Why use their market power to get

Why Trade? Voluntary trade
benefits both the buyer and the seller. The benefits in excess of costs are the
“gains from trade”. An “efficient” society maximizes the
gains from trade by wisely using human, natural and capital resources.
Political processes redistribute these gains to promote (or reduce!)
“equity”. We often call these gains the “pie”. An efficient
society has bigger pie; an equitable society divides the pie fairly. Free
versus Fair. Free trade means that anyone can trade with anyone else. The
fairness of this trade depends on the amount of competition between buyers and
between sellers. Many people think that buyers and sellers compete. That is
false. Stop and think of your different roles. As a worker or business, you
compete with others for customers. As a consumer, you compete other consu mers
and drive prices up – regardless of sellers’ actions. Say you go to the
farmers’ market to buy tomatoes. When there are many buyers and few sellers,
the price of tomatoes rises; sellers get a bigger share of the pie (the gains)
because they have “market power.” With few buyers and many sellers,
the price falls; buyers use their market power to get a larger share of the
pie. Thus, more market power – whether in the hands of the buyer or the seller
– can lead to “unfair” trade, i.e., an asymmetric division of the
pie. Free and Fair. When trade is freed, competition increases, market power
falls and gains are distributed more evenly. Numerous buyers and sellers in the
farmer’s market reduce bargaining power. Seller competition pushes prices down;
buyer competition holds them up. Free trade leads to fair trade. Fair trade is
not the same thing as fairness in the family, with friends or on the
playground. If Mom offers her son €10 for washing the car when the “market
price” is €5, she chooses to not exercise her market power. He has plenty
of competition; she does not. The marketplace is different – smart shoppers
bargain with many sellers; smart workers seek the greatest payment for their
skills. When trades are repeated, a relationship forms and fairness becomes
more important: You may give a bigger tip, throw in a few extra tomatoes, or
agree to more profit-sharing. These considerations make the longterm
relationship more stable and enjoyable, where friends help each other out in
times of need. Thus, we can get fairness in two ways: through competition,
which destroys market power, or relationships, which make market power
irrelevant.

Free trade benefits consumers,
who get better, cheaper goods. It benefits efficient producers with larger
sales. Inefficient producers are hurt; they go out of business and fire their
workers. This is not bad from a social perspective if that industry is
“valuesubtracting” by diverting resources from better uses. Typical
examples of businesses that subtract value are “national champions” such
as steel producers, airlines, car makers and agricultural commodity producers.
European and American sugar producers protected by quotas (quantity limits) and
tariffs (import taxes) sell their sugar for three times the world price. Europe
even exports subsidized sugar, hurting competitive producers a second time.
This situation persists because sugar producers, who get large benefits, lobby
for protection; the costs are small for each consumer, so it is not worth their
effort to oppose protection. Sugar protection is particularly atrocious because
it prevents developing world producers from rising out of poverty.

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Free trade can be fair, but
agreements that open some markets to powerful producers where they can use
their market power, while keeping others closed and uncompetitive, are neither
free nor fair. The little guy (the consumer, the small producer, the poor
farmer, the developing country) gets hurt. When nobody has special treatment
and the field is truly level, then free and fair will mean the same thing.
Competition may be tough on the level playing field, but political power and
legal leverage tilt it further. Free trade is fair trade when it is truly free.
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