Free And Fair Trade

1. GENERAL OVERVIEW

Global trade enjoys an increasingly high political profile. As a result of technological advance, large-scale migration and progressively liberalised markets, we live in a world that is ever closer both physically and in public perception. Europe is no longer the frontier of people’s experiences as it was in most of the twentieth century; communication and travel to the Americas, Africa, Asia and the Pacific is now commonplace.

Today there is greater compassion for those in the developing world and increased awareness of global environmental outcomes. Indeed, any aspiring UK government will find it necessary to show a willingness to address the principles and practical application of trade policy as well as making some common ground with the supporters of increasingly high profile campaigns in this arena. The Trade Justice Movement’s national campaign in spring 2003 to promote what it describes as "fair trade" and greater justice in global trade to benefit developing nations is a theme that is here to stay.

The current round of trade talks was launched before the WTO ministerial conference in Doha, Qatar in November 2001 but negotiations have been disappointing to date especially in the key areas of agriculture and public health. This paper sets out my outlook on international trade issues and practical suggestions for its global development.

2. FREE AND FAIR TRADE AS AN ENDURING PRINCIPLE

An open, democratic and civil society is the ideal to which countless millions outside the free world aspire. Alongside the rule of law, protection of individual property rights and the maintenance of personal liberty stands the capacity ? for both nations and individuals ? to trade freely across the world.

I am an internationalist by instinct. Central to this core belief is my support of global free trade and open markets. Britain has always had a global outlook and whilst 55% of the UK’s annual trade is with fellow European Union nations, the corollary is that the remaining 45% by value of our trading network of imports and exports is with those 150 or so nations outside the EU. Many of these nations are amongst the world’s fastest growing economies and will provide even more extensive trading opportunities in the decades ahead. Our belief in free trade should be inextricably intertwined with compassionate concern for the welfare of those living and working in the world’s least developed nations. Contrary to common sentiment their welfare is threatened not by free trade but by an array of protectionism, subsidies (including many of those proposed by the so-called Trade Justice Movement) and the often misguided aid-driven approach to economic development.

The operation of a free market without the imposition of import/export subsidies or tariffs has unambiguously delivered prosperity to generations of humankind over many centuries. The historical clash between this traditional exposition and the periodic desire by governments and commerce alike to protect markets is something that we all can understand even if it is undesirable in the long term. Put at its simplest, free trade best promotes consumer choice. It removes power from government and places it into the hands of individuals. Time and again it also produces the most desirable economic outcome in enabling the widest base of competition, the most extensive incentives to do business and hence the widest choice and best value for individual consumers. The notion of comparative advantage was first stated over 150 years ago and still underpins the basis for free trade between sovereign states. It applies particularly to impoverished, developing nations and will be explored below in a little more detail in dealing with the corrosive effect of agricultural subsidies in the domestic European and US markets.

There is increasing evidence of a renewed appetite for protectionism, especially as European nations grapple with the social and economic effects of large-scale job losses in both long-established manufacturing and service industries to China and India. We her in Britain should not be fearful of restating in explicit terms our support for free trade, which remains economically beneficial even if applied unilaterally. For by retaliating and putting up their own import barriers, domestic governments can only skew home markets. In this way consumers are forced to pay more for goods that are imported or else will need to buy more expensive domestic substitutes. Local companies soon become less efficient in facing a more limited range of outside competition and in the longer term will not be encouraged to operate in those markets to which they are most suited.

3. A MODERN PERSPECTIVE

Today’s Britons are rightly concerned not just about the quality of life within our own borders but express a passionate concern for the wider welfare of those who, by accident of birth, have been brought up in less prosperous regions. There is a greater knowledge of the lives of those in developing nations and by virtue of overseas travel and extensive migration, a greater direct connection with the global community. The establishment of the Department for International Development (DfID) reflected this heightened public alarm at the plight of those living in developing nations. Yet the past six years have seen the gap between developed and developing nations growing ever wider with the poorest in the world not only becoming more impoverished but facing declining life expectancy, periodic famine and widening gaps in wealth and economic opportunity.

DfID periodically and proudly trumpets the fact that the UK continues to expand its aid budget. Yet the UN in making its Millennium Declaration some three years ago recognised that in order to achieve this commitment to 18 specific targets for human development by 2015 it was crucially important to open up international trade especially for the very poorest. The dominance of aid rather than trade in promoting global economic development has been subject to increasingly perceptive criticism. Lending money to poor nations in order to fund large infrastructure projects regarded as neither necessary nor a priority to the nations concerned, but which might create substantial business for consultants and contractors, often burdens developing nations with debts they cannot hope to repay. Aid Agencies and the World Bank are currently trying to fund projects that will lead to sustainable economic improvements whilst involving local officials and businesses in them.

