Fairness in trade II: Export subsidies and the Fair Trade movement

Politics, Philosophy & Economics

Volumn 7, Issue 1, 2008, Pages 29-56

  Kurjanska, Malgorzata ^a   Risse, Mathias ^b  

^a UNIVERSITY OF CALIFORNIA   (United States)

^b HARVARD UNIVERSITY   (United States)

Author keywords

development; fairness; markets; subsidies; trade

Indexed keywords

EID: 57749126440     PISSN: 1470594X     EISSN: None     Source Type: Journal    
DOI: 10.1177/1470594X07085150     Document Type: Article

References (37)

1. Martin Wolf, Why Globalization Works (New Haven, CT: Yale University Press, 2004), p. 215. Anderson says agricultural subsidies account for 38 percent of governmental expenditure on subsidies between 1994 and 1998. See Kym Anderson, ‘Subsidies and Trade Barriers’, in Global Crises, Global Solutions, edited by Bjorn Lomborg (Cambridge: Cambridge University Press, 2004), pp. 349-50.
2. Oxfam, Rigged Rules and Double Standards (Oxford: Oxfam International, 2002), p. 11.
3. Mathias Risse, ‘Fairness in trade I: obligations from trading and the Pauper-Labor Argument’, Politics, Philosophy and Economics 3 (2007): pp. 355-77.
4. Risse, ‘Fairness in Trade I’.
5. There are additional benefits to trading, in particular that larger markets allow for economies of scale and that competition improves efficiency. Compare Paul Krugman and Maurice Obstfeld, International Economics: Theory and Policy (Boston, MA: Addison Wesley, 2003) for an introduction to international economics; on the trading system, see Bernard Hoekman and Michel Kostecki, The Political Economy of the World Trading System (Oxford: Oxford University Press, 2001); compare Michael Trebilcock and Robert Howse, The Regulation of International Trade (New York: Routledge, 2005) on the regulation of international trade. Compare Joseph Stiglitz and Andrew Charlton, Fair Trade for All: How Trade Can Promote Development (Oxford: Oxford University Press, 2006), Ch. 2 for difficulties in applying the idea of comparative advantage to economic scenarios (which especially involve transition problems and applications to scenarios with particularly pronounced market failures). Compare Jagdish Bhagwati, ‘Fair Trade, Reciprocity, and Harmonization: The Novel Challenge to the Theory and Policy of Free Trade’, in Protectionism and World Welfare, edited by Dominick Salvatore (Cambridge: Cambridge University Press, 1993) for objections to free trade. For the importance of experimenting to development, compare Ricardo Hausmann and Dani Rodrik, ‘Economic Development as Self-Discovery’, Journal of Development Economics 72 (2003): 603-33.
6. Douglas Irwin, Free Trade Under Fire (Princeton, NJ: Princeton University Press, 2002), p. 55.
7. See Arvind Panagariya, ‘Think Again: International Trade’, Foreign Policy (November/December 2003): 22. For net food importers, see Hoekman and Kostecki, The Political Economy of the World Trading System, pp. 225ff. One should be careful not to make too much of the value of this argument in support of export subsidies. Individuals in developing nations lack food security fundamentally because they ‘lack buying power’, that is, employment or sufficient income. Furthermore, the lack of food production in developing countries that are importers (though they have a comparative advantage in the cost of labor and ought to be able to match global agricultural prices) is possibly already a result of the international ‘price signals’ (of subsidy-depressed prices), which may provide disincentives for necessary investment in a developing nation's agricultural development. See Merlinda Ingco and John Nash (editors), Agriculture and the WTO: Creating a Trading System for Development (Washington, DC: International Bank for Reconstruction and Development and World Bank, 2004). So, the productive inabilities of a developing nation that are a result of its current state of development and poverty make for dubious support to continue international practices that contribute to the lack of incentives and aid to propel institutional and productive development.
