Russ Roberts

Narlikar on Fair Trade and Free Trade

EconTalk Episode with Amrita Narlikar
Hosted by Russ Roberts
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Amrita Narlikar of the University of Cambridge talks with EconTalk host Russ Roberts about fair trade and policy issues related to trade. Narlikar argues--based on a recent article with Dan Kim--that the Fair Trade movement hurts workers outside of the fair trade umbrella and does little for those it is trying to help. She advocates free trade, particularly the elimination of agricultural subsidies in the developed world and the best way to help workers in poor nations. Drawing on a recent article with Jagdish Bhagwati, she criticizes the international response to recent deaths in Bangladesh factories. In the last part of the conversation, she defends the World Trade Organization.

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0:33Intro. [Recording date: July 23, 2013.] We're going to talk about a number of issues in international trade and trade policy related to articles you've written recently that we'll link to. I want to start with Fair Trade and the article you wrote in Foreign Affairs with Dan Kim. What is Fair Trade and the Fair Trade movement? What are they about? What are they trying to accomplish. Guest: Sure. So, Fair Trade--and we'll use capital letters here when you talk about Fair Trade--a product is granted a Fair Trade label once it has producers have matched a list of social, economic, and environmental requirements. And, the stated purpose of the Fair Trade movement is to give economic security to producers in developing countries. And usually these are producers of unprocessed commodities--fruits, live animals, minerals. By requiring companies and consumers to pay a premium on the marketplace-- Russ: Here in the United States I think most consumers encounter it at Starbucks, the coffee chain where they tell their particular style of coffee, particular flavor of coffee is Fair Trade. And that's supposed to reassure people that the people who picked it, grew it, got a decent wage. But we don't know--when you say to be certified you have to pass a certain number of hurdles, we don't know exactly how much those amounts are. Right? I assume it varies by country? Or is there any kind of general standard that the movement or the general certifiers try to establish? Guest: So, there have been quite a lot of studies already about how there have been quite a lot of problems in the certification process, and how the process can be very expensive for poor farmers and particular countries. And there have also been some interesting studies on how only a small proportion of the premium--so, 1-2% of retail price according to some studies, but actually retail is the poor farmer in the developing world. But these are all micro-level questions. And our paper was actually trying to draw attention and trying to get people to start thinking about the macro level. So it really wasn't about what are the problems with the certification process and how difficult is it for poor farmers to actually get certification. We said: Let's assume that all that is unproblematic and there are other people who are working on this and they are doing good work on it. We want to look at: Is Fair Trade having an effect at the macro level? And the reason we were so intrigued by this question was partly related to what you just started out with, you know, when you were talking about Starbucks. And how people buy that cup of coffee and feel reassured. And we think this is very much so--the Fair Trade movement is very big in the United Kingdom. And so we have entire cities that do Fair Trade. Right? Colleges will have Fair Trade products. Students are really committed to the Fair Trade label. So we wanted to ask the question: Are there any interesting macro-level consequences of Fair Trade that people aren't actually thinking about? So the study isn't really about the micro level. It's about the macro level. Russ: Well, go ahead. What are the macro issues? Guest: Okay. So, our argument was two-fold. First, that Fair Trade deflects attention from the real long-term solution, which is free trade. And second, that the Fair Trade movement runs the risk of fragmenting the world market on agriculture and depressing the wages of the non-Fair-Trade farmer. So that was one of the interesting things that was a result of our study. Which is that people are not thinking about what's happening to the non-Fair-Trade farmer, non-Fair-Trade products. So, shall I tell you a little bit about the first argument and the second argument?
5:28Russ: Let's go in reverse order. Start with what would be impact on the non-Fair Trade worker? Guest: Let me just start off by saying first: What is the problem that the Fair Trade movement is trying to resolve. And then I can tell you about what the problem will be for the non-Fair-Trade worker in the developing country. Russ: Okay. Guest: So, the root of the problem that the Fair-Trade movement is trying to address is the fact that the agricultural commodities market is volatile and distorted. Right? And just how distorted this market this is can be seen from the very large volume of subsidies doled out by OECD (Organization for Economic Co-operation and Development) governments to domestic farmers. Russ: You said, OECD governments? Guest: Yeah. Russ: Which are typically the nations--Europe and the United States. Guest: Exactly. And so just as an example, in 2011, OECD governments doled out $252 billion dollars' worth of subsidies to their farmers. And the problem with these subsidies then is that it becomes very difficult for even super-efficient farmers from the developing world to compete with these subsidized products. And so what these so-called ethical consumers want to do is they want to try and provide access to the needy farmers from the south. And one of the reasons--and this is the idea behind the Fair Trade movement, as well--farmers from poor countries find it very difficult to get access to our markets in the developed world. And we try and give them better market access via the Fair Trade movement. And here's the problem--to go back to the question that you had asked, what is the impact that this has on the non-Fair Trade producers? So, the idea for the Fair Trade movement is that we pay a premium on the market price to the Fair Trade producers. Regular trade producers do not enjoy this market premium. And so they would likely end up with significantly lower wages. And second, if we have a guarantee of above-market price for the Fair Trade portion of producers, this would likely lead to increased production, resulting in lower overall commodity prices. And ultimately decrease profits for all regular trade producers who do not enjoy the price guarantee. So, chances are that the small farmer producing Fair Trade coffee does benefit from the Fair Trade movement, but we do need to also think about the non-Fair Trade producer of coffee, who is going to be affected by this Fair Trade price. And Fair Trade subsidies right now are just not on the scale of government subsidies for agriculture. But they are unarguably growing very rapidly. So in the United Kingdom alone, Fair Trade certified products recorded a staggering percentage increase in just one decade; between 2001 and 2011 we saw an increase of over 2000%. Russ: But they started at a very low level. Guest: Yeah, no, this is true. But even anecdotally in my time here at Cambridge, I've seen colleges transforming into embracing Fair Trade products. Russ: It's definitely very popular among a bunch of folks. I want to go back to your argument that the idea of this is to offset the subsidies from the developed world. So, your argument is that because of the subsidies of the developed world, farmers in undeveloped countries, poor countries, have trouble competing; and that these are very small relative to the subsidies that are being offered by the developed world. But it seems to me that, given that the program is growing, and given that these farmers who are receiving the payments already have