Saturday, February 07, 2009

The "Fair Trade" Cringe

Like many economists, I cringe whenever I hear the term “fair trade.” It is not that I am against fairness — who is? — but the word “fair” is so amorphous in this context as to defy definition. Most often, the slogan “fair trade” is little more than a rallying cry for protectionism.

Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy.


~Harvard economist Greg Mankiw in
today's NY Times

MP: Mankiw is exactly correct. As surely as night follows day, what follows from someone's advocacy or support of "fair trade," is ALWAYS, ALWAYS, ALWAYS a proposal for some kind of government interference in the form of trade protectionism.


19 Comments:

At 2/07/2009 9:41 PM, Anonymous Anonymous said...

I figure they're concerned about something like blood diamonds. Is that protectionist?

My understanding is some people are willing to spend more on free trade goods for a clean conscience of sorts.

 
At 2/07/2009 10:36 PM, Blogger lineup32 said...

Lets open up a wider scale of American society to free trade. healthcare, education would be my first choices

 
At 2/07/2009 11:35 PM, Blogger PeakTrader said...

Anonymous, the article suggests no one is against fairness (see U.S. Clean Diamond Trade Act). The point is whenever the term "fair trade" is used, it almost always means protecting U.S. jobs.

If you feel guilty about not paying enough for consumer goods, you can always donate to charities of your choice.

 
At 2/08/2009 2:37 AM, Blogger PeakTrader said...

Also, I may add, the U.S. has little or no control over many foreign economies. For example, China is the world's low cost producer, because it's willing to work almost for free, paying low wages and using economies of scale. The communist government or elites become stronger, while the masses become weaker. Here's what ChinaLaborWatch.org found:

Illegal discrimination based on gender, age, height, province, and origin
Wages below subsistence level.
Workers earn $0.40 an hour, $3.22 a day. After mandatory deductions for dorm and food expenses, daily earnings drop to $2.55 at most
Routine 10 hour shifts, six days a week
Mandatory overtime shifts, without full overtime pay
Denial of paid holidays, marriage and bereavement leaves, to which Chinese workers are legally entitled
Lack of benefit rights for workers such as health insurance, work injury insurance and pension programs
Physical and verbal abuse

Mattel and foreign distributers (including shipping, advertising, profit, etc.) received $9.65 for each Barbie Doll produced in China, while China received $0.35 for labor, plant & equipment, and electricity.

The masses have too little money to buy goods at world prices (Wal-Mart is a luxury store in China, so they shop at Wu-Mart; they can't even afford the insurance on a Toyota, etc.).

"Some expenses in China:

A quart of milk:
$0.82 --over 2 ½ hours wages
A liter of orange juice
$1.45 --five hours’ wages
A “Big Mac” with fries and a Coke
$1.93 --6 ½ hours’ wages
A movie
$ 1.81 --over 6 hours’ wages
A pair of Nike sneakers
$81.93 --nearly 5 ½ weeks’ wages
Men’s new shoes
$24.10 --80 hours’ wages
One man’s t-shirt
$ 2.41 --7 hours’ wages
A cheap, plain woman’s 2-piece outfit
$12.05 --more than 40 hours’ wages"

"A spokeswoman for Kaisi Metals acknowledged that working conditions at the factory in Guangdong province were not ideal, but insisted that employees chose to work long hours. Workers were paid US$24.33 (€18.69) a week — or US$0.32 (€0.25) per hour — for a 77-hour work week." "Grueling, exhausting, numbing, dangerous and poorly paid would be the only way to describe the work day at the Kaisi Metals factory," the report said.

 
At 2/08/2009 6:46 AM, Blogger Sackerson said...

Free trade, if there is also a free (uninterfered-with) exchange in currencies. Manipulating the exchange rate is protectionism, too.

And can't we get some cheaper economic professors?...

 
At 2/08/2009 9:09 AM, Blogger GOGGA said...

Living on a dreaming..

the free trade is a fake. That´s the main problem...

 
At 2/08/2009 9:29 AM, Blogger John said...

Actually, Mankiw is only partly correct because he leaves out something. All goods the US imports must be paid for by exports of equal value (or by an inflow of foreign investment). Protecting our firms that cannot compete in the industry whose goods we import necessarily harms those firms in the industries whose goods we export. On its own terms, protectionism is half-baked because it ignores half the story.

 
At 2/08/2009 10:32 AM, Blogger PeakTrader said...

