I don't understand "fair trade"

In principle fair trade is a wonderful way of marrying markets with social objectives, achieving a better globalization as a result. Since consumers in the rich countries attach positive value to the well-being of the farmers (of coffee or cotton) and their immediate environment, it is a way of translating that value into increased incomes for the farmers. And there is no government or international organization setting down rules and imposing heavy-handed regulations. It is a market-based approach that should delight libertarian and social progressive alike.

But now consider the anomalies in how fair trade really works.

First, even though fair trade brands sell as premium products, they often do not carry a larger price tags than other premium products. Sometimes, as in the case of Starbucks, the fair trade version of the product sells at exactly the same price as the regular one. Well, this 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. 

Coffee usually passes from farmers through roasters, packers, traders, shippers and warehouses before arriving in stores. But Sam’s Club will buy shelf-ready merchandise directly from Café Bom Dia, the roaster here in Brazil’s lush coffee country. 

“We are cutting a number of steps out of the process by working directly with the farmer,” Mr. Ellgass said.

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?   

OK, on to anomaly no. 2. Fair trade certification requires that growers commit to various farming practices, and often to other things too.  As the NYT notes, 

Rafael de Paiva was skeptical at first. If he wanted a “fair trade” certification for his coffee crop, the Brazilian farmer would have to adhere to a long list of rules on pesticides, farming techniques, recycling and other matters. He even had to show that his children 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?

Finally, consider some of the requirements that the fair trade purchaser imposes. The Brazilian coffee farmer mentioned in the NYT story above has to make sure that his children are enrolled in school. Wait a minute, the economist in you should say. 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 conditonality imposed by multinational companies better than conditionality imposed by the World Bank or the IMF?

Do I fret too much?  Has my economics training corrupted my mind so much that I cannot leave good things alone?

Comments

[aaron schiff]

Tim Harford is also sceptical of fair trade coffee: http://www.timharford.com/favourites/gofigure.htm

[Asif Dowla]

Even when the vendor charge higher price for fair trade coffee, it is used as a means of identifying consumers who are willing to pay higher price or what the economists call third-degree price discrimination. In his book, Undercover Economist, Tim Harford shows that the farmers get a few pennies extra for producing fair trade coffee and the rest is pocketed by the retailer. Are few extra pennies worth the conditionalities imposed? Don't the activist complain about conditionalities by the big bad IMF and the World Bank?

[Asif Dowla]

Even when the vendor charge higher price for fair trade coffee, it is used as a means of identifying consumers who are willing to pay higher price or what the economists call third-degree price discrimination. In his book, Undercover Economist, Tim Harford shows that the farmers get a few pennies extra for producing fair trade coffee and the rest is pocketed by the retailer. Are few extra pennies worth the conditionalities imposed? Don't the activist complain about conditionalities by the big bad IMF and the World Bank?

[Peter]

“Has my economics training corrupted my mind so much that I cannot leave good things alone?”

Yes and no. On the yes side, there is already a high degree of standardization in fair trade, with an international association that sets common criteria. Conditionality is based on a level of input from developing country producers that far exceeds the zero-to-meager democratic content of IFI conditionality. Criticism should be directed at free-lancers, who make up their own definition of “fair trade” and use the label misleadingly.

As for the stipulation that children of coffee growers be in school, this is a reasonable protective measure. It reflects the interest of children in an education that prepares them for the world they are destined to be part of, and it also preempts the possibility that children’s labor may be exploited. That is, children are often paid less than adults per unit output, which cannot be healthy for adult labor markets.

On the no side, there are limits to fair trade that are crucial to bear in mind. Requiring the children of coffee growers to attend school, for instance, says nothing about whether the schools are worth attending, which many are not. Fair trade as a social and economic movement is not in a position to cope with the many dimensions of the poverty/child labor/schooling nexus. Access to schools, proper training for teachers, adequate facilities and materials, affordability for parents: these things are beyond the reach of the best-intentioned consumer movement, and yet it makes little sense to stipulate school attendance without them.

The main point, however, is that fair trade is simply too limited a response. It is a means for influencing global development through trade, but only a minority of traded goods markets are subject to fair trade, and most goods and services produced in developing countries are not traded internationally. It is, as you say, too external a model, too far away, in geography and often culture, from the world it wants to transform.

