Free Trade and fair trade may sound like similar economic concepts, but the two terms describe different conditions. Free trade defines the international exchange of goods and services with minimal or no barriers. Fair trade focuses on improving the standard of living of producers in developing countries.
Free trade describes markets where there are few impediments to exchanging goods and services across borders. In its purest form, free trade between two countries would have no tariffs, subsidies, quotas or regulations. An example of free trade is the North American Free Trade Agreement, a treaty Canada, Mexico and the United States entered in 1994. The major issues NAFTA addresses include the elimination of tariffs on specific goods and services as well as non-tariff barriers such as restrictions placed on products shipped across borders. The agreement also brought product standards for the three countries to the same level. According to the Council on Foreign Relations, in the 20 years since the treaty was ratified, trade between the three countries increased from $290 million to $1.1 trillion.
The Cost of Free Trade
Free trade can be disruptive to industries that have previously been protected to a degree by tariffs and other trade barriers. This can be a challenging issue for countries trying to balance an embrace of unfettered competition while preserving jobs. Competitive forces in free trading markets can put downward pressure on wages. Free trade also can lead to increasing exploitation of a developing country’s workforce as higher demand for products leads to abusive child labor practices, long hours and poor working conditions.
Fair trade describes partnerships that seek to address some of the problems that can result from free trade, specifically low wages, substandard working conditions and child labor issues. Fair trade organizations and independent buyers provide support to producers in developing countries in a variety of ways, including pre-payments for product orders, making sure those payments are passed through to producers and paying for work performed when orders are cancelled at no fault of the producer. Additionally, fair trade organizations closely monitor treatment of children who work for their producers and prohibit the use of forced labor.
Coffee and Fair Trade
While supporting producers, fair trade organizations also must raise awareness of consumers, stressing the benefits of buying products that meet standards for ethics and sustainability. Building awareness increases consumer support, encouraging end users to seek out and purchase products labeled as following fair trade protocols. Fair trade food and drink products are labeled after being certified by either the Fair Trade Labeling Organization/Fair Trade USA or Marketecology. The first product labeled as fair trade certified was coffee, and Fair Trade USA reports that there are now about 500 certified coffee brands available in North America.
After working for 21 years as a licensed adviser specializing in corporate and private finance, Scott Krohn began his writing career in 2008 covering a variety of topics including business, personal finance, health, and IT. He graduated from Cal State University, Long Beach with Bachelor of Arts degree.