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2023

Free Trade is Not Free: A Case for Fair Trade

Wardah Javaid Cheema
University of Denver

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Free Trade is Not Free: A Case for Fair Trade

Abstract
To this day, mainstream economists favor free trade policies as the best way to generate economic
development. They do so at the expense of their unjustified romanticization of reductionist classical trade
theories. This thesis seeks to comprehend the constraints of traditional trade theories and their inability
to be applied to practical contemporary problems. Further, contrary to the fundamental assumption of
free trade theory, there is ample evidence of government intervention in free trade agreements. These
interventions solely encourage and protect large corporations and investors rather than the actual
development and sustainability factors, namely labor and the environment. It all adds up to a compelling
case for developing and implementing a fair trade regime.

Document Type
Thesis

Degree Name
M.A.

Department
Economics

First Advisor
Chiara Piovani

Second Advisor
Robert G. Urquhart

Third Advisor
Henning Schwardt

Keywords
Environmental standards, Fair trade, Free trade, Free trade agreements, Labor standards

Subject Categories
Economics | International Economics | Social and Behavioral Sciences

Publication Statement
Copyright is held by the author. User is responsible for all copyright compliance.

This thesis is available at Digital Commons @ DU: https://digitalcommons.du.edu/etd/2246

 Free Trade is Not Free: A Case for Fair Trade

______________

A Thesis

Presented to

the Faculty of the College of Arts, Humanities and Social Sciences

University of Denver

____________

In Partial Fulfillment

of the Requirements for the Degree

Master of Arts

____________

by

Wardah Javaid Cheema

June 2023

Advisor: Dr. Chiara Piovani

©Copyright by Wardah Javaid Cheema 2023

All Rights Reserved

Author: Wardah Javaid Cheema
Title: Free Trade is Not Free: A Case for Fair Trade
Advisor: Dr. Chiara Piovani
Degree Date: June 2023

Abstract

To this day, mainstream economists favor free trade policies as the best way to

generate economic development. They do so at the expense of their unjustified

romanticization of reductionist classical trade theories. This thesis seeks to comprehend

the constraints of traditional trade theories and their inability to be applied to practical

contemporary problems. Further, contrary to the fundamental assumption of free trade

theory, there is ample evidence of government intervention in free trade agreements. These

interventions solely encourage and protect large corporations and investors rather than the

actual development and sustainability factors, namely labor and the environment. It all adds

up to a compelling case for developing and implementing a fair trade regime.

ii
 Acknowledgements

First and foremost, I would like to express my gratitude to my parents for their

unending love, unwavering faith in me, and constant encouragement. Their

steadfast support, sacrifices, and dedication to my education have been the bedrock of my

success. I am eternally grateful for the values they instilled in me and the opportunities

they provided me. I would also like to express heartfelt gratitude towards my dear brother’s

endless support, belief in my abilities, and encouragement that inspired me to achieve my

best. Furthermore, I am extremely thankful to my wonderful husband’s wise advice,

motivation to push my boundaries and for being a rock of strength for me throughout this

journey.

I would especially like to express profound appreciation to my supervisor, Dr.

Chiara Piovani, for her invaluable guidance and mentorship. Her expertise, constructive

feedback, and constant support have been instrumental in shaping this thesis. I am deeply

grateful for her dedication and commitment to my academic and personal growth this past

year. Thank you for teaching me the art of being humble and wise.

Moreover, I am grateful for Dr. Markus Schneider, who has been my mentor

throughout and has encouraged me greatly since the beginning of my master’s degree. I

am thankful to Dr. George DeMartino for his insightful guidance and valuable

contributions to my research. His expertise and scholarly advice have greatly influenced

the direction of my work. I am grateful for his eagerness to share his knowledge and his

genuine interest in my academic development. I would also like to extend my sincere

gratitude to Dr. Robert Urquhart for his wisdoms that have been vital in shaping my

research. Thank you all for being incredible teachers and mentors.
iii
 Table of Contents

Chapter 1: Introduction.................................................................................................... 1

Chapter 2: Fair Trade: Historical and Conceptual Introduction................................. 6

2.1 Introduction ............................................................................................................... 6
2.2 Historical Background and Context .......................................................................... 7
2.3 Understanding Fair Trade: Theoretical Frameworks .............................................. 12
2.3.1. Amartya Sen’s Capability Approach............................................................... 12
2.3.2. Marxist Economic Approach .......................................................................... 20
2.4 Fair Trade Policy Proposals .................................................................................... 30
2.5.1. The Social Charter Approach .......................................................................... 30
2.5.2. The Social Tariff Approach............................................................................. 33
2.5.3. The Sullivan Principles Approach................................................................... 38
2.6 Conclusion ............................................................................................................... 40

Chapter 3: A Brief History of International Trade Theories and their Impact on

Globalization .................................................................................................................... 43
3.1 Introduction ............................................................................................................. 43
3.2 Theoretical Limitations of International Trade Theories ........................................ 45
3.2.1. Mercantilism.................................................................................................... 45
3.2.2. Classical Economic Theory:............................................................................ 49
3.2.3. Neo-classical Economic Theory...................................................................... 55
3.2.4. New Trade Theory .......................................................................................... 59
3.3. A Critical Reassessment of Trade Models ............................................................. 62
3.3.1. Historical Evidence Against Old Trade Theories ........................................... 62
3.3.2. Deepening of globalization: Redefining Role of Government........................ 64
3.3. Impacts of Trade Liberalization and Hyper Globalization..................................... 71
3.3.1. Ecological Imbalances: Competing on Environmental Standards .................. 72
3.3.2. Social Imbalances: Competing on Labor Standards and Safety ..................... 75
3.5 Conclusion ............................................................................................................... 79

Chapter 4: How Free Are "FTAs"? Evidence of Government Intervention ............ 81

4.1 Introduction ............................................................................................................. 81
4.2 Brief History of North American Free Trade Agreements ..................................... 82
4.3 Government Intervention in Provisions of the Free Trade Agreements ................. 86
4.3.1. Intellectual Property Rights (IPRs) ................................................................. 86
4.3.2. Investor-State Dispute Settlement (ISDS)....................................................... 90
iv
 4.3.3. Government Procurement (GP) ....................................................................... 92
4.3.4 Regulatory Cooperation ................................................................................... 95
4.3.5. Anticorruption Provisions ............................................................................... 96
4.3.6. Social and Ecological Provisions .................................................................... 99
4.4. Conclusion ............................................................................................................ 101

Chapter 5: Conclusion .................................................................................................. 104

References ...................................................................................................................... 109

v
 List of Abbreviations

ANC African National Congress

CA Comparative Advantage
CAFTA-DR Central America-Dominican Republic Free Trade Agreement
FDI Foreign Direct Investment
FTA Free Trade Agreements
GATT Global Agreement on Tariffs and Trade
GDP Gross Domestic Product
GHGs Greenhouse Gases
GP Government Procurement
HDI Human Development Index
HDR Human Development Report
IMF International Monetary Fund
IPCC Intergovernmental Panel on Climate Change
IPR Intellectual Property Rights
ISDS Investor-State Dispute Settlement
ITO International Trade Organization
KORUS-FTA US-Korea Free Trade Agreement
LDC Less Developed Countries
NAFTA North American Free Trade Agreement
NGOs Non-governmental Organizations
OAS Organization of American States
OECD Organization for Economic Co-operation and Development
PTPA Pacific Trade Pact Agreement
PWC Post-Washington Consensus
QC Quality Control
SITS Social Index Tariff Structure
TPP Trans-Pacific Partnership.
TRIMs Trade-Related Investment Measures
TRIPS Trade-Related Aspects of Intellectual Property Right
UNDP United Nations Development Program
USMCA United States-Mexico-Canada Agreement
USTR United States Trade Representative
WB World Bank
WC Washington Consensus
WTO World Trade Organization

vi
 Chapter 1: Introduction

Since the beginning of the 1980s, the economic performance of individual nations

has become increasingly dependent on the dynamics of the global economy. This brought

to light trade as the most conspicuous and contentious policy space, where the advent of

global neoliberalism has been disputed in recent years. The international community has

been advocating for neoliberal policies such as free trade, which are being implemented in

both developed and developing countries. This has been predominantly driven by the belief

that free trade is the primary engine of economic expansion and progress. As a result, state-

imposed tariffs of any kind on international trade flows have been considered inefficient

and almost completely hindering the progress of developing nations in the economic world.

Further, the World Bank (WB), World Trade Organization (WTO), and International

Monetary Fund (IMF) have also constituted the influence or interreference of any state in

international trade as inefficient and causing market distortions. This thesis aims to

investigate the fundamental concerns associated with free trade that make it not truly "free".

The inclusion of provisions safeguarding intellectual property rights and mandating the

enforcement of stringent copyright laws in free trade agreements has been observed to

result in increased expenses for consumers and potential constraints on innovation and

competition. Accordingly, the objective is to analyze the extent to which fair trade provides

a morally and environmentally responsible substitute for global trade.

1
 Chapter 2 primarily focuses on the background of fair trade policy and proposals.

It explores the background, context, and relevance of the fair trade proposals that we are

proposing as the solution to mitigate the negative impacts of neoliberalism throughout the

world. Under the relevant context of fair trade theory, the chapter will shed light on the

need for and emergence of fair trade theory in practice. It will further analyze the

conceptual framework behind the fair trade theory. The capabilities equality approach

proposed by Sen and Marxist economic theory are employed as the most viable conceptual

frameworks for the implementation of fair trade, given their emphasis on the promotion of

human welfare and the equitable allocation of resources. The aforementioned frameworks

facilitate the adoption of equitable labor regulations and environmental preservation in fair

trade methodologies, which are indispensable for ensuring sustainable and ethical

commerce. Fair labor standards emphasize the protection of workers' rights, such as

equitable compensation, safe working conditions, and the capacity to form unions. This is

consistent with the principles of Marxist ideology, which places emphasis on the

importance of providing fair remuneration for work. The capabilities approach

acknowledges the significance of the well-being and growth of workers in enhancing their

capacities and empowering their agency. The significance of ecological conservation in

fair trade lies in its promotion of sustainable and responsible practices aimed at reducing

environmental damage. The Marxist theoretical framework acknowledges the

interdependence between economic structures and the natural environment, whereas the

capabilities approach prioritizes the conservation of the ecological system for the

betterment of present and future cohorts.

2
 This thesis centers on the proposition that governments ought to implement

rigorous labor and environmental regulations. Consequently, the viewpoints of Amartya

Sen and Karl Marx are subjected to critical scrutiny. The latter portion of the chapter delves

into an analysis of three discrete policy alternatives for fair trade, along with their

respective methodologies for implementing an equitable trading system. Advocates of fair

trade have been promoting various aspects of social, economic, and ecological

development for a considerable period of time with the intention of raising awareness about

these issues. However, the assessment of each proposal on an individual basis falls beyond

the purview of this research.

The adherence of numerous mainstream economists to the notion that free trade is

the sole strategy capable of driving the growth and development of nations and economies

can be attributed to their unfounded idealization of the reductionist methodology employed

in classical and neoclassical trade theories. A meticulous examination of the existing body

of literature pertaining to the constraints of conventional trade models was conducted in

Chapter 3 of this thesis to undertake supplementary analysis. First, it presents a brief

description of the theoretical frameworks of classical, neo-classical, and new trade theories

by assessing the contributions made by the theories of absolute advantage by Smith,

comparative advantage by Ricardo and Heckscher-Ohlin-Samuelson, and economies of

scale by Paul Krugman, respectively. What follows is an examination of the implications

of conventional trade theory by comparing and contrasting it with fair trade frameworks.

After that, it examines their flaws and limitations, which make them inappropriate and

inadequate for grasping international commerce and growth within the framework of the

3
present global economy. The next section provides a detailed criticism of classical and neo-

classical theories as they were extensively used to advocate for "free trade" as the ultimate

trade theory for mutual growth and development. Chang’s extensive criticism of developed

countries hypocritically preaches to developing countries to adopt liberal trade policies for

growth and development. In reference to the new trade theory, Paul Krugman’s redefining

of the role of government in trade policies is analytically analyzed to understand the impact

and repercussions of hyper globalization.

In light of this, Chapter 4 provides detailed evidence of government intervention in

free trade. The chapter demarcates that certain free trade agreements (FTAs) include

provisions that protect particular industries or countries, which fundamentally goes against

the primary principles of free trade. It examines various free trade agreements (FTAs) that

incorporate patent and copyright provisions, which confer benefits on large corporations

while potentially disadvantaging small businesses and developing nations. Furthermore, it

analyzes how FTAs possess the capability to lead to employment reductions in industries

that lack competitiveness. The chapter substantiates the critique of FTAs by asserting that

they deviate from the tenets of unrestricted trade by providing safeguards to particular

enterprises or nations. It presents evidence of various provisions restricting trade and

competition in several FTAs signed by the United States. It attempts to understand how the

inclusion of these provisions has the potential to provide benefits to specific businesses or

nations but may also impede the principles of unrestricted commerce. The chapter also

analyzes the sustainability of the inclusion of provisions incorporating ecological and

social regulations to create a level playing field for all signatories.

4
 Chapter 5 provides conclusive remarks on the discourse surrounding international

trade policy. The author arrives at a precise conclusion, advocating for the establishment

of a state-led fair trade system, which is supported by two distinct lines of reasoning. The

limitations and inaccuracies of theories supporting free trade suggest that the underlying

theoretical framework is flawed. Consequently, those mainstream economists who

continue to advocate for fully liberalized trade may be doing so out of obstinacy. The

economists in question have not adequately anticipated the rapid transition from

globalization to hyper globalization and have also neglected to account for the significance

of human rights and ecological preservation. The second strand of the argument centers on

the evidence indicating that the concept of "free trade," which is promoted and executed

through the signing of Free Trade Agreements (FTAs), has not truly been free. The

available evidence regarding the involvement of the state in the development of these free

trade agreements (FTAs) establishes a robust framework for the role of government in

shaping trade policies. The state is currently perceived to be operating in a manner that

favors large corporations, while global financial institutions, such as the World Trade

Organization, have been observed to operate in a manner that favors the global north. The

argument put forth by fair traders advocating for the implementation of labor standards to

reinforce social justice and environmental standards for the purpose of ecological

conservation is a sound one.

5
 Chapter 2: Fair Trade: Historical and Conceptual Introduction

2.1 Introduction

The current chapter provides an overview of the historical context of fair trade and

the diverse perspectives that have been discussed regarding the establishment of ethical

and sustainable international trade practices. It will indulge in historical background of fair

trade movement, the specific context relevant to our study, and fair trade policies and

practices under organized purview. The chapter begins with an introduction of the fair

traders advocating for the states to mediate trade flows according to strong executable

standards regarding sustainable environmental practices, human and labor rights, gender

equality, eradication of child labor. It first, briefly, gives an uneasy historical development

of trade policies in the United States. The United State switch from protectionist policies

to free trade is analyzed. Many mainstream economists preach the world to adopt free trade

policies if they want to see growth in their economy. However, the history as evident

through research by many heterodox economists provides the intel that the countries that

are now developed and preaching trade liberalization are the ones who industrialized and

developed by adopting a rather strategic trade policy, which mostly was protectionist

policies to protect their infant industries in their early years struggling for development.

The chapter also clarifies the context under which this thesis attempts to advocate for fair

trade policies. A critical approach that necessitates the role of government in establishing

fair trade policies is the context this thesis advocates for fair trade.
6
 The chapter then goes on to provide theoretical frameworks, Marx’s Economic

Theory and Amartya Sen’s capabilities equality approach, for understanding the socio-

economics importance of fair trade regime. Since the major focus of this thesis is on

inclusion of strict labor and environmental standards by the governments, the evidence

supporting importance of these two have been reviewed and analyzed in the writings of

Amartya Sen and Karl Marx. The last section of the chapter provides three different types

of fair trade policy proposals and their methodologies to implement a fair trade regime.

The proposals have been included to understand the aspects of social, economic, and

ecological development that the fair traders have long been championing for. Therefore,

the individual critical analysis of these proposals is beyond the scope of this research.

2.2 Historical Background and Context

'Fair trade,' or new trade and investment regimes that may enjoy the advantages of

international economic integration while shielding disadvantaged communities from the

most harmful tendencies of neo-liberalism, emerged in the 1990s. It was highly advocated

by heterodox economists and social movements around the world. Neoclassical trade

theorists, in reaction to the free traders, reaffirmed their support for free trade throughout

the 1990s and beyond, and even urged for additional liberalization (DeMartino, 2019).

This, first of all, points us towards understanding the long and complicated history of free

trade in the United, with policies and tactics changing throughout time in response to

changes in economic, political, and social conditions. Free trade and protectionist measures

have both been enacted at various points in U.S. history, with both having been pushed for

7
by different governments, political parties, and interest groups. The United States has

maintained its free trade and protectionist policy mix throughout the last several decades

despite shifting its economic and political objectives after industrializing. Since the

repercussions of hyper globalization, a byproduct of trade liberalization, have started to be

widely experienced, trade imbalances, labor and environmental standards, intellectual

property rights, and the effects of globalization on domestic companies and employees

have all been the subject of heated discussion and controversy.

Conversely, there was also a concerted campaign in the 1990s to build a global

system of "fair trade," driven by a broad mix of activists and academics who adhered to

non-mainstream economic ideas. Fair trade advocates used the new trade and investment

initiatives of the time, such as the negotiations for the Global Agreement on Tariffs and

Trade (GATT), which resulted in the World Trade Organization (WTO), and the North

American Free Trade Agreement (NAFTA), to incorporate strong, enforceable standards

concerning labor and human rights, child labor exploitation, gender equality in

employment, and environmental practices. These guidelines were patterned after the

GATT talks that culminated in the World Trade Organization (DeMartino, 2014). Fair

trade supporters have said that global economic integration promoted profits and growth

by increasing worker exploitation, the wealth gap, and environmental degradation. It has

been seen over and again that free trade and foreign direct investments harmed (or

obstructed the execution of) social safeguards in countries that already had strong

safeguards in place, and that they hindered the development of such safeguards in nations

that already had poor safeguards in place.

8
 In recent decades, "fair trade" has been a popular term among academics, socially

aware corporations, international development professionals, social movement activists,

and morally concerned consumers. Raynolds and Bennett (2015) describes:

“As a concept, fair trade refers to a critique of the historical

inequalities inherent in international trade and to a belief that
trade can be made more socially just. This notion is
increasingly linked to a set of concrete initiatives that
challenge global inequalities and create more egalitarian
commodity networks, linking marginalized producers in the
global South with progressive consumers in the global
North. In moving from abstract concept to grounded
practice, fair trade works to transform international trade
from a vehicle of exploitation to an avenue of empowerment.
In the global South, fair trade seeks to enhance wellbeing –
by fostering higher prices and wages, stable markets and
employment, better work conditions and environmental
sustainability – and to bolster individual and collective
capacities – by strengthening information exchanges, social
service access, opportunities for self-determination and local
organizations. In the global North, fair trade seeks to bolster
more equitable trade policies, business models and
consumption practices by making available a range of goods
that are produced under more socially just and
environmentally sustainable conditions.” (p. 3)

World Fair Trade Organization (WFTO) declares that the fair trade movement

originated when people realized that traditional trading methods were harmful to both

society and the environment. The late 1940s and early 1950s are seen as the beginning of

the debate over fair trade since it was during this era that talks and campaigns for more

equitable trading practices gained traction. The year 1988 was a watershed moment in the

growth of the fair trade movement since it saw the establishment of the first Fair Trade

Organization, a Dutch organization known as "Max Havelaar." This meeting marked the

start of a coordinated campaign to promote fair trade norms in the agriculture and food

9
industries. Each of these company’s value fair trade practices. The Max Havelaar label was

created to help ensure that small-scale farmers in developing nations were paid a living

wage for the things they produced and had access to resources that would enable them to

better their communities. A diverse range of stakeholders, including consumers, producers,

governments, non-governmental organizations (NGOs), and international organizations,

have been involved in the fair trade debate from its inception. As a result of continual

discussions, debates, and activities related to fair trade principles, practices, and

consequences, the movement has grown in relevance and awareness in the global economy.