If concerned consumers in the wealthy countries see fair trade as one of many useful ways to combat global poverty, then fine. The problem is that such people often have an unrealistic expectation of what they can achieve by consuming more conscientiously, the product of a demobilized political culture in which consumerism has replaced collective action.

[Francesco]

I do understand.

First. Goods with a fair trade label are more expensive (5-10% more). Indeed just Starbucks can pretend to sell its "fair coffee" at the same price of the "unfair one". But we don't have to pretend Starbucks to be fair for this.

Second. The "long list of rules" is not too long. Generally, ten.
This set of rules is subscribed by most of the fair trade organizations in the world, and do not say how parents should grow up their children.

To buy is just like to vote. So a better understanding about where our money goes is desirable.
Information about the actual chain of production is what we do not get from a big corporation (like Starbucks I would say), just because information is not free. Fair trade organizations make us pay for this information. And apparently somebody is happy to pay. This makes sense from an ethical and economical point of view. With more information markets work better.

[Per Kurowski]

Fair prices!

And while waiting in the line I see a “Fair Trade Certified” coffee that on its label promises that its purchase will improve the lives of coffee farmers by insuring they receive a guaranteed “fair price for their harvest”. I could not resist such an enticement and I bought a cup of it. It was great, and like any truly good coffee it made my mind wander. What does a fair price mean?

That the coffee grower can afford to send his kids to school, afford good decent healthcare, and buy a car? Or that his kids will not go to bed starving. I hope he gets at least the last. Or does fair in this context mean that he is getting prices that are fairly similar to those quoted for coffee on the commodities exchanges without risking being taken to the cleaners by some savvy distributors? Who knows?

I finish up my coffee with a lingering suspicion that perhaps a fair price might still not be enough. Would it not be better to certify “unfair prices” or, in perhaps more marketing digestible terms “fair price plus 100%”? Whatever, at the end of the day, if I were a farmer, I know that I would much rather get European farm prices than fair prices.

An extract from my Voice and Noise

[mk]

A few things:

1) The price of fair trade may sometimes be the same because the added cost is incredibly low. The Starbucks spokesman probably gave some BS answer because customers don't want to hear "you're mostly paying for things that aren't the coffee anyway."

2) I'd like to see a retailer allied with a charity, such that you can buy a bag of coffee beans coupled with a donation to some charity that helps those farmers. In this way more of your money goes to the farmers, not to middleman profits.

I'm slightly surprised not to be seeing a movement toward this equilibrium. Obviously it is not as directly profitable, but it should attract some customers, and it should make fair trade look like a comparatively bad deal.

[Justin Rietz]

Corporations engaging in "fair trade" do a disservice to developing economies. In many cases, "fair trade" purchases are made from coops of farmers, thereby excluding farmers who are not part of the coop (can't afford the fees, etc.). Second, it is inflationary, and therefore hurts those who do not participate in a fair trade industry.

As far as IMF/World Bank vs. multinational corporations, there are several differences. First, the IMF and World Bank carry much more international weight and can make or break a country's credit rating. Second, these organizations are funded by governments, i.e. taxes, meaning that people who disagree with their policies don't have an option to "shop somewhere else." Third, the IMF and World Bank have no profit motive, and therefore are more apt to be aloof of local conditions and distort markets, whereas corporations are more likely to be active at a local level and maintain some sort of competitive market (with all of its fair trade flaws) as they still need to protect their bottom line.

[notsneaky]

I'm also skeptical of the whole "fair trade" thing. It's always seemed like mostly a marketing campaign intended to make rich country coffee consumers feel good about themselves. Middlemen are usually middlemen because they play a useful role in in the production/delivery process. Specialization and all that.

[Tim Worstall]

I've seen that some of the conditions for fair trade can be: being in a cooperative: not mechanising.

That last sounds like an appalling condition: at the benefit of a slightly higher income now the farmer is committed to always being a peasant farmer.

[corvad]

Tim worstall: the farmer was always pretty much committed to being a peasant farmer -- Mexican farmers have been fighting for this since NAFTA, for example. Being a peasant farmer might be, in that farmer's pov, a better alternative to living in a megaslum/migrating seasonally/splitting up the family by going to the States in search of dignified poverty. Aristide's lofty goal for Haitians: dignified poverty. Because under the current neoliberal system even that is not possible.

