Fair Trade for All: How Trade Can Promote Development is by Joseph E. Stiglitz and Andrew Charlton (Oxford University Press, 2006).

For more than 50 years, the world’s countries have attempted to undo the terrible harm inflicted by inter-war and post-World War II protectionism. Starting with the General Agreement on Tariffs and Trade (GATT), which has evolved into today’s World Trade Organization (WTO), countries have slowly made strides to dismantle tariffs and non-tariff barriers on manufactured goods, services and agricultural products.

As with most processes of this type, it was relatively easy to develop consensus among the original member nations on the first steps toward freeing trade. But now, decades later, consensus is elusive. As the former Chief Economist at the World Bank, Joseph Stiglitz is intimately familiar with the issue of free trade, the ins and outs of the WTO, the problems being debated in the current Doha Round of trade negotiations, and the obstacles faced in earlier negotiating rounds. In Fair Trade For All: How Trade Can Promote Development, he and Andrew Charlton have presented an accessible description of the hurdles still faced, as well as a personal perspective on the source of the problems and potential solutions.

Much of their description is spot on. As they repeatedly state, many of the current trading rules are biased against the smaller countries of the world. Market access is not symmetrical. Countries like Bangladesh are free to export airplanes and a lot of other things they don’t produce, but not the textiles and apparel they do. Opening trade, for its part, does not affect everyone in a country equally. Some win, some lose.

Stiglitz and Charlton do agree with most economists that “free trade is, in the long run, the preferred regime,” but they fear developing countries have markets that are incomplete, imperfect, and missing vital components. They point out, for instance, that eliminating agricultural subsidies in the “developed” countries is likely to have the net effect of promoting development.

Moreover, tax policies advocated (or imposed) by international institutions on poor countries have created incentives that enlarged the informal economy at the expense of the formal market. Insightfully, the authors point out that developing countries stand to gain more if only they would eliminate tariffs and other barriers aimed at each other, rather than solely blaming developed countries. Finally, bilateral agreements such as NAFTA are not truly “free trade agreements” in that they fail to eliminate agricultural subsidies that pit the agribusinesses of one country against the farmers of another.

The authors’ views on these issues are fairly standard among economists. It is in other aspects, contained in the title of the book, that differences begin to flare. How does one define “fair” trade? What factors are key to development? And why do we even divide countries into “developed” and “developing” in the first place?

Indeed, a couple of years ago I shared the podium with a president of a steelworkers local in Cleveland. At the time the United States had imposed tariffs on steel imports. As we debated the pros and cons of free trade, the president of the local repeatedly used the term “fair trade.” Finally I turned to him and asked, “Fair to whom? Fair to the consumers paying higher prices? Fair to the manufacturers who use steel in production, who are becoming less competitive in the global market, and who are laying off workers? Fair to those workers who now are out of a job?” He, of course, was thinking only of his union members.

Stiglitz and Charlton indicate in their book that “fairness” of this type is not what they have in mind. They, too, are critical of the steel tariffs. So what is the fairness paradigm they are advocating?

Fairness is always in the eyes of the beholder. Stiglitz and Charlton see “fairness” in agreements that are based on “principles,” not economic power. And what are those principles? Agreements should not be uniformly applied to all countries. Countries differ, and any agreement which hurts developing countries more, or benefits developed countries more, are labeled “unfair.” For example, since the majority of developing countries have higher tariff rates than the developed ones, a movement to truly eliminate trade barriers would involve larger adjustment costs to the developing community. Since developing countries are “hurt” more, this would be “unfair.”

This is an understanding based on the 20th century interpretation of the Judeo-Christian concept of what Stiglitz and Charlton call “Social Justice.” Fairness is asymmetrical. It must involve a transfer from the rich to the poor and not the other way around. Their proposal for fairness is therefore that any WTO member country with a larger GDP or a larger GDP per capita must allow “free market access in all goods to all developing countries that are smaller or poorer than themselves.” The smaller or poorer country would not have to reciprocate.

This desire for transfers from rich to poor is reminiscent of the failed mid-20th century “Great Society” programs in the United States and live on in such proposals as the Jeffrey Sachs/Kofi Annan/Bono remedy of rich countries donating annually 0.7 percent of their GDP to poor nations. While such proposals may feel good, it is questionable whether they truly follow the spirit of Judeo-Christian Social Justice. For example, the revered 12th-century philosopher Maimonides created important distinctions between charity as an outright gift, charity as a loan, and charity as a partnership. Stiglitz and Charlton’s transfer systems constitute charity solely by outright gift, Maimonides’ least respected form.

Nor are Stiglitz and Charlton’s proposals likely to effectively enhance long-run growth for the poor. In Stiglitz and Charlton’s framework, developing countries should resist completely freeing trade and retain some of their high tariff and non-tariff barriers. Yet the gains to developing countries from freeing trade result not only from export expansion but also from allowing new access to a wide variety of cheaper imports.

A recent Cato Institute report examines a number of studies on trade and economic performance in sub-Saharan Africa, concluding that the region’s poor growth rates and low measure of economic freedom are, in part, a function of pursuing a high degree of trade protectionism. Should these countries embrace more open trade policies and initiate other economic reforms, they would reduce poverty and experience greater economic opportunity. The Stiglitz and Charlton approach would disallow developing countries the real economic potential stemming from fully liberalizing international trade.