Forget “Fair Trade”

December 9, 2006

Calls for “fair trade” and even “trade justice” have become increasingly louder. Drinking fair trade coffee is mainstream – the City of London’s Starbucks sell “fair trade coffee” to soothe the conscience of rich investment bankers. Other multinational firms such as Nestlé have also recently entered the “fair trade” market. Fair trade labelling organisations have flourished and their brands are increasingly visible in rich world’s supermarkets. It naturally follows that, although “fair trade” products still represent only a tiny fraction of the world’s agricultural market, the movement is under increased public scrutiny, and increasingly criticised.

Fundamentalists say the movement lost its soul and has degenerated into a marketing strategy aimed at targeting wealthy wallets with a bad conscience whilst the extra money paid hardly reaches the pockets of those it intends to support, i.e. coffee/banana/sugar etc. plantation workers or small producers. Any mainstream economist would say – indeed, it can’t be otherwise. Non-market-based prices, or artificially raising prices, create rents with no economic sense which mostly do not go to the targeted pockets.

More on this fair trade topic (with the environmental issue I will not be broaching here) in this week’s The Economist. For my French friends who have difficulties with English: “je vous invite à lire ce post excellent et très clair sur le commerce équitable.”

In my view, the “fair trade” movement has three fundamental flaws:

1) First, it does not necessarily deliver on its promises. There have been reported cases of workers or producers not receiving their promised wages/price although their products have been labelled fair trade. See for this an interesting article published this summer in the FT.

2) It emerges either out of ignorance of very basic market economics, or an ideological rejection of the market. Prices are a signalling mechanism. If prices for, e.g. coffee, are too low, this simply means that there is too much coffee on the market! It is a simple as that. Producers should think of diversifying their activities, investing in another crop or look for a more lucrative job somewhere else. It is true that in most poor countries, there are not many alternatives for people. But the pennies extra they get for their coffee does not fundamentally solve the problem of unemployment, lack of opportunities and so forth. As regards, for example, the coffee market, the infamous predatory behaviour of intermediaries between the few multinationals and the local producers emerges from lack of true competition in the market, not because of the nastiness of “the market” itself. If the market is distorted, creating a new market distortion, even if meant to compensate for the initial one, does not solve the problem.

3) It has flawed expectations on what international trade can do. On the one hand, it expects too much: international trade per se does not solve all the problems related to “underdevelopment”. International trade is also not the cause of those problems. A poor country is poor, and therefore the salaries there low, for a flurry of reasons, mainly related to state failure and productivity levels. It’s not the extra little fifty cents that will solve the Ghanan’s or Honduran’s existential problems. On the other hand, it is blind to the extraordinary lever that a really open and competitive trade regime can provide to get out of poverty. So if the global competitive market says to a producer via prices: “get out of the coffee market”, it is right. The problem is on state-side: to invest in infrastructure, in education and other productivity-enhancing mechanisms and get property rights “right” to help get people out the poverty trap. Yet you need an open local and international market to make economically viable activities really viable for those who engage in them.

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