8. The anticipation of the end of the Multi-Fiber Agreement led textile companies to shift their production to developing nations, largely to China (because of its large supplies of low-wage labor). As a result of the ending of the agreement, developed and some developing nations experienced a collapse of their textile industries and an influx of goods imported from China and some other nations, such as India. (For recent reporting on this, compare David Moberg, ‘Trading Down’, Nation, January 10, 2005: 4-5; Editors’ Post, ‘Protection Racket’, New Republic, April 25, 2005: 7; Maxine Frith, ‘Ten Years to Plan for Trade Changes, and Still EU Failed to Prepare’, The Independent [London], August 27, 2005: 2.)
9. Anderson, ‘Subsidies and Trade Barriers’, p. 550.
10. Kym Anderson and Will Martin, ‘Agriculture, Trade Reform, and the Doha Agenda’, in Agricultural Trade Reform and the Doha Development Agenda, edited by Kym Anderson and Will Martin (Washington, DC: Palgrave Macmillan and World Bank, 2006), p. 22.
11. Thomas Hertel and Roman Keeney, ‘What is at Stake: The Relative Importance of Import Barriers, Export Subsidies, and Domestic Support’, in Poverty and the WTO: Impacts of the Doha Development Agenda, edited by Thomas Hertel and Alan Winters (Washington, DC: World Bank, 2006), pp. 37-63 and Anderson and Martin, ‘Agriculture, Trade Reform, and the Doha Agenda’. The degree of variation here must be quite astounding to all those who are not familiar with how precisely such predictive models work. What needs to be kept in mind is that each such model builds in assumptions about what will happen when subsidies are removed. However, since this will create an entirely new situation on the market, it is difficult to estimate what will happen. In some cases, it will be easy to predict that countries will then change their production activities, but in the case of others, there might be no way of anticipating what they will do, and yet others will only react to the behavior of countries that show an immediate reaction to the removal of the subsidies.
12. Nancy Birdsall, Dani Rodrik and Arvind Subramanian, ‘How to Help Poor Countries’, Foreign Affairs 84 (2005): 136-52.
13. As The Economist reports, a World Bank report states that, in 2005, immigrants from poor countries were expected to send more than US$167 billion back home, an amount equal to the amount of foreign direct investment and twice the value of foreign aid that year. Money sent through informal channels might add another 50 percent to this estimate. See The Economist, November 26, 2005, p. 116. For a discussion of the impact of trade on poverty, compare Alan Winters, Neil McCulloch and Andrew McKay, ‘Trade Liberalization and Poverty: The Evidence So Far’, Journal of Economic Literature 42 (2004): 72-115.
14. See Stiglitz and Charlton, Fair Trade for All, Ch. 2; compare also Joseph Stiglitz, Globalization and Its Discontents (New York: Norton, 2002), Ch. 3.
15. John Rawls, A Theory of Justice (Cambridge, MA: Harvard University Press, 1999 [1971]); John Rawls, Justice as Fairness: A Restatement, edited by Erin Kelly (Cambridge, MA: Harvard University, 2001).
16. Rawls, Justice as Fairness: A Restatement, Sections 41-2.
17. For the Varieties-of-Capitalism approach, compare Peter Hall and David Soskice (editors), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University Press, 2001); for a review of the area, compare Chris Howell, ‘Review Article: Varieties of Capitalism. And Then There Was One?’ Comparative Politics 1 (2003): 103-25.
18. Wolfgang Streeck and Kozo Yamamura (editors), The Origins of Nonliberal Capitalism: Germany and Japan in Comparison (Ithaca, NY: Cornell University Press, 2001), p. 2.
19. For this reading of Rawls, see Michael Blake, ‘Distributive Justice, State Coercion, and Autonomy’, Philosophy and Public Affairs 30 (2001): 257-97. One might worry that the Rawlsian framework could not possibly deliver an argument for the actual preservation of jobs in a certain line of business, possibly through subsidies, because it operates entirely through primary goods, and jobs are not among those. This is true, but the social sources of self-respect are among the primary goods, and given the importance that one's profession has for one's self-respect, a link is readily made here.
