Saturday, May 10, 2014

Buying "Fair Trade" Is Not Fair: Why Freer Trade Is More Important

For those who did not know, today was World Fair Trade Day. In order to understand why we need to have a World Fair Trade Day, we need to understand the premise behind fair trade, which is to provide equity and sustainable justice to those in the supply chain, most notably poor farmers in developing countries, that do not receive proper treatment or wages. Those who buy products certified as "Fair Trade" believe that they are paying more for their product because the money from the price premium ends up helping the poor. I'm happy to see that the Fair Trade movement is based on voluntary transactions. It's certainly preferable to the government getting involved in labeling schemes or distorting the market. Seeing a more conscientious, ethical consumerism is also encouraging, and I hope that trend continues. However, what I have to ask is whether buying Fair Trade products is the most effective way to help those who it intends to or if it is merely feel-good consumerism.

One of the primary criticisms of the Fair Trade movement is that the money does not end up where consumers think it does. The theory behind Fair Trade is that the money goes to farmers on small farms who are disadvantaged by "the system." The problem with this in practice is that the individuals actually doing the farming, i.e. the grunt work, are migrant workers. Migrant workers, by definition, are too poor to own land and have to go from farm to farm to find work. This means that unless the farmer is lucky enough to be in a cooperative, the individual receiving the premium is not the farmer, but the landowner. Given socio-economic class stratification in places such as Latin America, it's safe to assume that the landowner, even if his property is not corporate size, is much better off than the farmers working the land. Even a large chunk of the premium does not go to the farmer, but rather other actors within the profit chain (Valkila et al., 2010; Kilian et al., 2006; Mendoza and Bastiaensen, 2003). One can go as far to argue that Fair Trade certification is actually harming the poor (Beuchelt and Zeller, 2011).

Since most of this premium does not even go to the intended party, in economic terms, buying fair trade is a subsidy to retailers of Fair Trade-certified products. One of the wrongs that Fair Trade certification is trying to mitigate is the market distortions that hurt farmers in developing countries. These developing countries have plenty of agricultural subsidies that distort the market, so why are we trying to fight one arbitrary price distortion with another? Wouldn't it be better to get rid of the initial price distortion to make sure that laborers are being paid fair market value?  

There are some other issues with Fair Trade certification, one of which being that access to the Fair Trade label is restricted due to the price of certification, which is tantamount to rent-seeking. Those in the poorest countries cannot afford paying the certification fees (Beuchelt and Zeller, 2011), which is especially true if the farm is too small-scale. However, those problems are minimal as long as the Fair Trade market stays small. For those farmers who do decide to join a Fair Trade cooperative, there is the issue of creating market inefficiencies with monopsony, which means the fact that there is only one buyer and many sellers [of labor] in cooperatives translates into depressed wages. There is also the incentivizing of even more corruption than already exists because Fair Trade provides more opportunities for corruption (e.g., passing non-Fair Trade products off as Fair Trade, keeping wages low, acquiring kickbacks from Fair Trade premium). Additionally, fair trade only addresses income disparities, and not the price volatility it was initially meant to subdue.

Buying Fair Trade is not the way to go about reducing poverty. Fair Trade products do nothing to help migrant workers escape the trap of poverty. Heck, even the proponents of Fair Trade cannot even agree on what makes trade fair! Fair trade only produces a market of $7B [in 2011 dollars] out of a global economy of $230T [in 2012 dollars]. In terms of impact, most of the Fair Trade certified farms are in middle-income countries (e.g., Mexico, India, Peru, South Africa). Unless fair traders can find a standardized way to define "fair" without distorting the market too badly, fair trade will remain a niche market for consumers who are under the misimpression that they are making a difference. Even if there were better oversight and record-keeping, at best, Fair Trade certification focuses on a limited amount of small producers while ignoring the larger issues of poverty in developing countries. I don't want to say that Fair Trade certification is as big of a scam as organic food, but the large gap between perceived and actual benefits is comparable.

Does this mean that farmers in developing countries are deterministically doomed to a life of poverty? I think not. Free trade has historically pulled more people out of poverty than any government program has, and I am confident that it can do so for those who are currently struggling. When critics of free trade say that "free trade harms these farmers," it's because developed countries have freer economies than developing countries. Rather than a modest subsidy that does not even reach the disadvantaged producers, we should find alternatives that directly impact those in need. There is the possibility of or structural reform to have more liberalized markets, which will mean that farmers will have more purchasing power and consumer sovereignty in the long-run. We can also end agricultural subsidies both in developing and developed nations that cause the initial distortions in the agricultural markets. Developing countries can be more collaborative and export some agricultural technologies so these countries can develop more quickly.

Even though a lot of the required changes need to take place on a more global, macroeconomic level, we should still look at what can be done from the individual consumer's standpoint. It might seem counter-intuitive, but it might be better to buy premium coffee than fair trade coffee because premium coffee means that better care to pick high-quality beans requires better-paid labor. Assuming that more and more individuals buy premium coffee, the demand will increase and more higher-paying jobs would be created than under the fair trade certification scheme. If we're going to be more socially-driven, conscientious consumers, then we have to make sure our dollars are going to good causes. We can't be swept away by the false promises of fair trade certification. We either need to demand better quality from the fair trade certification process so some or all of the criticisms can go away, or we need to find better ways to spend our charitable donations to help those in need.

11-17-2015 Addendum: If you're looking for a nice argument for free trade, here is one courtesy of the Cato Institute.


  1. Fair Trade was set up for smallholder farmers, not migrant workers. Farmers are typically members of a co-op anyway. The co-op can decide to gain Fair Trade certification based on a democratic process by the members.
    "These developing countries have plenty of agricultural subsidies that distort the market"
    Are you prepared to include the massive subsidies paid to US farmers as well. When NAFTA began, tens of thousands of indigenous Mexican families were effectively thrown off their land when cheap US corn entered the country. You talk about migrant workers. Millions of Mexicans have taken drastic steps to enter the US as a direct result of the policies of NAFTA.
    And you make it sound so simple for a coffee producer to just start producing "premium coffee". Farmers don't have access to the means to be able to do this, precisely for many reasons you already mentioned. And by definition not everyone can produce premium coffee, or it ceases to be seen as premium.

    1. First, I would like to point out that agricultural subsidies predate NAFTA. Second, yes, I think that American subsidies to agriculture are a problem, and I have done so in the past. And what does immigration have to do with fair trade? At best, it is a red herring to distract from the fact that fair trade doesn't work.