Question

3. Compare, in sufficient detail to demonstrate you understand the differences between the two, the use of Fair Trade as a means of changing the terms of trade for commodity producers, and the use of cartels. Make sure you detail who benefits, how each mechanism works, and why, in the end, each has failed to solve the terms of trade problem for commodity producers.

Answer 1

The free trade is a mechanism where international trade is promoted between two or more nations without using any type of entry barriers. In contrast to it, cartel is an arrangement (illegal) where firms collude and take collective decisions, regarding area of operations, price and quantity to be produced. Here, cartel is created, by the firms, but firms do not rely on each other. So, scope of cheating remains and cartel fails in achieving its objectives. In contrast to it, free trade causes competition to increase, and domestic firms are forced to become more competitive and efficient to compete in the market.

When free trade takes place, then it is the consumers who benefit most as they get quality products at competitive prices. It makes commodity producers to decrease the price due to higher level of competition and they suffer. As a result, they face trade problems and are unable to take the benefits of free trade.  When cartel is created, then it is the market leader who benefits the most. In this case also, commodity producers are confined to produce and sell in limited areas and price is also fixed. It harms these commodity producers and they again suffer from trade problems.