20. The competing considerations we have in mind are primarily moral, but there are also important political considerations that are raised by subsidies. As the quote in note 30 made clear, subsidies, once in place, are difficult to remove. For an example of this phenomenon in a coordinated market economy (specifically, subsidies for mining in the Ruhr area in Germany), compare Steffen Krohnert, Franziska Medicus and Reiner Klingholz, Die Demografische Lage der Nation: Wie Zukunftsfähig sind Deutschlands Regionen? (München: Deutscher Taschenbuch Verlag, 2006), p. 122. Subsidies for the coal industry were originally intended to facilitate the transition of a generation of miners into new jobs. But once in place, subsidies were maintained by a lobby of politicians, trade union functionaries, and industrialists, who continued to hire new miners whose presence was then used to exert more pressure on the government to obtain more subsidies. As a result, since 1980, Germany has spent about E100 billion on such subsidies. These subsidies could not save the coal industry in the Ruhr, but prevented local cities from developing economically sensible alternatives. As a result, the Ruhr is now stricken by severe economic and demographic problems.
21. Compare USITC, The Dynamic Effects of Trade Liberalization (Washington, DC: USITC, 1997). Compare R. Wacziarg and K.H. Welch, ‘Trade Liberalization and Growth: New Evidence’, NBER Working Paper 10152 (Cambridge, MA: NBER, 2003) and the discussion of the literature in Anderson, ‘Subsidies and Trade Barriers’, pp. 343-4. See also Arvind Panagariya, ‘Miracles and Debacles: In Defense of Trade Openness’, World Economy 27 (2004): 1149-71 and Arvind Panagariya, ‘Miracles and Debacles: Do Free-Trade Skeptics Have a Case?’ URL (consulted December 2004): http://www.columbia.edu/~ap2231/policy.html. Francisco Rodriguez and Dani Rodrik, ‘Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence’, in Macroeconomics Annual 2000, edited by Ben Bernanke and Kenneth Rogoff (Cambridge, MA: MIT Press, 2000) agree that there is a positive relationship between trade and growth, but question whether it is due to trade policy, rather than transport costs or demand.
22. Compare Birdsall et al., ‘How to Help Poor Countries’, for a concise statement of that view; compare also Arvind Panagariya, ‘Agricultural Liberalization and the Least Developed Countries: Six Fallacies’, World Economy 28 (2005): 1277-99. We are here glancing over the details of what it means to be important for development. Trade could be connected merely to growth, but neither trade nor growth may immediately be tied to other development goals. See, however, the United Nations Development Program, Human Development Report 2003 (New York: Oxford University Press, 2003) and the World Bank, World Development Indicators 2004 (Washington, DC: World Bank, 2004), and references therein, for arguments that growth is relevantly related to other development goals.
23. Risse, ‘Fairness in Trade I’, develops a more systematic view on fairness, according to which fairness consists in the proportionate satisfaction of claims whose realization is owed to people (‘stringent claims’). Conceivably, such stringent claims can be made on different bases (for instance, based on needs and based on entitlements). In this case, we are concerned with claims that are based on considerations of shared citizenship that need to be compared to claims based on duties to the needy. What is stated in the text above is a proposal for how to balance such claims.
24. Let us address one related topic. Oxfam, Rigged Rules and Double Standards, Ch. 4 insists that developed countries practice double standards: they insist on poor countries opening their markets, but they subsidize their own producers. This seems inconsistent - an inconsistency Wolf calls a disgrace. See Wolf, Why Globalization Works, p. 213. However, there is no inconsistency. According to economic theory, what is forced upon developing countries is good for them, at least in the long run. The reason why liberalization can be demanded is that aid is given to them; in response, it is reasonable to ask for measures improving the recipient countries’ economies. What matters for those countries at this stage is that they make economic progress so that later there is room for social improvements. Developed countries are not inconsistent in taking measures that harm their own economic prosperity, but that they consider justified on fairness grounds. In other words, there is no inconsistency if a rich country does not do what economic theory says is best in terms of