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 (well intentioned) 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 one 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.

www.MarketingScience.info

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3 thoughts on “Fair Trade Fallacy

  1. Wrong Low prices are caused buy traders who in senerio withe the ceiling set by the four major buyers keep the prices low Nestle, Proctor and Gamble,Sara Lee ,and Kraft
    There is amin and max depending upon the minimum the starving producers will accept based on contract established a year prior .Point two fair trade is not fair there
    is asize limit to which a grower must meet to join a coop which is the only people who qualify for fair trade prices .Point three fair trade compensation is not usally a benifit to the workers it as a rule is used up by the time the coop gets the adequate amount of organic fetilizer non toxic pest control and proper pruning there is but pennies left alfter this Fair trade is not a substiy nor has it created an over production
    There is a production short fall this year of 20 million 69 kilo sacks of coffee check National Coffee Assoation reports Fair trade minimily inproved quality level that was caused by the greed of the makets who do not reconise the quality diference in the grades of coffee so to make more money as does every one on this world does they grow more coffee istedd of better coffee for there is no compesation for it but at the roasters end where the 1.26 cent coffee becomes 12 to 16 dollar coffee and others are 6 and 7dollar Walmart fair trade coffee I grow coffee in Honduras I know and have seen from the small fincas to the large Cafetels The Pesident of the Specility Coffee Assoacation of America has pubicly admirted coffee price are held down from what the would be if had not from market pressuers to hold them down buy the monopoly buyers
    not his words the price would be 2.25 per # verse 1.09
    Arondo Hondo Coffee Company

  2. time and time again I hear the arguement for freer trade as a better means of reducing poverty, instead of fair trade. your arguement matches these. It is unfounded and unresearched. There are countless cases that prove that liberalised trade can in fact hurt subsistence farmers, e.g. banana plantation workers in Jamaica, who have been forced to trade illicit drugs instead of bananas because MNC’s in the US that locate their plantations in Latin America can exploite cheaper labour conditions and economies of scale to produce ‘dollar’ bananas. The fact that trade is ‘freer’ only undermines the abilities of Jamaican banana farmers to trade internationally – there costs are far higher as the do not have the capacity to spread their fixed costs. Freer trade has thus removed their abilities to earn for their livelihood. Freer trade is not an answer.

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