access, it's not an issue of--it seems to me that the Fair Trade movement isn't worry about access. It's just worrying about compensation, saying: These poor farmers, they don't make a lot of money in these countries where they grow these commodity products, and we just need to give them a better standard of living. So to me it's the equivalent of a minimum wage being adopted through the commodity price. Isn't that right? Guest: Except that these are products that we are actually importing. So it's not just like we are giving them a slight increase in price and that's where it stops. It's not a system of aid. It's a trade system. Russ: But isn't the idea simply to reward farmers in poor countries with prices higher than the market price, so that they have higher incomes. Guest: That is correct. Russ: I agree, I understand your point. Your point is that it's not just a welfare check. It's a welfare check through the price of the product. Guest: Exactly. Russ: Which offsets some of the benefit, because it discourages people potentially from buying it who otherwise might. So I don't understand the argument you are making that it's going to flood the market, lower the price, and hurt non-Fair Trade farmers. It seems to me the bigger problem is the competition among farmers to get access to the Fair Trade label is the equivalent of rent seeking. It's going to encourage them to expend resources and spend time and effort to try to get access to this Fair Trade label. But is there any evidence that it's limited? What are the restrictions that make it hard to get the Fair Trade label if I'm a coffee farmer in Kenya, or a small farmer of something else in a poor country? Is it hard to get Fair Trade access? Guest: Well, we haven't done direct research on this ourselves, so this is based on secondary sources. But yes, that has been one of the arguments, that it is difficult for small farmers to get access to the certification process. And it's also an expensive process, so you have cooperative movements that can help, but they only go so far. But the point that you are making about how this would result in competition between farmers for access to this label, too, is an important one. And this is also one that we've made in the paper. What we were trying to do is to conduct a thought experiment and see what would happen if current trends continue, and if the Fair Trade label continues to attract as much popular support, as much consumer support as it is already doing. And one of the effects that we would expect to see is also a shift by farmers from those products which do not enjoy a Fair Trade certification, so basic crops, for example, wheat and rice and so forth. And a shift to cash crops where you do have relatively abundant Fair Trade labels, just coffee and tea and fruits. Which would allow them to bring in income for certification. So we would expect in this instance in the competition between products which are Fair Trade and non-Fair Trade, and also farmers who are doing Fair Trade farming and non-Fair Trade farming, competition between them, we would expect to see some adverse consequences along these lines. Russ: It seems to me the biggest adverse consequences would be for the consumers of those products in those countries. So, if some of domestic production isn't traded, and it's used only for domestic consumption, and that becomes less attractive because it's not getting this Fair Trade subsidy, people would shift out of that; prices would go up in the home country, and that would be punishing the consumers in that poor country. Guest: Very much so. Yeah.
14:29Russ: Well, let's turn to the basic issue, though, your first reason in the macro area, which I find very interesting. I'm a big supporter of free trade, but it's not obvious to me that if we opened up trade, if trade were freer, if we got rid of some of the subsidies to agricultural products in the West and the developed countries, it's not obvious that's going to help poor farmers. Even though I'm not a fan of Fair Trade--I have no problem with people who want to pay a premium for their coffee, I do have a problem, intellectually, if it actually doesn't help them, which is part of what we're talking about. But I'm asking a separate question, which is, if we went to this more ideal system which you are advocating, which I'm sympathetic to, which is no subsidies in the West to farm products, how would that help poor farmers around the world? It's not obvious to me that it would. Guest: Sure. So, the very straightforward logic behind this for us is as follows. It has been very difficult for even reasonably efficient farming economies, such as Brazil, to compete with the United States and the European Union (EU) on agriculture because of the massive subsidies that their farmers enjoy on this, even if they might not necessarily have the best comparative advantage on these products. To say nothing of the least developed countries, or much poorer countries, or countries like India, where you have small-scale farming, where there may be some advantages in agriculture if we could have a rationalization of the agricultural system. And then these countries would potentially be able to compete in the international market. But there is absolutely no way they can do so right now with the subsidies that are in place. So, removing these subsidies won't immediately result--it will immediately benefit certain countries, like Brazil and Argentina, which do have incredibly efficient systems of farming. And they would be able to corner the bit of the market that opened up as a result. But also for countries which have been unable to have sustainable farming, mainly because of the competition coming from U.S. and European agricultural products, they too would be able to develop their comparative advantage once these subsidies are removed. And I want to relate this point to the Fair Trade point again, because the idea of the Fair Trade movement is: here are these distortions; they are problems of market access; this is one small way in which we can help, by buying Fair Trade products. But if the problems are actually subsidies then it seems pretty ironic and inefficient to counteract one subsidy with another rather than just address the source of the problem, which is the original government subsidies. Russ: Well, I guess the argument would be if the political system of the West is structured so that it rewards farmers--which it is, unfortunately; they have a lot of political power in the United States, they have a lot of political power in Japan, they obviously have a lot of political power in Europe, and as you mention, they are getting about $250 billion--that's annual, I assume-- Guest: Yeah. Russ: across the OECD. It's not surprising to me that we'd go to a different solution. My complaint is that both solutions, to me, seem ineffective. Let me make my argument and you can react to it. If we got rid of subsidies in the United States and Europe and Japan--which I'm all for, by the way; I'd love to see market prices for farm products--there might be a little more volatility but I think we'd be devoting a lot fewer resources to agriculture in the West. So, the corn industry, just to take a dramatic example, would be dramatically different in the United States and the price of corn would be higher in the world; which would be good; and that means corn farmers in poor countries would be able to compete better. As you point out. What's not obvious to me is that that's going to raise the wages and incomes of people in very poor countries that have fairly undeveloped labor markets and lots of opportunities for farming and not so many opportunities elsewhere. So the supply of labor to the farm is fairly elastic. Meaning that shifts in the demand for farm products don't change the price that much in those countries--and the wages don't, excuse me, don't change the wages of farm workers in those countries. And I would assume that if we made it more lucrative to be a corn farmer in Africa that more people would become corn farmers, but they wouldn't make a lot more money unless they have higher