Fair Trade is about incremental change, bypassing IFIs. It's NGO-driven, even consumer driven, so it's not "outside" or an alternative to capitalism, it's an attempt to make lives marginally better now, and to establish a more democratic form of trade (albeit certainly problematic, as posters have noted), by allowing elite consumers with disposable income to prefer ethical consumption.

you know, from the easy dismissal of Naomi Klein I feel obliged to point out that Klein, and the peasant farmer, (and the ethical consumer), are both highly skeptical of government top-down change, preferring grassroots-led change, even if that means a more cooperative form of capitalism -- you should see her documentary "The Take", about worker expropriation of factories in Argentina after its collapse in 2001. "Que vayan todos" -- not just the IMF, WB, and elites, but also the political parties on the "left", peronist and otherwise. It's about survival and stability first, upward mobility second.

[robertdfeinman]

Notice that for a minuscule change in it's purchasing patterns Sam's Club (that is Walmart) gets a featured article in the NY Times aimed at improving its tattered image.

The same is true of Starbucks which comes in for a lot of criticism. So, from their point of view the slightly smaller markup (if any) on the item is compensated for by the improved PR they get.

If you want to see how things are done when the company is really interested in obtaining a new product, look into the way Walmart set up a salmon farming industry in Chile. Salmon isn't even a native species. Walmart sets the price it will pay, the conditions under which the fish are grown and other factors. The pollution and the depletion of native fish used to feed the salmon are not their concern.

Does Walmart's PR department put out a press release about that? Of course not. Why did the NY Times rise to the bait?

The greenwashing industry is getting better at propagandizing. They have progressed far beyond "Beyond Petroleum" (BP).

[corvad]

Per Kurowski: indeed! but those farmers will never get European (or American) farm prices, not unless (a) the IFIs were somehow made more democratic and (b) the IFIs could actually make the US and Europe stop subsidizing. They can't, and won't.

[Mr. Todd]

whatever gains 'fair trade' can do for poor farmers' incomes, aren't they just a drop in the bucket compared to what reforming state marketing boards in developing countries could do? Why not tackle that instead of the fighting over a few percentage point premiums for coffee?

[Mr. Todd]

This also reminds me of something Paul Collier wrote in his recent book. Paying farmers a small premium for 'fair trade' goods only encourages them to keep grinding away in the industries that help keep them in poverty in the first place.

[Search the Web on Snap.com]

Translated from an article I published in El Universal, Caracas, Venezuela, July 2003, while I was an Executive Director at the World Bank

Place us next to something profitable …

I recently visited a country here in the Americas where I flew over a valley that appeared very fertile—a vast, thick green carpet beautifully woven by plantations of African palm trees. I was enthusiastic, thinking that at last I had discovered development in action—that is, until I landed.

The contrast between the wonderful view from above and the misery below screamed out that the African palm, far from being a motor of development, could be the mother of all poverty traps. By contrast, take, for example, a coffee bean. It may be worth very little in the field, but at least it lets us dream of the chance of capturing a bit more of the value suggested by the fact that some people pay four dollars or more for a cup of it at Starbucks. But in the case of the African palm, no dreams seem possible. Just for a starter, its saturated fats are considered undesirable.

In this sense, the difficult cultivation of the African palm would seem to be doomed to mark the borderline of lowest overall marginal cost, that is, where the least is paid to farmers for their labor. Palm farming now has such a small margin of profit that it does not even cover the costs of registering a union, and so, Mr. Planner, just in case, don’t place us next to the palms, please place us next to something profitable.

When analyzing agricultural margins of profit, we must not forget that in most cases in which farmers’ margins allow them to maintain a decent standard of living, this is due to some kind of subsidy, protection, or market interference. So, of course, if we’re offered the chance to grow African palms in France, we might just consider it.

It is one thing to be a marginal agricultural producer and it is another very different thing to be an agricultural margin capturer. In a supermarket in the United States I came across 11 kinds of eggs, ranging in price from 95 cents a dozen for caged, industrial production to $3.99 a dozen for eggs certified as coming from organically-fed free-range hens.

For countries whose hopes focus on Cancun and on agricultural opening, I hope that the above leads them to stop, think, and realize that opening in itself does not work miracles if farmers do not also receive other kinds of aid, such as those offered in many developed countries.

[max havelaurabar]

I'm amazed at the degree of ignorance displayed in the main blog post and in all the comments. People who don't understand a system or even basic market economics shouldn't write about it. If all you're basing your opinions on are the NYTimes article, other people's blogs, and rumor, then you're doing nothing other than displaying your own intellectual laziness.