According to Lyon (2010), the present fair trade movement is based on a significant

and developing contradiction. When faced with escalating poverty and environmental

damage in many developing nations, many buyers of fair trade products are motivated by

a fierce opposition to the effects of neoliberal globalization. Fair trade, on the other hand,

seeks a market-based solution to the issues posed by free markets to promote social justice

and environmental sustainability (Lyon, 2010). The World Bank has advocated for market-

based fair trade as an alternative to government-enforced labor standards and commodity

control schemes, and a recent observer observed that fair trade's "voluntarist, non-statist

program has been viewed by public institutions and corporations as fundamentally

compatible with neoliberal reforms" (Fridell, 2007).

In a rather contemporary approach, fair trade promotes social justice by embracing

deregulated markets, which are often responsible for deepening poverty in rural regions,

rather than legal and legislative solutions enacted by governments on behalf of farmers and

workers living inside their borders. Consequently, fair trade is often co-opted by the same

corporations against which it formerly battled (Lyon, 2010), since its methods of attaining
10
social justice are constrained by the nature of modern markets and the entities that regulate

them. In short, Fair trade aims to change North/South commerce from a tool of exploitation

to one of empowerment by challenging historically unfair international market relations.

via a "trade, not aid" approach, Fair Trade seeks to reduce poverty in the developing world

by bolstering producer groups and communities and enhancing the economic security of

farmers and workers via more sales at fair prices.

This thesis, however, explicitly examines a critical and progressive approach on

fair trade, which includes the state to practice its autonomy and legislate to take, what fair

traders’ reason are the basic social rights such as: labor standards, environmental standards,

gender-based discrimination, out of competition to impede the exploitation based on

comparative advantage in global trade. The motivation behind adopting this particular

progressive and radical fair trade approach, as opposed to the market based fair trade

marked goods approach, is predicated on the inherent tendency of markets to fail.1 The free

market mechanism may not result in the most efficient distribution of resources or may not

produce favorable outcomes for the broader community. When market failures occur, it

may be necessary to implement government intervention or other corrective measures in

order to attain more efficient outcomes or address social objectives. Therefore, this thesis

employs the role of government to establish fair trade regimes as suited for ta nation in

accordance with overcoming the critical harms explicated by DeMartino (2000) under free

trade:

“When wages, hours and work intensity are removed

from competition, the sweating of labor ceases to be a

1
Market failure is a phenomenon that occurs when the distribution of goods and services in an unregulated
market fails to attain an optimal result.
11
 viable innovation; when consumer safety laws are
effectively implemented, the adulteration of input
materials becomes unavailable in pursuit of competitive
advantage; when strict environmental standards are
enforced, new profitable technologies that increase
external social costs (e.g., pollution) while reducing
private costs are eclipsed by other technologies that
reduce social costs.” (p. 188)

2.3 Understanding Fair Trade: Theoretical Frameworks

This section establishes relevance of two important economic ideas to the doctrine

of fair trade. Fair trade methodologies play a crucial role in promoting sustainable and

ethical trade by facilitating the adoption of equitable labor regulations and environmental

preservation practices. The fair labor standards prioritize safeguarding the entitlements of

laborers, including fair remuneration, secure working environments, and the ability to

establish labor unions. The aforementioned statement aligns with the fundamental tenets

of the two theories examined in the following sections. In short, these two theories are

reasonable compliments to the fair trade theory itself.

2.3.1. Amartya Sen’s Capability Approach

Sen's capabilities equality approach provides a strong conceptual foundation for

fair trade by essentially highlighting the importance of human well-being, individual

capabilities, and social justice. A primary goal of the concept known as "fair trade" is to

foster more equitable and ecologically responsible economic operations, particularly with

respect to less developed countries and producers on the market's periphery. Sen's

capabilities approach is consistent with the goals and ideas underpinning fair trade in a

number of fundamental ways. The capability approach places human well-being at the

center of development, emphasizing the importance of people's capabilities or freedoms to

12
live a life they value. Human well-being is central to this approach to development.

Similarly, fair trade prioritizes the well-being of producers, workers, and communities. Its

fundamental purpose is to provide opportunities for these groups' long-term economic

development and social improvement. Nussbaum (2000), wholeheartedly agreeing with

Sen writes:

“Sen’s primary use of the notion of capability is to indicate

a space within which comparisons of quality of life (or, as
he sometimes says, standard of living) are most fruitfully
made. Instead of asking about people’s satisfactions, or how
much in the way of resources they are able to command, we
ask, instead, about what they are actually able to do or to be.
Sen has also insisted that it is in the space of capabilities that
questions about social equality and inequality are best
raised.” (p. 12)

When compared to traditional economic frameworks for analyzing poverty,

inequality, and human development, Sen's capability approach has emerged as the most

popular option in the recent decade (Clarke, 2006). Sen's criticisms of conventional welfare

economics provide the theoretical underpinnings for the capabilities equalities approach

(Sen, 1999). Conventional welfare economics tends to confuse well-being with either

opulence-commodities or utility-happiness (Crocker, 1992). Clark (2006) outlines how

Aristotle, Classical Political Economy, and Karl Marx all contributed to the development

of the capabilities approach. Marxist economic theory is also adopted in this thesis to

provide another theoretical framework for fair trade.

Fair trade is an alternative strategy suggested by Sen's internationalist definition of

capabilities equality, that is, the convergence of capacities at an appropriate, generally

accessible, and long-term level (DeMartino, 2000). DeMartino (2000) in his book sets that:

13
 “The import of capabilities equality in the trade debate is to
provide a compelling basis for rejecting neoclassical
theory’s strict agnosticism regarding the sources of
comparative advantage. The principle encourages us to
interrogate the strategies that nations (and indeed,
communities and firms) adopt in pursuit of their economic
interests, and to adjudicate what should and what should not
serve as sources of comparative advantage…nations should
be allowed (and indeed encouraged) to adopt strategies that
promote capabilities equality and should be barred from
undertaking those strategies that interfere with this end.
From the capabilities perspective, then, we are likely to
conclude that gender discrimination in employment or weak
worker health and safety standards do not qualify as
legitimate policies. Global policy regimes should therefore
disallow (or counter the effects of) such strategies in the
formation of comparative advantage.” (p. 208)

The capability approach prioritizes addressing social inequities such as economic

inequity, discrimination, and exclusion. This is because the method realizes that in order

to be successful, social justice must be prioritized. Fair trade strives to eliminate the global

economic gaps that exist between various groups of people by encouraging fairer trading

practices such as paying fair prices to producers, permitting market access, and promoting

social and environmental sustainability.

The capabilities approach emphasizes the need of prioritizing the capabilities of

society's most vulnerable and disadvantaged groups, such as women, children, and the

poor. This shows compassion for disadvantaged populations. Similarly, fair trade

prioritizes the rights and well-being of underprivileged producers, workers, and

communities in order to empower these people and communities and increase social

inclusion. Furthermore, it accentuates the importance of sustainable development, which

is development that is holistic in character and considers social, economic, and

14
environmental elements of development. Fair trade attempts to support sustainable

production and consumption practices, such as organic farming, fair pay, and

environmentally friendly production processes, in order to ensure the long-term well-being

of producers, workers, and the environment. Not only this, but the capabilities equality

approach also recognizes the importance of ethical issues in the formulation of

development policies and practices. These concerns may include issues of democratic

government, social justice, and human rights. Similarly, ethical issues are integrated into

commercial methods and relationships via fair trade. Fostering transparency,

accountability, and participatory decision-making are among the ethical factors.

Sen's capability approach, in general, provides a theoretical foundation for fair

trade. Since it prioritizes human well-being, social justice, sustainability, ethical concerns,

and the empowerment of underprivileged producers and employees, therefore, its ideals

and ideas are compatible with fair trade. This approach highly stresses the need of

addressing social and economic inequalities, since these imbalances have the potential to

limit people's capacities and freedoms. Due of its focus on competitive markets and profit

maximization, free trade has the potential to exacerbate disparities by providing strong

nations or firms an edge over economies that are less developed or smaller. As a

consequence, rewards and opportunities are distributed unevenly (Sen, 1999).

The capabilities approach, as proposed by Amartya Sen, is a theoretical construct

that offers a more comprehensive outlook on human welfare and progress, surpassing

conventional metrics such as financial resources or economic advancement. The

capabilities approach prioritizes agency and freedom, highlighting the significance of an

individual's capabilities to lead a life of personal value and to exercise autonomy in making
15
choices that promote their overall welfare. Moreover, it places significant importance on

the development of human potential, encompassing a diverse set of skills and abilities that

are essential for individuals to achieve a sense of personal satisfaction and underscores the

significance of tackling social disparities and advocating for social equity. The capabilities

approach prioritizes a comprehensive assessment of well-being that is sensitive to the

contextual factors that shape the social, cultural, and economic realities of individuals.

The fair trade regime aims to achieve a harmonious equilibrium between policy

autonomy and universal commitments/rules2. The fair trade approach aims to impose

specific constraints on policy autonomy, such as prohibiting the utilization of child labor

and prison labor. However, it simultaneously aims to maintain policy autonomy regarding

the methods employed by each nation to accomplish the objectives outlined in the fair trade

system. This thesis will attempt to emphasize on inclusion of fair labor and environmental

rights are also strongly complemented by the capability approach, since Sen’s theory

emphasizes the need of decent work and fair labor conditions as necessary components of

human happiness. Further it will emphasize on the need for achieving a balance between

policy autonomy and universal commitments to labor, human, and environmental

protections as imperative.

Free trade may result in a "race to the bottom" in labor standards as countries

compete for investment and trade by reducing worker protections, cutting worker costs,

and undermining worker rights. This may result in employee exploitation, the

2
Since several neo-classical economists support the notion of free trade by arguing that governments ought
to possess extensive autonomy in labor and environmental policy. They contend that comparative
advantage, which is based on varying labor and environmental standards, can be justified by cultural
relativism.
16
establishment of dreadful working conditions, and the violation of basic labor rights,

particularly in less developed countries (Ghosh, 2015). Additionally, the capability

approach recognizes the importance of environmental sustainability to human well-being,

both now and in future generations, and emphasizes this component of human flourishing.

With its emphasis on economic growth and the unrestricted movement of goods and

services, free trade can lead to environmental degradation, natural resource depletion, and

pollution, all of which contribute to climate change and undermine the capabilities of

vulnerable communities, particularly those in developing countries (Martinez-Alier, 2002).

Since there has been excessive disagreement on the idea of having universal labor

and environmental laws, the capabilities equalities approach provides a significance of

local autonomy and self-determination in the process of building culturally acceptable

development routes that are responsive to local needs and values. When countries are

forced to conform to global trade laws and regulations that may not correspond to their

local values, cultures, or priorities, free trade may result in the loss of local autonomy. This

is due to the fact that nations are required to comply with global trade laws and regulations

(Nussbaum, 2000). The capabilities equality approach emphasizes the need of establishing

democratic governance and participatory decision-making when developing development

strategies and objectives. Consequently, power is concentrated. Free trade agreements,

which are typically negotiated between strong governments or businesses, may concentrate

power in the hands of a few and undermine democratic governance, resulting to the

exclusion and limitation of disadvantaged groups. FTAs are often negotiated between

strong nations or enterprises (Lustig et al., 2010).

17
 Many neoliberal proponents fail to see that free trade doctrine puts the market,

rather than the state, in charge of meeting social, environmental, and monetary

commitments (Edelman and Haugerud, 2005)3. Contrary to that, numerous advocates of

fair trade say that the "free market" terminology utilized by governments in developed

countries is essentially disingenuous. They observe that these governments utilize global

institutions such as the IMF and WTO to compel subsidy elimination in developing

countries while retaining protectionist policies in their own economy (Stiglitz 2002).

Therefore, governments in the industrialized North dump a major amount of their surpluses

at cheap prices on deregulated markets in the global South, much to the disgust of local

farmers (Fridell, 2007).4

The capabilities approach, as we have seen, proposes that the enhancement of

human capacities, rather than economic growth, should serve as the primary goal of

development. While expansion is often crucial to progress, it is not always enough. Dreze

and Sen (1989) and Sen (1999) outline two major categories of development: growth-

mediated and support-led. The former is put into action through quick and widespread

economic development, which paves the way for an increase in fundamental capacities via

more employment, greater income, and enhanced social services. The latter is effective

because of well-designed social programs that promote health, education, and security. In

times of disaster and suffering, public action plays a vital role in both directly supporting

capacities and increasing political pressure for governmental involvement (Clark, 2006).

3
This is also a fundamental rationale for advocating a more progressive and radical stance on fair trade as
opposed to the certification-based fair trade model that operates within the framework of the free market.
4
This happens because the North subsidizes its agricultural sectors by an estimated billion dollars per day.
18
The CA can be widened by including agency, which acknowledges that people have values

and goals (like protecting the environment, buying free trade products, or fighting injustice,

tyranny, and oppression) that go beyond and, at times, even contradict individual

happiness. Inequality, social justice, living standards, and rights and responsibilities are

now focal points in the capabilities approach (Clark, 2006).

The capability approach, developed by Amartya Sen and Martha Nussbaum,

emphasizes the importance of human capabilities and well-being. DeMartino (2000)

reasons that for fair trade to have the potential to develop skills and well-being, it must

ensure that people are paid fairly, and that environmental sustainability is recognized. In

this context, "capabilities equality" refers to the idea that everyone should have equal

access to the capabilities needed to live a happy life, such as educational and medical

opportunities, as well as economic chances. According to the capabilities approach,

developed by economist and philosopher Amartya Sen, real equality can be achieved only

when everyone has equal access to specific talents, rather than just equal access to

resources. True equality can only be achieved in this manner. Fair trade, on the other hand,

is a commercial practice that assures farmers and other employees in developing countries

are paid a salary commensurate with the worth of the items they create. This business model

was created in order to make international trade more equal. Fair trade principles often

involve paying producers fair rates, providing employees with safe and healthy working

conditions, and contributing to the prosperity of local communities.

In a nutshell, there is a clear relationship between capabilities equality and fair

trade. We can increase the likelihood that people in developing countries will have access

to the opportunities and resources they need to live a meaningful life if we fight to
19
strengthen fair trade practices. This includes sufficient remuneration for their work, access

to educational opportunities and training, and the ability to participate in decision-making

at the local level. By striving to promote equality in capabilities, we can contribute to

ensure that all individuals, regardless of where they live or what resources they have, have

the opportunity to live lives that are significant to them.

2.3.2. Marxist Economic Approach

The framework and concept of fair trade also correspondences with Marxist

Economic approach. Many heterodox economists contends that Marx's ideas are still

relevant today (McGonnigal, 2012; Eagleton and Mosquera, 2011; Hudson and Hudson,

2003; Webb 2007; Geysmans and Hustinx, 2016; Nilsen, 2020). Marx's ideas are more

pertinent now than they have ever been, particularly in the dispute between those who

support free trade and those who support fair trade. It is widely observed that hyper

globalization is one of the most critical challenges that the global economy at the present

time is prone to face. Therefore, as fair traders are advocating for stern solutions to this

problem, we need to refer to Marx's very convincing indictment of capitalism (Hudson and

Hudson, 2003; Webb 2007; Geysmans and Hustinx, 2016; Nilsen, 2020). Hence, it is safe

to conclude that distresses, such as labor exploitation and environmental degradation,

stemming from capitalism, as evident by Marx’s writings, are significantly what the fair

traders are concerned for. Marx in Capital Volume I, demarcates that:

“Capitalist production, therefore, only develops the techniques

and the degree of combination of the social process of
production by simultaneously undermining the original sources
of all wealth the soil and the worker.” (p. 638)

20
 This thesis explores exploitation of cheap labor and poor environmental standards

out of many problematic outcomes of globalization. Numerous academic disciplines,

including economics, politics, sociology, history, and anthropology, have conducted

research on the idea of exploitation, each arriving at a somewhat different theoretical

framework as a result (Berger-Tal, 2014; Sindzingre, 2018). Because of its centrality in

Marx's works, the Marxist ideas and disputes around the notion have become de facto

canonical texts for future examinations of the subject (Sindzingre, 2018). The idea of

exploitation, as well as the question of what exactly constitutes exploitation and how it

should be defined, has been the topic of driven contentions in the trade debate. However,

unfortunately, for whatever reason, exploitation has always been considered nothing more

than a simple reality (Krugman, 1997); nonetheless, it is also a notion that needs critical

reexamination.

According to neoclassical economic theory, exploitation occurs when a producer

gets paid less than the marginal output of a given production factor (Hodgson, 1980), and

therefore, to maximize the returns the trade should take place based on comparative

advantage (Ricardo, 1817). Marx's view, on the other hand, is that workers are exploited

whenever they generate surplus value above what they are paid for it. This is because

capitalists use coercion over the labor process to appropriate this surplus value (Sindzingre,

2018). To Marxist point of view, exploitation refers to the process through which workers

hand over their economic surplus to capitalists. Yoshihara (2017) delineates that one of the

chief characteristics of exploitation in a capitalist system is the unequal exchange of labor

among workers. This explicitly resonates with the aim of fair traders to advocate for fair

labor standards for all laborers, in both developed and developing countries.
21
 To understand Marxist Economics as a framework for fair trade, first we need to

understand his commodity fetishism. Personifying objects and economic classifications are

what Marx defines as "commodity fetishism" (Marx, 1887; Hudson and Hudson, 2003).

Anything that can be witnessed when the part of social connections that overshadows

individuals, manifests themselves externally as domination by specific items is the

objectification of production relations between people under the circumstances of

commodity production based on private ownership (Hudson and Hudson, 2003). The

capitalist personifies capital as a production relation, whereas the worker represents wage

labor. The exploitation of man by man, which is hidden by the payment of wages, is only

one illustration of the pervasive fetishism that penetrates all economic categories of

capitalist society. Commodity fetishism reaches its pinnacle when one becomes obsessed

with accumulating wealth and material possessions (Marx, 1887).

Marxist economic theory critiques the concentration of power in the hands of

multinational corporations under capitalism. In his book Capital: Critique of Political

Economy, Marx elaborates on the process by which people go from being passive holders

of money (capital) to active capitalists who put others to work for profit (1867). As Marx

puts it, "dead labor" is put to use by "living labor," or workers, to create new value. Marx

considers the physical means of production to be a source of value since they are utilized

by workers and are the result of the activity of previous workers. There are two points of

argument he raises. He begins by saying that employees add value to the physical means

of production by using them. Even while it adds to the economy, labor is nonetheless

abused. In a fascinating phrase at the end of chapter six, Marx in Capital Volume 1,

envisions a stylized exchange between the "owner of money" and the "owner of this
22
peculiar commodity, labor-power," who meet in a marketplace to trade their respective

possessions. They get together as equals in order to do this transaction, but then:

“On leaving this sphere of simple circulation or of exchange

of commodities, which furnishes the “Free-trader Vulgaris”
with his views and ideas, and with the standard by which he
judges a society based on capital and wages, we think we can
perceive a change in the physiognomy of our dramatis
personae. He, who before was the money-owner, now strides
in front as capitalist; the possessor of labor-power follows as
his laborer. The one with an air of importance, smirking,
intent on business; the other, timid and holding back, like
one who is bringing his own hide to market and has nothing
to expect but — a hiding.” (p. 280)

This thesis attempts to understand how the closest form of Marx's ideal society can

be achieved by implementing fair trade initiatives and understand the essential problems

rooted within David Ricardo's theory of comparative advantage and specialization which

is seen as the most straight and basic definition of free trade (Ricardo, 1817). Under a free

trade regime, restrictions like tariffs, quotas, and sanctions are not in place, and to

maximize output while minimizing input costs, it emphasizes a cost-benefit analysis of

manufacturing only. However, Marxist ideas like reliance and exploitation can be traced

back to the fair trade doctrine (Eisenberg 2005).