Encouragingly the visit of President Bush to Africa in July 2003 reflects a step change in the promotion of trade-led economic generation within that most undeveloped of continents. Although the USA has traditionally been a relatively ungenerous donor of aid, some 46% of its imports come from developing countries and it is my belief that the developed world needs to allow Africa (and developing nations in other continents) to trade their way out of poverty. Free trade is the proven route to prosperity, but for Africa it has not been working. Although that continent houses some 12% of the world’s population it generates less than 1% of global trade. When African nations open their markets, as required under World Trade Organisation rules, they all too often find local producers are swamped by products dumped at below cost from more developed countries, destroying the domestic market at a stroke. The current WTO round reconvenes in September and I believe all political parties in this country should actively support the new enthusiasm for trade-led solutions in attempting to promote economic and human development across the globe.

There is a growing recognition that the failure of Europe’s governments to deal with domestic agricultural subsidies is a major factor in undermining opportunities for the world’s poorest people.

The Trade Justice Movement has argued for a concept of "fair trade" that differs from free trade. Generally this results in prices of raw materials being set by reference to Western rather than to local standards in anticipation that the difference will be paid to local producers. Yet, when all is said and done, fair trade is something of a misnomer as it is in effect a form of subsidy. The real problem is that whenever an additional sum of money is paid for fair trade products, such as coffee or bananas, it is in effect another way of making a charitable donation through the process of trade. However, unlike aid donations from nation to nation this ‘fair trade’ process has the corrosive effect of promoting economic inefficiency.

By concentrating its efforts on high-profile raw materials the Trade Justice Movement has simply reduced the incentives on developing nations to move into new markets and innovate more widely. Instead a substantial risk is run that the production of any raw material subject to a fair trade agreement will be favoured over other economic activity. Artificially high prices are ultimately likely to have the effect of reducing the volume sold and therefore further damaging the domestic economy. The same arguments may even more forcefully be made in countering the notion that large multinational corporations destroy local skills or culture by engaging in large-scale foreign investment programmes. Many in the West argue that traditional lifestyles and cultures should be preserved against the perceived threat of unashamedly global companies and question the morality of "imposing" global marketing and advertising upon countless millions in the Third World. Yet if economic improvements are to deliver lasting freedoms then they should also promote the widest choice without compromising opportunities. The claim that the traditional way of life in developing nations be preserved at all costs is misguided and underpinned by a patronising presumption that whilst we should continue to enjoy high living standards those in the developing world should be effectively discouraged from having similar aspirations through a network of subsidies and trade barriers.

Whilst Britain should not seek to impose cultural values on other nations, there are cases when fundamental human rights are violated, where we should act. In particular we should actively discourage trade with nations whose goods are produced in conditions of slavery or by using child labour.

However, I believe that aid can be important where either market failure or absence is endemic. We should refuse to allow people to suffer where there is a crisis or in the transition to a more developed society. To have the best effect this aid should be as locally controlled and direct as possible. It should also be structured to avoid destroying long-term incentives. An example of this is the concept of microfinance, which is a means of poverty alleviation through small-scale credit. Currently the World Bank funds less than 1% of its budget for microfinance, a concept that was begun by a Bangladeshi philanthropist some 20 years ago. It enables millions in the developing world to become stakeholders of their own businesses. The loans themselves are normally no more than US$800 and unlike classic forms of aid, they actively seek to break down a dependency culture and ongoing cycle of poverty.

Whilst microfinance theoretically provides a great step forward it is important that we are not too seduced by the arguments in its favour. In practice corrupt officials and village elders are often able to cream off the grants and establish their own patronage networks.

4. AGRICULTURAL SUBSIDIES AND HOW THEY UNDERMINE THE MORAL HIGH GROUND OF TRADE POLICY

Whilst subsidising its domestic agricultural industry is an economic activity in which nearly every developed country engages there is little doubt that the Common Agricultural Policy (CAP) harms the UK at both the domestic and international level, whilst simultaneously shredding any claim the EU might have to be an institution that is responsive to the welfare of developing nations. However, the most insidious effect of the CAP is that it acts a regressive tax and a market distortion on the home front. Because large-scale subsidisation raises food prices for every citizen of the EU, the poor pay proportionally more of their incomes towards agricultural goods than wealthier citizens. Moreover, subsidies are paid out mostly towards larger agricultural conglomerates, effectively withdrawing income from the less well off even within the agricultural sector. The domestic effects of higher food prices also have longer term economic effects representing a real drag on the UK economy. The system also focuses on quantity rather than quality and has stifled the growth of innovative sectors in the UK agricultural market such as organic food.