Moreover, I may add, during much of the Industrial Revolution, the U.S. had strong deflationary growth, which benefited the masses. Henry Ford understood his workers needed to earn enough to buy the autos they produced.

Unfortunately, the Chinese masses don't earn enough to buy many private goods, including foreign consumer goods (at world prices), to help correct global imbalances through consumption. When faced with slave wages or starvation, almost everyone will choose slave wages.

 
At 2/08/2009 4:48 PM, Blogger QT said...

Peak,

China does not have the lowest wage scale anymore. Vietnam and Indonesia have lower wages.

China faces many challenges...clean drinking water, pollution, feeding the largest population of any nation, a limited social safety net, lack of property rights, local government corruption and a massive migration from rural to urban unprecedented in scale.

A particular challenge is that citizenship is tied to regional locality ie. to be a citizen of Shanghai and receive social benefits, one must be born in Shanghai or if one marries a Shanghaiese, one can go through a complex legal process to gain citizenship.

Having visited China 3 times, the changes are dramatic and people are much better off than they were before the China opened its markets to the west.

Henry Ford was one of the more progressive employers of his age. The documentary, Chicago: City of the Century or the Ludlow massacre offer much darker vision of working conditions and employee rights.

John,

Protectionism also hurts industries that create finish goods from a combination of domestic and imported parts.

 
At 2/08/2009 5:52 PM, Blogger PeakTrader said...

QT, I agree there are other countries, e.g. Haiti, that have lower wages. I also agree China has benefited from trade. I stated before: "In 2007, U.S. per capita income was $45,000 and China's per capita income was $2,000. If the U.S. gains $700 and China gains $300 for each $1,000 in trade, then U.S. income rises less than 2% and China's income rises 15%." However, China's state-owned firms don't take social costs into account (which is a one-time cost). So, they've been able to maintain profit growth.

I'm sure U.S. labor conditions were much worse compared to today, particularly in mining. However, during the U.S. Industrial Revolution, the goal was money (for capitalists, entreprenuers, and managers). Capital creation and efficiencies were by-products. The goal in China is to strengthen government, and it's a system that creates less capital and efficiencies.

American Prosperity and Price Deflation
Written by Richard M. Ebeling
Friday, 09 May 2008

The decades between 1865 and 1900 were the years of America’s industrial revolution. Before this time, America had an economy of primarily light industry and farming. By the beginning of the 20th century, however, the United States had surpassed all of the European nations in manufacturing, including Great Britain and Imperial Germany, the industrial giants of the time.

Mass immigration from Europe, huge capital investments, and technological improvements provided the means for America’s growth and rising standards of living that soon became the envy of the rest of the world.

During the years after 1865 prices in general slowly fell from their Civil War highs. A Consumer Price Index that stood at 100 in 1865 had declined to 57 by 1900, or a 43 percent decrease in prices over a 35 year period. On average prices went down around 1.2 percent each year over three and a half decades.

At the same time, indices of money wages in agricultural and manufacturing employment both rose during this period as labor was becoming more productive due to capital investments, even with a rising population resulting from millions of immigrants joining the American work force.

The index of money wages in agriculture rose by almost 40 percent between 1866 and 1900, while money wages in manufacturing went up 20 percent during this period. Thus, on average, money wages in general increased by about 30 percent for workers as a whole.

In combination with the productivity gains and the capital investments that resulted in the 43 percent decrease in the price level, this meant that in the last 35 years of the 19th century the real standard of living of the American people increased by almost 75 percent as measured by the positive change in the average American’s buying power in the market place.

 
At 2/08/2009 6:43 PM, Anonymous argonaut said...

I quite agree. I get the same queasy feeling when I encounter "Free/Fair Market".

Usually uttered by those that don't understand the meaning behind the word "market".

 
At 2/08/2009 6:54 PM, Blogger Craig said...

"All goods the US imports must be paid for by exports of equal value"

I agree with your point on free trade, but the above simply isn't true. In the first place, the US doesn't import foreign goods -- I do and, presumably, so do you to some degree.

For example, when I bought my Korean automobile, I paid for it with money I had earned by helping my company create wealth right here in the U.S. -- it did not have to be "paid for" by Koreans buying something from the US or investing it here. If someone in Korea turned around and invested my money in America, it had absolutely nothing to do with my transaction.

It's as if to say that when I buy my groceries from a well-known (and excellent) supermarket chain headquartered in Rochester, Rochester is then obligated to turn around and buy stuff of equal value from Buffalo. They are under no such obligation.