alternatives. And if they don't have better alternatives, they are still going to stay poor. So it seems to me that neither, right now, free trade--free trade is great. I am all for it. The general wealth and wellbeing of the world; it gets the government out of things; it reduces the incentive for lobbying and special favors and exploitation of consumers. That's all great. But it's not obvious it's going to make the poor farmers of Africa or South America or Asia well off. Guest: Okay. I see where you are coming from. I have two responses. Before you gave me your argument, you made the point about how that's the nature of the political system in the OECD countries; that's the nature, that's where the power lies; we have all these lobbies, etc., etc. But we have come very close to a deal on agriculture, where the United States had agreed to cap its subsidies in the 2008 Doha talks. Russ: The Doha talks being the World Trade Organization (WTO). Guest: Right. And that was a very significant concession coming from the United States. And one of the reasons why they were able to make this concession was food prices were very high at the time, so they were able to justify it happening after subsidies to their farmers. And for various reasons we can go into later, this was a deal that was turned down by some of the developing countries. But the reason why I am raising this point is to indicate that it's not quite as impossible to get a deal on agriculture. Russ: I accept that point. And I agree. Hope springs eternal. And I'm optimistic that some day the American people rise up angrily, especially in tight budget times, to make the point that rich farmers don't need to be subsidized by the average taxpayer. And I don't know what the dynamics are in Europe. But certainly in the United States it's imaginable that that day could come. Guest: Yeah. Russ: But it's hard. But yeah, it could come. And we should fight for that. I agree. Guest: And then, now, to go back to the argument you made: it's an important argument and it's a persuasive argument. But the way--I think the mechanisms whereby these changes in market prices would affect farmers in different countries would vary very, very much from country to country. But I'll just give you one hypothetical example. So, right now, in the Indian case, we have very small-scale farming. It's not a very sustainable form of farming. The farmers--a lot of the small-scale farmers can barely survive. If there was a realistic chance that the Indian farmer could get access to Western markets, we would see more investment from the government to have more land reform; to facilitate transition of very, very small and unsustainable farmers to other areas or activities. We would have larger-scale farming. And in this way we would have more efficient forms of farming; and that would allow farmers to exploit the benefits emerging from the decrease in subsidies. So it's not going to happen overnight. But it is one mechanism whereby I would begin to see it happening, in the Indian case.
23:29Russ: Yeah. I just think the more important issue is the education level and skill set of the average 25-year old in the bottom billion. If we think about Paul Collier's 'bottom billion', the billion people that live in Africa in poverty--and I think when Americans, by Fair Trade coffee, they think they are helping those people. I don't think they are. I agree with your basic point. I don't think Fair Trade does very much for the people who are desperately poor. For a variety of reasons. But I'm not sure free trade is going to help them much, either. And I think the main argument for free trade has to lie elsewhere, in the short run. In the long run, the movement of capital across international borders, the movement of ideas across international borders, are definitely going to have an impact on the impoverished people of the world. And the nations that have closed their borders are punishing their own citizens; and those that are open have a better chance of--and we see this dramatically in the countries that have opened to international activity. I'm just not sure that eliminating OECD subsidies to agriculture, the richer countries getting rid of their subsidies, is going to help poor farmers very much. Guest: Well, I mean--I guess you just need to speak to Brazilian negotiators, see and hear them give a very eloquent account of how much of their country would benefit from the removal of subsidies. Russ: Well, for a country it might benefit. It's questionable whether the poor farmers will. It could be the landowners who would benefit. It could be consumers who benefit. Guest: Right, right, right. Russ: So, that's my issue. I don't have any problem arguing that free trade makes us all wealthier. I think it does. But I'm not sure the problems of the poorest of the poor are going to be helped much. Guest: Right. And even when you and I argue that free trade is good and it helps a whole lot--it helps everyone in different sorts of ways. We are not making the argument that even under conditions of free trade we won't need mechanisms of redistribution of wealth within countries. Russ: Well, I'm not sure that's true, either. My point is--I'm making a different point. I'm arguing that access to capital, human and physical, are what change people's standards of living. It's what changed in the United States. It's what changing in China and India. I don't want redistribution, and I don't think it helps very much to help the poor that way. All I'm saying is that the aspect of free trade that helps the poor is capital. Human capital, physical capital, and ideas. And the commodity price is not, by itself, going to help very much. Guest: So, let me just go back to the Indian example again here. Having freer trade would be a very important step towards improvement in the life of the poor in India. But that would certainly lot lead to the Nirvana of development. Even after we have these opportunities available, it's extremely difficult for the Indian farmer, the poor illiterate farmer, to transition into anything else when there are huge problems with Indian industry and infrastructure. And they can't, for example, go into computing. Right? So in this case there is no substitute for a good deal of government commitment to building infrastructure, to improving literacy standards, to improving educational standards, and so forth, which would allow these types of transitions to take place. So, free trade in agriculture itself isn't automatically going to improve the life of the poor farmer, in India. But having that opportunity will be a very vital first step to lead to all these other steps. That's the argument I'm making. Russ: Okay. I like that.
27:52Russ: Let's move on to a different issue, which you've written about recently. This is drawing on an article you wrote with Jagdish Bhagwati, who is scheduled to be a guest on EconTalk in the very near future. You wrote about the tragedy in Bangladesh. Talk about what happened there and what the response was and why you think that was not the right response. Guest: So, there have been a series of very serious accidents, of fires, in Bangladeshi factories. And the most recent occurrence I think was in May; that attracted a lot of media attention. But that wasn't a one-off event. There have been other factory fires which have taken multiple lives in Bangladesh. These are very serious casualties. But in the article with Jagdish Bhagwati, the argument that we were making is how the reaction in the West to these tragedies has been rather [?]