To improve trading circumstances, fair trade primarily aims to strengthen

cooperation, conversation, transparency, and respect. To ensure that mass productions,

especially factories producing on FDIs, produce under conditions of no child labor,

environmental sustainability, strict labor standards, and various regulations to ensure

worker safety, fair trade advocates work to encourage states to practice policy autonomy

and establish their own ideal labor and environmental standards (Fridell, 2006). In a

23
nutshell, the major objective of fair trade policies is to enhance working conditions for the

sake of worker safety and the reduction of other unfavorable consequences of globalization.

According to Eagleton (2015), this means that "decisions on the overall allocation of

resources" would be set by representative assemblies at the local, regional, and national

levels, and that "an economy which would be neither centrally planned nor market

governed" will serve as a shorthand for the Marxist vision.

In light of this, this thesis evaluates fair trade as a model of 21st-century Marxist

economics in international commerce. Since Marx's criticism is congruent with the

problems that fair trade seeks to solve, the Marxist economic approach is utilized as the

basis for the fair trade approach in this thesis. Marx postulated a vision of societal

alterations and a phase of metamorphosis towards improvement. He held the belief that the

ultimate goal ought to be the overthrow of capitalism and the establishment of a socialist

community. Nevertheless, the implementation of reforms that tackle the fundamental social

challenges is necessary to achieve this objective. Marx posited that the elimination of

capitalism required a revolutionary struggle by the proletariat, aimed at obtaining dominion

over the means of production and establishing communal ownership. Marx's critique of

capitalism centered on the exploitation of laborers and the inequitable distribution of

wealth. In a similar vein, the fair trade movement attempts to tackle issues of exploitation

by advocating for trading practices that are more just and balanced, as well as regulations

that promote fair labor and environmental standards, and mechanisms for ensuring

accountability.

Holland (2015) argues that the concept of comparative advantage, which originated

with Ricardo, is a flawed basis for economic policy because it assumes immobility of
24
capital while, in reality, FDI has been the primary force behind the expansion of

international trade since World War II and the confirmation of Marx's claims of unequal

development. He explains that this has led to unequal results, undermining the Bretton

Woods system established after World War II, and he proposes a post-Ricardian and post-

Keynesian conceptual framework for global government, which this thesis argues may

fundamentally be a system of free and equitable commerce. Marxist economic theory

emphasizes the exploitation of labor under capitalism - a bigger canopy to put neo-

liberalism under (Marx, 1877; Eisenberg, 2005), where workers are often subjected to poor

working conditions, low wages, and exploitation by employers. Which again points

towards the immediate and effective inclusion of labor laws in trade agreements, such as

those related to minimum wages, working hours, and workplace safety, to help protect the

rights and well-being of workers. By promoting fair labor standards, trade agreements can

help address exploitation in global supply chains, ensure that workers are treated fairly,

and prevent a race to the bottom where countries compete by lowering labor standards to

attract investment (Gitterman, 2003; Burgoon and Hiscox, 2000; Drezner 2001; Van den

Putte and Orbie 2015). This perfectly aligns with Marxist critique of exploitation which

contributes to more equitable and just labor associations in international trade.

Further, Marxist economic theory also emphasizes the importance of workers'

rights and collective bargaining power in challenging the power imbalances between labor

and capital. Marx also argues “that unions and strikes were a vital means to militate against

exploitation and wage the class struggle against capitalists” (Hampton, 2008). Labor laws

in trade agreements can help promote workers' rights, such as the right to organize, bargain

collectively, and engage in peaceful strikes (Kim and Park 2014). By empowering workers
25
to have a voice in their working conditions and wages, labor laws in trade agreements can

help rebalance power dynamics in global supply chains and promote more democratic and

participatory workplaces (Dorman, 1988). This brings into line Marx’s emphasis on the

role of collective action in advancing workers' interests and can contribute again to more

equitable and inclusive labor relations. Marxist economic theory critiques the social

inequalities generated by capitalism, including wealth concentration and income

disparities. Labor laws in trade agreements can include provisions that promote equitable

distribution of economic benefits, such as requirements for fair wages, gender and racial

equality, and social protection measures (Dorman, 1988). By addressing social inequality,

labor laws in trade agreements can help promote social justice, reduce disparities, and

contribute to more inclusive and equitable societies which has also been Marx’s staunch

emphasis on addressing inequality in economic systems, and can therefore, contribute to

more just and balanced trade relationships globally.

Marxist economic theory, like fair trade, recognizes the environmental impact of

capitalism as well, including environmental degradation, resource extraction, and climate

change (Foster, 2014). Environmental laws in trade agreements can include provisions that

promote environmental sustainability, such as requirements for environmental standards,

conservation measures, and sustainable resource management. Promoting environmentally

responsible production and trade practices, environmental laws in trade agreements can

help protect the environment, prevent ecological harm, and contribute to sustainable

development (Esty, 2001; Runge, 1994; Rodrik, 1997; Summers, 2000). This aligns with

Marxist recognition of the interdependence between economic systems and the

26
environment and can contribute to more sustainable and responsible trade relationships

(Burkett, 2006).

Fair trade activists have helped radicalize and grow ecological defense groups

around the globe as globalization's effects on the environment have deteriorated. This has

led many scholars to return to Marx in search of more holistic, dialectical explanations of

the social degradation of the environment (Foster, 2015; Foster and Holleman, 2014). To

such an extent that it is embedded in the very framework of Marx's value analysis (Burkett,

2006), the alienation of nature is a central part of Marx's criticism of political economy

and, by extension, of capital. He also underlined that people were a part of nature and the

inherent conflict between their use value and their trade worth. Marx and Engles

characterize the work and production process as a component of the "universal metabolic

process" (Marx and Engles, 1861–1863, p. 63). Marx described socialism as the "rational

regulation by associated producers of the metabolism between humanity and nature,"

(Burkett, 2006). Marx argued that no one, not even all the people on Earth, owned the

planet, but rather that they only possessed it in usufruct as "good heads of the household,"

and that they owed it to future generations to pass it on in better form than they had

inherited it. (Marx, 1894 : 911, 959). For instance, Marx argued that "Man lives on nature—

means that nature is his body, with which he must remain in continuous interchange if he

is not to die" (Economic and Philosophical Manuscripts, 1844) in order to explain how

humans depend on the natural world. Because man is a part of nature, the fact that nature

is essential to his bodily and spiritual well-being is equivalent to saying that nature is

essential to itself. Marx (1873) explains that:

27
 “It is not the unity of living and active humanity with the
natural, inorganic conditions of their metabolic exchange
with nature, and hence their appropriation of nature, that
requires explanation or is the result of a historic process, but
rather the separation between these inorganic conditions of
human existence and this active existence, a separation
which is complete.” (p. 489)

The sustainable development aspects of shared resources, co-evolution, and

common property are all accounted for in Marx and Engels' communist approach. In

addition, this perspective integrates environmental and social scientific approaches in a

manner that is both practical and intellectual, which is in keeping with the multidisciplinary

nature of ecological economics (Burkett, 2006).

According to Burkett (2006), the rising global revolt against dominant economic

institutions (transnational businesses, the IMF, the WB, and the WTO) is driven by the

need for more egalitarian and ecologically sustainable living options, which this thesis

attempts to prove is a worldwide fair trade regime. The market, private profit, and other

kinds of exploitation and oppression are not the driving forces behind human growth, he

argues, and this movement requires a framework for the discussion, reconciliation, and

implementation of alternative human development methods driven by life values.

If this interpretation is right, then environmentalists' (fair traders) ultimate goal

must be the eradication of capitalism rather than incremental reforms inside it. We need to

build a society based on collaboration, economic democracy, and long-term sustainability

to prevent ecological disaster (Gasper, 2013).

In Capital, Volume 3, Marx lays forth his vision for such a society:

“From the standpoint of a higher socio-economic

formation, the private property of particular individuals in
28
 the earth will appear just as absurd as the private property
of one man in other men.
Even an entire society, a nation or all simultaneously
existing societies taken together are not owners of the earth,
they are simply its possessors, its beneficiaries, and have to
bequeath it in an improved state to succeeding generations,
as boni patres familias [good heads of households].” (p.
911)

Their most in-depth examination of this issue was found in Marx's Speech on the Question

of Free Trade, which was presented in Brussels in January 1848, just before to the

publication of the Communist Manifesto (Hampton, 2008). In response to the question of

“what is free trade under the present condition of society?”, Marx (1848) makes the

argument that:

"When you have overthrown the few national barriers which

still restrict the progress of capital, you will merely have
given it complete freedom of action. So long as you let the
relation of wage labor to capital exist, it does not matter how
favorable the conditions under which the exchange of
commodities takes place, there will always be a class which
will exploit and a class which will be exploited. It is really
difficult to understand the claim of the free traders who
imagine that the more advantageous application of capital
will abolish the antagonism between industrial capitalists
and wage workers. On the contrary, the only result will be
that the antagonism of these two classes will stand out still
more clearly.” (para. 1)

In his criticism of capitalism, Marx addresses a variety of topics, including political

impotence as a result of capitalism, the exploitation of the worker class, income inequities,

and more (Eagleton 2011). Labor and environmental laws in trade agreements can help

challenge corporate power by regulating the activities of corporations in global supply

chains, setting standards for their operations, and holding them accountable for their social
29
and environmental impacts (Chapman and Suri, 1998; French 1993). By promoting

transparency, accountability, and responsible business conduct, labor and environmental

laws in trade agreements can help prevent corporate abuses, promote corporate social

responsibility, and contribute to more balanced and accountable trade relationships. This

aligns with Marxist critique of corporate power and can contribute to more equitable and

just global economic governance (Gasper, 2013).

2.4 Fair Trade Policy Proposals

Fair trade presents an alternative approach to international trade, with the aim of

promoting ethical and sustainable practices. The emergence of the fair trade concept was a

direct response to the exploitation of workers and small-scale producers in developing

nations by multinational corporations that prioritize financial gain over the welfare of

individuals and the environment. Various fair trade initiatives provide a set of viable

solutions to tackle the aforementioned concerns through the promotion of equitable

remuneration, secure labor conditions, and ecological preservation. It is important to note

that these proposals have their own limitations. The discussion about their limitations is

beyond the scope of this study but nevertheless important.

2.5.1. The Social Charter Approach

The social charter is a widely supported strategy for accomplishing the objective of

setting up a fair trade regime. If a country wants to join a single market, it must sign on to

a social charter promising to maintain a certain baseline of social protections. These rights,

which may be seen as reflecting what member states consider to be valuable functions, are

established via multilateral discussions among the concerned States. As a result, the charter

30
might be seen as laying forth minimum standards for competence in the single market.

Proponents argue that if a country has a strong enough charter, it will not engage in immoral

actions in order to gain a competitive edge. Europe is the birthplace of the modern social

charter movement.

Several North American fair traders, inspired by the European approach, which was

included in the 1992 European integration talks, fought unsuccessfully to get a social

charter included in NAFTA. The Charter guarantees a wide range of rights, from those in

the workplace to those of children, the old, and the handicapped (Kraw 1990). For instance,

Brown et al., noted that the draft charter included steps to strengthen the social safety net

and boost community and worker participation in upholding basic environmental and labor

norms (1992).

In 1993, Rothstein debriefed about the international labor laws and international

trade that:

“The Clinton administration has many opportunities to

expand American export markets in the Third World, as
well as to protect U.S. jobs from unfair low-wage
competition, by a policy which gives greater emphasis to
internationally recognized labor standards. The policy must
be guided by a new international development strategy
which recognizes that higher wages and the creation of
internal markets are as important to Third World
development as export opportunities.” (p. 31)

Although the final, agreed-upon Charter falls well short of its proponents' hopes,

certain (limited) social and labor norms are standardized throughout Europe (Silvia 1991).

Hence, the social charters are there to help regular people and solve their concerns and as

a result provide a level playing field for all the economic stakeholders, specially the labor.

31
Hence, modern trade agreements must adopt a cooperative strategy that prioritizes

capacity-building and fosters active citizen participation, with civil society in each country

guaranteed the legal standing to bring instances within the context of a renegotiated

agreement (Castaeda and Heredia 1992).

The basic premises behind each of the NAFTA parallel track institutions are

important for charting the course of future trade and environment efforts, even if the

specific structures and functions of the NAFTA parallel track institutions are perhaps best

suited to the particular circumstances of the NAFTA. Important lessons for future trade

and environment efforts can be learned from NAFTA's Environmental Provisions. The

implementation of these laws, together with the successes and failures that occur as a result,

will serve as an important laboratory for nurturing solutions to many trade and

environmental concerns. We can no longer treat trade agreements like NAFTA as if they

were corporate bill of rights (Castafieda and Heredia 1992).

Our national governments are jeopardizing our ability to meet urgent ecological

concerns because they do not fully understand or effectively address the environmental

implications of current trade agreements. This was found to be the case by (Shrybman

1992) that to pacify the fair-traders in Congress, the Clinton administration negotiated two

side agreements to NAFTA on worker rights and environmental preservation. While all

three signatories must adopt their own labor and environmental rules, it is vital to remember

that the side agreements do not impose a unified standard across the continent (Hufbauer

and Schott, 1993). There are many promising aspects to the social charter approach, but it

also has some significant weaknesses.

32
2.5.2. The Social Tariff Approach

Alternatively, "social tariffs", a unilateral approach, could be applied to products

made in countries with less robust labor and environmental protections. The objective of

this strategy is to prevent the loss of progress made in nations with high standards of labor

and environmental protection while simultaneously encouraging the adoption of such

standards in countries with lower ones. It aims for this by eliminating the benefit that

enterprises with lower standards over their competitors have (Lebowitz 1988). There could

be a number of benefits to implementing an environmental tariff in order to create a more

equitable trading system (Chapman 1991). He further elaborate that the funds raised could

be used to finance pollution control in developing countries, some part of the tariff funds

could be allocated for research on the general problems of transnational externalities and

world pollution, and producer resistance to pollution control would be diminished.

Environmental protection groups in developing nations would have a stronger

domestic political position with the help of a social tariff. Further, businesses that invest in

cutting-edge pollution-prevention technology would benefit economically. Due to the

minimal possibility of low-standard countries agreeing to multilateral accords that contain

a social tariff, a properly structured tariff would be levied unilaterally by the high-standard

country (Dorman, 1992). Tariffs would be adjusted on a product-by-product basis (rather

than being applied uniformly to all exports from an offending country) to negate the

competitive advantage gained due to substandard products. According to this strategy,

tariffs would be based on a country's own standards.

In his brief paper, Rothstein (1993) outlines why he thinks the United States should

prioritize improving working conditions in developing countries. According to him, the

33
consequences of slow growth in the developing world are rarely considered in policy

debates. Hence, he proposes, the opportunity to submit complaints with the commission

should be granted to workers or enterprises that claim to have suffered a competitive

disadvantage because another NAFTA member has failed to observe agreed upon labor

standards. The commission should have the authority to impose compensation tariffs or

limit cross-border commerce in the relevant product if it finds that labor standards have

been violated. The NAFTA countries should set up a "social tariff" to protect North

American standards from being eroded by low-wage imports from countries outside of

NAFTA. To prevent low-wage imports from non-NAFTA countries from undermining

North American standards, the NAFTA countries should implement a "social

tariff" (Rothstein, 1993). In summary, the idea for a social tariff would have workers and/or

businesses that feel they have been disadvantaged by unfair competition from foreign

enterprises who exploit lower standards petition an established authority for restitution in

the form of a tariff. The authority would make a decision based on the merits of the petition

after hearing evidence from both sides. The goal of the social tariff strategy is to eliminate

competitive advantages gained at the expense of the environment or workers' rights.

By safeguarding domestic employees and the environment, as well as pushing

foreign producers to improve their labor and environmental standards, proponents of social

tariffs claim this method can help to achieve fair trade. However, critics point out that

social tariffs are difficult to administer and enforce and might result in trade disputes and

retaliation. To promote equitable trade, governments have implemented social tariff

regimes, which are essentially import levies. Tariffs are used with the intention of leveling

the playing field between domestic producers and their foreign competitors, especially in
34
sectors where labor and environmental standards are lax in the exporting country. Social

tariffs are based on the idea that home companies and workers should be protected from

cheap imports by imposing higher taxes on items produced in countries with worse labor

and environmental standards. This strategy would also push international manufacturers to

raise their working conditions and environmental protections to compete in the U.S.

market. A government may raise tariffs on clothing made in countries with lower labor

standards in order to safeguard its domestic clothing industry and its workers. This would

provide international apparel manufacturers an incentive to raise their working conditions

so they can compete in the U.S. market.

2.5.2.1. Social Index Tariff Structure (SITS)

DeMartino, Moyer, Watkins’s (2014) thought experiment on fair trade is a worth

mentioning proposal under social tariff regimes. This experiment is an attempt to propose

a method of ethical trade. It advocates for capability-based development, equality, and

worldwide economic integration. SITS regime could be a global trade system that promotes

positive trade performance and growth while penalizing export-promoting policies that

harm human development, equality, or sustainability social tariffs at the multilateral level

(DeMartino et al., 2014).

In this approach, an index number is assigned to each country based on its efficacy

in promoting the average capabilities of its population relative to its means, sharing these

capabilities evenly, and displaying a commitment to sustainability. This index ranks the

capabilities of nations, and would encourage similar countries to trade with each other.

Under this approach, a social tariff will be imposed when one country exports to another

35
with a higher index number. SITS regime construction entails a number of judgment-based

processes. SITS, on the other hand, reveals the normative ideals that underpin any

international trading regime, which is a positive thing.

It begins with a capability performance measure for the country. The yearly UNDP

Human Development Index (HDI) produced by the HDR is a first approximation of a

capability indicator that allows for worldwide comparisons (DeMartino et al., 2014). The

HDI takes into account income, life expectancy, and education, and the countries are

ranked based on their human development.5 Since, systemic injustice is frequently caused

by class, gender, ethnicity, color, and other variables, and they fall short of

capabilities equality, therefore, further data is required to create a capability-equality index

In the lack of good cross-national data, income inequality data was used as a proxy for

these various types of inequality. In the absence of a consensus measure of wealth or

income inequality, SITS computations use the GINI coefficient for income, which is

relevant and available for most countries (DeMartino et al., 2014).

The global SITS index highlights countries that have made significant social

improvement. Unlike the free trade regime, which affects FDI inflows and trade

performance, the SITS regime would reward governments that improve labor and

environmental standards with development assistance and increased access to global

markets. SITS protects employees and communities from global neoliberalism's

temptations to accept lower wages and less protective standards in order to stay employed.

5
The HDI is a composite indicator that does not directly reflect capability disparities across countries.
36
In contrast to global neoliberalism, the SITS system promotes human growth, equality, and

sustainability while punishing those who do not. The SITS regime's index component

determination and weighting, tariff band groupings, tariff sizes, conditions under which

nations in distress due to natural or societal disruptions might opt out of SITS or be granted

unrestricted access to others' markets, and so on are all customizable. Political, economic,

normative, and practical issues all influence trading systems. SITS is purposefully unclear.

This component of SITS assists in balancing the various concerns and aims that are usually

present in global policy frameworks.

The authors of this thought experiment deem it as ethical since it requires wealthy

countries to contribute the most and provides low-income countries with human

development resources. To help low-income countries from trade, SITS revenues may only

be distributed to countries with GDP per capita less than a multiple of the global average.

Tariffs for SITS reflect capabilities, whereas development funding may be motivated by

present operations. As a result, good performance leads to lower SITS fines but not awards,

increasing a country's net benefit. SITS enhances performance by increasing market

competitiveness and revenue distribution. It protects high-performing employees (for

example, those with robust labor laws) and motivates low-performing employees. A SITS

regime promotes a free trade order by requiring countries to pursue comparative advantage

in ways that advance the regime's objectives.

