Sunday, December 9, 2007

Free Trade not Fair Trade

This weekend saw advertisements in Irish national newspapers calling on the Taoiseach to "ensure Ireland's aid to developing countries is not undermined by unfair trade agreements" currently being negotiated by the European Commission. The assumption behind the advertising campaign (supported by some, though not all of the leading Irish 'third world' charities) is that 'free trade' is being forced on poor African countries to their detriment.

This assumption is flawed in every regard. At the heart of the EU/African negotiations is a desire to reduce tariffs and barriers to trade imposed by both regions on one another's products and services. Why do tariffs exist? Fundamentally there are two reasons:
  1. To raise taxes for the governments imposing the tariffs.
  2. To protect industries and sectors favoured by the same governments.
Most governments most of the time operate tariffs as barriers to trade. But Paul Collier poses the question 'Why do governments of the bottom billion typically adopt high trade barriers?' in his book 'The Bottom Billion - Why the Poorest Countries are failing and What Can Be Done About It'. Here is his answer:
Partly because they are one of the key sources of corruption. That's why political reformers such as Marc Ravalomanana in Madagascar, Emmanuel Tumusiime-Mutebile in Uganda, and Ngozi Okonjo-Iweala in Nigeria all made trade liberalisation a priority. The corruption generated by trade restrictions works on both grand and petty scales. On the grand scale, governments confer protection on the businesses owned by their friends and relations, or ones that pay for the privilege. At the petty scale, actually running the system of protection day to day can be lucrative. Becoming a customs officer is about the best job you can possibly get in these countries.
Corruption is the evil, symbiotic twin of trade barriers. Yet we have organisations like Christian Aid, Oxfam and Trócaire campaigning to stop the removal of trade barriers, seemingly in denial about the harm that they cause to the citizens and consumers caught behind the barriers. Fundamentally their objections are ideological. Like so many NGOs, they view businesses and their activities as suspect at best, and malevolent at worst. They look to governments and international bodies to 'protect' the poor in developing countries from evil capitalists, ironically missing the point that it's usually the same governments that the poor need protection from.

Why is this? Here's Paul Collier again:
Seeing everything through the spectrum of rich countries oppressing poor countries, these agencies spend charitable donations opposing the reduction in African trade barriers. Lenin had a phrase for those in the West who supported him without understanding his true intent: "useful idiots". Today's useful idiots campaign for trade barriers.
I might add, these agencies are not only spending charitable donations received from private citizens and some corporate supporters on their ludicrous campaign, they are also spending the taxpayers money that they receive in increasing amounts from the rapidly expanding budget of Irish Aid.

So what's the answer to the pressing problems of poverty and trade barriers that perpetuate it? Some say it is initiatives such as 'Fair Trade'. I'm not so sure myself - even though personally I like the idea of the farmers and their families getting more of the money I spend on a cup of coffee. Who doesn't? And yet, as has been argued clearly by economists examining the trade issue in detail, Fair Trade is in danger of perpetuating the problem by effectively locking people into subsistence farming when in fact they should be moving on to other types of work. Listen to the recent interview with Mike Munger over at EconTalk for a more detailed critique of the Fair Trade initiative.

To my mind, it is initiatives like Traidlinks that will do more to raise the standards of living in Africa (with brilliant innovations such as their 'Heart of Africa' range) than the self-deluding blather of some Irish NGOs. There is a growing number of entrepreneurs, businesses, and profit-driven organisations doing good and making a real difference in the lives of millions around the world. Check out Fast Company's Social Capitalist Awards for truly inspiring ideas and stories.

So my advice to the Taoiseach is to ignore the "useful idiots" and to ensure that Ireland champions free trade as a way of raising billions out of poverty just as it raised our own standard of living in recent decades.


  1. Nice one. What do you make of - allows punters to give microloans to expanding businesses in 3rd world - i gave some in may and they are 33% paid back already

  2. Thanks for the reminder about Kiva. I came across them earlier this year - they seem to be doing excellent work, but I haven't tried them out yet.

    It's by the way ...

    Kiva and the likes of Zopa(.com) seem to me to be pushing out the boundaries to reinvent financial and investment services. Banking 2.0 indeed.

    I don't think the banks will be worrying for a while, but maybe if I was in the Credit Union movement I'd be paying a lot more attention!


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