. And so the reactions have been several. We've seen self-flagellation by consumers, and blame games by trade unions with point the finger at those companies that buy cheap garments from Bangladesh factories. We've seen the EU saying it wants trade agreements to accord a much more prominent place to health and safety considerations. We've seen the United States, that has suspended Bangladesh from enjoying the Generalized System of Preferences until its safety standards are improved. And we've seen also a response by various European and some American brands to the referring of the high cost of cheap goods. And these brands have agreed to accept responsibility for safety lapses in Bangladeshi-owned and Bangladeshi-managed common factories. And--should I just give you the arguments we've made against this? Russ: Yeah, but before you do, just explain one piece of technical language, which when you said the United States has suspended Bangladesh's access to the Generalized System of Preferences--basically, that means that stuff that used to come in with no tariffs and no quotas now is subject to some restriction, right? Guest: Exactly. Russ: As a way of punishing--in theory--them in order to get them to change their ways. But in the meanwhile punishing American consumers, as well as Bangladeshi workers and producers, at least in the short run. Guest: Absolutely. Yeah. And I think that's a very important point. The entire trading system is founded on this very mercantilist value, that I'm denying market access to your products. But what is often forgotten is the really important point, as you just raised, that you also punish your own consumers. Russ: Correct. So, given those responses, which I think would strike most listeners as reasonable--that is, worrying about where you get your clothes from, maybe not buying from the cheapest producer if they are prone to fires, taking responsibility for the safety of factories, making health and safety requirements in future trade agreements--why do you think those are the wrong responses? Guest: Okay. So, I would say there are four points worth keeping in mind about this, when we read reports about such tragic incidents and when we witness reactions in the developed countries. So, first, very importantly, let's not forget that the brands, the various companies that have been getting so much of the blame, the various Western firms that have been getting so much of the blame, by buying garments from these locally-owned factories--and again I emphasize locally owned, so they were outsourcing--have provided an engine for remarkable improvements in the wellbeing of Bangladeshi workers. So, the garment industry in Bangladesh has nurtured 4 million jobs, most of which have gone to women. So this is a major driver for growth. Now, what labor unions in the West are doing is that they are pressurizing suppliers to increase wages in these factories, in these factories with hazardous conditions. And the problem is that if we pressurize suppliers to increase wages prematurely, we will be depriving countries like Bangladesh of their comparative advantage. And we will be rendering Bangladesh's product uncompetitive in global markets. Russ: Do you have a measure of what's happened to wages in those factories over the last few years, or the standard of living in Bangladesh? Guest: I don't have the figures at hand right now, I'm afraid. Russ: We'll try to find some links for that. Guest: And then, the third point that I think is really important to bear in mind is that it's very likely that brands that have been guilt-tripped into accepting responsibility for Bangladeshi units, over which they actually have no control, will quietly seek to move to locations with better governance. And since the possibility of future fires cannot be ruled out, and the possibility of being tainted is very real, why would firms take this risk? And Disney has already announced such a move. So again, it's the Bangladeshi workers that are going to suffer the most from such exit strategies. That our so-called ethical consumerism and what our trade unions are pushing for would lead them to suffer. And then, finally, this is a point that's I think Professor Bhagwati has made elsewhere, as well, which is that garment industries in Vietnam and China have experienced few fires, even though unions to not exist there. So, we're not against unionization per se; but unionization does not seem to be a necessary condition for safety. Nor is it that trade unions are suddenly going to turn into health and safety experts.
35:09Russ: Yeah. It seems to me that there's some natural forces here that some of these responses are ignoring. For example, if your factory is prone to fire, it makes it harder to attract workers. Of course, if your workers don't have many alternatives they may be stuck working there anyway. But that's probably not true of every single one of them. Guest: Right. Russ: That puts some competitive pressure on the factory owners to be more careful. And that's the natural mechanism that doesn't have to be monitored or enforced with any resources. That's why it's such an attractive mechanism. Guest: Right. Russ: It does come back to our earlier point though: To the extent that Bangladeshi workers don't have many alternatives to working in factories, these natural forces are weaker. And the problem for me is that there's always this temptation to impose Western standards of every aspect to the labor market--wages, health, safety--and say, 'Your factories should be as safe as ours; your wages should be as high as ours.' And as you point out, that's a lovely idea but it basically means there won't be any factories there. Guest: Right. And it's also--I think it's also--it's again deflecting attention away from the people who are actually responsible for maintaining good safety standards. Right? And those people happen to be local governments--national governments, local governments. And the managers and owners of these factories themselves. So, we're often misallocating responsibility by this kind of misguided consumerism. Russ: But there's been some interesting--I don't know what the full effects have been, and a lot of it is cosmetic, I'm sure. There have been attempts by American companies, multinationals generally, to improve working conditions in their factories in, say, China. There are organizations, so-called voluntary organizations, that are semi-voluntary--they are basically industry consortia that have been started in a way, particularly, to deflect the possibility of legislation or other kinds of pressure. And I don't know whether they've been effective or not. I do understand--it's a very interesting issue; I often get asked this: As a free trader, would I be willing to trade with slave--with products made by slaves? And the answer is: No, I don't want to buy products made by slaves, unless it makes them better off to buy the products, in which case I do want to buy them. Guest: Right. Russ: There are a lot of people around the world who have horrible working conditions and very tough lives. If they want to improve their lives and the lives of their children, by far the best course is to let trade happen. But I understand the natural impulse people have to try to help that along. The only question I always have is whether it actually works: if we make factories in China adhere more to Western standards or the rest of the world adhere to Western standards, does it help them or hurt them? And I think that's an important empirical question. Guest: Yeah. Russ: So, I don't know. I have not seen a careful study of whether toymakers and clothing manufacturers and technology devices that are made in Asia, whether their public attempts to make those factories better have actually done anything. Is it just cosmetic? Is it just window-dressing? Or is it actually making a difference? I do know that trade has made a difference in those workers' lives. The standard of living in a lot of those countries is much higher. Guest: Definitely. It's also, at what stage these types of standards are brought in. Because--so now wages have been increasing in China. And health and safety conditions have been improving. But you could easily argue that that's the natural mechanism of the market which has been driven by export-led growth. Russ: I think that's true. The alternative hypothesis I guess is that it's a pittance relative to what we might be able to do for them if we did something else. I'm of the view that trade in general has been extremely beneficial for the poorest people of the world, but there are skeptics who argue that the system is rigged to help rich, powerful countries exploit poorer countries. And yet, those poor countries are doing increasingly better. Their workers and citizens have higher and higher standards of living. They are still awful by our standards, and that's a tragedy. But I don't think we have a very effective way to do better than that. Guest: Yeah. Yeah, I think we are actually on the same page on this.
