As you can guess by their names, free trade, and fair trade are both related to trade.
Trade is the export and import of goods and services between different countries. Every country has something the others do not have. The countries that lack resources but enough funds may import these resources or goods from producer countries in exchange for money or developmental work.
Free trade emphasizes making trade between different nations easier through lesser restrictions, open borders, and lesser tariffs on goods. Fair trade, however, emphasizes that the companies involved in trading their goods and services to other countries treat their workers fairly and pay them well.
Free trade gives way for companies to set up their factories in other nations. Most often companies do that to lower their expenditure for resources and services while making their name in other nations.
Fair trade, on the other hand, involves making sure the workers do not have to work in bad working conditions and fair wages are given to them. It makes sure human rights are maintained by the companies.
Free Trade vs Fair Trade
Free trade means removing or reducing the blockages from trading goods and materials among different countries. Free trade aims to make international trading barrier-free with zero taxes. Free trade helps businesses to spread across different nations.
Fair trade is the act of treating the workers involved in such companies with respect and dignity. Fair trade means providing good working conditions along with fair wages to the workers.
Differences between Free Trade and Fair Trade in a Tabular Form
|It is the free flow of goods, resources, labor, and capital across a nation's boundaries without government restrictions or barriers.
|It is the kind of trade where the producers or workers are given a fair price for providing their resources, goods, and services.
|Trade happens among various countries.
|Trade involves businesses and individuals.
|It focuses on reducing the barriers against trading among various countries.
|It focuses on maintaining the human rights of the workers by promoting good working conditions and paying fair wages to them.
|It aims to boost economic growth.
|It aims to have fair and equitable trade among firms and producers.
|Changing policies and regulations to make trade easier.
|Firms ensure to not overburden the workers and producers and provide enough wages.
|It involves fewer regulations for the free flow of goods and services.
|It involves certain regulations so the firms do not take advantage of the workers and producers.
What is Free Trade?
Free trade is the free-flowing of trade among different countries with fewer restrictions and charges by the government. When a group of nations agree on free trade, it means these nations would be involved in exchanging goods and services with one another without any tariffs or restrictions. This would help in lowering the cost of products and resources imported from one another.
Governments of some countries put restrictions on trade, especially for imports. They do this for various reasons including, encouraging local businesses and protecting them from foreign competition. Sometimes countries charge tariffs on imports to generate government revenue. Restrictions on trade often lead to mistrust among different nations. Free trade, however, connects firms and people of different countries and helps in making connections among nations at large. The World Trade Organization (WTO) is an international organization that oversees international trade and deals with the rules and regulations of the trading business.
Advantages of Free Trade
Free trade agreements are made for the following advantages:
- Obtain Specialized Products – Different countries are specialized in producing different resources and products. Through free trade, countries that lack resources can get access to specialized goods and resources from other countries at low costs.
- Increase in World Production and Consumption – Each country has the potential to produce goods that they specialize in on a large scale and earn loads from it. However, if the countries are not connected through free trade then there is no use of mass production of resources. If trading charges are in place then the costs of products would also be higher and consumers would be less interested in these products. Hence, free trade leads to lower costs of products. This leads to a greater demand for the products. Thus, free trade leads to an increase in world production and consumption.
- Links with Other Countries – Free trade among various nations build connectivity and trust among these countries. It encourages people to understand the cultures and learn from people of other nations.
- Benefits to Consumers – When there aren't any charges for imports of goods, the goods are sold at cheaper prices. This helps consumers get access to a variety of products at reasonable prices.
- Optimum Utilization of Resources – All the countries are specialized in producing one or the other resources or goods. Due to healthy competition or high demand from other countries, each country put its best effort to use its resources well and produce the best products.
- Removal of Ill Effects of Protection – Free trade can rid of ill effects of Protection or restrictions like monopolies, high prices, and abuse of power by the authorities.
Disadvantages of Free Trade
Free trade also has some disadvantages. They are
- Excessive Dependence – Depending too much on foreign countries may not be favorable all the time. If a problem occurs that causes a breakdown of the free trade agreement, it would be difficult for nations dependent on other nations to meet their needs.
- Loss for Home Industries – Local industries, especially in developing countries, can face unhealthy competition from superior foreign industries due to free trade. It would hamper the growth of home industries.
- Over-exploitation of Resources – Free trade increases the production and consumption of resources. However, due to greed, many countries forget to put a limit on the exploitation of resources. It causes excessive damage to the environment and sometimes these resources get exhausted and cannot be recovered.
