. Constructive policies are available to implement that vision. The U.S. Congress has made a promising start by passing bills to raise the minimum wage, make higher education more affordable, and eliminate subsidies for the U.S. oil industry, shifting resources toward developing clean energy technologies. It is also hopeful that Max Baucus, the new chairman of the Senate Finance Committee, would like to renew the Trade Adjustment Assistance program. He also supports a broader "Global Adjustment Assistance" that would offer benefits to workers displaced not just by trade, but by all aspects of globalization. Enacting fair trade To combat protectionist temptation and build on the ability of the country to cope with the tides of globalization, U.S. trade policy should also tailor its primary and secondary education system to equip graduates with the skills to compete in a global economy by emphasizing science, engineering, and foreign languages. The United States will be forced to take a look at redirecting resources away from war and toward upgrading its own infrastructure. New York City's status as the preeminent financial center is threatened by cities like London and Tokyo. To realize Baucus's goal of renewing fast track trade negotiation authority, the U.S. Congress must feel it has the capital to support trade agreements, otherwise fast track will be stuck in a pit stop. "Fair trade" agreements or comprehensive economic partnership agreements would continue the tradition of including labor and environmental provisions, like those with Jordan and Chile. A Washington trade journalist recently put it to me: "Labor and environmental enforcement is needed so that politicians feel comfortable enough to support FTAs without getting clobbered by labor groups. Then we can renew fast track." These comprehensive agreements commit partners to enforce their own environmental and labor laws, which in turn comply with the International Labor Organization. They could also offer deeper integration in the areas of labor movement and port screening, for example, to trading partners that honor the freedoms of speech, assembly, and religion. These three freedoms are good proxies for transparency, labor rights, and civil society, all necessary for the establishment of fair trade practices.

Other powerful approaches include fair trade and ethical trade initiatives. As clean energy consultant David Dell puts it: "That which is truly profitable is also sustainable and that which is truly sustainable is profitable." Social entrepreneurs, local governments, and increasingly business gurus like Michael Porter have reached this axiom. To these ends, fair trade initiatives, such as HandCrafting Justice and Global Goods Partners, seek to cut out the middleman, pay producers fair wages, and reinvest in community health and education.

Ethically traded goods are those produced by companies that ensure labor standards are enforced within their own company and by their suppliers. Another idea is for companies to shoulder some of the burden of providing a safety net to those laid off when jobs are moved to take advantage of cheaper labor. Trade adjustment insurance and freer labor flows are part of the compact of free trade that is yet unfulfilled.

The above initiatives define corporate social responsibility: philanthropy and reinvestment, good labor practices, and business models that benefit people and the planet as a whole. They help sustain a healthy trading system and act as a de facto "trade Peace Corps," putting a human face to an American-led free market system. Given the services these initiatives provide to American leadership, the U.S. government should consider bolstering them by establishing a fund to support grassroots fair trade activities and giving tax breaks to socially responsible business models.

Notice that tariffs and competitive devaluations are not on the list. Although both of these approaches are advocated under the guise of protecting fairness and even human rights, history and economics tend to dispute those claims. Instead, openness—with the proper safety net—can help advance human rights.

For the United States to justify and prolong its international leadership, it must ensure that the rest of the world can access the benefits of globalization. It can start by promulgating a more thoughtful approach to trade—one that is neither protectionist nor free market fundamentalist. By finding a middle road between these extremes, the United States can realize its own dream of freedom and justice for all.

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