Skeptics of trade liberalization often argue that the current international trading system is unfair. It is said: workers in developing countries are paid abysmally low wages and must endure dangerous working conditions; profit seeking corporations seek out production locations with lenient environmental regulations contributing to global warming and unsustainable development; and firms produce products threatening consumer safety. The proposed solution is to promote fairness and global social justice. Surely this is something everyone can agree on, since who could possibly be in favor of unfair trade and global injustice.
The fact that there is no agreement means either that people have different conceptions of fairness or that they see fairness in different places. This post will begin an exploration of what people mean when they express concern about fairness in trade.
Let me begin with a simple proposition: Unfairness must involve perceived losses to someone caused by someone else. Stated a bit more emphatically: Unfairness means someone is getting “ripped off”.
Consider the low wages paid to workers in developing countries. Anyone who considers the low wages unfair, will almost surely argue the point by highlighting the much higher incomes earned further up the supply chain. Thus we’ll see comparisons of CEO salaries or sports celebrity promoters to the average production worker. The implication is that high wage management is ‘ripping off’ the low wage production workers. A more fair salary distribution would provide income to the production workers sufficient to provide for themselves and their families by reducing the astronomical salaries earned by top executives in the company.
Or try another example. Proponents of a fair tax code generally argue that special exceptions provide opportunities to evade taxes. However, to take advantage of these opportunities one needs to be wealthy enough to hire competent tax accountants and attorneys who are experts in the complexities of the tax code. Average and low income households rarely can take advantage of these exceptions. The implication here is that wealthy individuals and corporations pay less than their fair share of taxes while the lower income groups pay a disproportionately larger share. In other words the tax code allows wealthy individuals to rip-off poorer people. One commonly suggested solution is a flat tax, whereby every household will pay a fixed percentage of their income in taxes with no special exceptions allowed.
If the above proposition is true it does not necessarily follow that the reverse implication is also true. Indeed I will argue it is not true. Stated formally: Losses to one person caused by someone else are NOT necessarily unfair. In other words, a loss caused by another does not always mean someone is being ripped-off.
The example that demonstrates the exception is a competitive sporting event; say a soccer match. If Manchester United and Chelsea come together in competition, play 90 minutes, adhere to the rules of the game as judged by the officials, suffer the consequences of any penalties (also according to the rules of the game), it is quite likely that one team (CFC) will win and the other lose (MU). (although of course, sometimes the teams will tie!) In this instance the loss by one team is clearly caused by the other, and yet we would not argue that the loss was unfair. That is unless one is a “sore loser.”
Sore losers are those who look for excuses to explain their loss; they are prone to argue that the loss was due to poor officiating such as botched calls and favoritism. They may even look further and contend that differences in player salaries give one team an unfair advantage.
Numerous fairness issues arise from this simple sports analogy. In a later post I’ll explore the interesting parallels between sports competition and economic competition.
Anonymous said:
I’ve been following your essays for awhile and am confounded by the ground rounds for understanding them.>>Can you please define free trade and free market for me. >>How are the two correlated?
Steve Suranovic said:
Government policies can be split into two types: domestic policies and trade policies. A domestic policy is anything whose purpose is primarily domestic. This includes most of what a government does such as income tax policy, agricultural support policies, cigarette and gasoline taxes, and environmental regulations. >>Trade policies are those that are targeted at trade. They include import tariffs and quotas, and export subsidies, taxes and quotas. These actions are sometimes implemented using WTO-allowed trade laws; antidumping, anti-subsidy and safeguards. >>Now, to get to your question, free trade means elimination of trade policies. Thus, no tariffs or quotas or subsidies on imports or exports. >>Free markets on the other hand means limited government intervention in the form of both domestic and trade policy. The places most economists accept a government role in in controlling externalities like pollution, to provide public goods such as national defense, to provide a judicial system for things like enforcement of contracts, and to prevent anticompetitive practices as with antitrust legislation. One contentious issue in the US today is in the provision of health care. Should it be provided in a free market in which government allows competition among health care providers and insurance companies, or should the government just collect taxes and pay for universal care? >>Finally, a free market application to international trade is free trade. But free trade doesn’t necessarily mean a free market since it also depends on what a government does with domestic policies.
Anonymous said:
I have another question:> >How does the Ricardian definition of comparative advantage come into play when two different nations, the US and China, have a differing opinion on the extent of government intervention as it pertains to say pollution, and one nation, the US, treats the externality as a legitimate monetary cost, and the other, China, treats it as an uncontained nuisance putting peoples well-being in danger. Doesn’t this unlevel the playing field of free trade? or does the field have to be level?