Why not actually go to the site of FLO or FLO-Cert and read the standards for Fair Trade Certification for small farmer organizations? Why not search and find criticisms of Tim Harford's woefully uninformed book? Really people, had the Neo-Con agenda really altered the zeitgeist so greatly that ignorance and spurious statements pass for commentary and journalism on all sides of the political fence?

It's appalling really. From the comments about fair trade forcing farmers not to mechanize to someone talking about the inequalities between the prices European & American farmers get vs. those in developing countries. Well, anyone with a brain knows that sustainable quality coffee production means cover crops & shade, hand harvesting, composting, limited pesticide use, etc. and guess what kind of beans command higher prices? Not the mechanized ones. Also, coffee is not grown in any significant capacity in developed countries, mostly because it's impossible (one exception being Hawaii)

So, really, read up people. Learn something before you go off making idiotic posts.

Then again, this is the internet...

[Andrzej]

Bravo Max Havelaurabar!!!

[greykangaroo]

well that's interesting max haveabrain, accusing Rodrik of not understanding "even basic market economics".

Hmmm, as someone who does work to promote free trade in Asia I dont think your post amounts to anything much but abuse. My impression of 'fair' trade proponents that I meet is that they cannot define it economically and they believe it is somehow the opposite to free trade.

Furthermore, they have difficulty defining 'free trade' and why they resist, they generally resort to abuse and slogans. I think you fair traders act and speak with good intentions by and large but do not really understand what free trade is and where its pitfalls really lie, thus your arguments against it remain weak.

[Said Salih KAYMAKCI]

Black Gold, Wake up and Smell the coffee.
http://www.blackgoldmovie.com/

A grim portrayal of the coffe industry and i think the reason why do we need fair trade even with its inadequacies.

[pat toche]

I don't understand "fair trade" either, I have always had the impression it was just bonkers.

[Meghan Sweet]

"Isn't the farmer himself a better judge of how his extra income should be spent?"

Fair trade offers a non-market-fluctuating base price for the product plus a social premium. This premium can be spent however the farmer (or usually cooperative of farmers) decides. I spend two weeks in Nicaragua this summer visiting Fair Trade cooperatives, and they spent it on all sorts of things, whatever was needed in the community. A lot of the money goes into scholarships for students, which often require a number of volunteer hours on the cooperative in return. Other projects we saw included paving roads, women's reproductive rights work, potable water projects, and a recycled paper project.

The reason I love fair trade so much is because it works in solidarity with cooperatives. It empowers people to organize themselves. In comparison, while in Nicaragua, I visited a large, more traditional coffee plantation. The setting was a large house for the plantation owner and then poor conditions and poor pay for the workers. For example, the 500 seasonal harvest workers all slept in one giant room/building with no windows on wood planks. We found out at the end of the tour that this plantation sells all its coffee to Starbucks.

Compare this to fair trade cooperatives where people have family homes, work in conjunction and have real power over their organization.

[Dani]

Here is the turist version of fair trade, http://www.responsibletravel.com/

[hari]

Dani-

This is AGAIN like the blind following the (wicked) blind!

Max Havelaurabur is known here for FAIR TRADE!

You guys think the authour is "right" in his analysis - which is of course false! He doesn't know the (economic) difference between "free trade" and "fair trade".

May be you shld try to do a fair seminar on the subject in one of your classes.

[ivan janssens]

The fact that major companies like Starbucks are involved now, does not make "fair trade" in any way market-based. It only means that it gets more businessfriendly and that some companies see some opportunities here. But everyody should know that pro-business it not the same as pro-market.

Fair trade looks instead to be an authoritarian and anti-liberal solution. I mean we have governments taxing some portion of your income to provide social services like education or to build infrastructure or just to waste it (most of the time). Some libertarians would contend this amounts to coercion. Well, fair trade goes yet one step further. Here we have companies or non-governmental organisations, sometimes backed by governments, who will decide what income you will get in the first place. No children rolled into education? Do you use pesticides? The wrong farming techniques? Sorry, no fair wages for you! (Whatever that may be.)

The second major problem with fair trade is that it is hindering real development. If some occupation does not provide enough income you should get the hell out. Development means providing opportunities to find occupations who do pay. Thus, the creation of jobs in sectors with higher productivity like manufacturing. Yes, fair trade gives those who obey some serious conditions a little more income. But that is not development.