- Rivalry – Rivalry between nations which have expertise in the same resources or products may arise. Sometimes these kinds of rivalries even cause war between nations.
What is Fair Trade?
Fair trade is a term used for a system or arrangement where the producers and workers involved in the trading business are treated and paid fairly. Fair trade ensures that there is transparency in the manufacturing and production process of goods so that consumers can choose whether they should buy the products or not.
Many firms of developed countries have taken advantage of the people and resources of developing countries in the past and are still doing so. They put too much burden on the workers with excessive work and bad working conditions yet pay them unfairly low. Fair trade keeps a check on the treatment of the firms towards their producers and workers and holds the firms accountable for any kind of mistreatment done.
Fair trade also involves the conservation of the environment. Many firms are involved in the mass destruction of the environment in the name of resource utilization. This could be due to the high demand for the products in the market hence, the firms speed up the production process destroying the environment. Fair trade makes sure that consumers understand the damage they can cause due to their excessive demands.
Fair trade helps consumers get aware of the impact they can make by opting for sustainable consumption of goods. The World Fair Trade Organization (WFTO) is a network of Fair Trade Organizations of the world that monitors the fair trade supply chain route.
Advantages of Fair Trade
Some people advocate for fair trade due to the following advantages –
- Fair Wages – Fair trade keeps a check on the wages of the farmers and workers under multi-national firms or industries. Before fair trade, a lot of producers and workers in developing countries were taken advantage of by foreign firms. They were given unfairly low wages compared to the excessive workload. Fair trade has made a big difference by increasing the pay of these workers.
- Good Working Conditions – Fair trade is against unsafe working conditions and advocates for healthy and safe working conditions for everyone.
- Reduction in Child Labor – It has been found earlier that child labor is rampant in developing countries. Children have worked and still are working in factories, mines, and many other unsafe environments from a very young age. Fair trade ensures that adults are paid more so that children do not have to earn for the family.
- Sustainable Use of Resources – Fair trade is against the over-exploitation of resources, and that is why it advocates against overproduction and overconsumption of goods.
- Fair Selling Price – Fair trade lets the producers sell their goods at a set price that would be fair and good enough for the products sold. The lowest price would never be lower than the market level.
- Improve Standard of Living – Fair trade aims for an improved standard of living for the farmers and workers. Since they are paid a fair wage for the goods produced or made, their standard of living automatically improves.
Disadvantages of Fair Trade
Fair trade has the following disadvantages –
- Limited Growth – Fair trade does not only prioritize the profits for a business but also the well-being of its workers and producers. It would not let the workers work excessively long hours, and it would spend a lot of money on the payment for the workers. Most often it would not have the budget to advertise the products in big platforms, which is why many consumers aren't aware of products made through fair trade.
- High Price of Products – Fair trade is associated with higher prices of goods. Most commoners may choose to go for a budget-friendly product instead.
- Limited Range of Products – Although the range of products is growing day by day, fair trade still has very limited product choices.
- Lack of Awareness – Most people are not aware of their impact on the environment. Consumers tend to go for products that are popular in the market, and it so happens that these popular products are most often the cause of environmental degradation or a product of unfair labor practices. Large-scale awareness is necessary to let customers choose wisely.
Main Differences between Free Trade and Fair Trade in Points
- Free trade emphasizes loosening the restrictions for trade to flow smoothly, whereas fair trade emphasizes keeping a check on how the producers and workers involved in the trading business are treated.
- Free trade leads to the growth of the world economy, whereas fair trade leads to fair treatment of workers and producers.
- Free trade benefits the firms worldwide that get involved in it. However, fair trade benefits the producers and the workers with a fair wage and improved living standards.
- Free trade has fewer regulations as that would encourage trade among different nations. On the contrary, fair trade has more regulations to check on the treatment of the workers, farmers, and anyone involved with the firms.
- Free trade may lead to over-exploitation of resources if limits are not set. Fair trade, on the other hand, advocates against over-exploitation of resources.
- Free trade has a lot of range of products, whereas fair trade has a limited range of products.
Free trade and fair trade have different aims altogether. Free trade aims for better access to products from other countries which increases the interdependence of various nations. It builds connections between various nations and their citizens. Free trade is highly beneficial for countries as it helps improve the world economy.
Fair trade aims to prioritize the human rights of the farmers, merchants, workers, etc., of developing countries involved in trading. It involves firms and their relations with the farmers, merchants, and workers who produce resources or assemble parts to make final products for the firms. Overall, it improves the standard of living of the producers, merchants, and workers who are involved in the fair trade setting.