“Fair trade” appears to be a noble assembly of words. We all trade and it should be fair, right? A quote, which I can not adequately attribute to a proper author, was told to me that generally questions the premise of fairness: “Fair? to whom?”(1)

It is a simple question that presents a quagmire of logical reasoning in order to answer it. Even the definition of the word can be problematic:

According to Princeton:

free from favoritism or self-interest or bias or deception; conforming with established standards or rules

The problematic nature of the word is that when joined with the general term “trade”, it largely becomes meaningless. Trade is:

According to Princeton

the commercial exchange (buying and selling on domestic or international markets) of goods and services

First, we need to look at the general definition of “fair” and “trade” in the context of the given statement – or how it is implied and applied to arguments. First, we will analyze the word “trade”. Trade in common parlance is generally an exchange of goods or services for other goods or services. Within the scope of a capitalistic system, trade is conducted in the pursuit of profit. There is an inherent level of self-interest built into the system.

When the farmer sells cotton to the mill, he does so with the expectation of gains above the costs of producing the cotton. The mill then refines the raw cotton and sells the refined product into the marketplace with a markup that is generally driven towards producing a profit. The shirt maker buys the fabric, makes his changes, adds buttons or zippers (etc.), and then puts the shirt out to a distributor. The product will eventually make its way into the hands of the consumer who will use the final product. At each step, the motivation of profit is built into the changing product.

At each step, each agent in the process acts in its own self-interest; the primary interest is survival and the secondary instinct is profit or gain on an exchange. This is important because self-interest is one of the more common components of the definition of “fair”. Much of human and animal compulsion is driven by self-interest. At some primitive level, we become motivated towards the idea of self-preservation which requires self-interest as a primary driver of action through life. Profit itself is only achieved when our self-interest is refined to such a state that it creates excesses in other areas of our lives and business. In the commercial world, profit is largely derived from our pursuits whereby it creates, most often, a monetary surplus distributed amongst the owners of a business. We then enter into a bit of a paradox in that our pursuit for profit can only truly be achieved by refining self-interest processes to such a degree that it creates more surpluses.

While it may be argued that I am creating a straw-man argument based on the dictionary definition of the word or concept of fairness, it serves as the only tangible definition of what we are working with. For the sake of argument, if we remove self-interest from the definition, we find a more palatable, but equally flawed remnant.

So we are left with a rough-shod definition composed of:

“free from favoritism or bias or deception; conforming with established standards or rules.”

Consider for a moment that trade itself is generally composed of two parties who are privy to the transaction at hand. There may be more parties involved, but with a reasonable assumption that all trade is a casual 1:1 relationship, the entire remnant of our definition of fairness is lost. When engaged in trade we make a decision to enter into a defined agreement with another party. Trade takes place after the decision of who to trade with has been decided.

It would be a mistake to retreat one step back into the decision making process to define trade as the consideration of a given transaction; consideration and choice is a process used to arrive at decisions in matters of trade.

When we look at the relationship of trade, when two parties come together, we can infer some valuable information simply by the standard in which the trade was conducted. If the cotton farmer goes to the mill and presents his harvest, the mill owner will then consider his own position and self-interest when considering the purchase of the materials. The mill owner’s consideration is to drive the price as low as possible while the farmer’s ideal action is to drive the price higher. At some point during the discussion, the farmer and the mill owner will either reach a decision to trade cotton for money respectively, or they will agree to no transaction. If there is no transaction, there is no trade. If the farmer feels he can get a better price for his cotton elsewhere, he is free to take his business elsewhere. If the mill owner believes the farmer is asking too high of a price, the mill owner can choose to trade with another party.

In some cases, either or both parties in the transaction will come away with the feeling that they “had no choice” or they were coerced into making such a decision. Maybe the farmer was the only farmer and the mill owner had to accept the price . Or maybe it was the other way around. Regardless, most people who ascribe to “fair” trade ideals view this as a zero sum game. However with a world of buyers and sellers, the marketplace is far broader than the minds of fair-traders. The assumption is that if either party has an advantage, all possible choices are none.

Our remaining definition again:

free from favoritism or bias or deception; conforming with established standards or rules.

Favoritism and bias are generally not applicable to amicable trade transactions. While favoritism and bias may play a part in the process of deciding who to trade with, it is not a part of the actual transaction taking place. Both parties reach an agreement and the trade is executed.