This brief paper is not the place to explore fully the detail of the insidious effects of the CAP, but there are some important implications in the context of trade policy with the developing world. As we have seen one of the key pervading forces of free trade is the ability of nations to be able to exploit their comparative advantage in producing certain goods. However, while notions of the developed world typically have a wide variety of products to export, developing countries usually have few to offer and these usually take the form of natural resources or agricultural goods. The CAP robs these developing nations of one of the only goods in which they have a comparative advantage in several different ways. First, the EU insists on producing these goods at a higher cost rather than importing them at the much lower free market price by engaging in trade diversion rather than creation. Second, the EU robs developing nations from access to its markets, the largest in the world. Finally, extremely cheap EU goods destroy local and world businesses since the farmers of poorer nations cannot compete with the subsidised agricultural goods from the richer EU.

There is a strong psychological desire in mainland Europe since the foundation of the EEC for plentiful supplies of home-grown food. Likewise there is a clear desire in Britain to preserve our countryside and agricultural sector. However, we should find alternative ways of delivering these goals that do not skew the market – and be at the forefront of exposing the highly damaging effects that the CAP has on trade policy with the developing world. Naturally, the same principles apply to the highly subsidised US agriculture sector ? think also, for example, of impoverished Saharan states like Mali which is unable to sell its staple crop ? cotton – into the American market.

5. ENVIRONMENTAL CONCERNS

I believe that free and fair trade is the most ethical, economical and efficient way of distributing and exchanging the world’s resources. However, I recognise this trade only encompasses conventional markets and does not fully take into account the environmental costs of production. As wealth has increased in the developed world, our aspirations have broadened beyond economic welfare to embrace wider quality of life issues. This has resulted in public concern about damage to the global environment and demands for inter-governmental action.

I have always believed in a conservationist approach that seeks to preserve quality of life. Indeed historically it has been the most centrally planned command economics that have been guilty of the worst environmental outrages. Disparity in environmental standards between countries has led to the accusation of "unfair competition". Some argue that in order to make trade "fair" all nations should commit to minimum environmental standards. Whilst we may deplore environmental destruction, it is dangerous and counterproductive to reflect this in trade negotiations. It will be sustainable economic growth that creates an aspiration amongst individuals for better living standards. Countries in different stages of economic development may have different priorities and their citizens may be prepared in the short-term to accept higher levels of pollution.

However, problems arise with common resources, such as air and water, which are not owned by any one nation. In the production of goods, nations have an incentive to deplete shared natural resources. Many on the left argue for trade restrictions to deal with these difficulties or fixed restrictions on a country-by-country basis such as those negotiated through the Kyoto protocol. This is arbitrary and is inefficient because the pollution is not reduced in the areas where it will cost the least to achieve. In addition, the lack of connection with trade means that such agreements are difficult to enforce.

My approach is to ensure that prices in freely traded goods reflect the full cost of production including the external cost to the environment. One method of doing this is to sell tradable emissions licences, which entitle the holder to create a certain level of emissions. The holder has an economic incentive to reduce emissions in order to sell on the licence. In a free marketplace, these licences will be used in the areas where there is the greatest economic cost in bringing down the level of pollution, thereby maximising efficiency.

A method of imputing goods through a permit process would need to be agreed through international trade accords, likely to be a complex and protracted process. However, we should be aware that if we fail to solve this problem through the market, there will be growing pressure to address this issue through interventionist means, which are likely to be undermined by unintended consequences.

6 THE WAY FORWARD

(a) We should make a strong ethical case for supporting trade in preference to aid in promoting development in poorer countries. However, where aid is the right solution, this country should support and play a role in directing, locally distributed aid, such as micro-finance, that preserves incentives for the citizens of those countries to achieve self-sufficiency.

(b) I believe this nation should make an unequivocally moral (rather than simply economic) case in opposition to agricultural subsidies in the European Union and United States. We need, in relation to CAP, to be seen as not simply ‘anti European’ but in favour of the developing world in its fight to become more self-reliant and less dependent upon aid and ultimately self-defeating subsidy. Similarly we should argue that the UK is in a unique position to work constructively with the Commonwealth, (for example, India which now leads the G21 and Kenya which represented the poorer nations in the closing session at Cancun) and should do so visibly and effectively.

(c) This country should take the lead in promoting market-based approaches to ensure that environmental costs are taken into account in the trade process. We should recognise that this is an increasing area of public concern and if we do not act, further attacks on free trade are likely to emerge.

(d) The benefits of the widest possible spread of trade are fundamentally associated with the best values of a civil society. I believe in a commitment that everyone should have the opportunity of a fair deal and that notion must extend beyond the boundaries of the UK so that no-one should be held back and no-one left behind in the world today. It is surely only right that through trade the fair deal is rolled out to the very poorest in our global community.