We should really get over our obsession with the so-called trade deficit, it's an interesting number, but essentially meaningless.

 
At 2/08/2009 9:11 PM, Blogger @sethstorm said...


There is, however, another side to the story. The loss to American producers

Whatever advantage is gained is lost when you see them use the nice shortcuts called lead and melamine to go with that slave labor and currency manipulation.

Hopefully Geithner starts making them more nervous. That's how our nation should be negotiating with that country, not by waving the white flag when we see the PRC's.

 
At 2/08/2009 9:14 PM, Blogger @sethstorm said...


For example, when I bought my Korean automobile, I paid for it with money I had earned by helping my company create wealth right here in the U.S. -- it did not have to be "paid for" by Koreans buying something from the US or investing it here. If someone in Korea turned around and invested my money in America, it had absolutely nothing to do with my transaction.

You paid for a Korean golf cart, not a car. That and it's a poor copy off of some other golf cart or (gasp!) an actual car.

 
At 2/08/2009 9:44 PM, Blogger PeakTrader said...

Seth, Chinese producers were under great pressure to lower costs, while inputs, e.g. raw materials and energy rose, because they sold their output too cheaply. The free market should determine whether China continues to overproduce through lower quality or shift production to another country that can meet quality standards.

It's remarkable, the U.S. was able to surpass Britain and Germany in the Industrial Revolution so quickly a hundred years ago. A similar feat today would be a country surpassing the U.S. in the Information Revolution (however, currently, the U.S. leads the rest of the world combined in the Information Revolution, in both revenues and profits).

 
At 2/09/2009 2:35 AM, Blogger @sethstorm said...


Chinese producers were under great pressure to lower costs, while inputs, e.g. raw materials and energy rose, because they sold their output too cheaply. The free market should determine whether China continues to overproduce through lower quality or shift production to another country that can meet quality standards.

I'd make the case that it would be a matter of them being able to put one market over the other.

If the entirety of the US could be considered proverbial line noise in terms of demand, they would only have to make very little progress in terms of quality.

 
At 2/09/2009 1:19 PM, Blogger QT said...

Peak,

Great posts especially the economic data around U.S. industrial revolution in the 19th century.

My friends in Hong Kong and Macau tell me that China is already outsourcing to lower cost destinations particularly in the garment industry. I can certainly agree with your concerns regarding government control although I am hopeful that increased economic opportunity will lead to increased political freedom.

sethstorm,

Am presently reading a very interesting book from the Harvard Negotiating Project entitled Getting to Yes. Exchanging allegations does not engender either mutual understanding nor trust but seems more likely to produce frustration, anger and entrenchment. The book presents an alternative to hard position bargaining which you might find interesting.

 
At 2/09/2009 2:22 PM, Blogger OBloodyHell said...

> My understanding is some people are willing to spend more on free trade goods for a clean conscience of sorts.


Then by all means, LET THEM, and stop trying to dictate to the rest of us... NKay?

 
At 2/09/2009 2:32 PM, Blogger OBloodyHell said...

> Actually, Mankiw is only partly correct because he leaves out something

So do you by using that idiotic "trade imbalance" argument.

Historically, the economies doing well are the ones which have "more coming in than going out".

If the chinese government is willing to accept pieces of paper in return for real goods, then what's the problem? The only thing they CAN do with those pieces of paper is, at some point in time, come here and buy things we make. The fact that they imagine they're going to get a better deal later rather than now is a matter of business sense and argument.

Everyone in the late 80s was whining about how the Japanese were coming over here and buying things left and right... (ignoring, mind you, that at its peak the Japanese didn't own as many US assets as the Dutch did at the same time).

What happened? Well, they came over here with all that money, bought a lot of stuff that quickly drove the prices up, so they were buying what they bought at inflated prices which did not reflect the actual worth of what they bought.

And in most cases, they wound up selling the things the bought at a loss.

Offhand, about the only thing that I know of which they still own is Sony/Columbia. I'm sure there are other things, but you don't hear any one whining about the Japanese controlling America any more, either, do you?

If the Chinese are no more prudent (and there's no reason to believe otherwise at this point), they will do the same things and make the same mistakes, and we will get back a lot of that paper for a song.

China's got its own problems to worry about. I'm not worried about trade imbalances with them, they're going to have to find some way to deal with the rising expectations of their middle classes over the next decade or two. That means that they are going to HAVE to start spending that money on things they aren't buying right now. And that's, at one point or another, going to devolve on critical creative design and technical services which the USA is the only reliable source of.

 

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