FAIR-TRADE LAWS. Fair-trade laws protect businesses and governments from companies or countries attempting to dump goods into a marketplace at low prices or with unfair subsidies. Initially, fair trade was primarily a domestic issue; after World War II, fair-trade laws developed into a key tenet of international trade relations.
The U.S. and other governments provide financial assistance, or subsidies, to companies to aid in the production, manufacture, or exportation of goods. Subsidies run the gamut from cash payments to companies to loans granted at below market rates to stimulate sales in other countries. When governments determine that an unfair subsidy has been granted, they can offset the subsidy through higher import duties, thus keeping competition open between foreign and domestic companies.
Domestic Fair Trade
In the United States, fair-trade laws were first enacted in California in 1931 to protect small retailers and druggists. Soon, most states had enacted similar legislation. These laws were frequently contested; in 1936, the U.S. Supreme Court agreed to hear Old Dearborn Distributing Company v. Seagram Distillers Corporation. The Court ultimately ruled that state fair-trade laws were legitimate means of protecting manufacturers. In 1937, the Miller-Tydings Amendment to the Sherman Antitrust Act of 1890 exempted fair-trade laws from antitrust legislation.
In the 1950s, fair trade was hotly contested among various corporations and in the court system, particularly at the state level. By 1956, eight state supreme courts had ruled against fair-trade statutes, making the laws meaningless in some areas. Manufacturers were no longer able to dictate the retail price at which their goods could be sold, which was at the heart of fair-trade laws. Supporters of fair trade redoubled their efforts at the state and national level in the 1950s and 1960s, but by mid-1975, fair trade had been eliminated in 25 states.
Fair-Trade in the Global Economy
Global fair-trade laws are enacted to ensure that U.S. businesses are protected in the world marketplace against unfair foreign pricing and government subsidies, which distort the flow of goods between nations. In the United States, the Import Administration (part of the International Trade Administration) within the Department of Commerce enforces laws and agreements. When a U.S. industry suspects that it is being hurt by unfair competition, either through products being dumped at a reduced cost or by an unfair subsidy, it can request that measures be taken against the offender. The process begins with a petition filed with the Import Administration and the U.S. International Trade Commission.
The General Agreement on Tariffs and Trade (GATT) governed international trade from 1948 to 1995, when it was subsumed by the World Trade Organization (WTO). The idea that global trade broke down in the 1930s as a result of the Great Depression and rise of totalitarian regimes was the impetus behind GATT. The administration of President Franklin D. Roosevelt pushed for the expansion of foreign trade and used a series of agreements to set up reciprocal trade with other nations. Initially, twenty-three nations participated in GATT. Roosevelt's successor, President Harry S. Truman, also supported global trade and forced the United States into signing GATT.
After World War II, government officials wanted to set up an international trade organization to regulate and expand world trade. After failing to win congressional ratification of such an organization in 1948, subsequent administrations adhered to GATT through executive agreement. GATT negotiations between the late 1940s and the mid-1980s lowered tariffs, reduced trade barriers, eliminated trade discrimination, and called for settling disputes through mediation. During the Uruguay Round (1986–1994), the idea for the WTO came to life. In 1996, the WTO became the first international trade organization to be ratified by the U.S. Congress. The WTO oversees international trade and has the legal authority to settle disputes between nations. At the turn of the twenty-first century, 124 nations belonged to the WTO.
Large corporations have been the strongest advocates of free trade, arguing that global competitiveness will raise wages and benefits for all workers as markets expand. In June 1991, the administration of President George H. W. Bush began talks with Canada and Mexico to achieve a trilateral trade agreement. In late 1992, the agreement was signed by Bush and later lobbied for by the administration of President Bill Clinton. The North American Free Trade Agreement (NAFTA) took effect in 1994. NAFTA eliminated tariffs for the three nations, reduced barriers to trade and investment, and exempted businesses from many state, local, and national regulations.
Many of the largest corporations in Mexico, Canada, and the United States lobbied aggressively for NAFTA. They reasoned that creating the world's largest free trade entity would bring prosperity for all three nations. Critics, however, chided NAFTA for its lack of protection for workers, small business, and the environment.