The SITS experiment advocates for human and worker rights as the foundation of

capabilities, and therefore, delineates that trade regimes must priorities subjects as worker

and human rights, labor passivity, low salaries, gender-based oppression encompassing
37
physical coercion over women's bodies, unequal household chores, discrimination in

formal labor markets and public institutions under the state law. Human abilities are

influenced by environmental quality. Environmentalism gives future generations power.

For justice, fair trade must support ecological sustainability. Environmental performance

should be measured. Environmental indices rank countries. For each indicator, long-term

public health or ecological sustainability goals are established through international

standards, leading national regulatory requirements, or scientific agreement (Emerson et

al., 2012). It is concerned with growth strategies and their outcomes. SITS would penalize

labor exploitation and environmental degradation in global markets. SITS that promotes

trade. SITS has no impact on globalization. The dynamics of trade and investment promote

human growth, equality, and sustainability. Incentives for market integration shift. "X"

methods must be excluded from competition because they promise victory at the expense

of political, economic, and environmental devastation (DeMartino, 2000).

2.5.3. The Sullivan Principles Approach

Another approach would be for wealthy nations to mandate that their home

companies operating abroad respect basic human and environmental rights while investing

in poorer nations. Drawing parallels to the "Sullivan Principles," which mandated that

American companies with assets in South Africa at the time of apartheid abide by

American anti-discrimination laws, Jagdish Bhagwati (1993), a proponent of free

trade, proposed this technique in the context of North American integration. Bhagwati, a

staunch free trade advocate, only recommended this course of action as a last resort to calm

38
the anti-NAFTA emotions that threatened to sink the accord. This plan can be understood

as exemplifying fair trade ideals regardless of its origins or the intentions of its architect.

Critics have labeled the relocation of businesses from high-standard countries to

poor countries as "social dumping," and the Sullivan Principles aim to put an end to this

trend. Followers of Bhagwati believe this tactic effectively eradicates social dumping

without encroaching on the sovereignty of the host country. We've seen that Bhagwati

disagrees with holding less-developed nations to the same criteria as more-advanced

nations. It would be an affront to their independence, he says, and their economy would

suffer as a result.

While critics of NAFTA have called for other signatories to adopt strong

environmental regulations similar to those in the United States, this idea has been roundly

rejected by Bhagwati. He elaborated that in the similar manner that United States prioritize

different areas and sectors when allocating funds to meet its environmental goals, so must

other signatories. It is ridiculous to assume that other trading partners will adopt a specific

country’s norms and values, which are nonsensical because that country would not accept

them if they were crafted by anybody other than themselves. He further argues that no

nation should be forced to adopt the development policies of another. While the concept of

sovereignty is important, it must be weighed against the competing idea of equal freedoms

to pursue goals that individuals have reason to value. The Sullivan principle was a close

second to the free trade system in Bhagwati's estimation. He felt that the method preserved

the sovereignty of poor countries while yet addressing the main concerns of fair traders

(DeMartino, 2000).

39
 Therefore, the goal is to craft policies that encourage this result without requiring

all nations to take the same action. In this respect, the Sullivan Principles falls short. The

lack of mechanisms to guarantee that the higher standards are implemented throughout the

low-standard countries receiving investment is a major flaw in the proposal. It discourages

FDI while offering no proactive inducement (like money) to boost QC at home. Only a

small fraction of the people engaged by multinational corporations from underdeveloped

countries are affected. As Bhagwati sees it, this might have a "demonstration impact,"

encouraging NGOs and other groups to push for widespread adoption of the higher

standards enforced by international firms. This thesis does mention the shortcomings of

this proposal, however, providing an alternative better solutions is beyond the scope of this

research.

Given the relatively weak rights to association and political speech in many low-

income countries, it is debatable whether this demonstrable influence will be sufficient to

achieve universal improvements in rights and living standards without extra steps. Like the

social tariff system, the Sullivan Principles policy leads nowhere. It is seen that

unilateralism can be used for nationalist aims that have little to do with the policy's original

motivation, despite any economists’ praise. The African National Congress fought against

this method when it was employed to exert pressure on South Africa (ANC). The African

National Congress (ANC) was accused of caring more about the profits of foreign firms

than about the welfare of black South Africans (DeMartino, 2000).

2.6 Conclusion

This chapter analyzed the developments in fair trade theory’s advocacy in context

with its historical background, the perspective which is relevant to our study, and its
40
policies and practices under organized purview. It was found that nearly every single

contemporary industrialized country has, at some point in the course of their economic

development, enacted severe rules and regulations, as well as formulated its own

requirements prior to participating in trade liberalization. Therefore, the big trading entities

like WTO essentially include the freedom for contemporary developing countries to

practice their policy autonomy and formulate their own fair trade polices when they enter

in trade agreements. These entities should be there mediate the agreements and not impose

the liberalization restrictions as favorable for the developed countries. Not only this, but

the main goal of any international trade agreement should also be to ensure that human

development and environmental conservations takes indefinite lead over merely generating

trade flows and profits. This will be discussed further in detail in Chapter 3.

Chang and Green (2003) present favorable argument as:

“The tightening-up of foreign investment regulation after the

Second World War by these three countries (UK, France and
Germany) reflected the changes in their status in the world
of international investment. As they exchanged places with
the USA, becoming net recipients of FDI, rather than net
providers, they adopted the same restrictions on foreign
investment that they had previously criticized when the USA
had used them. This suggests that countries have used, and
indeed should use, different policies towards foreign
investment according to their role as investment providers or
receivers. Since developing countries are today almost
always at the receiving end, it follows that they too need, and
should be allowed to have, significantly more freedom to
regulate foreign investment in their long-term interest than
do the developed countries.” (p. 16)

The chapter defends the point of view of various heterodox economists and social

and human rights activists in favor of adopting an internationalist egalitarian perspective

41
in criticism to mainstream view of free trade, since 1990s. It provides a background,

context and two important economic framework that can be analyzed to understand and

champion for a fair trade regime. Many heterodox economists pursued a rather

comprehensive movement to advocate for multilateral fair trade regime (DeMartino, 2014).

Economic policy makers, if they really want humanity as a whole, and individual societies

within, to develop to its full potential and become an ideal society needs to divorce from

their fetishism with increased economic returns and focus on devising policies that

prioritize human development and environmental conservation.

42
 Chapter 3: A Brief History of International Trade Theories and their Impact on

Globalization

3.1 Introduction

There still exists wide global consensus on free trade as the best international trade

policy. Many economists still advocate their believes that free trade is the only way to go

if nations want to achieve economic development and growth. The United

States adopted a protectionist strategy in the early years after its independence from Britain

in 1776. Protection of home producers from foreign competition and encouragement of

economic self-sufficiency were among the goals behind the placement of tariffs on

imported products. There was a trend toward free trade advocacy in the United States in

the 19th century, a time of great industrialization and economic prosperity. It was only after

the World War II that United States “liberalized its trade and tarted championing the cause

of free trade” (Chang, 2007). The thesis analyzes this argument in depth later in this

chapter. David Ricardo's theory of comparative advantage, which argued that countries can

benefit from specializing in producing goods or services in which they have a comparative

advantage and engaging in trade with other countries for goods or services in which they

do not have a comparative advantage, is largely credited with popularizing the concept of

free trade (Chang, 2007).

In short, depending on the economic and political climate of the time, the United

States implemented a variety of protectionist and free trade policies throughout the late
43
 19th and early 20th century. Economic and political factors, such as the need to

safeguard domestic industries, raise funds, and resolve labor issues, prompted the

imposition or removal of tariffs. Following WWII, the United States took the lead in

establishing the Bretton Woods system and other international economic institutions that

would foster global economic stability and free trade. The United States has engaged in

several trade talks and accords, and it played a pivotal role in the establishment of

international institutions like the General Agreement on Tariffs and Trade (GATT), which

evolved into the World Trade Organization (WTO).

There have been several official free trade accords signed based on this

unwarranted support of the free trade as the ultimate international trade strategy. For

instance, the U.S.-Peru Trade Promotion Agreement was signed into law in 2007 by

President George W. Bush (PTPA). By lowering tariffs and other trade barriers, this

agreement sought to increase commerce between the United States and Peru.6 Once the

North American Free Trade Agreement (NAFTA) expired in 1994, the United States signed

the PTPA as its first FTA. Since the U.S.-Colombia Trade Promotion Agreement in 2006,

this was the first trade pact inked between a South American country and the United States.

This treaty entered into force on February 1, 2009, after being passed by the United States

Congress in November 2007. Many businesses backed it because they believed it would

boost exports and create jobs, but unions and environmentalists opposed it because they

feared it would promote outsourcing and do harm to workers and the environment.

6
It also included provisions to further safeguard workers' rights and the environment.
44
 This chapter will critically analyze the old trade models and the new trade model

that have been the fundamental basis of free trade proposals proposed, accepted, and

implemented globally. It is important to note that mostly these FTAs are heavily supported

by the economies of global north with the help of international financial institutions.

3.2 Theoretical Limitations of International Trade Theories

This section provides a brief critical summary of old trade and new trade theories

to understand the dynamic of globalization. Some of the theories included are just to

understand the evolution of international trade practices and theories, and their in-depth

analysis is beyond the scope of this study.

3.2.1. Mercantilism

During the period spanning from the mid-sixteenth century to the late eighteenth

century, the trade policy formulation and implementation in a majority of European nations

were primarily influenced by the philosophy of mercantilism, as noted by Heckscher (1931)

and Magnusson (1994). According to the theory, the most effective approach to

augmenting wealth was through global trade and expansion of territories. There were

certain advantages observed, including an increase in commercial operations. According

to Viner's (1937) analysis, the mercantilist school of thought posited that the principal

objective of commerce was to attain a "favorable" balance of trade, which was

characterized by an excess of export revenues relative to import expenditures. The main

objective was to enhance the country's economic prosperity through specific means, such

as diminishing imports and elevating exports, promoting the growth of domestic

45
businesses, and procuring colonies to gain entry to their innate resources (Irwin, 1996;

O'Brien & Williams, 2016).

The British Navigation Act of 1651 exemplifies a mercantilist trade policy that was

prevalent during that era, as noted by Taylor (1972) and Wallerstein (1980). According to

Wallerstein's (1980) account, transportation of imports originating from continental Europe

was restricted to British ships or those registered in the country of origin. Additionally,

foreign vessels were prohibited from engaging in coastal trade activities within England.

Mercantilism has faced criticism on multiple fronts within academic discourse. Initially, a

multitude of economists who advocated for free trade held the belief that the prioritization

of amassing valuable metals was misguided. Instead, they argued that a country's economic

well-being should be assessed based on its output and utilization of goods and services.

The mercantilist trade policy exhibited a hostile stance towards multilateral trade

agreements, as it involved the imposition of import taxes and quotas, and the prohibition

of the shipment of industrial equipment, raw materials, and skilled personnel, with the aim

of supporting domestic industries. Adam Smith and David Hume (1752) were notable

critics of the mercantilist theory, as noted by Viner (1937). Smith emphasized the

importance of free trade and specialization, primarily due to their contribution to economic

growth. The analysis conducted by Smith investigates the impact of implementing a

fundamental mercantilist principle, which involves the imposition of tariffs or embargoes

on commodities produced abroad. According to the author's definition, the aforementioned

"restraints" confer advantages to particular domestic sectors, as indicated by the user. The

imposition of a tariff on imported goods results in an increase in their cost, while a complete

prohibition may lead to a corresponding escalation in the cost of smuggling them.

46
Consequently, there exists a comparative reduction in the expenses of domestically

produced commodities of analogous kind, potentially leading to a circumstance where local

manufacturers attain a predominant stance in the regional marketplace. Under conditions

of restricted trade, purchasers tend to demonstrate a higher level of readiness to pay an

elevated price premium, as opposed to scenarios where trade is not restricted.

According to Smith's analysis, the imposition of such restrictions has a negative

effect on the well-being of the populace, as individuals strive to optimize the utilization of

their available resources. The proposition put forth by the author suggests that the

intervention of the government in this specific process would impede its advancement.

When the potential benefits are comparable, individuals tend to favor domestic trade and

transportation of goods over international trade, owing to the relatively lower risks

associated with the former. As per the author's assertion, a significant increase in import

costs could dissuade their importation, leading to a reduction in customs revenue due to the

decrease in imported goods outweighing the augmented charges.

According to Smith's assertion, there exist specific circumstances where limitations

on imports are considered necessary. The author's proposal entails the cessation of

importing commodities from companies involved in activities related to warfare, in order

to promote their growth within the national market. It can be argued that if domestic items

are taxed, it is justifiable to subject foreign items to the same taxation. The author cautions

against expediting the reduction of import tariffs or relaxing import limitations as a means

of preventing potential disruption to the domestic economy. Smith presents a pessimistic

viewpoint regarding the likelihood of trade liberalization, which he attributes to the

47
influence of politicians and their affluent supporters who advocate for protectionist

policies.

Smith argues that the imposition of import restrictions has negative consequences

for both business enterprises and ethical values. The author's literary work is based on the

concept of "innate entitlements" (Smith, 1776), which serves as the primary source of his

indignation and the viewpoints expressed therein. According to Smith's analysis, the

prohibition on exporting sheep and grain is considered a violation of the right to utilize

one's own resources to the fullest extent possible. The infringement of this fundamental

right could be deemed necessary for a critical objective, such as readiness for military

confrontation. Mercantilism, according to

Wallerstein (1980) facilitated both imperialism and exploitation. According to

Smith (1776), the implementation of mercantilist policies such as protectionism and tariffs

resulted in heightened international tensions and reduced commerce, ultimately leading to

trade wars. According to Smith's assertion, the implementation of import tariffs tends to

benefit merchants primarily, without being a necessary outcome. Smith asserted that the

implementation of free trade would yield advantages for all parties concerned.

Additionally, he refuted the concept that a nation's affluence was predominantly reliant on

its accumulation of gold and silver. Several economists have posited that mercantilist

practices were employed to justify the appropriation of resources and labor from colonies

and other countries. The outcome of this phenomenon was the

proliferation of destitution and a surge in disparities.

48
3.2.2. Classical Economic Theory:

Adam Smith, in his revolutionary manuscript "The Wealth of Nations," published

in 1776, presented classical trade theory and specifically the principle of absolute

advantage that laid the foundations of free trade across. Smith rationalized that nations

should focus their production efforts on the kind of commodities at which they have a

absolute competitive advantage, and should engage in trade with other nations in order to

acquire the types of things that they are unable to produce as effectively (Appleyard &

Field et al. 2006). According to the notion of absolute advantage7, nations should focus on

exporting those products which they can produce efficiently and inexpensively as

compared to all other nations. Then, in return, they should buy from nations that do have

an absolute edge in the products they import, driving up global prosperity via more trade.

Absolute advantage is the foundation for enormous profits that result from trading between

diverse producers of commodities that each have their own distinct absolute advantages

(Smith, 1776).

Smith, in 1776, made his feted case for free trade. "Free trade", over time, attained

an intellectual status that remained unchallenged by any other doctrine at that time (Irwin

1996, Viner 1937). Gradually, the proposition that freedom to trade internationally is more

favorable than protectionism for an economy, both individually and as a whole, endured a

lot of criticism but remained relevant and widely supported. Smith puts forward the

7
Adam Smith pioneered the school of thought known as "laissez-faire" economics, which holds that a free
market driven by competitive, self-interested actors would naturally achieve a state of efficiency that
promotes increased output and wealth creation. Smith (1776) writes in Wealth of Nations that the greatest
advance in the productive capacities of work is the result of the division of labor. His famous pin factory
example is the clearest illustration of this. The concept of absolute advantage is a worldwide extension of his
concept of division of labor.
49
proposition that, for the general opulence—state of high consumption amongst all the

societies, each and every single society is to be exposed to a global market where

production and specialization take place in various labor forms (Meek and Skinner 1973).

According to Appleyard and Field et al., (2006), one of the most essential reasons that

Adam Smith favored free trade was the availability of necessary market for increased

output resulting from the division of production at industrial level. Aspromourgos (2009)

further explains that if the global market is exposed to the variety of specialized labor (free

international trade), it will facilitate the extension of the benefits of division of labor to

other societies (economies) around the globe. This will favor general opulence globally.

There are plenty of assumptions that Smith makes for his idea of absolute advantage

to work efficiently. First, he assumes that labor is the only factor of production, and the

relative number of labor unites required for production translates the cost of production.

However natural resources and capital also determine the costs of production, which in turn

determines the prices. This theory is also a very simplified version involving only two

countries and two commodities; hence this assumption divorces the theory from the

realities and complexities of the real world, and simply assumes that the international trade

is merely all about bilateral agreements. Smith also assumes no costs of trading goods

across borders, which is completely detached from the reality of variation in prices and

production depending on transportation costs. For the global division of labor, providing

low-tech inputs may not be as valuable as being further up the value chain. In the absence

of an industrial policy to supersede free trade theory, the historical record shows that free

markets in the Third World simply meant deadly competition from experienced foreign

firms before local enterprises had sufficient playing field to compete with international
50
prices. This was true even in the most labor-intensive manufacturing industries, where low

wages were no match for the knowledge of advanced countries.

In short, this classical theory of economics is founded on a number of assumptions,

the most important of which are that trade is advantageous to all parties involved, that there

are no costs or impediments to trade caused by transportation, and that means of production

are not transportable across nations. Moreover, it presupposes that markets are fully

competitive and that prices adjust in such a way as to guarantee that every nation specializes

in the production of the items in which it has a comparative advantage (Amsden, 2008).

Therefore, the classical trade theory has been criticized on the grounds that it does not

adequately take into account the impact that technological advancements, economies of

scale, and other variables that might influence patterns of trade can have. They further say

that it does not address problems like as income inequality and the distributional impacts

of trade, both of which are major concerns in today's society. The framework illustrates

that absolute cost trade will benefit technologically sophisticated economies and force poor

nations to produce inexpensive labor and raw commodities (Shaikh 2003). He explains that

this paradigm convincingly demonstrates that trade based on absolute costs would benefit

technologically sophisticated industrialized economies while pushing poor nations down

the ladder in exchange for cheap labor and raw resources.

If absolute advantage is to be accepted as an accurate notion, and the nations use

division of labor to reap benefits from international trade, all the countries require

infrastructure to execute Smith’s idea to enjoy the wealth created by production process

separation while continually improving their production methods, equipment, etc. It is

highly unlikely that all the world's poorest countries would benefit from this type of
51
universal luxury, especially if research and development are mandatory prerequisites.

Theoretically, the poor nations should take part in universal opulence, however, their

capabilities and access to the market are restricted to only participate by producing primary

goods and raw materials. Therefore, developing nations can contribute to division of

production operations and enjoy its universal opulence if they have a strong domestic

market, manufactures to trade, technological advances, etc., but not so much if they are in

the low-technology parts of the chain and certainly not if they are only supplying primary

goods, according to their absolute advantage. In heterodox economics, the notion of

absolute advantage has been revived to better comprehend trade within the context of

competitive advantage.