39:58Russ: Let's turn to the issue of the so-called Rising Powers. What does that phrase mean and what do you think are the key issues that surround those nations? Guest: Okay. So, there are lots of different ways in which you can conceptualize Rising Powers, and that's partly also why we have these various categorization/taxonomy games, right? So is it the BRICS (Brazil, Russia, India, China and South Africa)? Is it 11? Which group of countries is included? Russ: Explain what the BRICS are. Guest: Sure. So, this is Brazil, Russia, India, and China, and this was the concept and the acronym was coined by Jim O'Neill from Goldman Sachs as the big emerging markets of the century. And a lot of attention has been paid to which will be the next big growth market or the big emerging market, and this varies according to the financial climate and other various types of transient factors and so forth. For me, the way I think about a Rising Power is those powers that have what is effectively veto[?] player status. So, you can't really get an international agreement unless these powers are on board. So, these are the powers that have the ability to walk away from a negotiation and thereby completely derail it. And it depends on which issue area you are looking at. So, in some issue areas--if it's energy, you might say Russia is a rising power. In a lot of issue areas you would say it's not. Brazil, India, and China for me are the constants, the constants of rising powers across multinational regimes. And you have a second question to this. You asked me what are the rising powers and what are the kinds of debates. Russ: Yeah, what are the key issues that surround their rise? Guest: Sure. So, there are two sets of key issues that we discussed quite a bit. And both academic and policy wells[?]. So the first one has to do with, is the more political science perspective, which has to do with: Are these revisionist powers or are these status quo powers? Russ: Explain that. What does that mean? Guest: So, will these powers come up with radical, even possibly revolutionary visions of global order and demand a complete overhaul of the established system of governance that we have? Or are these powers that can work within the system and while they are still seeking to improve their influence across special areas, they will still broadly fit within the existing regimes? So that's my one set of interesting questions about, that's coming from the political science side. And then we've got lots of analysis coming from economists, and particularly the kind of the Goldman-Sachs-type economist, and also academics, on the gross patterns that we are witnessing in these Rising Powers and how sustainable are they and where do the vulnerabilities lie. And so forth. And one of the--so, these are the two sort of dominant streams in the debates. One of the issues that I thought was quite important was that both these sets of accounts seem to be missing out on a very crucial aspect of the power transition that we're witnessing today, which is this: That power transition is seldom solely a function of growing economic or military prowess. And a lot depends on how power is exercised, in relative to whom, and how action and reaction are interpreted and misinterpreted. So, the bit that, to me, has been missing from both the economic and political side is that, is the story about the rise of new powers, which is the story fundamentally about getting[?] in negotiation.
45:01Russ: Don't you find that--I mean, I find that very strange. I understand your point. But let's talk about it for a minute. Let's take China, which is a dramatic example. Clearly belongs on the list. And I agree with you--it seems like, to me, that Russia is sort of on the list as sort of, I don't know, a bone to throw to the old regime and their former military and political strength. But China clearly is a rising power, in every dimension: militarily, economically, and in these issues of worldwide governance of various kinds, on international military issues, economic issues, trade issues, patent, intellectual property issues, etc. So, China--I understand, clearly has--its growing economic success has implications for its military potential. And that raises issues for Asian countries but also for countries elsewhere. On the economic front, why wouldn't we just--let me ask it differently. Wouldn't we be better off if we lived in a world without these various international organizations, which, on paper, have the opportunity to make the world a better place? And I'm considering the three obvious ones: The World Trade Organization (WTO), the IMF (International Monetary Fund), and the World Bank? Those are the places where countries come together to make economic decisions of many kinds. Wouldn't the world be a better place if we just said, 'Look, we think this whole negotiation and bargaining issue which you raise, it's just not beneficial to the people of the world. Let's just open up our borders.' A bunch of the nations, who understand the virtues of trade. Let's open up our borders, let's get rid of all these really thick books that have all the trade minutiae of how do you define peanut butter, and what's a t-shirt, and let's instead just say, 'Trade's good and the nations that want to enrich themselves and help others by trading freely shall do so' and let the others impoverish themselves and miss the game? Why shouldn't we do that? Why shouldn't we be pushing--instead of pushing for another WTO round that would integrate these rising powers, why wouldn't we just say: Let's have free trade? Guest: I think it would--if we were able to get a world where countries could back, easily, say, 'You know, let's open up our borders, and let's trade with each other,' I think that would be great. But I don't think we live in a world like that at all. So, we live in a world where, a country, one, we live in a world that is still extremely mercantilist. Two, we live in a world where we need access[?] to the markets of these rising powers. Especially with the world in, you know, the financial crisis that we've been in. So we need access to the markets, to the Chinese markets, to the Indian markets, to the Brazilian markets. And if these countries aren't on board, it's going to be a real problem. And in terms of your point of about, why do we need the WTO? I mean, for one, well one very important reason why we need the WTO is--and we need this new round--is to prevent the return of protectionism. And so right now, it looks--we have countries that--um, right now we haven't seen the 1930s style protectionism. But you only have to read global trade alert reports to see various ways in which protectionism has been on the rise. And one of the things that the WTO does do is present the research into protectionism. The new round, al so very valuable insurance against more protectionism. Over things like water in the tariffs[?]. So, countries have a big difference between their applied rates and bound rates of tariffs. And they can actually, legally, within the WTO's rules, increase their tariffs very significantly to the boundary. So, having this new round, concluding this new round, would help us insure that that doesn't happen. And we also have the very important [?} mechanism. So those are the reasons why I think it's so very important to maintain institutions. But there's another reason why I think it's so very important to maintain institutions: it's because it's the argument that constructivist thinkers make about socialization into international regimes. And the argument here is, the more a country becomes a member of a regime and the more it's given greater voice in the regime, the more it also starts buying into some of its values. So, we might--if we go into the debate of status quo versus revisionist power, if socialization in regimes works, then we are likely to see more satiated powers than revolutionist power.
