Fair Trade Fallacy

“Fair Trade” branding of products is an emerging marketing phenomenon. It’s also promoted as a trade policy.

“Fair Trade” is big in coffee. Where the spiel goes something like this:

“Only a tiny fraction of the money you pay for your cappuccino goes to the coffee growers who receive very low prices for their coffee beans. Yet multinationals like Nestle and Starbucks earn millions in profits. With our ‘Fair Trade’ coffee we pay growers a decent price and ensure that they employ workers at proper wages and conditions”

Sounds great, doesn’t it. For the cost of a cup of coffee you make the world a better place. Except you don’t. It’s a sham.

1) Low coffee prices are caused by over-production. Fair trade encourages farmers to keep on producing uneconomic crops rather than diversifying. It encourages farmers to start growing coffee, and to increase production (eg by cutting down forests).

2) “Fair Trade” isn’t fair. Some farmers get the special price, most don’t.

3) “Fair Trade” proponents push for workers to receive wages and conditions similar to developed countries. But low cost labour is the competitive advantage of poor countries. Without it Nike wouldn’t have a factory there. Needless to say unions and politicians in developed countries (who fear competition for jobs from poor countries) argue not to accept goods from countries that don’t have developed country labour standards. They say they are protecting workers in poor countries, but really they are trying to keep them out of a job.

People choose to work in Nike factories because it is a better option than others. Remember your “sweat shop” is to someone else a nice paying job in a warm factory - much better than toiling in rice paddies for next to nothing in pay.

4) “Fair trade” is essentially subsidisation. Which distorts markets, preventing resources to flow to where they earn best return, and thereby reinforcing pverty.

Oxfam is a leading proponent of “Fair trade” (and marketer of “Fair trade” coffee). They sensibly oppose European farm subsidies that undermine the competitiveness of 3rd world farmers. Yet Oxfam promote subsidies and other trade tariffs for poor countries. Poor countries already have much higher tariffs than developed countries, they hurt consumers in these countries, and prevent resources flowing to productive industries (that’s oen of the reasons why too much coffee is produced).

I wrote that “Fair Trade” is a sham. Really it is a case of good intentions undermined by faulty logic, and failure to understand economics.

What the developing world desperately needs is freer trade. Fewer subsidies and tariffs, not more. If you want to reduce poverty then protest against subsidies and tariffs. Protest against Australian rice farmers getting access to under-priced water. And don’t buy “Free Trade” produce.