Adithi said:
I agree there are many editorials and articles I come across which seem to misinterpret the whole cause and effect situation vis-a-vis fairness of trade. Workers may receive sustainable salaries if there was better income distribution in a country like India instead of using CEO salaries as a means of comparison. >>However, there is increasing reason to believe especially from several reports produced by ground-working groups that multinational corporations like coca-cola establish themselves in remote areas of developing countries like india where there is severe water scarcity (which is augmented with their produciton actvities) and forceful takeover of land belonging to village assemblies. They are repeatedly accused by locals of dumping hazardous waste inside and around factory areas of production not only causing harm to factory workers but also to residents of the area. >>This is a failure on the part of local authorities (due to rampant corruption) but there is gross unfairness of trade here, wherein, multinatinoal companies need to regulate the activities of their franchisees.
Steve Suranovic said:
I am not familiar with the specific example of Coca Cola in India. What I have read and seen elsewhere is that in most cases Western firms operating in developing countries usually bring their own standards of production, including environmental controls with them. >>I once visited a Budweiser plant in China and was told that their environmental controls were the same as plants in the US and thus were significantly better than the typical Chinese firm. Reports by many others suggest the same result.>>However, is this just a story they tell visitors? Is it true for every western firm operating in developing countries? I don’t know the answer. I suggest we be suspicious of both the strong claims by businesses that their controls are effective, and the claims by critics that foreign firms are destroying the environment. My hunch is that both claims may be exaggerated.
Anonymous said:
I’ve been to about a dozen third world countries and a fair number that are somewhere between 1st and 3rd (2nd world?). A common sight in each is incredible pollution by the locals. I recall seeing rivers in Bosnia (well after the fighting ended) that seemed to have more trash than water. I’ve seen people urinate directly into the same stream that they get drinking water from. I’ve seen people dump trash outside the front door to their hooches and set it afire. >>Basic sanitation is lacking in the 3rd world and 2nd world, let alone environmental controls. However, when a big rich corporation comes to town, the people know that the corporation is big and rich and they want whatever they can get from the big rich corp. One way that they know they can get this is to highlight all of the things that we rich, naive westerners will perceive as injustice: low wages, environmental damage, long hours, etc. >>Most people in 3rd world countries have lives much harder than the average soft, spoiled westerner with a sense of entitlement can comprehend. The 3rd worlders are generally content to work 14 to 18 hours per day for $1 because it is better than the alternative and they have not been pampered for their entire lives. But if whining about Coke dumping too much of the byproduct of their soda into a river will garner than an extra quarter per day, then they’ll whine.>>The commenter “adithi” above is the primary target audience because adithi just bought into their bogus PR.
Anonymous said:
Are US people born to think that life and market or trade thing in a third world country like china should be disastrous??? If you have never been to the place, never pick a country that you have no idea about as an example, or comment on it. things have changed so much. I used to have the same idea that china was poor, and everything was tough, but after i have been there myself, it shocked me. china is a coutry just like any so-called first world countries,the difference is only the language they speak.>>I bet the free trade and the import of the concept of free market contribute to today’s china.
Steve Suranovic said:
You are right. China is advancing rapidly and catching up to standards in Western countries. The cities look much like the West. However, there remain millions of the people in the countryside where conditions are not as good – adequate, no one’s starving, but not great. The nation still has a long way to go to catch up completely. >>The difference for China has clearly been free markets. Central control is not the reason for their successes; it is the release of central control. By now the momentum in favor of markets should be almost unstoppable since too many people can attribute their success to them.
Anonymous said:
This is regarding the reply by anonymous to Adithi.
Adithi claims that Coke is (actually only might be) dumping waste etc., and anonymous claims (which too only is a possibility) that it's all just whining and PR job.
How do we know the fact of the matter? If it is incompetence engendered whining or corruption engendered local callousness it is the fault of the 3rd world country. However, if it is owing to the ignorance of the locals (government and the people) then a part of the fault does lie with the MNC (say Coke). Though one could always argue that the ignoramus must pay for their ignorance.
It is one thing to say that the ignoramus must pay for their ignorance, and completely another to conclude on this basis that there is no unfairness in fooling someone who is ignorant.
There does exist a view that there is no such thing as a fair price. One may even grant that. But I wonder if one would agree with the view that there is no such thing as unfairness.
Movies and Concepts Handled in the Movies said:
Nice post and interesting blog. Thanks a lot.
MLB2k11
reliance data card in chennai