Making the trade system fairer

Opponents of the fair trade movement believe that ‘free trade’ is somehow pure and untouched by the dirty hand of regulation. Nothing could be further from the truth.

All transactions, whether they are between customers and retailers or multinationals and nation-states are governed by rules. Without rigidly enforced property rights, dispute settlement procedures and boundaries for what is tradeable and what is not, there could be no effective system of trade.

It is ironic that many of those politicians and commentators most willing to criticise the notion of fair trade are some of the staunchest opponents to the importation of illicit drugs. Tougher penalties and more resources for customs are the typical solutions to the social and economic ills associated with illicit drug importation and use. But that sounds like a trade barrier, one that most people happily accept.

While trade restrictions (in the form of a total import ban) are promoted as the solution to protecting Australians from the adverse consequences of illicit drugs, apparently no such action is justified to protect Australians, and foreign citizens, from the impact of child labour, slave labour, and dangerous, environmentally destructive, production techniques.

Although its supporters claim that free trade represents the ideal and that proposals for fair trade are a deviation from that ideal, the trade system is not neutral. The rules and institutions that govern trade can be designed to protect human rights and the environment, or to ignore them.

The existing trade rules already reflect a small number of human rights. These rights must be expanded if all countries are to benefit from trade. For example, it is legal under the existing trade rules for a country to discriminate against goods produced using prison labour, even though prisons may be able to produce goods more cheaply than wage labour.

What then is fair trade? It is important to separate two sets of arguments in favour of ‘fair trade’. The first focuses on the differences between countries in environmental and labour standards and the way that free trade may see these standards weakened. The second focuses on the promotion of domestic firms through various forms of ‘industry policy’. This essay focuses on the first set of issues.

Advocates of fair trade argue that free trade encourages (or at least ignores) violations of human rights, exploitative labour conditions and environmentally destructive activities. Producers in countries that permit sweat-shops, suppression of trade unions, child labour and dangerous or polluting production processes can often undercut competitors that must abide by better standards.

Fair trade policies would involve changes to the international trade rules to allow countries to discriminate against products made by firms that exploit workers or despoil the environment.

At present, with few exceptions, the GATT rules prevent countries from discriminating against imports of ‘like products’ so that goods produced using environmentally damaging process (such as indiscriminate logging or fish caught by dynamiting coral reefs) cannot be banned. This was established in the famous Tuna-Dolphin case.

The Tuna-Dolphin dispute between the US and Mexico led to two successive GATT dispute panels that have been the subject of considerable controversy. The US attempted to restrict imports of yellow fin tuna caught by Mexican fishing boats because too many dolphins were being killed in the process. Mexico challenged the US under the GATT rules.

US laws have ensured that US fishing fleets reduce the risks of killing dolphins by using better fishing methods. The Marine Mammals Protection Act also prohibits the import of tuna from countries where the level of dolphin deaths associated with tuna fishing is significantly higher than in the US. This prohibition was the cause of the dispute before the GATT.

Although a GATT panel gave a ruling in 1991, Mexico reached a deal with the US and dropped the case without it being formally adopted by the GATT. The European Union then brought a separate case, which ensured that the GATT reached a formal decision in 1994.

In both cases the US argued unsuccessfully that their prohibition was consistent with GATT exceptions for environmental purposes, but the GATT ruled that Mexican and US tuna are ‘like products’, regardless of the level of harm caused to dolphins, and that US import restrictions were illegal.

A simple change in GATT rules to permit discrimination against goods produced using unacceptable methods of production, including unsustainable and polluting processes, would bring about a major improvement in environmental standards around the world.

Imposing a floor for environmental and labour standards would make international trade a tool for improving wellbeing. By contrast, the existing system puts pressure on governments to reduce their standards in order for domestic firms to remain ‘competitive’. This gives rise to a phenomenon known as ‘eco-dumping’.

While environmental costs are as real as any other costs, they are often not reflected in the market prices of products. (The same can be said for the ‘costs’ of violations of human rights and exploitative labour practices.) If these ‘external costs’ are not reflected in prices, then the country in question is effectively subsidising production by not imposing adequate environmental standards. By permitting environmental damage a country can gain an unfair advantage in the international marketplace.

The acceptance by some countries of environmental damage can therefore be considered as a form of subsidy, resulting in eco-dumping. At present, trade rules prevent countries from taking any measures to prevent this type of dumping. While no one is arguing that all countries should have the same environmental and workplace standards, those countries that have decided to adopt higher standards should not be undermined by exports from those with unacceptably low standards.

This is especially true if transnational corporations go in search of locations with low standards in order to avoid higher standards elsewhere. There is a danger of a ‘race to the bottom’ in environmental and labour standards as a result of which governments come under pressure to defer the introduction of tighter standards or even water down existing ones.

Once upon a time, ‘all the fish in the sea’ was meant to imply an infinitely large number. Now, it is simply seen as an annoying constraint on the capacity of the world’s fishing fleet. As time and circumstances change, so too must domestic and international laws.

Advocates of the free market often celebrate the enclosure and privatisation of the English commons as a turning point for wealth creation and prosperity. Such a change in laws was no more ‘interventionist’ than what is now required if global capitalism is to deliver benefits to all.

Trade can become a powerful tool for raising the production and living standards of all counties. But this will not happen while those of us in developed countries continue to turn a blind eye to the fact that many of our ‘cheap imports’ come at the cost of other people’s health, lives and environments.