In the early twenty-first century President George W. Bush unveiled an ambitious trade agenda, including agreements with Chile and Singapore, the thirty-five democracies in the Western Hemisphere, and a global free-trade accord with the more than 140-member nations of the WTO. Bush set off a wave of protest, however, when he pushed for unilateral authority to negotiate trade agreements without amendments (known as "fast track").
Nations will continue to argue for and against free trade and protectionist policies. Since World War II, the global economy has become increasingly important for nations of all sizes. Powerful countries, like the United States, have taken steps to formalize global trade, but these issues are burdened with controversy. For example, China entered the WTO in December 2001, after fifteen years of negotiations, despite the country's poor record on human rights. The desire to gain access to the world's largest emerging economy by corporate and government officials overrode longstanding and legitimate environ-mental and human rights concerns.
Kunz, Diane B. Butter and Guns: America's Cold War Economic Diplomacy. New York: Free Press, 1997.
Miller, Henri, ed. Free Trade Versus Protectionism. New York: Wilson, 1996.
See alsoTariff .
State statutes enacted in the first half of the twentieth century permitting manufacturers to set minimum, maximum, or actual selling prices for their products, and thus to prevent retailers from selling products at very low prices.
Manufacturers have an interest in establishing and maintaining good will toward their products. This means assuring consumers that the manufacturers' goods are quality products. Good will is promoted by advertising and other sales efforts. Manufacturers in the early 1900s believed that commanding minimum retail prices was necessary to preserve good will, and that uncontrolled price-cutting by retailers would be detrimental to good will. Specifically, manufacturers feared that consumers would become skeptical if a particular retailer began to sell for a lower price a product that had had a relatively consistent price over the years: the lower price would undercut any claim by the manufacturer that the higher price was necessary to maintain the product's quality, and purchasers at the higher price would feel cheated.
The Great Depression following the stock market crash of 1929 started a movement toward state involvement in product price controls. State lawmakers believed that allowing manufacturers to dictate resale prices to retailers would help stabilize price levels and markets.
In 1931, California became the first state to pass fair-trade laws. These laws made it legal for a manufacturer to enter an agreement whereby the purchasing retailer, the signor, could resell a product only at a prescribed minimum price. In 1933, California amended these laws to make such an agreement binding on nonsignors. The amendments made minimum-price agreements enforceable against any retailer who had knowledge of another retailer's agreement with the manufacturer.
The setting of minimum resale prices, which state fair-trade laws legalized, was precisely the sort of vertical price-fixing that the federal sherman anti-trust act of 1890 (15U.S.C.A. § 1) had been intended to prohibit. While the courts wrestled with the conflicting state and federal laws, Congress passed first the Miller-Tydings Act (50 Stat. 693 [Aug. 17,1935]), which amended the Sherman Act to exempt state fair-trade laws, and then the McGuire Act (66 Stat. 632 ), which allowed states to pass fair-trade laws making minimum price agreements enforceable against nonsignors as well.
After the enactment of Miller-Tydings and McGuire, state fair-trade laws and federal antitrust laws were no longer in conflict, and as many as forty-five states enacted fair-trade laws. As time passed, though, state courts whittled away at the fair-trade laws, often finding them to be in violation of the state's constitution. The perceived importance of allowing manufacturers to set minimum prices deteriorated as it became evident that the laws were harming the free market. In 1975, Congress, with support of the Ford administration, passed the Consumer Goods Pricing Act (Pub. L. No. 94-145), which repealed the Miller-Tydings and McGuire Acts, putting state fair-trade laws back within the prohibitions of the Sherman Act.
Today, the computer and electronics industries face retail price-cutting issues. Volume discount retailers sell name brand computers and electronics at prices far below those initially established in the market. With fair-trade laws off the books, retailers and the market determine at what prices goods will be sold.
Areeda, Phillip, and Louis Kaplow. 1997. Antitrust Analysis. 5th ed. New York: Aspen Law & Business.
Posner, R. 1976. Antitrust Law: An Economic Perspective. Univ. of Chicago Press.