Difference Between Fair Trade and Free Trade

The key difference between fair trade and free trade is that free trade does not restrict imports and exports, and remove all boundaries for all parties, whereas fair trade places restrictions on farmers and other manufacturers.

Both free trade and fair trade are trading models designed to increase wealth globally. The main objective of free trade is to increase the growth of the nation. However, the main objective of fair trade is to empower marginalized groups of people in small business communities and to improve their living standards.

CONTENTS

1. Overview and Key Difference
2. What is Fair Trade
3. What is Free Trade
4. Side by Side Comparison – Fair Trade vs Free Trade in Tabular Format
5. Summary

What is Fair Trade?

Fair trade is an institutional arrangement intended to help manufacturers in developing countries to achieve better trading conditions. World Fair Trade Organization defines fair trade as “a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade.” Moreover, fair trade aims to provide better trading conditions, and secure the rights of marginalized groups by offering standard wages (at least minimum wage) and standard working conditions. It also helps to prevent child labour issues.

Furthermore, the fair trade concept also mitigates violations that occur in certain countries within the scope of trading. These violations can include violation of human rights and labour laws as well as environmental conditions. Fair traders express their concern against these issues through government regulation as well as through private action like boycotts of products (products made with child labour, products of factories that cause intense pollution, etc.).

What is Free Trade?

Free trade is a trade policy that does not restrict imports and exports. Under this policy, buyers and sellers from different economies voluntarily trade without a government applying tariffs, subsidies, quotas, or prohibitions on goods and services.

Furthermore, free trade involves bilateral agreements between countries that allow unrestricted export and import of goods. Moreover, it supports the efficiency of global markets by increasing economic growth and enhancing market competition. As a consequence of free trade, goods may get cheaper due to certain trade violations, such as the use of cheap labour.

However, there are some disadvantages of free trade as well. The main criticism of free trade is that it is responsible for job losses and job outsourcing. When cheaper products come into the market from overseas, domestic companies face losses, resulting in layoffs. Some companies may start outsourcing jobs as a way to avoid costs. Both of these scenarios can ultimately result in job losses. Degradation of natural resources, destruction of native cultures, increase in poor working conditions in developing countries as a result of job outsourcing and theft of intellectual property (mainly in developing countries) are some other negative aspects of fair trade.

What is the Difference Between Fair Trade and Free Trade?

Free trade is a trade policy that does not restrict imports and exports. Fair trade is an institutional arrangement intended to help manufacturers in developing countries to achieve better trading conditions. There is a significant difference between fair trade and free trade in their objectives. The main objective of free trade is to increase the growth of the nation. However, the main objective of fair trade is to empower marginalized groups of people in small business communities and to improve their living standards.

In the current context, free trade provides the least amount of overheads in the manufacturing process, with lower prices of products that are not regulated by the government. On the other hand, fair trade is inclusive of an additional price for fair labour, and its products and services are much pricier. Another difference between fair trade and free trade is that free trade protects traders against the unhealthy competition, whereas fair trade aims at maintaining tariff barriers to protect the producers.

Moreover, there are few regulations in free trade with concern to exchanging goods and services across borders. In most cases, free trade between countries have no subsidies, tariffs, quotas or regulations. Fair trade businesses work hand in hand with small business community groups to ensure favourable conditions concerning remuneration, working standards, human rights and environmental factors are met. Free trade, on the other hand, mainly give benefits to businesses in the export and import industry. So, this is also an important difference between fair trade and free trade. Furthermore, free trade mainly involves bilateral talks between countries and government involvement is higher, while fair trade involves small business traders and the communities and has very less involvement of government.

The below info-graphic summarizes the difference between fair trade and free trade.

Summary – Free Trade vs Fair Trade

Fair trade places restrictions on farmers and producers. It forces them to pay minimum wages, adopt safe working conditions, standard remuneration packages and environmental conditions. Meanwhile, free trade removes all boundaries for all parties; it affords unrestricted international export and import, which is free from taxes, tariffs, worker protections or other conditions. Thus, this is the key difference between fair trade and free trade.

Reference:

1. “DEFINITION OF FAIR TRADE.” Home of Fair Trade Enterprises, Available here.

Image Courtesy:

1. “Free Trade Areas” By Emilfaro – Primarily based on the WTO list with exceptions for AFTZ, ASEAN+3 and AANZFTA (Public Domain) via Commons Wikimedia
2. “Fairtrade Certification Mark” – (Fair use) via Commons Wikimedia