2007 Imani West Africa University
Seminar
------------------------------------------------Is Trade a Free or Fair Concept?
By
Robert Darko Osei
Institute of Statistical Social and Economic Research
University of Ghana
Overview of Presentation

Why Should Countries Trade with Each Other?

What is the evidence on trade and Development?

Have All Countries Benefited from Trade?

Free Trade Versus Fair Trade

Is Fair Trade the Solution to Current Problems in
International Trade?

Summary and Conclusion
Why Trade with Other Countries?
“While it is quite legitimate to look at trade from the point of view
of the balance of payments (BoPs), and to regard the balance
of payments as a development problem that can be solved only
by new trade policies, the benefits of trade in traditional trade
theory is not measured by the foreign exchange earned but by
the increase in the value of output and real income from
domestic resources that trade permits”. Thirlwall, A. P. (2003)
p-626

The benefits from trade goes beyond Balance of
Payments issues that confronts every country
Gains from Trade

Here our concern is with output gains from trade

We distinguish between


Static Gains – Gains which accrue according to comparative
advantage doctrine
Dynamic gains – gains resulting from impact on production
possibilities
Absolute Versus Comparative Advantage

Illustrating Absolute Advantage
Labour units to
produce 1 ton
Total World Output
Ghana
Nigeria
autarky
Cocoa
5
20
2
3
Cassava
10
2
2
11
Ghana has absolute advantage in
cocoa production and so produce cocoa
Nigeria has absolute advantage in
cassava production and so produce
cassava
Specialization
With specialisation and
trade total world output will
be
3 tonnes of cocoa
11 tonnes of cassava
Absolute Versus Comparative Advantage

Illustrating Comparative Advantage
Labour units to
produce 1 ton
Ghana
Cocoa
5 (1)
Cassava 5 (1)
Total World Output
Nigeria
autarky
20 (2)
2
2
10 (1/2)
2
3
Ghana has absolute advantage in both
cocoa and cassava production
But Ghana has a comp. disadvantage in
cassava production.
Ghana produces cocoa and Nigeria
produces cassava
Specialiazation
With specialisation and
trade total world output will
be
2 tonnes of cocoa
3 tonnes of cassava
Benefits of Trade

Some of the benefits are as follows:

Increased specialization – related to the comparative advantage
theory. Usually referred to as the Static gains from trade. Here each
country produces with greater efficiency and the surplus is traded.



This is consistent with the idea of trade being a vent for surplus -
Dynamic Gains 
Larger markets enable countries to take advantage of the
economies of scale (Note that specialization is limited by the size of
the market)

Large Scale Investments in capital equipment will go to countries
that have ‘larger markets’ – This will in turn drive real output and
incomes

Increased competition drives efficiency

Dissemination of technical knowledge
It provides the Greater product choice for consumers
Trends in Total World Trade
18,000.0
US$ 263 Billion
US$ 15,337 Billion
16,000.0
14,000.0
• There has been a significant
increase in trade over the last
40 years
10,000.0
•The level of trade in 2003 is
over 58 times the level for 1960
8,000.0
6,000.0
4,000.0
2,000.0
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
0.0
1960
Billion US$
12,000.0
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
4000
1962
1960
US$ (2000 Prices)
World Per Capita GDP Trends
6000
US$ 5,345
5000
US$ 2,417
3000
2000
1000
0
Trade and Output Relationship
UMIC
6000
7000
5000
6000
Trade (US$ Billion)
GDPPC (US$)
World
4000
y = 0.1572x + 3279.7
R2 = 0.8528
3000
2000
1000
5000
y = 2.0557x + 3636.4
R2 = 0.7175
4000
3000
2000
1000
0
0
0.0
5,000.0
10,000.0
15,000.0
0.0
20,000.0
500.0
South Asia
SSA
700
y = 1.8231x + 188.2
R2 = 0.9814
Total Trade (US$ Billion)
Total Trade (US$ Billion)
600
400
300
200
100
0
0.0
1,500.0
GDPPC (US$)
Total Trade (US$ Billion)
500
1,000.0
600
500
400
y = 0.1209x + 499.65
R2 = 0.026
300
200
100
0
50.0
100.0
GDPPC (US$)
150.0
200.0
0.0
50.0
100.0
150.0
GDPPC (US$)
200.0
250.0
What does the Evidence say?