We’re left with a shorter definition at this point: “free from deception; conforming with established standards or rules.” The expectation in trade is that the underlying assets involved are equal. The value of the product to the buyer is the price paid to the seller. Even as a buyer getting a “good deal”, the exchange tells us the value. If I trade coconuts for peanuts, I may give 15 coconuts for 5 pounds of peanuts; thus, five pounds of peanuts is worth 15 coconuts to me. In most trade, the value of the exchange will vary from transaction to transaction establishing a value at any one given point in time.

If you were to present me with 4.5 pounds rather than the agreed amount of 5 and did so knowingly attempting to cheat me, you have committed fraud. While there is a penalty for committing fraud under the laws, such a penalty does not prohibit the action of deception from being taken. The American court system is formed around making the incomplete whole. In a dispute, disregarding any general regulation for a moment, I am capable of bringing the case to the court system to resolve the dispute if I am unable to satisfactorily reach an agreement to make my position whole. Our system of laws is a veritable mechanism for resolving disputes with a sense of neutrality. Up to this point, we have a single mechanism in trade for the resolution of issues that have come to an impasse.

We, again, venture into dangerous area when we dwell on the final part of the equation: conforming to standards and rules. The difficulty in any state where trade is a core part of the functional economy is the competitive nature of the economy itself. In the United States, the power of the government over regulation is sweeping. And it is in the regulation where the devil comes to play. With the power to dictate the rules of trade, and a government derived of many individuals with their own self-interest being put into play, we can easily see the appeal of government as a mechanism for protectionism.

Where some of a different political persuasion seek to limit or interfere in private trade through regulation, an outlet is created for those who engage in trade to come to the government seeking favors. While a business has no ability to vote, the voice of business is often vocalized by the plethora of lobbyists that inhabit the capitol. Businesses vote with the only resource that creates a general incentive for most politicians: money. While not always cash going directly into the pockets of politicians, money does find a way to rest in election funds, slush funds, special programs, padding for trips and junkets and so on.

Incentives. Humans tend to respond to incentives when they are significant enough to overcome the doubts within the conscience. When an external body, creating the standards and rules, is empowered to enforce rules that affect trade, it also creates an outlet for favoritism where the field can be tilted in any given direction depending on the political climate.

The general “tilt” of the field comes in many forms. Often they come in the form of the addition or removal of regulations over industries. Other times they manifest themselves as subsidies or increases in tax rates or tariffs. So long as the government is accessible, the field can be changed.

Until now, I have focused strictly on the definition of “fair”. Fairness to the supporter of fair trade is the implication that the traditional mechanism of trade is inherently unfair. Yet there is a caveat. The fairness of trade, to a fair-trade person, will not be directed at the two parties involved in the act of trade. Fair trade is fair only to the competitive marketplace by supporting policy and regulation that restrict two parties from trading freely. This manifests as many forms of regulation and law.

Loosely speaking, I have discussed how law can be made and swayed. We know that Congress will generally make the law unless it has been relegated to a special body (such as the FCC). If the state finds a violation, it brings the case to the judicial branch for enforcement. In most cases, the third-party involved in every transaction is neither wanted nor privy to the transaction taking place itself. It creates an external feedback mechanism that permits third parties, not involved in the transaction, the ability to interject their own terms to protect their own interests. This is just one facet of a larger economic definition of “rent-seeking”.

This gap in the economic system of trade leaves us with a distinct problem. We suddenly have to deal with two of the terms that violate the definition of “fair”. Through rent-seeking activities, it permits non-privileged parties the ability to serve their own self-interest by soliciting empowered bias or favoritism from the one source with the power to enforce its own arbitrary rules: government.

In the short run, rent-seeking can be effective and produce results sought by the rent-seeker. However, in the long run, the intended result dissipates as the rush of unintended consequences rise to replace what “should have happened”. A few of the more prescient examples of our recent economic history serve this point well:

US steel companies faced increasing pressure from foreign made steel products. In an effort to protect US steel interests, the government artificially raised the cost of imported steel. The intended effect was to buoy the steel industry and prevent the loss of jobs. The long term effects are generally far worse. Unable to trade freely, the tariffs meant to protect steel jobs in the US, developers and consumers of steel are forced to raise prices or pay higher prices, shift contracts or abandon projects altogether. While the protection of jobs is often plainly visible and easily measured in the nearest degree, the unintended consequences are more difficult to see for most of men. We can not see the general loss of work for construction workers who can no longer work on a building because the price of steel has risen too high and there is little choice in the market. We can not, with any certain specificity, measure the costs of protecting others at our expense.

To effectively protect jobs in the steel industry, we must forgo jobs and some business in the construction industry and peripheral consumer markets of the steel industry. This may take the shape of lost jobs, slowed growth, and lost contracts.

