A hypothetical question: Say a government that is a fully paid-up member of the WTO, and is party to any other agreement that covers today’s free-trade principles, wanted to encourage environmental protection by rewarding firms deemed most green with a subsidy, would it be contravening its treaty obligations by doing so?
Say this government wanted to cut down on pollutants from washing powder, could it legally reward the firm that produced the most chemical-free (or whatever else determines “most environmental” in this case), be it local or foreign, with an annual, reviewable, subsidy? Or would this contravene fair-trade principles?
Sounds like something lawyers would have to argue out on a case-by-case basis in front of WTO arbitrators or judges or whatever they may be.
Probably.
Probably not.
The “master agreement” concerning free trade is the Agreement Establishing the World Trade Organization, which incorporates the earlier General Agreement on Tariffs and Trade. The provisions on “subsidies and countervailing measures” defy easy synopsis, but the fact that your hypothetical subsidy could go either to domestic or foreign producers would definitely count in its favor.
Of course, if your country participates in regional trade blocs such as NAFTA or the European Union, then you would need to consult the treaties establishing those organizations as well.
Well, that sort of thing falls within the scope of so-called fair trade. Fair trade is just protectionism for firms favored by one’s ideology.
But let’s forget about fair trade and get more specific to your question, if the gov’t. were subsidizing domestic and foreign firms, then it would not affect the free flow of goods because it is subisidizing them both. It’s not like a domestic industry is being heavily subsidized so that foreign industries cannot compete; rather, if both are being subsidized then no domestic advantage should obtain. (With the obvious caveats, of course.)
The legal problem will arise when a gov’t. is using a subsidy as a non-tarriff (sp?) trade barrier; e.g., until recently the U.S. and Europe used farm subsidies as a form of non-tarriff barrier (in my work I’ve recently heard farmers whining about new foreign competition). If your subsidy to chemical-free washing powder firms goes to any firm, whether domestic or foreign, then it isn’t a non-tarriff barrier.
(IIRC, the notion of flight from environmental regulations has been empirically disproved. I think the World Bank has some working papers on that.)
Is this an IMHO or is it really?
It may not be stated nicely, but that is essentially it. Fair trade is, as I understand it, so named to distinguish it from free trade, which is simply bringing down trade barriers. When I read about or hear about “fair trade” it is in the context of promoting some particular social goal; e.g., protecting jobs, saving the environment, etc. You can see the fundamental notion there: “free trade” is inherently unfair in many ways, therefore we need to support “fair trade.”
Free trade has no truck with ideology. Free trade is simply the idea of removing barriers to trade. Under a free-trade policy we would reduce or remove trade barriers between the U.S. and Bangledesh (sp?). Under a fair-trade policy we would remove some barriers, but keep some and raise others on the basis of our social goals; e.g., Bangledeshi firms or industries that do not follow the rules we impose will be forced to pay tarriffs.
Another way to look at it is that “fair trade” does not, as far as I am aware, exist in economics. “Free trade” is an economic notion of no (or low) trade barriers. We can do the math on that and come up with quantitative and qualitative results. We can make predictions. We can use it scientifically. “Fair trade” is with us because some want to protect something or other and they feel that barriers to trade are the way to do that.
As an analogy, virtually every micro textbook I’ve seen includes competitive markets. I have never seen “free market” in any economics textbook, and if I have, it has never been used for meaningful and rigorous analysis.
At least, that’s they way I understand it.
So, for example, a ban on importation of goods produced by slave labor is fair trade, and not free trade. If, so long as certain standards are agreed upon by the international community (Fat chance, but I thought I’d throw it out there), does fair trade become free trade? Do we really have free trade agreements in this context or do we have fair trade agreements?
Have I misread this? Did you mean “free market” doesn’t appear or “fair market” doesn’t appear?
Yeah, though it’s hard to say because I’ve never been able to find a standard definition of “fair trade.”
Consider child labor. A supporter of fair trade might say that we not allow trade with countries that use child labor. Someone who supports free trade would say that we should lower the barriers to trade, and if we want to help the children, we should enact policies to help them; e.g., pay them money to go to school. Children do not work in sweatshops because they have better options available to them, and taking away their best choice—no matter how crappy it is—is not going to help.
In the case of slave labor, perhaps a trade embargo would be painful enough to bring compliance, perhaps not. Clearly the slaves are not making their own choice to do what they do. (Children may not either, but they do have families who love them and who must make horrible decisions that we in the States really cannot appreciate.) I suspect that there would be other, more effective policies besides trade embargos to stop slave labor in a country; however, banning imports from Sudan because they use slaves is not free trade—and it may be a case where that trade off may need to be made, or it may not.
In the purest sense, free trade means that I can engage in commerce with any person in any other country without the government putting up barriers. The U.S. is a model of free trade: I can buy goods from someone in Florida without paying tarriffs on the goods.
You did not misread it. You know how some people talk about how good free markets are? I have never seen the free market in any economic analysis. The free market is an ideological entity, that’s how it is used and that is how it’s applied. One time I even pressed an economist who was going on about the importance of free markets; in the end he admitted that a free market had to be economically competitive. He never did tell me why he talked of free markets when competitive markets were what mattered.
The government subsidy getting the most airplay these days is China’s manipulation of its currency value. Economists say that China’s government is keeping their currency artificially weak, which means Chinese goods are much cheaper than they otherwise would be. Even without this subsidy, low labor costs make Chinese goods inexpensive, but some nations are crying foul.