Geo FactsheetNumber 158www.curriculumpress.co.uk
Free Trade or Fair Trade - why is this issue important?The importance of tradeInternational trade is a complex issue. Understandably, governments areconcerned with developing and preserving the standard of living for theirown people. Countries with strong economies have great influence overinternational trade. Many multi-national corporations have more purchasingpower than most of the LDCs and the LEDCs. In their drive to maximiseprofits and reduce the price of their finished products, they strike hardbargains with the producers of their primary products. General Motors,Wal-Mart, Exxon Mobil and Daimler Chrysler all have revenues greaterthen the GDP of the 48 least-developed countries.
All countries need to trade, to exchange products of which they have asurplus for goods or services they need. Given favourable circumstanceseach country aims to have a trading surplus, which means the value of thegoods and services it sells or exports, exceeds the value of those it buys orimports. Traditionally those countries regarded as belonging to the MEDCgroup have had stronger economies and more favourable trading balances,while the majority of countries classified as LEDC or LDC have sufferedfrom significant trade deficits.
Why is trade so important in attempts to reduce the developmentgap?Debt relief and aid have done much to kick-start development in manycountries, but they are not a long term way of improving the standard ofliving in so many countries. However a country that can develop andsustain a favourable trading balance has the ability to generate wealth thatit can invest for the benefit of its citizens, for instance in education andhealth services.
Free trade assumes there are no barriers to trade between countries. Theprices paid for all goods and services are determined by the balance betweenwhat the producer wants for the goods and services and what the consumeris prepared to pay. Whether the producer or the consumer has most influenceover the final price varies. If a commodity is scarce then the producer hasmost influence. Conversely, if there is a glut, then the consumer can drive theprice down.
Kenya is classified by the World Bank as a low income country. Fig 1shows that although the value of Kenyas exports is rising, the cost of thegoods the country imports is increasing more rapidly.
1982 1992 2002
Fig 1. Kenya - imports & exports 1982 - 2002
The size of Kenyas debt has increased significantly since 1982 (Fig 2).
1982 1992 2002
Fig 2. Kenya external debts
Most of the exports are primary products: tea, coffee and fresh flowers.Prices paid for these goods vary widely as supply and demand fluctuate.Countries like Kenya usually have little control over these prices eventhought the cost of the manufactured goods and fuel supplies they need toimport continues to rise.
Tourism is a growing industry in Kenya but it is very susceptible to factorslike political stability. People do not travel for pleasure if there has beensome national or international incident so income from this source fluctuatestoo. This explains why Kenya, like many other countries in a similarposition, continues to have a large trading deficit.
Why is the present trading pattern working against these poorercountries?Goods are not always traded freely. Traditionally, many countries have tariffbarriers designed to protect their own agriculture and manufacturing industry.Farmers in countries like the USA and EU do receive subsidies for some ofthe crops they grow. In some instances this has led to increased productionand these countries find they have surplus supplies that they sell to othercountries, often at cheap prices. Countries whose farmers are not protectedin this way find they cannot compete with these subsidised producers.
What is fair trade?Fair trade differs from standard trade in six principal ways: Focuses on trading with poor and marginalized producer groups, to
help them develop skills and sustainable livelihood through trade.
Pays fair prices that cover the full cost of production and providea living wage for the producers.
Provides credit for producers when it is needed so they have thefunds to cover production costs. This allows for a steady flow ofgoods so orders can be fulfilled on time.
A premium can be paid that will provide funds for socialdevelopment work in communities where the producers live.
Encourages the fair treatment of all workers and ensures healthyand safe conditions in the work place.
Allows for the development of long term trading relationships thatwill benefit the producers rather than short term contracts.