Despite these critiques, the classical theory of trade, especially the notion of

absolute advantage, continues to be a significant topic in economics. It has also affected

debates on trade policy and international trade agreements. This thesis affirms, regardless

of its shortcomings, the idea of absolute advantage continues to serve as a cornerstone of

classical trade theory, building upon the work of earlier economists.8

Smith's concept of absolute advantage served as the foundation for David Ricardo's

theory of comparative advantage. Ricardo refined Smith’s idea that a nation “A” is also

able to manufacture a product at an opportunity cost9 lower than that of another nation “B”,

8
Globally, the way nations think about and act upon international trade and specialization in production is
largely attributable to the notion of absolute advantage and classical trade theory more generally. While being
critiqued and improved upon throughout time, the theory's fundamental concepts are still useful in modern
economic discussion. The classical trade theory served as the basis for the development of a new school of
thought known as neoclassical trade theory, which was developed in the latter half of the 19th century and
the early 20th century. It places a strong emphasis on the part that market forces and individual decision-
making play in defining trade patterns and the consequences they have on welfare.
9
The value of the next best option that is not taken advantage of to generate a thing is referred to as the
opportunity cost of that thing.
52
then nation “A” has a comparative advantage over nation “B”. The idea was, that even if a

nation does not seize an absolute advantage in production of any good or service in the

global economy, according to Ricardo's theory, it should focus on producing items for

which it possesses a comparative advantage (Ricardo, 1817; Samuelson, 1948). This

enables nations to increase their total production of commodities and reap the benefits of

increased commerce. Ricardo, whilst extending Smith’s idea, also favors international trade

with the most important underlying assumption that there are no transaction costs (i.e.,

trade is completely free). He presented the concept of comparative advantage and proposed

that the countries should focus on the production of the good with the lowest production

opportunity cost (1817). The idea of comparative advantage is the central tenet of the

neoclassical school of thought in economics and commerce. Opportunity cost is included

into the equation, and the potential advantages from trade due to nations specializing in the

production of items for which they have the lowest opportunity cost are highlighted.

One of the major arguments against the idea of comparative advantage is that it is

based on unrealistic assumptions, such as perfect competition and full employment

(Stiglitz, 2019). The underlying assumptions of the comparative advantage model makes it

difficult to apply it to the real-world scenarios and thus make the argument for free trade

invalid. Prasch (1996) argues that these assumptions fail in practice. The model does not

account for the externalities and assume that the total private costs are equal to the total

social costs. This model further assumes constant returns to scale and perfect competition

to imply that trade can only arise based on the comparative advantage. Another problematic

assumption is the perfect mobility of the factors of production from one industry to another.

The labor in industrial goods production cannot effortlessly shift and contribute to the
53
production of agricultural goods—there are transitions costs that might be quite large, that

are ignored by the comparative static nature of the models. In case of developing countries,

many industries, such as electronics and clothing, will be wiped out by the imports based

on comparative advantage. This will result in outflow of labor from threatened industries

to absorb into the informal sector. This labor transfer will reduce the standard of living and

the overall well-being of developing nations.

Since, developing and developed economies have quite dissimilar production

structures. Therefore, for free trade to be mutually beneficial based on comparative

advantage, production possibility frontiers and comparable costs need to exist in the first

place. The most concerning drawback of Ricardo’s comparative advantage theory is

embedded in its sole focus on static, short-term gain in a single period. Which is also holds

for the Heckscher-Ohlin model. It completely overlooks the need to expand production

capacity for sustainable economic development and prosperity over the long-term. Palley

(2006) concludes:

“Although there are always gains from trade, countries can

suffer from further globalization – their future gains from trade
may fall, making them worse off than before. This sobering
conclusion derives from pure trade theory, which assumes away
macroeconomic problems such as unemployment, trade deficits,
and financial instability. When these problems are factored in,
the case for strategic trade policy becomes even stronger.” (p. 5)

The notion of comparative advantage is nevertheless an important part of

international economics and commerce, regardless of these criticisms. The scope of the

theory has been broadened by some researchers to include issues including technological

transfer, institutional quality, and political economy (Helpman & Krugman, 1985; Rodrik,
54
1995; Acemoglu et al., 2012). Throughout the course of the last two centuries, the idea of

comparative advantage has been the subject of intense scrutiny and development. While it

has been criticized for its assumptions and limitations by some academics, it is nevertheless

used by others as a lens through which to examine the pros and cons of a liberal

international commerce. Over the course of the previous two centuries, researchers have

improved and expanded upon this idea, and a wealth of literature has been produced

investigating its applications and caveats.

3.2.3. Neo-classical Economic Theory

Developing on the traditional theory of comparative advantage, the Heckscher-

Ohlin theory (also known as the factor-proportions theory) was formulated in the early 20th

century. In the 1920s and 1930s, two Swedish economists, Eli Heckscher and Bertil Ohlin,

independently developed a hypothesis based on the premise that the level of technology in

trade nations is similar and that each country has a specific level of factor endowment in

either of the two factors of production in a very simplified model (Heckscher, 1919; Ohlin,

1933). According to this economic theory, nations would focus on exporting and importing

products that make the most of their plentiful resources for making certain types of

commodities (Samuelson, 1948). Neoclassical trade theory presents the notion of the

Heckscher-Ohlin model, which explains trade patterns on the basis of disparities in the

factor endowments of different countries. The model predicts that nations would export

products that make use of their plentiful factors of production while simultaneously

importing products that make use of their limited factors of production (Heckscher, 1919).

55
 The Heckscher-Ohlin Model (1933) proposed that the economies should produce

the commodities that extensively require their abundant factor endowment (either labor or

capital), and the free international trade of a specific commodity derived from the abundant

factor endowment will result in price convergence across the two trading parties. Among

the foundational assumptions upon which Heckscher-Ohlin theory is built are free-market

competition, consistent returns to scale, and factor immobility across nations (Stolper &

Samuelson, 1941). With this paradigm, we can see why some nations export products that

make extensive use of their plentiful factors while others import products that make

extensive use of their scarce elements (Leamer, 1980). When nations' factor endowments

change over time, the theory predicts that trade will cause a convergence in factor prices

(Vanek, 1968).

The subsequent presumptions serve as the foundation for the Heckscher-Ohlin

theory's theoretical framework: different countries have varied resources, or endowments

of factors, of the elements of production, such as labor and capital, economies throughout

the world employ the same production technology to manufacture the same items; the

market is said to have perfect competition when there is no way for any one entity to

influence either the price or the quantity of goods or services being offered, the production

process displays constant returns to scale, which means that output grows proportionately

with inputs as the size of the operation increases (Subasat, 2002). In essence, this idea

proposed that a nation will export commodities that make use of the plentiful factors of

production in its economy and buy items that make use of the scarce factors of production

in its economy. For instance, a nation that has a plentiful supply of labor would export

products that are labor-intensive and import those that are capital-intensive.
56
 Prasch (1996) argues that it is problematic to assume that two countries have static

set of technologies (know-how). That’s a critique for both the comparative advantage

theory by Ricardo and Heckscher-Ohlin model. For instance, in case of global south, the

model assumes that it is abundant in unskilled labor and compares it with global north

which is well endowed with skilled labor. However, skilled labor is not a resource that

should be taken as given, instead it is developed over time. According to the H-O Model,

developing countries’ given level of unskilled labor is its natural endowment, and therefore,

it again fails to take into consideration the economic development over time. The reason

behind this is that it is not a dynamic model, and like comparative advantage, it promises

just a one-time jump in consumption.

If developing nations were to identify the unskilled labor as their potential natural

endowment and produce the unskilled labor abundant goods, it will mean ignoring their

potential to create new sets of endowments (like capital and skilled labor) to ensure the

economic prosperity and development over time. Further, H-O Model assumes perfect

competition and constant returns to scale, and emphasis only on factor endowments to

initiate trade flows (Krugman, 1987).

Subasat (2009) points out that according to this model, the trade possibilities are

greater amongst the countries that are dissimilar in their endowments. Theoretically, it

implies that developing nations and developed nations should have greater trade

possibilities, however, historical, and present evidence shows us that the most frequent and

beneficial trade is happening between the countries within Global North (and since then,

with China, which he doesn’t account for). He believes that the trade flows driven by the

abundant factor intensive outputs is rather obvious, and therefore it fails to provide any
57
convincing evidence about how a country could benefit from specializing in production of

their abundant factor intensive goods.

Subasat (2009) argues that factors of production are not only naturally existing, but

they can also be produced; for instance, labor can be trained, and capital can be created. In

case of free trade agreement between global north and global south, the advocates of factor

endowment theory might argue that trade openness will gradually shift the production of

unskilled labor-intensive commodities to skilled labor-intensive commodities. However,

this should then suggest an opposite shift (from skilled labor-intensive commodities to

unskilled labor-intensive commodities) in global north. This model merely gives us the

idea of how a country would behave under the free trade regime and not how they should

behave to promote economic development and prosperity-the main argument in favor of

fair trade. These are not models of economic development at all.

The Heckscher-Ohlin theory has been criticized for a number of reasons, the most

prominent of which are its assumptions of perfect competition and the homogeneity of

labor and capital inputs (Lall & Streeten, 1977; Deardorff, 1984). Moreover, the model

disregards the impact of technological development and creative thinking on comparative

advantage (Kravis, 1956). Yet, the Heckscher-Ohlin theory is still widely used as a model

for analyzing intranational and international commerce and income distribution (Markusen,

1986; Feenstra & Taylor, 2014). The neoclassical trade theory, in its whole, offers a

theoretical framework for studying the impacts of international trade on welfare and the

allocation of resources, and it has had a key influence on trade policy throughout the 20th

century. Nevertheless, critiques of the assumptions and predictions of neoclassical trade

theory have led to the creation of alternative trade theories, such as the new trade theory
58
and the political economy approach. These theories have been developed in response to

these concerns.

Further, the Heckscher-Ohlin theory has been expanded and modified in a variety

of different ways, including as the Stolper-Samuelson theorem (1941), which predicts that

free trade would lead to a redistribution of wealth amongst factors of production inside a

nation. In general, this thesis does not deny that the HeckscherOhlin theory continues to be

an essential addition to the area of international trade theory and has had a substantial

impact on the administration of trade policy.

3.2.4. New Trade Theory

In the 1980s, a new school of trade theory arose that aimed to improve upon the

neoclassical model of international commerce by include such concepts as economies of

scale and imperfect competition. Being one of the first economists to argue that a

company's capacity to spread its fixed costs across a bigger output would provide it a

competitive advantage in international commerce, Krugman (1979) was among the first to

bring the notion of economies of scale into trade theory. Helpman and Krugman later

expanded on Krugman's work by creating a model that accounted for economies of scale

and imperfect competition (1985).

The conceptual framework of new trade theory is based on the following principles:

It is possible for companies to achieve economies of scale in their manufacturing processes,

resulting in a reduction in average costs as production volume increases. Imperfect

competition arises when companies possess some degree of market power, allowing them

59
to charge prices that exceed their actual costs. Companies also engage in product

differentiation, where they offer goods that are not perfect substitutes for one another.

According to the new trade theory, the dominance of certain nations in exporting

specific manufactured goods can be attributed to economies of scale. A country with a

substantial domestic market may have a comparative advantage in producing goods at a

lower cost per unit relative to a smaller country. As a result, the larger nation possesses a

competitive advantage in global trade. The novel trade theory elucidates the rationale

behind the engagement of nations in intra-industry trade, wherein nations are involved in

both importing and exporting of goods that are analogous to each other. This phenomenon

can be attributed to the ability of nations to specialize in the production of various iterations

of a particular product, leading to the emergence of product differentiation.

The model exhibited that firms manufacturing similar products within a particular

geographical area may form a cluster, thereby conferring them with a competitive

advantage in the international market. Baldwin (1989) expanded upon the concept of

clusters and proposed that governments could promote their growth through measures such

as investments in education and infrastructure. According to the speaker, trade agreements

may promote the development of clusters by facilitating the increased mobility of

commodities, money, and people.

This section elucidates the manner in which new trade theory effectively supplanted

the three primary argumentative foundations of the models in the old trade theories, namely

perfect competition, constant returns to scale, and homogenous goods. The novel trade

theory pertains to trade that is predicated on external economies or the amplification of

returns to scale. The concept of economies of scale provides nations with an incentive to
60
engage in specialization and exchange of goods and services. In cases where there are

increasing returns to scale, the industry's production will experience a more than

proportional increase when the inputs are doubled. In light of this, it can be observed that

economies in the global south are poised to benefit from lower production costs of raw

materials and primary goods in comparison to their global north counterparts, owing to the

relatively lower wages prevalent in these regions. Asymmetry is expected to exist, as noted

by Finlay (1984). One potential explanation for the initial advantage could be attributed to

the variances in unskilled labor supply between the northern and southern regions. Hence,

taking into account all pertinent variables, it can be inferred that emerging economies are

poised to experience amplified returns to scale within their raw material and primary goods

sectors. The new trade theory proposes that developing nations should intervene by

providing subsidies to their industries that will experience increasing returns to scale.

The tenets of the new trade theory acknowledge the overall advantages of

liberalized trade, while also acknowledging the existence of circumstances in which such

benefits may not be realized. Given this circumstance, the emphasis transitions towards the

identification of specific circumstances in which trade can generate tangible benefits and

serve as a catalyst for economic development (Shaikh, 2003). Particularly in discussions of

regional trade agreements and the role of state in supporting economic growth, the new

trade theory has been formative (Krugman, 1981). It has been criticized, nevertheless, for

having such little empirical evidence and for failing to take into consideration variables

like the rate at which technology is evolving and regional variations in factor endowments

(Grossman & Helpman, 1995; Deardorff, 2005).

61
 The idea of strategic trade policy is one of the most important things that modern

trade theory has contributed to the field of trade economics. This notion proposes that

governments may improve their country's competitiveness in specific sectors by offering

subsidies or other types of assistance (Krugman, 1981). This, on the other hand, has been

met with opposition and remains a contentious issue among economists. The evidence

analyzed in Chapter 3 will show that regardless of the case for intervention, the government

intervention has failed to tackle the issues of social and ecological imbalances. This thesis

shows that the intervention is mainly encouraged for protection of domestic industries and

not to hinder the labor and environmental exploitation.

3.3. A Critical Reassessment of Trade Models

Trade models served as the theoretical basis for the concept of free trade, which

advocates for the elimination of trade barriers and the promotion of international trade

based on each country's comparative advantage and increasing returns. However, the

assumptions of these models have been challenged for their lack of real world implication

and reductionism. This section examines the historical and intuitive evidence challenging

the free trade policies.

3.3.1. Historical Evidence Against Old Trade Theories

Chang (2002), as opposed to many economists, argues against the free trade policy

as a universal mandate for the developing countries. United States adopted industrialization

policies against the advice of Britain. Chang explains that Smith (1776) advised Americans
62
to adopt free trade policy and import the industrial goods from Britain than to manufacture

(and protect) them at home. Since, United States had comparative advantage in producing

agricultural goods (and exchanging for industrial goods). Even though the United States

was advised against the production of industrial goods and to stick with importing them,

they went ahead and introduced protectionist policies for their infant industries. For almost

a hundred years till the second world war, United States had the most protected economy

globally with the highest tariff rate in the world (Chang 2002). Soon after the end of second

world war, when United States achieved dominance, it started championing the free trade.

Countries that have more open trade regimes tend to experience faster economic growth.

Partially, this can be attributed to the benefits that are obtained as a result of transparency.

Openness can be considered a "forcing variable" as it influences policy decisions. Countries

with inward-oriented policies may be tempted to implement counterproductive policies,

but they may not be able to adopt them or may abandon them quickly if they have an

outward-oriented trade regime (Krueger, 1990).

Chang explains how the developed countries, while still in their developing stages,

did not practice what they are preaching to the current developing economies. United States

– beacon of free trade, used more aggressive tariff protections than the countries (e.g.,

Germany and Japan) associated with state interventionism. He makes the argument that

tariff protection policies, export subsidies, research and development support, cartel

arrangements, infrastructure investments in many countries, specially United States and

Britain, were the crucial component of their sustainable economic development strategies.

Williams (1994) points out that Britain’s early capitalist development was centrally driven

63
by slavery and monopoly. Therefore, association of Britain’s industrial success to free trade

is a mere myth.

In the United States and Britain, agricultural development, propelled by

protectionist policies and other state interventions, expedited the process of industrial

development (Shafaeddin, 1998). In the United States, particularly, the state facilitated

capital accumulation, institutional development, infrastructural build-up, and Research &

Development training for development of the domestic economy. Chang (2002) sheds light

on how numerous successful economies, rather than using free trade, used strategic trade

policies and specific industrial policies to achieve dominance. He further gives the example

of China’s, India’s, and Mauritius’s economic growth to establish the fact that many

developing economies prospered under protectionist policies as opposed to what the free

trade advocates advise. Undoubtably, Chang advises developing countries against any strict

free-trade agreement proposed by the countries in global north. Chang demonstrated,

through his assiduous research, that the United States and Britain’s advice to emerging

economies regarding laissez-faire national industrial and free trade policies are completely

contradictory to the practices they themselves pursued to achieve dominance.

3.3.2. Deepening of globalization: Redefining Role of Government

During the 1990’s, campaign for the establishment of ‘fair trade’ regime by various

activists and heterodox economists, was discredited heavily by many leading trade theorists

including Krugman (DeMartino, 2014). Krugman, around 1960s, expansively argued that

taking fair trade position will harm third world countries the most. Alongside many other

64
free trade economists, he argued that fair trade is not a serious position, and it hurts the

very masses that it essentially claims to protect. He believes that the moral outrage amongst

the challengers of trade liberalization stems from their unreal expectations towards

production standards in Global South.

Some of the arguments made by neo-classical trade theorists against fair trade are

almost compelling. One of the arguments by Krugman (1997) for justification of free trade

is the lack of alternatives for the poor nations. He presented a thorough argument regarding

the competitive advantage that the Global South possesses in the global market due to their

low labor wages. Krugman asserts that the workers' limited access to alternative

employment options is the primary factor contributing to their meager compensation.

Producers prioritize cost minimization over improving healthcare and living standards for

workers. Therefore, laborers in developing nations are confronted with perilous work

environments regardless.

Another argument by Krugman was that the global poverty is not something caused

by the multinational corporation for profits but has persisted since long before. About two

decades ago, Bangladesh and Indonesia were only exporting raw materials while importing

most other manufactured goods whereas there was a rapid growth of some other small

Asian economies. The mere purpose of their own inefficient manufacturing sectors was to

serve domestic markets under import quota. The only improvements that have taken place

in these economies are the direct or indirect result of the actions of ‘soulless multinationals

and rapacious local entrepreneurs’, who take advantage of the cheap labor. According to

him, the lower wages have given these economies the competitive advantage in the global

markets.
65
 Further, Krugman (1997) argues that given most of the starving rural populations

in the third world countries working as subsistent farmers, the wage laborers working at

slave wages in the garment and shoe factories are far better off. He gives the example of

how industrialization in poor economies like Indonesia, where people have preferred to

work as scavengers on garbage dump than any alternative jobs, had significantly improved

the lives of local people. The standards in Indonesia had been so poor, that the progress

was measured by the per capita consumption of calories. He explains that the relatively

higher wages in these industries was an incentive for people to move from alternative

sectors. Further, this growth of industry and creation of jobs had a ripple effect throughout

the country. As the burden on land decreased, the rural wages increased. The unemployed

labor force dwelling in cities in search of work started to shrink and the firms started

competing by offering higher wages. To support this argument, Krugman gives the

example of South Korea and Taiwan where he believes that this process went on for too

long and finally resulted in average wage approaching the wage of an American teen-ager

working at a McDonald’s.

