The Destructive Fair Trade Movement

The fashionable and anti-capitalist "Fair Trade" movement is well intentioned, but by misdiagnosing the problem, it only hurts those whom it seeks to protect.

Although Fair Trade groups speak of "empowering producers through trade," Fair Trade's main focus is on providing higher than normal wages to producers by passing the costs onto the consumer. The theory is that, when made aware of such policies, consumers will be prepared to spend slightly more on their produce in the knowledge that it is helping poor producers and farmers to earn a higher wage.

Such marketing has had significant successes. Over the last five years, sales of Fair Trade-certified products have grown at an average of 40% a year, and in 2008, sales amounted to approximately €2.9 billion worldwide. Fair Trade is a significant movement, and it should not be ignored.

Unfortunately, beneath the language of "fairness" and "empowerment," the Fair Trade movement is not one that has faith in the free market, and it believes that free trade is exploitative. It therefore seeks to fix the market, but it ultimately does the opposite. To illustrate this, it is worth examining one of the exports that Fair Trade has sought to influence: coffee.

The coffee industry is an example frequently cited by those opposed to free trade as to where free-market exploitation is rampant and in need of international intervention via subsidies, regulation, and other means. However, while the coffee industry is one in which many producers have fallen upon hard times, the trouble is with changes in supply and demand, not exploitation.

Despite what one may be led to believe by the growth in Starbucks® and Dunkin' Donuts® franchises, recent global demand for coffee has seen limited growth -- an average of 1%-1.5% a year. However, due to ever more efficient production methods and countries such as Vietnam -- a once-negligible producer now producing in excess of eight million bags a year -- and Brazil producing enormous amounts of coffee at low price, supply has soared. Global production has jumped from 108.5 million bags in 1998-99 to 122 million bags in 2002-3 [i] While this growth has been excellent for hundreds of thousands of workers now employed in Vietnam and Brazil, it has made it harder for coffee producers in other parts of the world, who cannot keep up with fast production methods and find that excess supply is driving down prices.

The problem for the coffee industry is clear. Supply is growing faster than demand, and this is driving down prices. The solution is in finding a way to stimulate demand and/or to ease supply -- normally by helping those who are no longer competitive to innovate or to find new industries. It is a harsh reality, but to deny the economic progress that has taken place in the coffee industry would be to deny opportunities for workers in Vietnam and Brazil. 

However, the Fair Trade movement has misdiagnosed the problem -- in part due to its anti-capitalist foundations -- seeking instead to place the blame on the free market. As a result, it tries to make the market "compassionate," and by doing so, it makes supply/demand difficulties even worse.

Supply

The Fair Trade movement subsidizes limited groups in certain areas who are unable to compete in the free market. Therefore, by (unfairly) offering subsidies to those who have inefficient production methods, it is first rewarding mediocrity and discouraging innovation and economic progress. It does not help the poor to grow and to innovate, but instead encourages stagnation. Secondly, by offering what are sometimes double market prices to certain privileged bubbles, it encourages those in those bubbles to flood the market with yet more coffee in order to take advantage of those subsidies, as they are shielded from the price signals normally sent out through the market.

Instead of easing supply, Fair Trade floods the market. This may be fine in the short term for those who are lucky enough to be inside the Fair Trade catchment areas, but it makes the situation even worse for those outside. This is because supply will jump even quicker than usual, dramatically reducing prices outside the Fair Trade catchment areas, giving those outside the catchment area less time to innovate or make the transition to new lines of business. Such flooding of the market will eventually have negative effects on those in the bubble as well, as Fair Trade groups can subsidize only so much coffee without running into difficulty themselves. Such a practice is not sustainable.

Demand

Advocates of Fair Trade have argued that it is possible to sell coffee to customers at higher prices, as they have a unique selling point that adds value to the product -- that of being "ethical." However, their approach only damages the industry further.