50:40Russ: Yeah, I just don't see any evidence for them. It's a nice theory. Could be true. And I don't disagree with you, by the way. I do think the WTO has had some, perhaps, positive impact on encouraging trade to be more open. What is also done is created an impression, that may be true, that very powerful organizations, very powerful forces--farmers, multinationals with copyright power and under current law, current legislation, independent property power under current legislation, that they use the WTO as a way to keep anything from changing. It helps, it gives the illusion that we are moving toward freer trade, but it also creates a forum where they can hang out and interact across international borders. Which strikes me as a really bad idea. I guess I'm asking a different question, which is: As an economist who is an advocate for free trade, I think there's a temptation all the time for us to accept what is--that the glass is half full, it's better than nothing; yes, real free trade would be better but so-called managed trade is at least a step in the right direction. And it's not obvious. That may be true in some meta-sense of political reality. But it seems to me those of us who want to see open capital, moving capital across borders, moving goods across borders, moving people across borders, freely--we should advocate for that. And I think to some extent, to the extent that we play the game, we are conspiring with those who actually are going in the other direction and are using this as a cover for their own self-interest. It's just not obvious to me that the WTO really is a force for freer trade. Guest: I don't think self-interest is going to [?] this path, the WTO. You are still going to get countries going for their self interest. Having the WTO in there mitigates against some of the worst excesses of power. If you are a small--in fact--I disagree with you on your point about this is a forum where, you know, there's powerful multinationals, holders of intellectual property rights are the players that manage to exercise influence. Russ: Yeah. Make me feel better. Go ahead. Guest: I disagree very strongly with you on this. And just two examples. A good example of this is the TRIPS (Trade-Related aspects of Intellectual Property rights) and public health exploration. Russ: Explain what TRIPS is. Guest: Trade Related Intellectual Property Rights. It's one of the agreements of the WTO; it was one of the most controversial agreements of the Uruguay Round. And developing countries really did not want to sign on to it. And they, according to many accounts, they agreed to sign on to the TRIPS agreement partly because they thought it was a much narrower agreement than it turned out to be. They thought it would be only the counterfeit products as opposed to several other forms of intellectual property, including patents--which it does. And ultimately there were brought around by, came to be known as 'The Grand Bargain.' And this is one of the reasons why Rounds are important, because you are able to get big tradeoffs across issue areas. In this case, the tradeoff was, developed countries were pushing for, particularly the United States, bringing TRIPS into the Uruguay Round, and in return, developing countries were told some of the issues that they cared about, such as agriculture would be brought in. But anyway, going back to the TRIPS and public health declaration, under the AIDS (acquired immune deficiency syndrome) pandemic in Africa, some of the least developing countries thought that they would be able to import medicines that would be manufactured in Brazil and India, because they were much cheaper. And they were told they could not do so under the TRIPS regime. Russ: Because they violated patent and copyright, etc. Intellectual property. Guest: Yeah. Exactly. Patents in particular [?] Russ: Yeah. Not copyright. Patents. Sorry. Guest: And they were told that there was no way this was going to happen. And the U.S. pharmaceutical companies began a huge lobbying effort against that. And in return, a coalition emerged of the least developing countries, what we call emerging markets or rising powers, so, countries like Brazil and India, and northern NGOs (non-governmental organization) as well as southern NGOs. And they lobbied really hard to allow parallel imports. And now this is allowed under the regime. So they are able to import medicines when facing such a pandemic. And that's a good example of how the very poor were able to exercise voice and influence in the WTO. But there is another--the other really--you only have to speak to, not just the Brazils and the Indias of the developing world but also the smaller, least developed countries that are members of the organization today, and you will get quite a story of empowerment. Because just in terms of how process works--if the GATT (General Agreement on Tariffs and Trade), used to be known as a rich man's club and decisions were made between the EU (European Union), Canada, the United States, and Japan, and developing countries had very little say. And today we have something called New Quad, where Brazil and India and recently China have become the constants. These countries work in coalitions with least developed countries and other development countries, which have much greater voice in the regime. And in fact, you could argue that one of the reasons why the WTO is actually so badly developed now is because this is not a power-lever[?] organization. It's a very pluralistic organization, where it has become very difficult to get consensus. But [?]. I think the WTO is not a story of the powerful getting their own way. Russ: Well, I'll feel better when we see more of those agricultural concessions. I'll take your point. I have to confess that part of me thinks the main purpose of the WTO is to allow trade economists, negotiators, lawyers to fly around with the world and hang out with each other; but I am a little bit cynical and a little bit pessimistic.
58:00Russ: You do point out, and I think it's an interesting issue: there has been some increase in protectionism in response to the Great Recession, but it's striking to me how little there has been. Certainly in the United States. We have, President Obama, I think he put some large tariffs on Chinese tires, but that's a symbolic--I think it's a really bad idea, but it was a symbolic measure. It did threaten to start a trade war with China which doesn't seem to have happened, thank God for that. But it's striking to me how little worldwide protectionism there has been, in contrast to the 1930s and the Great Depression. And that could be just because the Great Depression was milder but I think it probably is due to other reasons. Why don't we close and why don't you talk about why you think that's true. Guest: Well, I think that's a nice way to close because in my field, one of the reasons why we haven't seen a trade war between the United States and China, the complete proliferation of high levels of protectionism, is because of the WTO. This is one of the very few organizations--this is the only organization that has a very, that has an enforceable dispute settle mechanism. And if you slap on tariffs against your trading partner, chances are, if they are able to use the DSM and increasingly countries from the developing world are-- Russ: What's the DSM? Guest: Sorry--the Dispute Settlement Mechanism. I'm sorry. Russ: It's okay. Guest: So, the Dispute Settlement Mechanism, is a very powerful tool not just in the hands of the big but also of the small. And we know that if we hike up our trade barriers against our partners, chances are they will go the Dispute Settlement Mechanism and will get some kind of sanctions raised against you. So I think the WTO has--the fact that we haven't seen the resurgence of protectionism on the scale that we saw in the 1930s--one of the very important reasons is the fact that we do have an organization like the WTO.