He believes that the fair trade movements cause significantly more harm than the

good they suppose they will do. In 1993, there was a ban on imports from Bangladesh’s

textile firms if they had employed children. Therefore, the factories stopped employing

children. As a result, significant number of children were left out on streets, and a big chunk

of those were coerced into prostitution (Krugman, 1997). The call for harmonizing

production and labor standards for trade, therefore, is merely a lack of understanding of the

cultural and social paradigms in poor countries. Employment in the industries serving the

needs of multinational corporations is way better than alternatives. The only way possible
66
for these developing nations to be able to export manufactured goods is their competitive

advantage due to having cheap labor and poor labor standards. In Krugman’s (1997) own

words:

“The point is that third-world countries aren't poor because

their export workers earn low wages; it's the other way
around. Because the countries are poor, even what look to us
like bad jobs at bad wages are almost always much better
than the alternatives: millions of Mexicans are migrating to
the north of the country to take the low-wage export jobs that
outrage opponents of NAFTA. And those jobs wouldn't exist
if the wages were much higher: the same factors that make
poor countries poor -- low productivity, bad infrastructure,
general social disorganization -- mean that such countries
can compete on world markets only if they pay wages much
lower than those paid in the West.” (para. 6)
In addition to Krugman, many other neo-classicals had opposed fair trade

harmonization of environmental and labor standards. Bhagwati and Srinivasan (1996),

argue that the differential environmental standards of developing countries are simply due

to the differences in endowments and technologies across the countries. The neoclassical

economists claim that the development of David Ricardo’s theory of comparative

advantage considers the climate and technology in reference to culture relativism and

subjective priorities, and therefore, advocates that free trade will maximize global welfare.

Bhagwati contests that countries, based on their natural differences in priorities, will assign

importance to various environmental externalities. For instance, a country depending upon

its technology and endowments may want to prioritize people not dying of starvation than

saving the dolphins and reducing ecological degradation.

In short, the Krugman almost three decades ago, in his multiple books and articles,

recognized almost every opponent of free trade and globalization as fool who is unable to
67
understand the field of economics very well. He bluntly called the fearful commentary on

economic competition with nations with lower labor and environmental standards, like

China, as ridiculous. He did not want the US labor force to worry too much about the

globalization, as it will only have an insignificant impact on their prosperity. Fair traders

who think that their cries are to help the poor exploited workers in third world countries

are only halting the developing nations’ overall progress and maybe even reversing the

some they had achieved through globalization.

Interestingly, in 2007, Paul Krugman tepidly switched his stance on fair trade

movements. He does not do so by advocating for fair industrialization in the developing

countries, but rather the protection of less-educated, unskilled American workers.

According to his opinion, as the import of labor-intensive goods from third world countries

is increasing, the wage of American un-skilled labor is rapidly decreasing. While in 1996

Krugman believed that the US workers should not worry about the impact of globalization

on their prosperity, the recently suspicious 2007 Krugman reasons that persistent free trade

agreements with third world countries will damage the American workers the most.

“By all means, let’s have strong labor standards in our

pending trade agreements, and let’s approach proposals for
new agreements with an appropriate degree of skepticism.
But if Democrats really want to help American workers,
they’ll have to do it with a pro-labor policy that relies on
better tools than trade policy. Universal health care, paid for
by taxing the economy’s winners, would be a good place to
start.” (para. 15)
He agreed that many mainstream economists, failed to foresee the globalization inevitably

leading to hyper globalization. He states that trade, even though not the main source of

increased economic inequality, has begun to contribute way more than anticipated in the

68
1990s. Specially the excessive imports from countries like Mexico and China where the

wages are only eleven and three percent, respectively, of the United States’ level have

proven to be detrimental to national economic equality. Although Krugman accepts this

dark side of hyper globalization, he still opposes protectionist policies as they will result in

closing the global markets to the poor nations in third world. Therefore, he claims that

‘labor standards’, allowing for unionizing and preventing slave and child labor, must be

inserted in free trade agreements with US. He even called out the Bush Administration for

not supporting the inclusion of these labor standards in trade agreements, as it might force

them to mend their own labor policies.

Krugman is skeptical that these amendments will positively affect the American

workers, as regardless of the labor autonomy to organize unions, the third world workers

will remain to earn lower wages. Hence, the wages in US will be forced to decrease. He

concludes that the mere amendments in trade policy are inadequate to achieve these goals.

There is a need for better pro-labor policies separate to the trade policy with a clause on

labor standards. One such policy would be to tax the winners in the economy and use that

to provide healthcare for all.

Krugman (2019) argued, that although the reliance on data for the correct

estimation of the modest impact of trade on relative wages was inevitable, the early 1990s

period was merely the beginning of the era of increasing trade flows. The volume and

nature of trade following the globalization eventually entered unlimited international

exchange flows. There was decrease in the cost of shipping overseas and eventually, the

capital was also freely mobile across borders. Subsequently, he would argue that the impact

69
of export producing countries was actually a lot more during the fifteen years following

1995 than they could anticipate in the 1990s consensus.

Krugman contended the backlash on globalization in the light of trade imbalances.

On contrary to his former pure mainstream approach, he later argued that ignoring trade

deficits due to their insignificant impact in long-run is not a well thought approach; as the

spiraling imports inflict a negative shock on the American manufacturing industry workers

in the short-run. For instance, after 2000, the manufacture goods deficit increased sharply

in the United States which resulted in a sharp decline in employment in manufacturing

industry. Therefore, the globalization has received such backlash in past years. Lastly,

Krugman (2007) admitted to his shortsightedness in ignoring the analytical methodologies

focused on workers in particular industries and communities would have better presented

the short-run trends. Hirsh (2019) recalled that “Krugman has been forthright in recent

years in second-guessing his earlier assertions about the effects of open trade.”

The 1990s consensus heavily relied on the models that presented the effects of trade

on unskilled or skilled labor and ended up concluding that trade did not significantly

contribute to rising inequality. Krugman’s tepid switch to the fair trade, also includes his

newly formed opinion on significance of having both winners and losers (Heckscher Ohlin

Model) resulting from trade and not merely looking at the overall increase in global

consumption.

Considering this switch in his stance, this thesis takes a stance that a staunch free

trade proponent like Krugman, after understanding the previously ignored fallacies of

hyper globalization, felt the need to redefine the role of government in trade policies. The
70
paper further favors the inculcation of fair trade clauses in trade agreements. In addition to

the effects of globalization not standing the test of time; the gender, labor and

environmental blindness of theories supporting trade liberalization calls for the need of fair

trade agreements. Essentially, the agreements based on fair trade will result in trade and

labor policy autonomy for developing countries who have been bonded by free trade

agreements with various countries in Global North. This can result in nations having proper

pro-labor policies complimented by trade policies to ensure prosperity. WTO and other

international financial institutions should facilitate these agreements between global

economies. Moreover, the countries will have the independence to explore, acknowledge

and prioritize their standards regarding labor, environment, race, and gender. Achieving

fair trade agreements based on cultural relativism will not only increase the overall

prosperity but will also help in achieving development on the basis of Sen’s (2000)

capabilities approach, and Marx’s ideal society thriving towards development and equality.

Hence, under fair trade regimes, the welfare state will aim towards immediate promotion

of true capabilities in all social groups resulting in overall growth of a nations involved in

trade flows.

3.3. Impacts of Trade Liberalization and Hyper Globalization

The international trade liberalization has carried significant expansion of economic

activities and driven the economic growth (not quite equally for the global north and south)

since the early 1980s, and so the climate injustice and demeaning labor standards have

prevailed at large scale. This sections provides facts regarding social and ecological

imbalances caused by adoption of above mentioned free trade doctrines.

71
3.3.1. Ecological Imbalances: Competing on Environmental Standards

The key energy injustice is the extreme over dependence of the global societies on

the use of fossil fuels to satisfy the expanding energy demand for the production and trade

of economic goods. According to the International Energy Agency, in 2016, the global

output production has doubled since the 1973. Since then (1973) the world only

experienced about 4% reduction (recorded in 2016) in the use of coal, oil and gases for the

energy production regardless of the advancement in high technology (McCauley, 2018).

The trends show that as the freedom of trade grew, the emissions carbon dioxide and other

harmful gases increases which led to the global climate change. Trade leads to very high

level of transport-related emissions, such as nitrogen dioxide form the motor vehicle

exhaustion. Trade liberalization requires increased transportation of goods, and in current

economy the capital mobility which contributes to hazardous wastes and toxins being

spilled into the environment. Not only increased global carbon emissions, but trade also

shifts their patterns. A very significant amount of carbon emissions has resulted from the

production of export goods for North America and Europe in China. The trade flows of

goods being produced in Global South and exported to Global North for consumption have

fair share in producing environmental externalities (Davis and Caldeira, 2010). This has

caused a differential impact of climate change on various groups.

Globally, the environment is bearing a heavy burnt of the climate change due to

substantial economic activity that the trade liberalization has stimulated. Some may

disagree, but the evidence from around the world, especially in China during the lockdown

72
during COVID-19, shows that heavy economic activity (mostly the production and

transportation of goods for export) contributed to bad air quality and harmful greenhouse

gases (GHGs) emissions. According to Caine (2020), almost half of the reduction in

nitrogen dioxide (which is emitted from the burning of fossil fuels) occurred as the heavy

industries in China were shut down amidst the lockdown. In short, we can find significant

evidence that the current global economic dynamics and trade liberalization has been

substantially impacting the environment adversely. We can assess the environmental

externalities of trade, the estimates of demand-based carbon emissions (final demand

distribution across economies for the embodied carbon emitted globally), using the OECD

Inter-Country Input-Output database combined with the carbon emissions by the burning

of fuel and industrial production across economies (Yamano & Guilhoto, 2020 and Wiebe

& Yamano, 2016).

China, Germany, India, Japan, Russia and United States are some of the leading

contributors to the carbon dioxide emissions in 2018 (OECD 2021). European Union (EU

27)10. The environmental externalities and the trade openness for China is the perfect

example of unaccounted trade flows considering the global climate. In 2018, three times

increase in the per capita demand for carbon emissions can be seen in China since 1995.

According to the International Energy Agency, China’s economic activity accounted for

approximately thirty percent of the global carbon emissions (2018). These carbon

emissions are caused by the combustion of energy related fossil fuels (IPCC 2013). In 2020,

10
Refers to twenty-seven European Union countries: Austria, Belgium, Bulgaria, Croatia, Republic of
Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain
and Sweden.
73
China is emitting 10.67 billion out of 34.81 billion tonnes of total global carbon emissions

(Friedlingstein et al., 2022). To understand the relation between trade (open) to the climate

degradation we can look at China as an example.

Zheng et al. (2019) divides the history of China’s carbon emissions into three

stages: First, the launch of reform and opening up (2000) where the carbon emissions were

increasing slowly at 4.2%; second, becoming the part of WTO (2001) and the emissions

were growing at the annual rate of 8.5%; and finally, where the emissions rate was growing

at 0.81%. The period after China joined WTO experienced high carbon emissions as the

industrial production increased significantly in response to the trade openness. After 2001,

there was openness to trade without any restrictions, so China’s investment increased

significantly in the energy-intensive industrial production and therefore the world

experienced the sharp increase in environmental externalities due to combustion of fossil

fuels for the purpose of energy consumption. On the other hand, the OECD countries are

the net importers of the embodied carbon emissions. Although the share of United State of

America in global carbon emissions is less than a half of that of China, it remains one of

the highest consumer of embodied carbon emissions. In 2019, United States’ net import of

carbon dioxide was approximately 7% higher than its net exports (Andrew and Peters

2021). Many other countries, for instance Japan and Germany, from the Global North are

highly contributing to the climate injustice. According to Harris and Roach (2013), a

significant portion of emissions are resulting from the production in Global South (China)

to be exported to and consumed in Global North (United States and Europe). There is a

separation of cost and benefits of the negative externalities which results in high inequality

74
around the globe. Resulting in the proposition that trade patterns have extremely important

implications for negotiations at the international level.

The intensive combustion of fossil fuels for heavy industrial productions to

compete in open trading system has had immense adverse impact on the climate. There is

a need to rework the doctrines of trade around the global (specially between global south

and north) to reduce inequality and differential impact of climate change. These climate

change evidences have resulted in wide ranging contentions against the trade openness by

the environmentalists (World Commission on Environment and Development, 1987).

Some economists argue that the economic growth and development can be achieved rather

sustainably along with improving environmental conditions. One such policy is “fair

trade”. Fair trade is a model that seeks equity in international trade. This fair-trade

approach’s theoretical groundwork is based on “harmonization of capabilities at a level that

is sufficient, universally attainable and sustainable” (DeMartino 2002). This thesis will

look at the impact of implementing fair trade policies on the environmental externalities

and climate change.

3.3.2. Social Imbalances: Competing on Labor Standards and Safety

The phenomenon of capital mobility, which has emerged as a result of the process

of hyper globalization, has been extensively noted to have led to the outsourcing of

inexpensive labor by large corporations in the global south. According to Davidson et al.

(2007), in order to compete on a global scale, reduced production costs are utilized through

the implementation of lower wages and substandard working conditions. Furthermore, as

75
per Cooney's (1998) analysis, the International Labor Organization (ILO) has exhibited a

significant lack of efficacy in countering the escalating influence of transnational

corporations on a global scale. The author posits that the primary cause is attributed to

inadequate enforcement capabilities. The fair traders argue that it is crucial to establish

enduring objectives aimed at restructuring the bargaining power of labor and capital

owners. This necessitates the involvement of national governments in fair trade

agreements, thereby exercising their autonomy.

Mazzucato (2018) deftly recalls the debate over such limited and quantitative

measurement, as well as, more importantly, the generation of value in the economy. She

notes that the economic debate on value has mostly focused on price while disregarding

the history of economic thought on production and wealth distribution. She thinks that

environmental, labor, and poverty legislation should be more than just supplements to

policymaking. Instead, these factors should be key to evaluating today's value metrics, such

as GDP and, by extension, economic growth. To do this, it is even more necessary to

negotiate an international agreement to ensure that countries that meet minimum

environmental, labor, and other standards are not discriminated against in the global value

chain. Improvements in both environmental and labor conditions are crucial to attaining

sustainable development, in which current economic development efforts take into account

resource availability and the standard of living of future generations (Krugman, 2011).

As production has shifted to global south, fair traders have raised concerns

regarding the working conditions and labor standards in developing economies. .

Globalization and the spread of industry supply chains to developing nations have sparked

a heated debate over how to improve labor standards in these emerging production centers
76
(Locke & Romis, 2007). There is a growing realization that low labor standards in

developing countries can lead to a race to the bottom, in which big corporations seek out

the lowest-cost production locations regardless of labor standards. The issue of child labor,

hazardous work environments, prolonged working schedules, and inadequate remuneration

are enduring challenges in numerous production hubs situated in developing nations. The

aforementioned concerns have led to disputes and instances of discomfiture for large

corporations that make use of said amenities.

Numerous academic studies have provided evidence of the prevalence of such

challenges in workplaces located in developing nations. The prevalence of child labor in

factories across Bangladesh, China, and India has been documented by Connor and Dent's

(2005) research. Additionally, hazardous working conditions have been observed in

various industries in countries such as China, Bangladesh, and Indonesia. As per

Kernaghan's (2006) findings, instances of prolonged working hours and inadequate

remuneration were observed in industrial sectors situated in China and Mexico (Lazare,

2006). These issues have resulted due to worldwide competitive forces, which can prompt

the implementation of cost-reduction tactics that culminate in unfavorable labor conditions

and inadequate remuneration for workers (Elson and Pearson, 1981; Kabeer 2004). In many

developing countries, the implementation of labor laws and regulations by local

governments is often hindered by insufficient resources and a lack of political

determination, thereby perpetuating these problems.

Consequently, there has been a surge in demands by fair traders for multinational

corporations to assume accountability for the labor conditions prevalent in the factories

where their merchandise is produced. Numerous enterprises have established codes of

77
conduct and monitoring mechanisms to tackle these concerns. However, detractors argue

that these endeavors have been insufficient in addressing the magnitude of the issue. In

light of the constrained ability of numerous governments in developing countries to

implement their labor regulations (Baccaro, 2001; Elliott and Freeman, 2003),

multinational corporations have established their own "codes of conduct" (Scharge, 2004;

Mamic, 2004) for their suppliers, along with diverse monitoring mechanisms designed to

ensure adherence to these codes. The statement pertains to the incapacity of several

governments in developing nations to perform the aforementioned task, as noted by

Baccaro (2001) and Elliott and Freeman (2003). Locke and Romis (2007) assert that global

corporations and labor rights nongovernmental organizations rely on compliance checks as

the primary approach to addressing poor working conditions in manufacturers within the

global supply chain. Though not official, the objective is to ensure that factories adhere to

their respective codes of conduct. However, various free traders express their obliviousness

towards importance of fair trade policy measures negotiated by international organizations

such as WTO, IMF and WB. Evidently, the women in question aspire to enhance their

working conditions. Kabeer (2008) explains the dilemma of exploited women in

manufacturing industries in global south, due to the absence of a social safety net, is

cognizant of the fact that their sole alternative, employment in the informal sector, is

significantly inferior. Consequently, they are precluded from advocating for improved

labor standards. Efforts to enforce labor standards globally via trade sanctions may result

in the displacement or relocation of jobs to the informal sector. In the absence of measures

to enhance the circumstances of laborers in the private sector, the imposition of "the social

clause" may exacerbate social disparities in the labor market.

78
 Notwithstanding the casual nature of these codes with regards to authorized trade

agreements, advocates of equitable trade and societal activists in the developed world have

contended that there are "inequitable" labor practices and circumstances in the trading

partners of developing countries that require suitable trade policy measures to "equalize the

opportunities." The present thesis endeavors to argue in favor of a fair trade system that

can establish a "level playing field." There is a concern that the augmented imports from

nations where labor standards are purportedly not enforced at an adequate level may have

an adverse impact on the remuneration and labor conditions in the industrialized importing

nations. There is a contention that laborers in emerging nations are susceptible to

exploitative and oppressive labor circumstances, and that their remuneration is repressed.

3.5 Conclusion

The significance of trade has garnered considerable attention from economists,

policy experts, government officials, and the public, on a global scale, and this attention

definitely holds a strong merit. During the postwar era, and particularly in recent decades,

there has been a gradual rise in the proportion of worldwide economic activity that can be

ascribed to trade. Furthermore, during the 1990s, trade negotiators hailing from both the

Northern and Southern hemispheres collaborated to develop expansive trade accords. The

aforementioned accords have considerably facilitated the liberalization of the transnational

flow of goods, services, and capital.

The creation of the World Trade Organization (WTO) as a result of the negotiations

held during the Uruguay Round of discussions on the General Agreement on Tariffs and

79
Trade (GATT) is considered the most extensive among the various agreements. This

agreement was achieved shortly after the implementation of the North American Free

Trade Agreement (NAFTA), which aimed to fully deregulate trade across North America

within the subsequent ten years. The North American Free Trade Agreement (NAFTA)

was ultimately ratified by the governments of the United States, Canada, and Mexico,

despite encountering substantial opposition within each country.

It is noteworthy that in 1997, a mere three years subsequent to the ratification of the

North American Free Trade Agreement (NAFTA), President Clinton encountered an

inability to secure congressional endorsement for fast-track authorization (DeMartino,

2000). The aforementioned authorization would have enabled the administration in

question to engage in negotiations aimed at extending the stipulations of the North

American Free Trade Agreement (NAFTA) to additional countries situated in the Latin

American region. This occurrence of failure transpired a mere three years subsequent to

the ratification of the North American Free Trade Agreement (NAFTA). The World Trade

Organization (WTO) has faced notable criticism, especially in the Southern regions, where

farmers have expressed opposition to the organization's potential social and economic

impacts. Despite the ongoing progress towards complete economic integration, various

factions globally such as labor associations, have expressed notable apprehension

regarding the character and consequences of neoliberal unification.

80
 Chapter 4: How Free Are "FTAs"? Evidence of Government Intervention

4.1 Introduction

Free trade agreements (FTAs) have been a topic of controversy since their

inception. Advocates argue that they enhance market accessibility and commercial activity,

thereby stimulating economic growth and employment opportunities. FTAs aim to

facilitate international trade by removing tariffs and non-tariff barriers. The outcome is

expected to be a result of competition, lower prices for consumers, and the advancement

of the economy. Nevertheless, detractors argue that FTAs exhibit a lack of impartiality and

instead provide preferential treatment to prominent corporations and affluent nations at the

expense of emerging nations and small enterprises (Rodrik, 2018).

