Foreign Affairs: Unfair Trade
The Fair-Trade Movement Does More Harm Than Good
... Until now, any questioning of the fair-trade movement has been limited to the micro level. The movement has faced repeated criticisms, for example, for the relatively expensive fees that producers must pay to get a fair-trade label, which make it ineffective for many poor farmers. Another area of concern is just how lucrative the process is for middlemen and retailers. Finally, several studies show that very little of the premium that consumers pay actually reaches needy producers. Consumers might be surprised to learn that only one or two percent of the retail price of an expensive cup of “ethical” coffee goes directly to poor farmers.
The adverse effects of fair trade are even more worrying at the macro level. First, fair trade deflects attention from real, long-term solutions to rural poverty in developing countries; and second, it has the potential to fragment the world agricultural market and depress wages for non-fair-trade farm workers. ...
... Fair-trade enthusiasts might argue that the world would be better off if the fair-trade market replaced the free-trade one. But in fact, such an outcome would destroy the livelihoods of millions of farmers who do not have the luxury of paying for fair-trade certification. To survive, these farmers would likely have to stop planting basic crops, such as wheat, corn, and rice, and shift to cash crops, such as coffee, tea, and fruits, which could bring in the income for certification. The immediate effect would be a prohibitive hike in food prices. Further, as farmers shift their production, non-fair-trade basic food products would become more vulnerable to price instability caused by supply and demand shocks, because there would be fewer producers willing to take the risk of non-subsidized farming.
If the fair-trade movement eventually came to encompass all categories of agricultural production (including basic food products), the price shocks would be even worse. Rather than responding to market prices, farmers in developing countries would be incentivized to produce whatever products garner the greatest subsidies. With subsidies, not consumer demand, dictating production, consumers in the developed and developing worlds would see further increases in basic food prices. ...
... Self-proclaimed ethical consumers need to start looking reality in the eye. Fair trade is a form of protectionism, and it should not be allowed to hide behind the mask of morality. There is nothing ethical about privileging small groups of producers while the majority are sinking deeper into poverty.
This is one of those topics where a particular activity (buying fair trade goods) feels so worthwhile and yet does harm in ways that are not readibly discernable. When it comes to commodities, I suspect the authors are right that fair trade does more harm than good. Fair trade doesn't fully account for the economic complexity involved. It becomes yet another form of toxic charity. However, it is not clear to me that all fair trade products have the same consequences. For instance, handcrafted products sold through stores like Ten Thousand Villages are not commodities and I don't think they subject to the same type of economic realities. I haven't seen a detailed analysis by economist that would help me clarify the differences.
Once again we need to heed the admonition to act with warm hearts and cool heads. For an insightful booklet on the problems with Fair Trade Coffee see Victor Claar's Fair Trade? Its Prospects as a Poverty Solution. I suspect that what he says about coffee applies to all agricultural commodities.