COMMENTS (19 to date)
Jim Feehely writes:

Hi Russ,

I may have not listened closely enough, but Amrita made no sense to me all.

I have heard some palpable nonsense from utopian free trade zealots, but this exceeds anything I have heard or read from such zealots.

I understand your libertarian view in respect of markets, although I respectfully disagree because ideal markets are illusory, a mere economic model. But I suspect even you were a little surprised by Amrita's zealotry.

Oh well, there's always next week.

Reagrds,
Jim Feehely

Mat Hayashi writes:

Listen to the Planet Money podcast (#224: The Cotton Wars) to hear a great example of the WTO in action in response to our government agriculture subsidies.

Mike Tolhurst writes:

I couldn't help but feel a bit of interdisciplinary mismatch. Amrita sounds much more like the political scientists I've heard (who take decisions made by political leaders and decision makers very seriously as 'brute facts) than the economists (who are more interested in the basic structures of markets). I *think* that explains the kerflufle over the role global trade organizations. It seems on the political science side of things free trade is not seen as the 'natural' or the 'default' but an active policy choice that is picked, pursued and legislated through international organizations. It seems that, at least what I've heard from Russ, is that the economist view is that free markets emerge when politicians keep their mitts off economic activity.

Best,
Mike Tolhurst

Zak writes:

I agree with Jim, this was difficult to listen to. It seemed as if Amrita was wanting to return to the start of the conversation and preface everything before responding. I found her arguments neither compelling nor informative. This is a shame given the interesting nature of the free trade topic.

Dodoson writes:

Russ- You have the best show/podcast of its genre, bar none. No offense to you, but, Amrita is the least articulate guest I've ever heard on your show. She was unable to defend her mindless (and ever-changing) ideology. One can only assume that you agreed to have her on the program in order to score the real interview (with her colleague) that you wanted.

Carl writes:

Hi

One issue with Fairtrade that is rarely mentioned is that it has no requirement on quality to pass as Fairtrade (unlike other organisations like the Rainforest Alliance).

I've heard stories of coffee farmers having two plots of land, one of good quality and one of bad quality. The farmer would always get a good price for the coffee grown on the good plot but would hardly be able to sell what is grown on the bad. By Fairtrade certify the bad plot of land, the farmer can sell the good coffee to the market like normal and ensure a better price for the bad coffee than what could be gotten if it was sold on quality alone.

In my mind, when people buy Fairtrade commodity products, they're choosing inferior quality.


I too found the speaker difficult to follow as she seemed to develop her line of thinking right there in the interview, not having thought about these issues from this angle before.

thanks
Carl

Russ Wood writes:

I'm glad to see that it was not just me: this was the least satisfying EconTalk I've listened to. The guest made a few good points, but mostly rambled in response to Russ' questions. I'm not sure that any approach to questioning the guest would have improved it, but I almost feel that she needs a second chance to make more sense.

Radovan Ďurana writes:

Hi,

I am afraid, that Mrs Narlikar is not citing the correct data. Fairtrade premium (1,2% of total market sales) is just a special premium for development projects. Sales of Fairtrade producers are 10 times higher, reaching 12% of total market sales.
You can verify the data here:
Market sales: http://www.fairtrade.net/fileadmin/user_upload/content/2009/about_us/FLO_Annual-Financials-Sales_2010.pdf

Sales of producers (p.37)
http://www.fairtrade.net/fileadmin/user_upload/content/2009/resources/Monitoring_the_scope_and_benefits_of_Fairtrade_2011.pdf

Fairtrade premium is at p.46.

Best
Radovan

Daniel Barkalow writes:

My impression of the point of Fair Trade is that it is really a response to unfairness like the whole United Fruit Company mess, not unfairness due to agricultural subsidies. Obviously, coffee producers in other countries aren't hurting from the US's subsidies to domestic coffee production, nor to competition from people brewing corn instead of coffee. The (perceived) problem is that US importers control shipping to the markets, and can therefore pay producers only enough to keep the farms operating, while taking all of the difference between that and what the US market is willing to pay as profit. There is also the related possibility of US companies operating the farms as well as shipping, and again sending the profits back to the parent company in the US, so some attention to that step in the supply chain is important.

Whether or not Fair Trade's actual process does anything about either of these issues is an empirical question, but neither are really what was discussed in this episode, and it's unclear as to why there would be anyone in the market who is neither Fair Trade certified nor taking advantage of access to capital and shipping priorities, so downsides for such people would presumably not be important (assuming, of course, that you aren't discussing flaws around Fair Trade's monopoly on certification).

Tom writes:

I'll add my voice to the chorus. I often disagree with the guests on Econtalk, and with Russ, but have always found it compelling and informative and I look forward to listening every week. I always learn something, question/modify my own position or strengthen a conviction, but this episode was almost painful to listen to. I didn't come away with much more than a feeling that it was time somewhat wasted. Props to Russ for getting through it- though there was frustration in his tone here and there he managed to not abort the whole thing (though I wonder if maybe he should have...)!

Shawn Eng writes:

She was perfectly understandable. She's making a judgement call on sweatshops: Sometimes a few eggs must be broken in order to make an omelette. This is the standard argument of free trade fundamentalists and shills for the sweatshop/gulag lobby on this side of the Pacific.

