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No Fair Trade Without Free Trade

Article by Herbert Oberhaensli

September 15, 2006

There are many beneficiaries and there are many drivers of globalization. In fact, free trade is one of the most powerful guarantors of fair trade, which should be high on the list of anyone really interested in helping the so-called developing countries. To make the world fairer, we need to make trade freer.

At the moment, we are still living with a trading system that has many forms of open and hidden protectionism, including undue tariff barriers, cumbersome customs procedures and trade distorting subsidies of all kinds. This creates a trading environment that is both far from free and also far from being fair.

Trade distorting subsidies don’t even always work for those they are supposed to protect. The European Union’s Common Agricultural Policy and farm policies of other OECD countries are very good examples of this problem. Approximately 70% of EU subsidies go to 30% of the biggest farmers. Most small farmers usually struggle to break even – despite the subsidies.

Real CAP reform would send a powerful message of free and fair trade to the world as it would end the effective locking out of farmers from developing countries. Latin America and many Asian sugar producers, for instance, who at the moment find it impossible to successfully enter European markets despite being very competitive, could finally sell their goods on the continent. Such free and fair trade would be mutually beneficial: European consumers would be able to buy cheaper products while Latin American and Asian farmers could make a better living. Unfortunately, Europe is not alone in wasting billions in farm subsidies – the U.S. is also guilty of handing out distorting farm aid. America’s 25,000 cotton farmers alone receive each year $3.5 billion in subsidies, effectively locking out some of the poorest African countries that could offer American consumers much cheaper cotton of comparable quality. This kind of protectionism hurts the livelihood of a large part of the more than 3 billion people living in rural areas of the developing world.

A constructive free trade agenda would help lift emerging economies out of poverty. This should also include the liberalization of trade between developing countries. Just as free trade helped Switzerland – the home of Nestlé – in the 19th century, free trade can help the developing world in the 21st century. Reducing trade barriers is vital to increase the efficiency of global economic structures and systems and to promote the economic development of some of the world’s poorest countries.

In October 2002, Rubens Ricupero, Secretary General of the United Nations Conference on Trade and Development, went so far as to tell international business leaders that their most important corporate social responsibility was to advocate free trade and capacity-building in developing countries. Only when governments lower barriers can local and international companies invest in new capacities, thus attracting investment and improving living standards.

It is certainly right that businesses can gain from globalization but so can emerging economies. The two are not mutually exclusive. The dichotomy of the anti-globalization movement is a false one. But while it is true that lowering trade barriers creates new opportunities, it also intensifies competition. And some businesses are simply afraid of this competition and don’t want to adapt to the new challenges, rejecting therefore free trade. The same debate is raging among governments around the world, but as long as they hold on to protectionism they will continue to frustrate economic progress of developing countries.

Contrary to the anti-globalization slogans, there is no single business voice at trade summits and no powerful monolithic force driving the opening of international markets. However, the unambiguous message at the heart of all campaigns for free and fair trade is that it will increase prosperity in both the developing and developed world. This holds the key to the eventual success of future trade talks.

Businesses cannot allow themselves to become bystanders in trade negotiations. They need to develop a strategic, long-term perspective on trade liberalization, appreciating its overall benefits as well as its risks. Strong, balanced and successful advocacy from companies in all sectors and of all sizes, from rich and poor countries, need to muster a common effort to guarantee the proper functioning of the multi-lateral trading system that will emerge from future trade rounds. Before business leaders are able to convince others, however, they may need first of all to convince themselves.

Mr. Oberhaensli is head of economics and international relations at Nestlé. This opinion editorial is adapted from “Free and Fair: Making the Progressive Case for Removing Trade Barriers”, an essay collection published by the Foreign Policy Centre.

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