Nonetheless, several FTAs comprise clauses that safeguard specific sectors or

nations, a practice that some contend contravenes the principles of unrestricted commerce.

Several FTAs containing patent and copyright clauses that provide advantages to big

corporations at the expense of small enterprises and emerging economies are discussed in

this chapter. Moreover, FTAs have the potential to result in job losses within non-

competitive industries. The potential negative impact on the local economy and workforce

is also a matter of concern by fair traders.

The chapter validates the criticism on FTAs on the grounds that they do not adhere

to the principles of free trade, as they offer protection to specific businesses or countries.

For instance, the Central America-Dominican Republic Free Trade

81
 Agreement (CAFTA-DR) safeguards the interests of American pharmaceutical

enterprises, whereas the US-Korea Free Trade Agreement (KORUS FTA) safeguards the

interests of American automobile manufacturers. This phenomenon could potentially

confer advantages upon certain enterprises or countries while hindering the principles of

free trade.

It is widely believed that FTAs exhibit a bias towards larger corporations and

industrialized nations at the expense of smaller enterprises and developing countries

(Warren, 2015). While larger organizations possess the necessary resources to take

advantage of FTA opportunities, smaller enterprises may lack the means to do so. FTA

have the potential to displace small businesses in underdeveloped countries that lack the

resources to compete with multinational corporations given the lack of transparency in

dispute settlements (Hahm et al., 2019). Further, they have the potential to result in adverse

effects such as unemployment and negative externalities stemming from heightened

economic activity. This chapter provides evidence that free trade policies never actually

adhere to the notion of “free.” The state intervention to safeguard the rights of developed

nations and big corporations is one of the biggest instance of protection in these so called

“free trade agreements.”

4.2 Brief History of North American Free Trade Agreements

Since, the United States of America holds a crucial position in the global economy,

rendering it a significant case for analysis in the context of world trade activities, it is

reasonable to begin with a discussion of its role in FTAs. The United States harbors some

of the most prominent multinational corporations worldwide, exerting significant influence

82
in shaping global trade dynamics, and it has taken a prominent role in advancing free trade

policies and accords, exemplified by initiatives such as the North American Free Trade

Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). After the end of World War

II, the US government took a leading role in promoting the ideals of free trade and creating

international institutions to facilitate its implementation. Chang (2002) recalls that:

“It was only after World War II, with its industrial
supremacy unchallenged, that the United States liberalized
its trade and started championing the cause of free trade –
once again proving List right on his "ladder-kicking"
metaphor. However, it should be noted that the United States
never practiced free trade to the same degree as Britain did
during its free-trade period (1860 – 1932).” (p. 85)

From 1947 until 1994, the world was bound by the multilateral pact known as the

General pact on Tariffs and Trade (GATT)11. Its purpose is to facilitate international

commerce by lowering trade barriers such as tariffs. In the years after World War II, GATT

was essential in reshaping the international trading system and the whole global economy.

GATT underwent eight rounds of negotiations, each of which was designated as a "round"

and assigned a sequential number (Crowley, 2003). The Kennedy Round, a trade

negotiation that spanned from 1964 to 1967, yielded a noteworthy outcome of a 35%

decrease in tariffs (La Barca, 2016). The Tokyo Round, a multilateral trade negotiation

spanning from 1973 to 1979, is notable for its incorporation of non-tariff barriers into the

negotiation framework (Coppolaro, 2018 and Gilbert, 1986).

11
See WTO:
https://www.wto.org/english/tratop_e/gatt_e/gatt_e.htm#:~:text=The%20General%20Agreement%20on%2
0Tariffs,from%20all%20WTO%20member%20countries
For detail analysis of its principles see: Wolf (1987), Baldwin (1987) and Bhagwati (1990 and 1991)
83
 The Tokyo Round facilitated the subsequent Uruguay Round, which yielded

extensive outcomes and significantly advanced the global economic integration

(Coppolaro, 2018). The Uruguay Round, which took place from 1986 to 1994, was a

comprehensive and ambitious series of negotiations that resulted in the creation of the

World Trade Organization (WTO) (Zeiler, 2012). The principal aims of the Uruguay

Round were to reduce tariffs and non-tariff barriers, improve market access for services,

and strengthen the protection of intellectual property rights. Subsequent to the formation

of the WTO, GATT remained a binding agreement until 1995, when it was replaced by the

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) under the

auspices of the WTO12 (Kennedy, 2015 and Correa, 2007). The inclusion of TRIPs in the

Uruguay Round, however, was opposed by many fervent free-trade advocates (Bhagwati,

Krishna, and Panagariya 2014). Currently, the WTO remains the primary global

organization tasked with the responsibility of supervising international trade and resolving

trade-related disputes.

Furthermore, the North American Free Trade Agreement (NAFTA) was ratified in

1994 amongst the United States, Canada, and Mexico13. The elimination of trade barriers

and promotion of unrestricted movement of goods, services, and investments between the

three nations was facilitated by this agreement (Hakobyan and McLaren, 2016). NAFTA

was the inaugural trade agreement between industrialized and emerging nations, and it had

a notable influence on the economic conditions of the participating nations (Romalis,

12
See WTO: https://www.wto.org/english/thewto_e/thewto_e.htm
See USTR: https://ustr.gov/issue-areas/trade-organizations/world-trade-organization-wto
13
See USTR Archives: https://ustr.gov/about-us/policy-offices/press-office/ustr-archives/north-american-
free-trade-agreement-nafta
84
2007). Several significant provisions of NAFTA comprised the removal of tariffs on

numerous commodities, the expansion of service markets, and the safeguarding of

intellectual property privileges. Another FTA, United Stated-Jordan Free Trade

Agreements, followed in 200014.

In 2004, United States signed The Dominican Republic-Central America-United

States Free Trade Agreement (CAFTA-DR) with Costa Rica, the Dominican Republic, El

Salvador, Guatemala, Honduras, and Nicaragua15. The objective of the agreement was to

enhance the trade and investment activities within the member nations. The agreement

encompassed clauses pertaining to agriculture, textiles, and services. The inclusion of

intellectual property provisions in CAFTA-DR was a contentious issue due to the

perception that such provisions favored US industries over those of the other participating

nations (Castro, 2015). Several other FTAs followed the CAFTA-DR16.

Successively, the Trans-Pacific Partnership (TPP) was a significant trade

agreement that involved the United States and was signed in 2016 by twelve countries in

the Asia-Pacific region17. After the inauguration of the Trump administration, the United

States opted to withdraw from the aforementioned agreement in 2017 (Riley, 2017). The

Trans-Pacific Partnership (TPP) had the objective of diminishing tariffs and other

14
See USTR: https://ustr.gov/trade-agreements/free-trade-agreements/jordan-fta
15
See USTR: https://ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-
america-fta
16
See USTR: https://ustr.gov/trade-agreements/free-trade-agreements
2004: United States-Australia Free Trade Agreement
2005: United States-Chile Free Trade Agreement
2006: United States-Oman Free Trade Agreement
2007: United States-Peru Trade Promotion Agreement
2011: United States-Korea Free Trade Agreement (KORUS FTA)
2012: United States-Colombia Trade Promotion Agreement
17
See USTR: https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text
85
impediments to trade, enhancing labor and environmental safeguards, and encouraging

investment within the participating nations.

Ultimately, the United States, Canada, and Mexico entered into an agreement in

2018 known as the United States-Mexico-Canada Agreement (USMCA) as a replacement

for the NAFTA18. The accord encompasses clauses pertaining to workforce and ecology,

alongside revised safeguards for intellectual property. The revised agreement entails

significant modifications such as the imposition of elevated thresholds for the proportion

of North American content that must be met by specific products to be eligible for

exemption from tariffs, the establishment of fresh regulations of origin for automobiles,

and the expansion of the Canadian dairy market to US farmers (Lea, 2018 and Norman,

2018).

4.3 Government Intervention in Provisions of the Free Trade Agreements

Notwithstanding the label "free trade," governmental intervention has been quite

evident in free trade agreements. This section examines various methods through which

governments have intervened in Free Trade Agreements (FTAs).

4.3.1. Intellectual Property Rights (IPRs)

Incorporation of clauses pertaining to intellectual property rights (IPR) or property

rights is a common practice in trade agreements within the United States trade and

investment framework (Dur et al., 2014). IPRs in FTAs have strengthened over time. FTAs

18
See USTR: https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-
agreement
86
initially eliminated tariffs and quotas, however, later, trade agreements required to address

IPRs in the information economy. Developed nations desired IPRs in FTAs to safeguard

their pharmaceutical, software, and music industries. NAFTA, signed in 1994, protected

IPR19. NAFTA covered copyrights, trademarks, patents, and trade secrets. The 1995 WTO

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) also added

comparable portions20. The TRIPS agreement encompasses three primary domains of

intellectual property rights, namely patents, copyrights, and trademarks. It lays down

fundamental principles that regulate intellectual property rights, such as national treatment

and most-favored nation, and also sets out the minimum standards for IPRs and their

enforcement (Osgood and Feng, 2017). The 2004 CAFTA-DR21, 2012 KORUS22 and 2016

TPP23 FTA included stricter IPR protections. These parts addressed piracy, counterfeiting,

copyright protection for digital material, and longer medication patents. In 2020, USMCA

replaced NAFTA with intellectual property responsibilities24. USMCA protects patents,

copyrights, and trademarks. The USMCA also prohibits online piracy and counterfeiting

and ensures adequate intellectual property infringement sanctions.

FTA IPRs are blamed for impeding access to crucial pharmaceuticals and other

improvements. Strong IPR restrictions benefit industrialized countries' firms and hinder

emerging nations' access to breakthrough technology. In conclusion, industrialized nations

19
See OAS: http://www.sice.oas.org/trade/nafta/chap-172.asp#A1714
20
See WTO: https://www.wto.org/english/tratop_e/trips_e/trips_e.htm
21
See USTR: https://ustr.gov/sites/default/files/uploads/agreements/cafta/asset_upload_file934_3935.pdf
22
See USTR:
https://ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file273_12717.pdf
23
See USTR: https://ustr.gov/sites/default/files/TPP-Final-Text-Intellectual-Property.pdf
24
See USTR comparison of NAFTA and USMCA:
https://ustr.gov/sites/default/files/files/Press/fs/USMCA/USMCA_IP.pdf
87
have sought greater safeguards, increasing IPRs in FTAs. FTA IPRs are contentious

because to worries regarding innovation and pharmaceutical availability IPRs have

evolved. FTAs initially eliminated tariffs and quotas. Trade agreements required to address

IPRs in the information economy. Developed nations desired IPRs in FTAs to safeguard

their pharmaceutical, software, and music industries.

The inclusion of property rights clauses in trade agreements in the United States is

based on the belief that strong and enforceable protections for intellectual property are

essential for promoting innovation, creativity, and investment, as well as fostering

economic growth and progress (Richards., 2002 and 2004). The provisions typically define

the scope, duration, and enforcement mechanisms for intellectual property rights, and may

also include provisions related to technology transfer, disclosure of information, and

dispute resolution. Proponents of strong intellectual property rights embedded in trade

agreements argue that they are essential for promoting innovation, protecting investments

in research and development, and ensuring fair conditions for business enterprises.

According to the proponents, these clauses are consistent with international agreements

and standards, and could promote the development of innovative concepts and economic

growth.25

The inclusion of robust intellectual property rights (IPRs) clauses within free trade

agreements (FTAs) can be perceived as a manifestation of state intervention in so called

“free trade”. The implementation of intellectual property rights (IPRs) via trade agreements

represents a deviation from the conventional free trade doctrine (Smith, 1776; Ricardo,

25
See (Kim, 2015), (Kim et al., 2016) and (Manger and Shadlen, 2014)
88
1817), which advocates for the advancement of competition and innovation by enabling

unrestricted movement of commodities and amenities across national boundaries

(Bhagwati, 2007). This thesis delineates that rather than fostering innovation, the practice

in question seeks to establish legal monopolies or oligopolies that curtail competition and

impede the advancement of novel products and technologies, particularly in emerging

economies. The aforementioned intervention confers advantages to the corporations that

possess the patents or copyrights. However, it may have deleterious effects on consumers

by augmenting prices and restricting access to indispensable medicines, technologies, and

cultural products.

Notwithstanding the potential benefits of strong intellectual property rights,

detractors raise concerns about their potential negative impact on the availability of

pharmaceuticals, diffusion of technology, and the ability of developing countries to attain

their developmental goals. The argument put forth is that overly strict regulations on

intellectual property may hinder the availability of affordable medications, limit market

competition, and hinder the ability of developing countries to adopt and adapt technologies

for their economic progress.

The incorporation of IPRs in the US-Jordan Free Trade Agreement26 led to elevated

costs, postponed introduction of generic pharmaceuticals and drugs, as noted by Abbott et

al. (2012). According to Alawi and Alabbadi (2015), data exclusivity has resulted in a

restriction on the accessibility of generic drugs and medications. According to Kyle and

McGahan's (2012) research, the implementation of patent protection for Research and

26
See USTR:
https://ustr.gov/sites/default/files/uploads/agreements/fta/jordan/asset_upload_file120_8462.pdf
89
Development (R&D) has resulted in an increase of R&D activities in developed countries,

while the same cannot be said for developing countries. The study conducted by Shaffer

and Brenner (2009) investigated the drug availability in Guatemala subsequent to the

rigorous enforcement of Intellectual Property Rights (IPRs). The findings revealed a

decrease in the accessibility of existing generic drugs and a delay in the importation of new

generic drugs. In short, the prediction of limited medication accessibility by all pre

implementation of IPR studies turned out to be an expected outcome (Trachtenberg et al.,

2019).

4.3.2. Investor-State Dispute Settlement (ISDS)

The inclusion of the Investor-State Dispute Settlement (ISDS) mechanism has been

observed in multiple Free Trade Agreements (FTAs) that have been ratified by the United

States. The eleventh chapter of the North American Free Trade Agreement (NAFTA)

includes provisions for Investor-State Dispute Settlement (ISDS)27. According to Article

110128, the chapter's scope is defined as follows: an investor belonging to a Party is entitled

to present a claim to arbitration under this Section, alleging that the other Party has violated

specific obligations. The definition of "investment" and "investor", obligation of fair and

equitable treatment, and minimum standard of treatment is established in subsequent

chapters.

27
See OAS: http://www.sice.oas.org/trade/nafta/chap-111.asp#Chap.XI
28
See: http://www.sice.oas.org/trade/nafta/chap-111.asp#A1101
90
 Similarly, Chapter 11, Section B29 of the United States-Korea Free Trade

Agreement (KORUS FTA) encompasses ISDS provisions. The chapter's scope is

established by Article 11.1, which pertains to investments made by investors from one

party within the jurisdiction of the other party. Chapter 9, Section B30 of the Trans-Pacific

Partnership (TPP) agreement also incorporates provisions pertaining to ISDS. The

chapter's scope, as stipulated in Article 9.1, pertains to investments made by investors

31
belonging to the TPP member states. Likewise, the fourteenth chapter of the United

States-Mexico-Canada Agreement (USMCA) incorporates ISDS provisions, albeit with

certain modifications as compared to the NAFTA.

It is noteworthy that the ISDS provisions have been a subject of controversy and

have encountered censure from diverse sources. The ISDS mechanism has garnered

significant interest from both scholars and the public, necessitating a thorough analysis

(Hahm et al., 2019). Rodrik (2018) explains that ISDS is not immune to challenges as it

operates beyond established legal frameworks, grants excessive authority to arbitrators,

lacks adherence to or establishment of legal precedents, and precludes the possibility of

appeal. The inclusion of ISDS in trade agreements among advanced countries with well-

functioning legal systems, is more challenging to justify, despite its potential benefits for

developing nations. It is due to their perceived capacity to erode national sovereignty and

exhibit partiality towards multinational corporations at the expense of domestic enterprises.

Stiglitz (2015) expounds that:

29
See USTR:
https://ustr.gov/sites/default/files/uploads/agreements/fta/korus/Chapter_Eleven_Investment.pdf
30
See USTR: https://ustr.gov/sites/default/files/TPP-Final-Text-Investment.pdf
31
See USTR: https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/14-Investment.pdf
91
 “International corporate interests tout ISDS as necessary to
protect property rights where the rule of law and credible
courts are lacking. But that argument is nonsense. The US is
seeking the same mechanism in a similar mega-deal with the
European Union, the Transatlantic Trade and Investment
Partnership, even though there is little question about the
quality of Europe’s legal and judicial systems.
To be sure, investors – wherever they call home – deserve
protection from expropriation or discriminatory regulations.
But ISDS goes much further: The obligation to compensate
investors for losses of expected profits can and has been
applied even where rules are nondiscriminatory, and profits
are made from causing public harm.” (para. 8-9)

In short, trade and investment agreements offer foreign investors expanded

property protection rights that surpass those enshrined in domestic constitutions.32 The

aforementioned entitlements are conferred via agreements pertaining to trade and

investment.

4.3.3. Government Procurement (GP)

The method through which governments purchase goods and services for internal

use is known as government procurement, and it is covered under several FTAs. Chapter

1033 of the NAFTA laid out the rules and regulations that were to govern government

procurement throughout the three member countries with the aim of promoting greater

levels of transparency and fairness throughout the procurement process. In particular, it

mandated that each member nation should treat suppliers of goods and services from the

other members equally and without discrimination. Discrimination against suppliers from

32
See Corporate Europe Observatory: https://corporateeurope.org/en/international-trade/2014/04/still-not-
loving-isds-10-reasons-oppose-investors-super-rights-eu-trade
33
See OAS: http://www.sice.oas.org/trade/nafta/chap-101.asp#Chap.X
92
other member nations is prohibited under Article 1001. The need that all members provide

one another "national treatment" in terms of government procurement is one of Chapter

10's most significant provisions. This means that all bidders from each member nation must

be treated equally with respect to the procurement process and are not permitted to be the

target of discriminatory or protectionist activities. While Article 1003 mandates that every

member state promptly publish its procurement policies and regulations.

Similarly, the provisions pertaining to government procurement in the CAFTA-

DR34 mandate that all participating nations must extend equitable treatment to suppliers of

goods and services from other participating nations during their government procurement

procedures, with certain exceptions. The aforementioned pertains to the acquisition of

commodities and amenities by federal establishments, state-owned corporations, and sub-

national entities. Within the framework of CAFTA-DR, member nations are obligated to

disclose their procurement opportunities, along with the standards and methodologies

employed to assess proposals, with the aim of promoting impartiality and openness in the

procurement procedure. Notwithstanding, specific exclusions are applicable to particular

government procurement undertakings, including those associated with safeguarding

national security, promoting public health, or preserving cultural heritage.

Likewise, chapter 17 of the US-Korea Free Trade Agreement (KORUS) contains

rules for public procurement35. Each member nation is required to provide suppliers of

products and services from the other member nation fair and transparent procurement

34
See USTR: https://ustr.gov/sites/default/files/uploads/agreements/cafta/asset_upload_file766_3926.pdf
35
See USTR:
https://ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file2_12716.pdf
93
procedures. Article 15.2 states that each member nation must promptly publicize its

procurement policies and regulations and forbids discrimination against vendors from the

other member countries. Furthermore, government procurement is also covered in Chapter

1336 of the USMCA and Chapter 1537 of TPP. Under these provisions each member nation

is required to provide suppliers of products and services from the other member nation fair

and transparent procurement procedures. Article 13.2 of USMCA specifically states that

each member nation must promptly publicize its procurement policies and regulations and

forbids discrimination against vendors from the other member countries.