Her other argument is that Western multinationals have washed their hands clean from the factory fire deaths because it's all the fault of these rogue, fly-by-night subcontractors. An elegant variation of the "white man's burden": Oh woe is me, my humble corporation would throw so many crumbs at the grateful wretched of the earth, if only these unreasonable ethical consumers would get out of our way.

I did gain from this show an absolute jewel from Mr. Roberts around the 37 minute mark:

"The problem for me as a free trader is whether I would buy the products made by slaves and the answer is no, I don't want to buy products from slaves unless it makes them better off to buy their products."

When I encounter young libertarians who hopped on board the civil liberties or marijuana train, I'll be sure to use this interview to warn them what characters have appropriated the libertarian label. Defending sweatshops and being on the fence about slavery? I'll bet I can get a few "I didn't sign up for this" responses.

[Comment edited with permission of commenter.--Econlib Ed.]

Matěj Cepl writes:

Couple of comments:

* I completely despise all comments above who dislike the presentation quality of Ms. Narlikar. This is an academic discussion between learned men and women and not your average infomercial on TV. If you want perfect presentation, watch your Evening News. Brian Williams (or whoever else from these guys and gals) give you way better presentation with zero content. I listen to EconTalk for content not presentation.
* I think that the relation between OECD agricultural subsidies (which are IMNSHO The Pure Evil™) could be much more dug into. One thing which stroke me is: how come that all Fair Trade products I have heard about are those which are generally not produced by the OECD countries. Have anybody heard about Fair Trade™ wheat, corn, or wine? Perhaps there are some efforts like that, but I have never heard about any substantial movements in such products.
* I however, also don’t understand Russ’ argument, that opening of OECD food markets to the external producers would not help the bottom billion. Perhaps poor Indian farmers would not be able to compete in the OECD markets, but wouldn't opening of these markets for say, Brazilian producers mean that markets where the current Brazilian products goes to now would be opened? So in the result, perhaps, Brazilian consumers would be a bit worse off (because instead of superior Brazilian products they would get more Indian ones) and Indian farmers wouldn’t do as well as the Brazilian ones, but to say that the Free Trade wouldn’t help Indian farmers at all seems to me too skeptical.

Russ Roberts writes:

Shawn Eng,

I misspoke and you misunderstood me. There is an interesting moral question as to whether one should buy products made by people under duress. There are different kinds of duress--slavery being one extreme. My view is that you should buy products from people, even under duress, if it makes their lives better. To abstain from buying on moral ground and worsen such people's lives seems wrong to me. Many workers around the world who work in what are called sweatshops have seen their standard of living rise because of international trade.

But a slave? A slave is unlikely to be made better off by trading with the masters of the slave so that's a different case. That's what I meant.

What would you do to help the unfortunate people of the world who have limited skills and opportunities?

emerich writes:

Like the commenter above, I too am taken aback by the hostility to the guest. Her central claim was quite comprehensible: the fair trade movement and similarly motivated initiatives have unintended consequences that hurt those they're intended to help. What puzzled me is Russ's skepticism and quibbles. Russ, focus your energies on enlightening the truly benighted, like last week's Michael Lind, whose logical inconsistencies were big as a barn. It was disappointing that last week's commenter's were for the most part impressed by his glib self-assurance. Like consultants and confidence men, he was often wrong, but never in doubt.

Adam S writes:

Russ,

Like you and the guest, I dislike agricultural subsidies. However, I'm not clear on the "good libertarian's" view on subsidies as a way of preserving national food security. Like Mr. Lind alluded to a few weeks ago regarding subsidies for Airbus and Boeing, a decent argument could be made for preserving some inefficient industries "just in case" the rest of the supply chain closes due to some embargo or war.

If the US where to wholesale outsource its food production to another country, how could the US cope if that country decided to suddenly cut off supply? The OPEC oil embargo in the 1970s seems to provide evidence that it could happen. A cartel of grain producers isn't all that far fetched.

I would guess the libertarians might argue that at least the government should be more honest if this is the goal, and simply nationalize certain farms or industries directly. At least that would be more transparent. But I'm interested if there are other ideas on this topic, since it's certainly a serious security issue and one that every country deals with in its own way.

Brian Willott writes:

I normally love the podcast, but not this one. Russ, with all due respect, I don't think you understand the current system of agricultural subsidies, neither in the US nor in other OECD countries. Your comments about corn subsidies and their impact on price were outdated. I think you need to have a guest on about this issue.

Also, I think the issue of fair trade coffee shouldn't be tied to discussion of OECD agricultural subsidies. How little coffee is produced in OECD countries? What do wheat subsidies in he UK or rice subsides in Japan have to do with coffee farmers in Africa?

Gandydancer writes:

Adam S: "A cartel of grain producers isn't all that far fetched." One that includes the US is far fetched. One that doesn't include the US is absurd. Subsidies are not needed to make US -grain- production price-competitive. Nor illegal immigrants.

Gandydancer writes:

Brian Willott:"Your comments about corn subsidies and their impact on price were outdated." Don't be coy. Say what you mean. Sounds like you believe something that anyone whose livelihood doesn't depend on corn subsidies will recognize as an obvious falsehood, but I can't tell for sure. And there's no transcript (yet?) for this podcast to search for "corn".

That said, there's no question that corn subsidies (including sugar import restrictions, ethanol requirements, etc.) continue to make the price of corn and its derivatives (including the subsidy) higher for US consumers/taxpayers than a free market would produce. That hasn't changed and will never become "outdated".

Brian Willott writes:

Gandydance, I'm not being coy and my livelihood does not depend on corn subsides. The current system of corn subsidies is mostly ethanol subsidies, which raise the price of corn. The only other corn subsidy in play today in the US is a direct payment to farmers, unlinked to their corn production and thus unlinked to corn prices. Take away the ethanol supports and the price of corn goes down. Simple economics, and CONTRARY to what Russ said in the podcast.

What is outdated is to refer to corn subsidies in a way that ignores the last 3 farm bills. Payments and productions began to be unlinked in 1996. This is 2013.

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