Category: Trade

I’ve never been comfortable with the “fair trade” movement. The motives are commendable enough (who doesn’t want higher and more stable prices paid to farmers?), but it has always seemed to me to be predicated on a basic misunderstanding of economics, or at least the belief that in this case, economic incentives can be overruled by political and social will.

My brother and I occasionally debate whether economics or politics is supreme in the life of a nation and it’s people. It’s hard to argue that politics and populism don’t trump economics on occasion. Witness the madness of the U.S.S.R.’s draining of the Aral Sea, or the fact that Robert Mugabe is still in power. However, while terrible and life-destroying, these events nevertheless seem to me to be short-term in the grand scheme of things. In the end, I suspect that the power of economic incentives is (almost) inexorable. The power of personality might hold it at bay for a lifetime, especially if the country has a common enemy to rail against (Cuba), but not forever.

So when it comes to the fair trade movement, I cannot help but wonder how guaranteeing above-market prices for some farmers can — in the end — achieve anything other than to encourage more coffee to be cultivated. As any first-year economics student can (or at least ought to be able to) explain, an increase in supply will lead to a lowering of equilibrium prices, and while a few farmers will be protected by the fair trade scheme, the great majority will be further impoverished.

I also worry that new crops may be planted on poorer quality land that suffers from more variable conditions, meaning that output (and therefore prices) will also be more volatile.

I am reminded of all of this because Dani Rodrik, a strong advocate of attempting to ameliorate the negative aspects of free trade, has just blogged on this very topic. He raises three very good questions (all quotes are from his entry):

1. “[E]ven though fair trade brands sell as premium products, they often … sell at exactly the same price as the regular one. [T]his is a puzzle because farmers are supposed to get more when they produce the fair trade brand … Here is how the industry explains this: ‘Michael Ellgass, the director of house brands for Sam’s Club, said the company could afford to pay fair trade’s premium because it has reduced the number of middlemen.’ … Come again? So let me get this straight. The company could actually increase profits by cutting out middlemen, but waited to do so until fair trade came around and the increased revenues could be passed on to farmers instead of the bottom line?”
2. “Fair trade certification requires that growers commit to various farming practices, and often other things too [such as rules on pesticides, farming techniques, recycling and mandating that the children of farmers were were enrolled in school]. Now, which one of us really know what “fair trade” certification is really getting us when we consume a product with that label? The market-based principle animating the movement is based on the idea that consumers are willing to pay something extra for certain social goals they value. But clearly there is an opaqueness in what the transaction is really about. And who gets to decide what the ‘long list of rules’ should be, if not the consumer herself?”
3. “Isn’t the farmer himself a better judge of how his extra income should be spent? Should these decisions be made by Starbucks instead? (There are of course social assistance programs where cash grants are conditional on things like this, but they are (i) meant to be aid rather than fair payment for work rendered, and (ii) designed and administered by national governments rather than foreign firms.) Is conditionality imposed by multinational companies better than conditionality imposed by the World Bank or the IMF?”

Dani is not alone in his concerns. Joshua Gans has publically worried about this before (here, here and here). The Economist wrote late last year on the topic here (well worth a read). Indeed, in Australia two (admittedly pretty conservative) academics lodged formal complaints with the ACCC against Oxfam Australia, suggesting that it might be guilty of misleading or deceptive conduct.

The London School of Economics cafeterias exclusively stock Fairtrade coffee. You can see mention of it in the official newsletter of the university here (13 March, 2006). Within the sub-discipline of Trade & Development, LSE’s economics department is ranked in the top few in the world. I wonder if any of those faculty members were consulted before the school made their decision?

Update:

Tim Harford covers the topic tangentially in his book, The Undercover Economist, suggesting that retailers that offer both fair trade and regular products are simply using the fair trade brand as a form of price discrimination. This benefit (to the retailer) disappears, though, when they stock fair trade goods exclusively (as LSE’s cafeterias do) or decline to charge more for the fair trade brand (as Prof. Rodrik focused on). As noted by Free Exchange over at The Economist, this latter example implies a lessening of the retailer’s profit and a greater capture of the final product value by the original farmer, unless there really were greater profits to be had by cutting out the middlemen and the retailers waited until the fair-trade movement to exploit them.

Perhaps we have a coincidence of two phenomena. On the one hand, a consumer-driven (or interest-group-inspired) push for non-market-determined prices to be paid to the farmers gave rise to the fair trade movement. On the other hand, perhaps a lessening of administrative and logistic costs have made increased vertical integration (a.k.a. capturing more of the value chain, or cutting out the middleman) economically feasible or even desirable. If this is true, the coincidental timing would answer Rodrik’s first question.