Critics claim that these clauses might hurt domestic businesses and result in the

privatization of public services. For instance, the government procurement clauses in FTAs

have come under fire for giving foreign companies access to government contracts at the

cost of domestic firms and employees. Upon conducting a comprehensive analysis, it can

be inferred that if emerging economies were to grant market access in government

procurement, they would relinquish their authority over a crucial policy instrument for

development (Sengupta, 2012). Sengupta suggests that developing nations may only be

required to adhere to transparency measures outlined in the GP provisions of their Free

Trade Agreements, without any additional obligations. Despite the prevalent lack of

transparency and corruption in several developing political and economic systems, along

with significant gaps in the implementation of development-friendly GP policy, it is

imperative for developing nations to address these issues domestically while preserving the

36
See USTR:
https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/13_Government_Procurement.pdf
37
See USTR: https://ustr.gov/sites/default/files/TPP-Final-Text-Government-Procurement.pdf
94
flexibility and significance of this policy tool. Particularly talking about the prospects of

GP provisions in India’s FTAs, Sengupta (2012) declares:

“It is important again to emphasize that India can always

invite global bids on a need basis as it does currently without
making legal commitments to do so. India should not be
giving up development-sensitive policy tools for very
dubious gains in return.” (p. 22)

Additionally, some contend that these clauses may lead to a race to the bottom in

which governments slacken labor laws and regulations to draw in foreign investment.

Furthermore, a lot of people think that the laws and regulations described in the chapter

have actually made the procurement process extremely difficult for smaller businesses to

navigate, giving larger organizations an advantage.

4.3.4 Regulatory Cooperation

The regulatory cooperation provisions incorporated in free trade agreements

(FTAs) are intended to facilitate the standardization of regulations and standards across the

nations involved, with the objective of mitigating trade impediments and fostering

economic amalgamation. For instance, chapter 2538 of the Trans-Pacific Partnership (TPP)

was designed to foster collaboration and synchronization among member nations in the

formulation and execution of regulatory measures, as part of its overarching objective. The

promotion of regulatory cooperation to facilitate trade and investment among member

countries was specifically mandated by Article 25.1. Similarly, the KORUS Free Trade

Agreement contained a section dedicated to Technical Barriers to Trade, specifically

38
See USTR: https://ustr.gov/sites/default/files/TPP-Final-Text-Regulatory-Coherence.pdf
95
outlined in Chapter 739. This chapter encompassed various provisions pertaining to

regulatory cooperation. The establishment of a Regulatory Cooperation Council, as stated

in Article 7.10, aims to promote cooperation and coordination between regulatory

authorities in both countries.

Moreover, the United States has signed other FTAs that incorporate regulatory

cooperation provisions, such as the USMCA. The Regulatory Cooperation chapter

(Chapter 28)40 within the USMCA outlines a structured framework for collaboration on

regulatory matters, encompassing the formulation of uniform strategies to address

regulatory concerns and the exchange of optimal methodologies.

In general, the provisions pertaining to regulatory cooperation within Free Trade

Agreements (FTAs) are a contentious issue and are prone to receiving critical feedback.

Although regional trade agreements with regulatory provisions have the potential to

decrease trade barriers and encourage economic integration, they are most likely to result

in the dilution of significant health, safety, and environmental regulations, as well as the

exertion of substantial corporate influence on the regulatory framework (Schmidt, 2009).

4.3.5. Anticorruption Provisions

Generally, as per the federal legislation of the United States, engaging in corrupt

activities, such as bribery, by multinational corporations or other entities with the intention

of obtaining contracts is considered illegal. The Foreign Corrupt Practices Act (FCPA)41 is

39
See USTR:
https://ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file604_12708.pdf
40
See USTR:
https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/28_Good_Regulatory_Practices.pdf
41
See Dept. of Justice: https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act
96
a federal statute that was enacted in 1977. The regulation stipulates that U.S. corporations,

foreign corporations that are publicly traded on U.S. stock exchanges, and individuals and

organizations acting on behalf of said corporations are prohibited from participating in acts

of corruption. The aforementioned legislation forbids the offering of any type of

remuneration or advantage to officials of foreign governments, political organizations, or

aspirants for the purpose of acquiring or retaining commercial advantages.

Particular to the FTAs, the objective of anticorruption provisions is to mitigate and

counteract corrupt activities in both public and private domains, enhance openness and

answerability, and foster principled commercial conduct in trade agreements. For instance,

the anticorruption provisions of CAFTA-DR necessitate that every party involved must

criminalize bribery and embezzlement and implement measures to prevent and identify

corruption in the public sector42. The agreement encompasses measures aimed at fostering

transparency in governmental procurement, safeguarding individuals who report illegal or

unethical activities, and strengthening collaboration among the signatories to prevent and

counteract corrupt practices.

In addition to the aforementioned, the Trans-Pacific Partnership's (TPP) anti-

corruption chapter encompasses clauses mandating the criminalization of bribery and

embezzlement, and necessitates that each participating nation implement or uphold

measures aimed at preventing and identifying corruption within the public sector43. The

aforementioned text encompasses measures aimed at fostering transparency in the realm

of public procurement, bolstering collaboration among involved parties to prevent and

42
See USTR: https://ustr.gov/sites/default/files/uploads/agreements/cafta/asset_upload_file294_3938.pdf
43
See USTR: https://ustr.gov/sites/default/files/TPP-Final-Text-Transparency-and-Anti-corruption.pdf
97
combat instances of corruption, and instituting protocols for managing situations involving

potential conflicts of interest.

The recently ratified United States-Mexico-Canada Agreement (USMCA) includes

an anticorruption chapter that mandates the criminalization of bribery of public officials

and individuals involved in business activities, as well as the implementation of

preventative measures to detect and deter such illicit behavior44. The document additionally

encompasses clauses aimed at advancing transparency in governmental purchasing

processes, reinforcing safeguards for individuals who report misconduct, and augmenting

collaboration among involved entities to forestall and counteract corrupt practices.

These provisions are expected to have positive impact on the trade agreements,

however, the implementation of anti-corruption provisions within FTAs can present

difficulties stemming from challenges related to enforcement, transparency, cultural

nuances, intricacy, aversion to change, and inadequate coordination. Overcoming these

obstacles necessitates a persistent endeavor from all parties concerned. As issues

concerning the jurisprudence of allegations of corruption in investment arbitration have

been the subject of extensive discussion in economic policies, there have been relatively

few studies conducted on the increasing practices of anti-corruption provisions (Yan,

2022). In particular, there is a lack of a methodology for extensively assessing the driving

reasons and expectations of anti-corruption measures in the present inventory of IIAs.

44
See USTR: https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/27_Anticorruption.pdf
98
4.3.6. Social and Ecological Provisions

Numerous primary free trade agreements (FTAs) entered into by the United States

of America incorporate provisions pertaining to social and ecological considerations, such

as labor rights, safeguarding the environment, and promoting sustainable development.

Chapter 2345 of the United States-Mexico-Canada Agreement (USMCA) encompasses

provisions pertaining to labor, such as the elimination of forced labor and the entitlement

to engage in collective bargaining. Furthermore, Chapter 24 comprises stipulations that are

linked to the ecosystem. The aforementioned provisions encompass commitments to

maintain compliance with environmental regulations and ensure the protection of

biodiversity46.

In the same vein, chapter 19 of the Trans-Pacific Partnership (TPP) encompasses

provisions pertaining to labor, which entail the proscription of child and forced labor, as

well as the capacity to participate in collective bargaining47. Although Chapter 2048

incorporates certain provisions pertaining to the environment, including obligations to

safeguard endangered species and combat illicit fishing and logging, Sachs (2015)

delineates that these provisions are:

“A set of standards on labor and environment that purport to

advance the cause of social fairness and environmental
sustainability. But the agreements are thin, unenforceable
and generally unimaginative. For example, climate change
is not even mentioned, much less addressed boldly and
creatively.” (para. 7)

45
See USTR: https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/23%20Labor.pdf
46
See USTR: https://ustr.gov/sites/default/files/files/agreements/usmca/24_Environment.pdf
47
See USTR: https://ustr.gov/sites/default/files/TPP-Final-Text-Labour.pdf
48
See USTR: https://ustr.gov/sites/default/files/TPP-Final-Text-Environment.pdf
99
 Detractors of these clauses contend that they lack the necessary efficacy to uphold

social and ecological standards, and that they may be undermined by the ISDS (Investor-

State Dispute Settlement) mechanism and other policies that prioritize corporate interests

(Johnson, Sachs and Sachs, 2016). This argument posits that the aforementioned provisions

may be invalidated by other provisions that prioritize corporate interests. Moreover, there

is a perspective held by certain economists that suggest the utilization of these clauses by

affluent nations as a means of imposing their norms upon less developed nations, rather

than fostering authentic sustainable development and equitable social outcomes (Bhagwati,

2007). This constitutes an additional argument posited by certain individuals.

One potential motivation for domestic industries to advocate for the inclusion of

labor and environmental standards in trade agreements is to protect themselves from

competition with inexpensive imports that may be perceived as having an unfair advantage

due to less stringent labor and environmental regulations. This concern stems from the fear

that such imports could be subsidized, leading to a competitive disadvantage for domestic

industries (Teslik, 2007). According to Bhagwati (2007), international companies or

industries may promote labor and environmental standards in order to gain a competitive

edge over more efficient producers from other countries in the global market. This is

because such standards would increase the production costs of their international rivals.

According to Schmidt (2009), individuals who support a trade agreement, that is met with

disapproval due to its perceived negative impact on the environment or human rights, may

suggest the incorporation of minimal labor and environmental regulations as a means of

appeasing those who oppose the agreement.

100
4.4. Conclusion

Government intervention has exerted a notable influence on the terms of trade

around the world, with varying degrees of involvement and impact. The North American

Free Trade Agreement (NAFTA) is a notable example of governmental interference in

trade in North America. The inclusion of intellectual property protections in NAFTA was

advocated by the US government with the aim of safeguarding the interests of US

industries. Likewise, within the framework of the United States-Mexico-Canada

Agreement (USMCA), the government of the United States advocated for heightened entry

into the Canadian dairy market under government procurement provisions. The

aforementioned interventions are indicative of the political and economic interests that

underlie the actions of the respective governments, thereby highlighting the fact that “free

trade” agreements are not entirely devoid of government influence49. This in turn, what this

thesis attempts to justify, calls to take into consideration the labor and environmental

regulations for sustainable global development.

For decades, academics and policy makers have debated whether labor and

environmental norms should be included as criteria in trade agreements. Concerns about

the social and environmental consequences of trade liberalization and globalization

inspired a late-twentieth-century push to incorporate labor and environmental criteria in

trade treaties. However, implementation of these extended provisions seems to be a mere

49
According to Lal (2000), certain neoclassical theorists contend that state intervention should not be
employed to address market failures due to the potential for bureaucratic inefficiencies to exacerbate the
situation. Hence, free trade – free market phenomenon should be completely devoid of government
intervention.

101
formality, and therefore fair trade movement arose in reaction to concerns about these

particular effects of trade liberalization and globalization.

Two auxiliary agreements were established concurrently with the founding of the

North American Free Trade Agreement (NAFTA) in 1994. The North American

Agreement on Labor Cooperation (NAALC) and the North American Agreement on

Environmental Cooperation (NAAEC) are the names of these two accords. These two

accords were both signed in North America. These new agreements were a formal attempt

by the United States, Canada, and Mexico to include social and environmental

considerations into existing trade agreements. All three nations agreed to sign them. Since

then, labor and environmental requirements have been integrated into trade agreements at

all levels, including regional, bilateral, and global. Some supporters of adding labor and

environmental restrictions in trade agreements say that doing so would guarantee that trade

gains are distributed more equally and that social and environmental safeguards are

maintained. Skeptics, on the other hand, argue that there is a risk of negative effects for

competitiveness, costs, and sovereignty. It is noteworthy to mention Johnson, Sachs and

Sachs’s argument analyzing provisions regarding ISDS and environment (2016):

“Over the past year, we have been warning, for example, of

the threat the dead poses to sustainable development and the
environment. Unfortunately, recent developments have
done nothing to dispel these fears. Indeed, there is
growing evidence that a mechanism in the deal
represents a major grant of power to corporations, one
greatly disproportionate to the rights of all other
domestic actors including local governments, tribal
governments, environmental organizations, citizens,
and companies.
That mechanism, investor-state dispute settlement
(ISDS), gives multinational companies outlandish sway
over regulatory policies, including environmental
102
 protection. The Obama administration told us not to
fear, but the use of ISDS in an existing deal, NAFTA,
underscores the seriousness of the threat as one of the
President’s most important environmental decisions is
now at risk.” (para. 2-3)

Given the evidence of intervention by the governments to protect big corporations,

this thesis strongly defends the inclusion of labor and environmental protection laws as an

integral part of, first, the development policies and then, the international trade agreements.

This chapter particularly concludes that the integration of labor rights and environmental

standards should constitute a fundamental component of any novel trade accords that any

country in global north engages in, serving as an initial measure towards accomplishing

this objective. The enforcement of these codes may be achieved through the imposition of

trade penalties, similar to the enforcement of investor rights and intellectual property rights

as stipulated by the North American Free Trade Agreement and the World Trade

Organization. Additional examination of the methodology employed to implement these

provisions falls outside the purview of this thesis yet remains highly significant to

scrutinize. The production process necessitates crucial inputs, including labor and the

environment, which are both indispensable and scarce resources. It is imperative that in

forthcoming trade agreements, the treatment and consideration afforded to investors should

be extended to encompass the aforementioned group.

103
 Chapter 5: Conclusion

The negative consequences of trade, such as job displacement and declining wages,

as well as environmental damage, grew dramatically in the 1990s, as new trade agreements

and massive increases in international capital flows drove rapid increases in trade volumes.

Despite these issues, global financial institutions are doing little to assist workers and

communities affected by globalization (Scott, 1998). In order to offer a case for fair trade,

this thesis aims to examine the ramifications of globalization, free trade, and a relatively

biased government action. Because the purpose of fair trade is to achieve greater fairness

and transparency in economic operations and trade on a global scale. It is important to note

that the certification-based fair trade model functions within the context of the free market,

thus this is another basic argument for promoting a more progressive

and radical approach on fair trade.

Two distinct conceptual frameworks were examined, both of which are

complimentary to the basics of a fair trading system. Sen's capabilities was first employed

as a conceptual framework. The capabilities equality approach focuses primarily on the

advancement of human capacities. This may be accomplished through developing and

executing fair trade policies that encourage worker capacities, particularly those of

marginalized and disadvantaged groups, expanded access to markets and jobs, and

technological innovation. It can also be used to improve distributional equity. Fair trade

policies, which guarantee that the advantages of trade are dispersed evenly across different
104
groups, will assist achieve this aim. Furthermore, the capabilities framework approach

encourages participatory decision making. By incorporating safety requirements into

manufacturing, fair trade rules can impact the decision-making power of employees and

customers. Finally, the capabilities approach promotes environmental stability, which

helps to prevent environmental degradation, natural resource depletion, and pollution, all

of which contribute to climate change and undermine the capabilities of vulnerable

communities, particularly those in developing countries. As a result, fair trade policies will

lead to environmental protection.

Second, the significance of Marx's criticisms of capitalism and his understanding

of exploitation to fair trade was studied. Marx maintained that workers are exploited under

capitalism by capitalists who take surplus value from their labor while paying them less

than the full worth of their job. This exploitation can result in inequality, poverty, and a

lack of fundamental necessities and opportunities. Marx's work is crucial in understanding

how multinational firms exploit employees in developing nations by extracting surplus

value from their labor in the framework of international commerce. Low earnings, terrible

working conditions, and restricted prospects for promotion can all contribute to this. It

especially influences conversations about the need to solve global economic exploitation

and injustice. Proposals for fair trade regimes use Marx's insights to create laws that

promote more justice and eliminate exploitation in global supply networks. Fair trade

policies, for example, can contain measures for worker empowerment, collective

bargaining, and livable wages, all with the goal of minimizing worker exploitation in

developing nations.

105
 This thesis then went on to investigate and comprehend the flaws of free trade

policies. Many mainstream economists continue to believe that free trade is the only

strategy that will lead to the growth and development of nations and economies, which is

due to their unwarranted romanticization of the reductionist approach of classical and

neoclassical trade theories. These theories considerably simplify complex real-world

phenomena to basic variables. These theories were found to focus solely on factor

endowments, technological inequalities, and trade profits, while disregarding cultural,

political, and social factors that impact international commerce. A careful review of

literature on the limits of traditional trade models was used to do additional analysis.

Despite the fact that the new trade models incorporated more complex dynamics than

classic trade theories, such as strategic behavior, multiple equilibria, and endogenous

growth, they failed to explain the role of government in the context of sustainable

development.

The standard viewpoint characterizes the mainstream trade perspective, which is

still generally recognized and accepted. Neoclassical supporters continually push for free

international commerce. Historically, the notion of free trade was widely considered to be

the absence of state restrictions on the worldwide interchange of goods and services. Import

taxes, export and import quotas, licenses, and other measures geared especially at

managing trade flows are among the policy tools described above. The use of these policies

is seen to change naturally occurring trade patterns and reduce social well-being. Currently,

the concept of free trade includes the absence of technical trade barriers. Despite their

stated domestic objectives, the aforementioned laws are perceived to be excessively trade-

distorting (Bhagwati 1993).

106
 In summary, it is suggested that differences in policy regimes across nations may

limit the reciprocal gains normally associated with free trade (Dorman, 1988). Disparities

in environmental and labor rules have the ability to disrupt trade and financial operations

that would otherwise take place, since they provide a competitive advantage to many

businesses in countries with lower social standards. According to this line of reasoning,

several supporters of labor and human rights, as well as environmental quality, argue that

their political initiatives are jeopardized by the consequences of free trade. Despite

evidence indicating negative effects of hyper-globalization resulting from unrestricted

trade, a significant number of economists maintain the belief that free trade is the only

strategy capable of promoting the growth and development of nations and economies. This

perspective is often influenced by an ideological inclination towards reductionist

approaches inherent in free trade theories. Interestingly, following a thorough examination

of evidence of government intervention in FTAs, this thesis concludes that "free trade" is

not truly free. There exists ample evidence of government interventions solely encouraging

and protecting large corporations and investors rather than the actual development and

sustainability factors, namely labor and the environment. All of this adds up to a persuasive

case for establishment of a fair trade regime that can strike a balance between a nation's

policy autonomy and its global commitments to raise labor and environmental standards.

To reiterate, fair trade certification within a free market system supports equitable

pricing for farmers and workers in developing countries. It functions within the present

market system, which is built on a capitalist paradigm that emphasizes profits above social

and environmental concerns. The willingness of consumers to pay extra for fair trade items

in order to support fair trade is dependent on market volatility and consumer demand. Fair
107
trade sales are rarely a consistent source of revenue for fair trade producers; therefore, they

may experience challenges depending on these fluctuations. Not only that, but wage

contraction over the last several decades has made it difficult for consumers to pay the fair

trade premium, forcing them to rely on cheaper replacements for fair trade products. As a

result, there is a need to create a more progressive fair trade framework in which states may

exercise policy autonomy while adhering to their international labor and environmental

responsibilities.

Following a thorough examination of evidence of government intervention in

FTAs, this thesis concludes that "free trade" has never been free and that it must be replaced

by a global fair trade regime in which nations can exercise their autonomy. There is an

urgent need to alter the role of government in sustaining social and environmental

conditions for national development and progress. The evidence of clauses safeguarding

large firms and investors highlights the significance of worker rights and environmental

standards as essential agenda items for any future international trade agreements. These

codes may be enforced by trade sanctions, tariffs, and charters, in the same way as investor

and intellectual property rights are enforced under the NAFTA and WTO accords. Labor

and the environment are vital, rare resources and key inputs to the production and

development processes, and they should be accorded the same amount of attention and

reverence in all trade agreements as investors and multinational firms. Incorporating labor

and environmental standards into trade agreements is an important step toward promoting

equitable trade benefits for all stakeholders, rather than just dominant corporations and

developed countries. To be effective, these standards must be provided with greater gravity

and enforcement methods than simple provisions.

108
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