its own economy because it thinks that, on fairness grounds, it owes its population a different policy choice, while at the same time insisting that a poor country, in order to qualify for certain aid, should do what economic theory says is best for its economy. The urgency of the advice that one does what is best for one's economy depends on one's stage of development. The problem is, instead, that subsidies have effects on other countries, showing insufficient consideration for the poor. That problem is not best conceived as an inconsistency, given that we are talking about measures that would apply to countries at very different stages of development.
25. Oxfam, Rigged Rules and Double Standards, p. 151.
26. Daniel Jaffee, Jack Kloppenburg and Mario Monroy, ‘Bringing the “Moral Charge” Home: Fair Trade Within the North and Within the South’, Rural Sociology 69 (2004): 169-96.
27. On Fair Trade, compare Mark Leclair, ‘Fighting the Tide: Alternative Trade Organizations in the Era of Global Free Trade’, World Development 30 (2002): 949-58 and Mary Ann Littrell and Marsha Ann Dickson, Social Responsibility and the Global Market: Fair Trade of Cultural Products (New York: Sage, 1999).
28. The reasoning that ‘an individual's contribution is minuscule and therefore it does not matter what an individual does either way’ will look appealing at most to consequentialists, and, even for them, ultimately does not succeed. Compare Derek Parfit, Reasons and Persons (Oxford: Oxford University Press, 1984), Ch. 3 and Shelly Kagan's work-in-progress, ‘Do I Make a Difference?’
29. Henry Shue, Subsistence, Affluence, and US Foreign Policy (Princeton, NJ: Princeton University Press, 1980); Thomas Pogge, World Poverty and Human Rights (Oxford: Polity, 2002).
30. On agriculture, compare Luther Tweeten and Stanley Thompson (editors), Agricultural Policy for the 21st Century (Ames: Iowa State Press, 2002), p. 88. Leclair, ‘Fighting the Tide’ also takes this view. It should be noted that this argument can only be applied to cases in which pursuing a different industry is possible, meaning that there are resources and opportunities to do so.
31. Compare Jose Itzigsohn, Developing Poverty (University Park: Pennsylvania State University Press, 2002), p. 32. Compare Michael Finger and Julio Nogues, Safeguards and Antidumping in Latin American Trade Liberalization: Fighting Fire with Fire (New York: World Bank and Palgrave Macmillan, 2006), p. 174; compare also Deborah Sick, Farmers of the Golden Bean: Costa Rican Households and the Global Coffee Economy (DeKalb: Northern Illinois University Press, 1999).
32. If it sounds odd to think of products as being described in terms of their history, keep in mind that what counts as products on a market is not a naturally given fact. For instance, for a market in ‘wheat’ to emerge (rather than a system in which Smith's and Jones's harvests would be assessed separately), a system of transporting wheat had to develop in which harvests of different quality were mixed with each other early on. This led to ‘wheat’ per se as a product, as opposed to ‘Smith's wheat’ or ‘Jones's wheat’. Compare Kenneth Pomeranz and Steven Topik, The World that Trade Created: Society, Culture, and the World Economy, 1400 to the Present (London: M.E. Sharpe, 2006), pp. 186-8.
33. Wolf, Why Globalization Works, p. 187.
34. Amartya Sen, Development as Freedom (New York: Anchor Books, 1999).
35. In a different way, the view that fairness considerations are to be traded off against considerations of growth is disputed in T.M. Scanlon, ‘Human Rights as a Universal Concern’, reprinted in T.M. Scanlon, The Difficulty of Tolerance (Cambridge: Cambridge University Press, 2003). Scanlon argues that perceived trade-offs between human-rights concerns and economic development arguments that aim to speak on behalf of the people affected should generally go against human-rights violations. His point is that strengthening human rights will make it possible for the people affected to speak on their own behalf in the first place. In this spirit, one might think of Fair Trade as one way of helping ‘the people’ get into a position where they can speak for themselves.
36. Greg Mock and Paul Steele, ‘Power to the Poor’, Environment 1 (2006): 8-23.
37. Compare The Economist, ‘Fair Enough’, April 1, 2006: p. 33.