Fair Trade Analogy

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Q2. There are some nations who feel that free trade is not fair trade. What are your views on this?

A2. I think free trade is more fair than any proposed alternative. The problem is that free trade means more international competition for most firms which in turn will result in successes for some businesses and failures for others. Those that fail will lead to hardships for the workers, management, and investors in those industries. For those who suffer losses, a natural human response is to identify all the relative advantages the winners have and argue that it’s unfair. For example, workers who lose jobs to trade point to the greedy management who moved the factory abroad (unfair!) or the foreign workers with low wages (unfair!) or the lax labor and environmental policies abroad (unfair!) etc., etc.

I think competitive sporting events provide a good analogy. Consider basketball. When two teams come together and compete, one always wins, the other loses. That’s the nature of competition. But remember the teams are not the only participants; there are the fans too. And if there weren’t a winner and loser, the fans would never come and watch the game. Every losing team could easily find examples of unfairness if it wanted. The other team’s center was much taller, or they didn’t have an injured player, or the referees clearly favored them, etc., all of which is unfair(!). But think about it. Would we really want the teams to be equalized in every respect? Sure, we do expect the environment to be the same; the baskets the same height, one team can’t be forced to wear ice skates, etc.; but we expect there will be many other variations between the teams too.

Furthermore, the possibility of losing, or even persistent losing will lead to attempts to improve the team. Some players will be traded for others. The coach may be fired. The team may practice more frequently. These incentives mean the teams (even the winners) continually try to improve their performance. Without the chance of losing, teams would never progress or change very much. And since both teams keep innovating the fan continue to come to the game because you still never know who’s gonna win.

So it goes in international business. Firms that compete will continually seek ways to improve their product by reducing cost and raising quality. If they don’t do this effectively, they’ll lose. But just like in sports, that’s OK. Workers and management need to use the threat of losing to help strive for excellence. By stimulating competition, free trade serves the consumer (i.e., the sports fan) best. In this sense it is a fair system, despite the ups and downs.