Academic journal article American Economist

A Note on Teaching about Fair Trade

Academic journal article American Economist

A Note on Teaching about Fair Trade

Article excerpt

Introductory economics courses traditionally teach about free trade. This is often done both in the context of exchange between individuals within a country and trade between individuals in different nations. Most college textbooks include chapters (most often at the end of the books) that address free trade and that include numerical comparative advantage examples to demonstrate gains from trade. Discussions of trade barriers and the winners and losers from these barriers are also included.

At the same time, students as consumers are frequently confronted with the concept of fair trade as they shop for coffee, tea, chocolate and other products imported from developing countries. From informal surveys of our university students, we find that there is considerable ignorance and confusion about the differences between the economic concept of free trade and the social movement of fair trade. We also find, not surprisingly, that economists use the expression "fair trade" to refer to concepts other than the popularly recognized social movement. Perhaps adding to the confusion, we find that principles of economics textbooks usually do not address the topic of fair trade and those that do use the term in different ways.

Understanding free trade and its benefits to both sides of a transaction and to society is a fundamental and essential principle of economics. We believe that not addressing the differences between free trade and the fair trade movement upfront may interfere with students' understanding of free trade, and perhaps of the goals and consequences of the fair trade movement as well. For these reasons, we suggest that principles of economics instructors address, if only briefly, the issue of the fair trade movement and distinguish it from the concept of free trade.

Background

There is widespread agreement among economists about the meaning and importance of free

trade. When referring to international trade, free trade means trade between people of different nations without artificial or government-imposed barriers. For over two centuries economists have endorsed free trade as the best trade policy and as a matter of common sense, despite skepticism and disbelief from others (Blinder 2008). Following the insights of Adam Smith and David Ricardo, economists generally agree that free trade provides overall benefits to society and benefits both sides of voluntary trades. Trade barriers benefit some while hurting others and result in overall welfare losses.

The discussion of fair trade is not as straightforward. While probably no one would advocate for unfair trade, the use of the term "fair trade" differs both in and out of the economics profession. In their book Fair Trade for All, Stiglitz and Charlton (2005) use the term to refer to trade policies that would benefit developing countries. Through a proposed Development Round in the Doha Round of the World Trade Organization's trade negotiations, Stiglitz and Charlton suggest that "... any agreement that differentially hurts developing countries or provides disproportionate benefits to developed countries should be presumptively viewed as unfair and as being against the spirit of the Development Round" (page 7; italics added).

While there is not one agreed-upon definition of fair trade as it pertains to fair traded products such as coffee, most definitions relating to fair traded products refer to a social movement where socially conscious consumers willingly pay above-market prices to support workers (often agricultural) in developing countries. More of the gains from trade are then theoretically diverted to workers and producers in developing countries. The fair trade movement supports small farmers and cooperatives over larger enterprises and is also seen to support causes such as social justice and environmental sustainability. Dragusanu, Giovannucci and Nunn (2014, 217) define fair trade as a "labeling initiative aimed at improving the lives of the poor in developing countries by offering better terms to producers and helping them to organize. …

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