Mexican coffee farmers in Chiapas have raised their incomes while enhancing the environment thanks to "fair trade," according to the NYT. Meanwhile consumers can sip their coffee knowing that they are contributing to alleviating poverty and safefguarding the environment. Seems like a win-win, right? Yet, I can't stop myself thinking that there has to be more to the story. We know that labeling products (e.g. "fair trade" coffee) is in general a good idea when consumers have a preference for improved labor practices or for environmentally-friendly production methods. In principle, consumers who are willing to pay a higher price for these can thereby induce producers to adopt the production practices that the consumers value. While this increases economic efficiency, it is not clear that it makes the growers better off by all that much. After all, the increased price simply compensates the growers for the added production costs incurred.
So for fair trade to have a real impact on poverty, there needs to be an added element: multinationals must be willing to transfer a larger part of their sales revenue to the farmers--but this is something that could be done by multinationals in any case, without the ruse of "fair trade." Perhaps the quid pro quo is this: "fair trade" increases consumer demand and therefore profits; in return firms pass on a higher price to the growers. This kind of "rent-sharing" assumes of course that companies like Starbucks are making excess profits. Otherwise, there would be no rents to share.
This helps resolve another puzzle I have been thinking of for a while. At the cafeteria in the Kennedy School, "fair trade" Starbucks coffee sells for the same price as other types of Starbucks coffee. This is of course inconsistent with the standard labeling story under perfectly competitive conditions. So either Starbucks is pulling a quick one over us, or it is able to make excess profits (i.e., gouging consumers). If the latter, "fair trade" is just a means of increasing Starbuck's profits. It would be interesting to know how much of that really trickles down to the growers.
In any case, it would be good to have a serious industrial-organization analysis of the whole "fair trade" business. Does anyone know of something along these lines?