Can free trade be fair trade?

Fair trade special - It's unfair when poor countries can't sell their goods here. It's also unfair t

Free and fair are words that often go together, like spick and span or Marks & Spencer. Free and fair elections, for example, are events devoutly to be wished for everywhere from Baghdad to your local town hall. But what of free trade and fair trade? Do they go hand in hand, or is one the enemy of the other?

The loose alliance of anti-globalisation protesters and fair-trade campaigners who subscribe to the view - expressed on a banner displayed during the Seattle protests - that capitalism should be replaced by "something nicer", clearly takes the latter view. To them, free trade is a conspiracy of the rich to get richer at the expense of the poor, with the World Trade Organisation - the Geneva-based, 148-member Tower of Babel that sets the rules - doing the dirty work on behalf of Washington and its corporate cronies. In the free traders' dark heart, the protesters claim, is a plot to steal the developing world's natural resources, wreck its environment and treat its workers like slaves while ensuring that Halliburton gets the infrastructure contracts, McDonald's gets the fast-food franchises and the World Bank gets its loans back.

By contrast, a line of reputable laissez-faire thinkers from Adam Smith to the Financial Times's Martin Wolf take the former view: that international trade without the interference of tariffs, subsidies, price controls and pork-barrel politics is by far the most efficient way of matching global supply to demand while making all the participants more prosperous - and that the best indicator of fairness in a broad sense is rising prosperity, the absence of which makes all the benefits of a just and well-ordered society so much harder to obtain. Crucial to this side of the argument is the idea that, as John Kay put it in his even-handed analysis The Truth About Markets (2003): "We who live in rich states are not rich because those who live in poor states are poor" - or P J O'Rourke, rather less even-handedly in Eat the Rich (1998): "Economics is not zero-sum. If you eat too many slices of pizza, I don't have to eat the box."

You might expect George W Bush to subscribe to the right-wing O'Rourke's school, even if you suspect that he understands diddly-squat about economics.

Here is what he said shortly after he became president in 2001: "Open trade is not just an economic opportunity, it is a moral imperative." But what did he do in March 2002 to drum up Republican support in "rust-belt" states for the midterm congressional elections? He whacked a 30 per cent tariff on steel imports, causing extreme pain to exporters in parts of the world with which the US was supposed to be friendly, including Britain, Japan, South Korea and Vladimir Putin's Russia. When Russia responded in kind by banning imports of US poultry, jeopardising jobs in 38 states, Bush stuck to his guns, because the steel votes outnumbered the chicken votes. And when pressure from the WTO and other factors - including the need for alliance-building for "the war on terror" - made it expedient to take the steel tariff off again, he declared the whole episode a victory against anti-competitive practices in world trade.

Therein lies the problem in trying to judge whether free trade is fair. Like socialism, it has hardly ever been put into practice wholeheartedly; purists have to look back to Hong Kong in the 1960s for an example.

Politicians pay lip-service to the social and economic benefits of open markets and are always ready to lecture other countries about it. But they invariably back away as soon as jobs and votes are threatened at home.

And when it comes to agriculture (with the exception of subsidy-free New Zealand), politicians do not even bother to pay lip-service. In 2000, every cow in the European Union received the equivalent of $913 in subsidy, while every sub-Saharan African received $8 in EU aid. Two-fifths of the entire EU budget goes on subsidising farmers and putting food producers everywhere else in the world at an unfair disadvantage - except possibly American farmers, who are themselves comfortably protected by a $180bn subsidy deal also brought in by George W Bush in 2002.

Yet we must also be fair to politicians: sometimes they must find the morality of free and fair trade genuinely confusing. Take the story of the humble banana, staple product of several of Britain's former Caribbean dependencies and of Latin America's so-called "banana republics", such as Ecuador, which fall within America's sphere of influence. For many years, Caribbean producers enjoyed privileged access to EU markets, while Latin American "dollar bananas" were subject to hefty tariffs and quotas. But small traditional farmers in the Windward Islands tended to produce small, expensive fruits, while big, efficient operations in Ecuador produced big, cheap ones. The Latin producers already had a large slice of the European market (Germans like their bananas big) but wanted more, and argued with some justification that they were being blatantly discriminated against.

The WTO and the Clinton administration agreed with them - and the US threatened punitive tariffs on a list of luxury goods, including Scottish cashmere knitwear and "tartan" shortbread, unless the EU moved swiftly to remove the barrier. An open- and-shut case, you might think, but there were other factors muddying the water - not least that Carl H Lindner, the tycoon behind the Chiquita company of Cincinnati which controls most of the Latin American banana trade, happened to be one on Bill Clinton's major campaign contributors.

If you were a trade minister, would you think it fairer to stick up for old-fashioned Commonwealth preference (it was, after all, we colonialists who converted these island economies to banana production in the first place) or for Ecuadorian farmers who had for so long been denied equal market access? The outcome so far has been a long foot-dragging exercise, in which the EU has provided aid to convert Caribbean producers to other crops but dollar bananas are still subject to higher duties; yet another "trade war" looms as a result.

Or take another issue that stirs strong emotions: the exploitation of labour in poor countries - very often women and children - to produce cheap goods for export to rich countries. Martin Wolf tackles this one in Why Globalisation Works (2004), using the example of Bangladeshi women in the clothing industry. Is it morally wrong of us to buy shirts made in vile factories paying pittance wages?

No, it isn't, Wolf argues: before these factories came along to meet western demand, tradition forbade women from such work; now they have "a measure of autonomy" and their wages make it possible for a higher proportion of family incomes to be spent on education, health and nutrition. To western eyes their conditions look dreadful, but compared to the alternatives - dependency as a wife or despised daughter, prostitution, farm labour, begging - the factories offer "enormous gains". Taking a stance against this kind of trade development, he says, is "mere tokenism. To be upset over poverty is entirely justifiable; to block a route out if it, in response, is not."

In the end, most economists tend to agree with Wolf that developing countries gain more in terms of social progress and eradication of poverty when they engage more openly in international trade, while countries that do not do so - North Korea springs to mind - get left behind. Protectionism and closed borders encourage corruption, inefficiency and lack of opportunity; trade and inward investment encourage technology transfer, rising standards and rising aspirations.

For sure, there are bad foreign-owned factories in Dhaka and Jakarta, and rapacious middlemen in the Kenyan coffee trade; for sure also, western governments have been shamelessly hypocritical in protecting their own markets, and the WTO has yet to prove itself a true friend to the poor. But in principle, free trade and fair trade can go hand in hand, and offer the best chance of a slice of the pizza of prosperity.