Any evidence of the social and economic costs of protectionism and “fair” trade will generally come long after historians have ascribed the time period in a positive or negative light. We see the economic difficulties in the decision process coming to bear in the automotive industry. Once the pinnacle, if there is such a thing, of American business, all American auto manufacturers have found the sharp edge of competition through past decisions that formed the industry. The unionization of workers, while of decent intentions, has far outlasted its welcome. The pressures of unionization have ensured that wages perpetually moved upwards with no regard to the nature of the market or competition. When you consider in recent reporting the non-production labor wage for GM auto workers was at or above $28 per hour, you can see labor expenses serving as a conduit of poor resource allocation. These jobs often require no specific educational requirements or notable skills aside from physical ability and, at times, dexterity.

As the auto worker’s wages have risen, it has shifted GM and similar companies out of the competitive marketplace, given that American automobiles are manufactured purely in the United States. Despite adding destination taxes on imported vehicles, it has done little to offer GM any competitive advantage in the present – costs which are generally passed on to the consumer, GM and other domestic manufacturers have shifted many production facilities to locations outside of the United States for vehicles destined for the US auto market.

It is not uncommon to find that a significant number of “U.S.” vehicles are now equally foreign as “import” models. Companies such as BMW and Toyota have found that non-union production in the United States can be equally profitable and offers them a competitive advantage. But domestic manufacturers are largely tied into labor contracts that force the very opposite effect they are designed to have: they reduce and eliminate jobs rather than increase or protect jobs.

Now it may be also argued that neither steel nor auto industries are heavily effected by so-called “fair” trade. Yet, if we ascribe to a fair trade policy in the auto industry, we would find that the fairness of the trade removes any possible competitive advantage for a business or industry to take such steps towards improvement. If a vehicle is manufactured in Mexico where the labor wage is largely unbound by American union wage rates and we apply fair-trade policy, the policy would force the wages to rise for those foreign workers above a market wage.

While this may be a blessing for the foreign worker, the consumer of the product will feel the impact as the cost of the product will need to rise to compensate for these changes in costs. Where competitive markets ensure the constant reduction in costs and prices, fair markets ensure rising prices. Where those who advocate fair trade policy seek to address both their own self-interest and the interest of those making low wages, their actions will ultimately put the very products they produce further, or proportionately, out of reach.

We must recognize that labor and the self-interest of workers and unions are often tied into a transaction where they generally have no direct interest in the result. The goal of labor is to produce products or services. The goal of the organization and shareholders is to take the products and services and ensure they are sold into the market profitably. When labor becomes overly powerful and not held in check, it seeks to reduce the profit of the owners and divert those gains towards the labor group.

This creates a significant conflict of interest within the organizational structure. The fundamental nature of business is not to employ, but rather derive profit from ideas and abilities put into motion. While labor may feel their high wages are justified, it is consequently unfair to the owners who have a vested interest in the profit of the business.

The farming industry suffers from the same problem. The domestic U.S. sugar industry is heavily subsidized in order to artificially raise the price of imported sugar to a level where domestic firms can compete. To put this in perspective, consider the fast food icons McDonalds and Burger King. Burger King, at one point, was owned by a British company. Let’s say that Burger King sells its double cheeseburger at a cost that is $.50 lower than McDonalds. Let’s say that the average cost of the double cheeseburger at McDonalds is higher than the cost at which Burger King sells theirs for. So McDonalds finds a politician willing to hear their troubles, stresses that if this type of “unfair” competition continues, it will have to let go of employees through layoffs and close unprofitable restaurants. The proposed solution is a foreign corporation food tax of $.50 per double-cheeseburger sold.

The problem is one that if McDonalds’ proposal passes, price conscious consumers who buy double cheeseburgers from Burger King may be more inclined to go to McDonalds. Rather than McDonalds competing in the marketplace, it has sought “rent” from the government. Now Burger King must comply and pay the government a tax which will raise the price of the Burger King double cheeseburger to the same price as the McDonalds burger. If Burger King fails to comply, it faces the rule of law rather than McDonalds as a competitor. In most cases, this would not be “fair” to Burger King as it both impacts their ability to compete and diminishes a type of competitive advantage in some cases.

Final Words:

The point to take home from my writing is one that should hopefully shed some light on the contradictory nature of the so-called “fair” trade argument. If we tend to lean towards a literal definition of fairness, fair trade in common parlance can never be fair when parties not-privy to a given transaction are provided the opportunity to interject their own will with the threat of force. The only “fair” trade, in true form, is free trade.

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