Exam Hint. Make sure you are familiar with abbreviations like:-LDC Least Developed CountryLEDC Less Economically Developed CountryMEDC- More Economically Developed Country
158. Free Trade or Fair Trade - why is this issue important? Geo Factsheetwww.curriculumpress.co.uk
Most people in Senegal in the towns and the rural areas eat a dish calledthieboudienne at lunchtime. The main ingredients are fish, tomato paste,rice and onions and it is cooked in groundnut oil. Traditionally all theseingredients have been produced in Senegal by their own farmers andfishermen. However there are problems relating to the production ofthese commodities. Onions that keep much better than the locally produced ones are
being imported from Holland. Senegalese farmers need better storagefacilities so they can compete.
Rice crops require fertilizers. These used to be supplied to Senegalesefarmers at subsidised prices. The Senegalese government waspersuaded by the World Bank and the International Monetary Fundto drop the subsidies on fertilizers and to reduce the duties chargedon imported rice. So even in rural areas people can buy importedrice more cheaply than locally produced crops - so the farmers areearning less.
A recent deal with the EU lead to an agreement that trawlers fromthe EU could fish along Senegals coastline for four years in returnfor a payment of 41 million to the Senegalese government. Howeverthe local fishermen are finding it difficult to compete and theirincome is declining.
According to the World Banks price index, the price of groundnut oilhas dropped from US$1,576 a tonne in 1960 to US$700 a tonne in2000. Obviously this means less income for the Senegalese farmers.
Imported tomato paste from Italy tends to be sold more cheaplythan the locally produced product.
This shows that opening up markets to completely free trade does havedisadvantages for countries like Senegal. Countries like Senegal need totrade but they are not in a sufficiently strong financial position to negotiatefavourable terms with institutions like the European Union.
Metals and mineral productionLess attention is paid to this important sector of world trade probably because proportionally fewer people are dependent upon this sector for theirimmediate livelihood. However as a means of generating wealth it is important. Also it is generally acknowledged that there is a positive correlationbetween a countrys consumption of metals and metal products and its level of development (Table 1).
Maize in Mexico Since 1994 Mexico belongs to the North American Free Trade
Agreement (NAFTA). Cheap maize is imported from USA. Mexican farmers cannot compete so they are selling less and earning
less. See www.cafod.org.uk/wto-roughguide
Table 1. Population and consumption of metals in a selection of countries as share of total consumption in 2000
Exam Hint. Look out for further examples. Oil has been found in theCongo. Will the income generated benefit the peoples of the Congo?Foreign capital will be needed but will firms be prepared to invest ina country that is not politically stable?
Senegal how is agricultural production affected by world trading patterns?
Cotton in West Africa Growers in the USA are heavily subsidized by US$3billion a year. Farmers in countries like Burkina Faso, Benin, Chad and Mali cannot
compete so they are finding it difficult to sell their crops.See www.economist.com
% of Aluminium Copper Lead Steel(1999) GoldWorld population % consumption % consumption % consumption % consumption % consumption
USA 4.6 24.4 19.7 26.6 16.2 7.3
Western Europe 6.9 23.3 27.2 26.2 20.2 22.2
South Korea 0.8 3.3 5.7 4.9 4.6 2.9
Latin America 8.6 3.7 6.6 6.5 5.3 3.2
China and India 38.8 16.6 14.1 11.5 21.5 23.4
Africa, Middle East, 22.4 3.6 2.7 4.2 5 16.5and Other Asia
158. Free Trade or Fair Trade - why is this issue important?www.curriculumpress.co.uk
Organisations like Traidcraft are playing an important role in assistingmany small and medium sized producers to sell their produce for a fair pricein overseas markets (Fig 3)
Fig 3. Traidcrafts producers around the world
Main producers: AfricaBurkina Faso Sun dried mangoes.
Kenya Craft goods. Tea.
Malawi Craft goods (particularly paper products). Sugar.
Mauritius Furniture. Pressed flower cards. Hand screen-printed T-shirts. Packing (tea/ sugar), sugar.
South Africa Dried apricots, raisins, sultanas from the Orange.River region.
Wine from the Northern Cape region.
Tanzania Craft producer groups. coffee, tea, honey.
Uganda Coffee, tea