Generally, we find a positive correlation between trade and
well-being (as measured by per capita GDP)

World trade has increased significantly over the last 40 years

Also per capita income of the world has increased

However the strength of the correlation differs from one
set of countries to the other

In other words countries have not benefited equally from
the increased world trade

Sub-Saharan African countries have not benefited
significantly from the trade-induced welfare improvements

Empirical Literature seem to show that trade does impact
on growth






‘Key Dissident’


Sachs and Warner 1995 – they find a positive relationship between
growth and trade
Dani Rodrik (1998) Dollar (1992)
Edwards (1992)
Feder (1983)
Francisco Rodriguez and Dani Rodrik (2000)
Also trade impacts positively on poverty



Winters et al (2000)
Niimi et al (2003)
Ocran et al (2005)
Why Have SSA countries not Benfited
Significantly from Trade?

Inward Trade policies pursued in the 1960s and
1970s

For instance, World Bank (1997) classification of Developing
countries according to their trade orientation show that
 Between 1963-1973, all SSAs (except Cameroon) were classified
as inward oriented
 Between 1973 and 1985, all SSAs were classified as inward
oriented

Distortions in the terms of trade that is induced by policies of the
advanced countries
 Riedl and Markheim (2007) of the Heritage Foundation notes that
 WTO members report an average of over $221 billion/year – about 18% of total
agriculture value-added
 More than two-thirds of these subsidies are being paid in the EU and the US.

These subsidies adversely affect developing countries as they are
unable to turn their comparative advantage into a competitive one



Supply is artificially stimulated by subsidising countries. By removing these
subsidies developed countries will import more from the developing countries.
William Cline of the Center for Global Development has argued that the
benefits that will be conferred on Developing countries with the removal of
trade barriers will be more than 2 times foreign aid
The World Bank (2004) estimates that a reduction of tariffs on manufactured
goods, the elimination of subsidies and non-tariff barriers, and a modest 10
percent to 15 percent reduction in global agricultural tariffs would allow
developing countries to gain nearly $350 billion in additional income by 2015.
Developed countries would stand to gain roughly $170 billion.
Is Fair Trade the Answer?

What is Fair trade?

One could use an example to explain the notion of
fair trade:



Scenario: A company moves production to a developing country
that has an infant economy with no labour, health and safety or
environmental standards. Potentially this represents a
reduction in production costs. This results in the ‘sweatshops’
that the media loves to portray.
The fair trade approach will therefore require this firm to meet
some standards and in return be rewarded with higher prices
So whilst free trade seeks the realization of
economic benefits, fair trade seeks to balance
economic benefits with other values
But…

Fair trade does not have the same outcome as free trade

It can potentially distort the markets
 Who or what determines the minimum wage? Paying higher product prices as a
reward for a distortion in the labour market is not consistent with the ideals of free
market

It can be used as a basis to perpetuate the existence of trade barriers
 Example is the anti-dumping tariff which may in effect be used as an argument by
firms in a given country to stifle competition

It is important to note that free trade is an economic concept that is
underlined by proper working markets which deliver efficient
outcomes.


Unfortunately, an efficient outcome is not the same as an equitable outcome!
The true role of fair trade as pointed out by Paul Gunstensen (2004)

“…is in drawing attention to the exploitative effects of free trade agreements in
agriculture and food production and the apparent hypocrisy of the
industrialised nations when conducting trade”
Conclusions

Trade is good for growth and poverty reduction

Developed countries will stand to gain if they
change their policies in support of free trade

Fair trade may have good intentions but cannot be
a substitute for free trade
End of Presentation