June 2005 Issue
The Greatest Anti-Poverty Initiative The World Has Ever Known
EditorialI had the great fortune, one might call it, of encountering the latest anti-trade group collecting signatures at Thayer. This particularly unlucky brood was protesting CAFTA, the Central American Free Trade Agreement with the United States. They seemed convinced that free trade with the U.S. would lead to progressively greater poverty for the Central American masses. I told one of the group’s girls that they were misguided, that perhaps they should read a short tract on basic economics. She eloquently responded, “Do you value money more than human life?”
Normally, I would not take time to ponder the silly exploits of those who have hearts for human rights but can’t get their act together in any meaningful way. But the anti-free trade movement stems from a dangerous mentality. Free trade is the biggest anti-poverty program the world has ever seen. Yet policymakers in the highest echelons of governments throughout the world actively oppose it. These policymakers are on the left and the right, and they represent the biggest obstacle to eradicating poverty on a mass scale.
The following is one common argument against free trade, made by Jim Wallis, America’s foremost liberal evangelical Christian: “Agreements that force poor countries to open their markets to the wealthy countries, while their protectionist policies block exports from developing nations, simply perpetuate and exacerbate the rich-poor gap...Poor countries must become active participants in negotiations.” Statements like this are fraught with so much error that any Economics professor (or for that matter, any Economics student) would gleefully point out the flaws within. I will touch on three of them here.
A. Free trade inherently means free; it is not blocked. It flows freely, in both directions. That means that rich countries do not “force” poor countries to open their markets while they “block” imports from poor countries. In fact, the goal of free trade is to remove these blockages in trade. “Fair trade” or “trade justice,” two of the left’s favorite terms, do not do this. I would love to see just one person make an economically sound argument highlighting the benefits of “fair trade” (or even defining it, for that matter).
B. Poor countries do actively participate in trade negotiations—and they often initiate the treaties themselves. Mexico drafted and proposed NAFTA to the U.S. Chile recently approached the U.S. to negotiate a free trade deal. Chileans have experienced firsthand the benefits of decades of open trade policies, becoming one of the developing world’s most prosperous nations. Morocco and Jordan have also begun enjoying free trade with the U.S.
C. Free trade narrows the gap between rich and poor in a surprisingly simple way, that poor nations recognize quite well. I will present a simple example to illustrate the economic principles behind free trade, often ignored by “fair trade” advocates.
On a recent trip to Honduras, I witnessed an entrepreneur selling mangoes on the back of his pickup at the equivalent of 20 cents each. Poverty-stricken Honduran farmers get only 20 cents per mango in Honduras, and there are only about 7 million people who can buy mangoes. In the U.S., there are nearly 300 million people willing to buy mangoes and they will happily pay more than 20 cents each for one, because they cost up to $1 when produced domestically. That means Honduran farmers sell more (and more expensive) mangoes to become richer, and American consumers are better off.
The gains are even greater if Honduras tears down import barriers. Suppose a small Honduran farm implement industry sells required mango farming equipment for $100. Honduran farmers, wracked by poverty, wish to pay less. The U.S., because of greater productivity, can sell the equipment to Honduran farmers at only $50. The Honduran farmers are again better off, and U.S. farm tool workers are better off because of increased demand for their goods.
In sum, the analysis utilizes the familiar supply-demand framework. With free trade, the international demand for Honduran mangoes skyrockets because more people are available to buy mangoes; the price received by farmers increases. The supply of imported mangoes in the U.S. increases, driving down its price here.
I’ve painted a rosy picture, but there are indeed losers in this system. The farm tool workers in the tiny Honduran industry lose their jobs because of U.S. competition. U.S. mango growers are liable to lose theirs. However, both countries as a whole are better off, and more importantly, the gains are so great that they can be redistributed domestically to offset the losers. American consumers are happy to pay a tax on mangoes to provide a safety net to domestic producers, as long as they end up paying less than the pre-trade $1. Honduran farmers also will be willing to pay a small tax to the local farm tool industry workers with their savings from cheaper machinery and a higher selling price for mangoes.
Note the conspicuous absence of environmental degradation, exploitation, greedy capitalists, and the sundry free-trade worst fears of the Left.
Free-trade is absolutely the best tool for reducing global poverty—just ask the hundreds of millions of Chinese and Indians who have been lifted from its depths in the past 25 years. Groups like the Dartmouth anti-CAFTA chapter (I don’t know if it is a ragamuffin brood or an official student group) should spend their time educating themselves and others. Ultimately, they should encourage the domestic redistribution of the gains from free trade, a decidedly political undertaking and an opportunity to actually help the poor.
Take a break from your protests, enroll in Econ 1, and go enjoy a mango. Just be sure it’s imported - the farmers will thank you.
Bruce Gago ’05
Editor Emeritus