The first problem is that of quality and price. Fair Trade coffee, in order to provide higher-than-market-value wages, charges significantly more for its coffee. However, its concern for the actual quality and taste is secondary to its concern for "ethical" practices. Few, if any, drink Fair Trade coffee for the taste, and in fact, a great number of Fair Trade products have a reputation for being quite poor-tasting. In consequence, the consumer is being pressed to purchase a poorer-than-usual product for a higher-than-usual price. Although the selling point of a product being "ethical" may work in the short term, in the long term, it is not sustainable due to ethical fatigue amongst consumers, who will eventually turn back to the coffee they actually want to drink.

This leads to the second problem -- the damage Fair Trade does to non-Fair Trade brands.  The aggressive approach that the organization and its supporters take towards other brands of coffee means that it is common to see strong advertising slogans from Fair Trade, such as "How ethical is your shopping basket?" By doing this, they are implying that non-Fair Trade coffee is bad, exploitative, and unethical. This is made worse by various Fair Trade advocates often condemning non-Fair Trade brands explicitly. We all have a friend or colleague who gets angry when one gets coffee from a politically incorrect business.

If these values are internalized by a great number of coffee-buying consumers and there is a guilt attached to buying a product, then consumers will be caught in a trap -- buy an expensive product that they do not want, or buy a product they do want, but that makes them feel guilty and exploitative.

Such a combination of choices will not stimulate the demand that coffee producers so desperately need, and it is likely to actually reduce demand, which will hurt producers even more. Customers who are faced with a choice between a poor product and a product that makes them feel guilty may abandon coffee altogether and move on to tea, or to the growing market of energy drinks and caffeine substitutes. This would be disastrous for those struggling to get by in the coffee industry.

To conclude, Fair Trade is well-intentioned, but good intentions do not solve poverty. The coffee industry needs to limit supply and stimulate demand. Fair Trade does the opposite -- flooding the market with subsidized coffee and decreasing demand, and as a result, it must be rejected. Measures that help the market, not those that demonize it, are the answer. Authors from Milton Friedman[ii] to Deepak Lal[iii] have shown time and time again that the only way for those in poverty to rise out of it is through the free market. If you really wish to help poor coffee producers, go to your local retailer and buy the coffee you enjoy the most -- and buy lots of it!

Adam Shaw is a British-born conservative writer. His blog is The Anglo-American Debate and he can be contacted at adamchristophershaw@hotmail.com. Follow him on Twitter: @ACShaw  


[i] B Lindsey, "Grounds for Complaint? Understanding the 'Coffee Crisis.'" (Cato Institute: Center for Trade Policy Studies; 2003) p.4 Found at http://www.cato.org/pubs/tbp/tbp-016.pdf

[ii] M. Friedman, Free to Choose (London: Harcourt, 1980)

[iii] D. Lal, Reviving the Invisible Hand (Princeton: Princeton University Press, 2006)
The fashionable and anti-capitalist "Fair Trade" movement is well intentioned, but by misdiagnosing the problem, it only hurts those whom it seeks to protect.

Although Fair Trade groups speak of "empowering producers through trade," Fair Trade's main focus is on providing higher than normal wages to producers by passing the costs onto the consumer. The theory is that, when made aware of such policies, consumers will be prepared to spend slightly more on their produce in the knowledge that it is helping poor producers and farmers to earn a higher wage.

Such marketing has had significant successes. Over the last five years, sales of Fair Trade-certified products have grown at an average of 40% a year, and in 2008, sales amounted to approximately €2.9 billion worldwide. Fair Trade is a significant movement, and it should not be ignored.

Unfortunately, beneath the language of "fairness" and "empowerment," the Fair Trade movement is not one that has faith in the free market, and it believes that free trade is exploitative. It therefore seeks to fix the market, but it ultimately does the opposite. To illustrate this, it is worth examining one of the exports that Fair Trade has sought to influence: coffee.

The coffee industry is an example frequently cited by those opposed to free trade as to where free-market exploitation is rampant and in need of international intervention via subsidies, regulation, and other means. However, while the coffee industry is one in which many producers have fallen upon hard times, the trouble is with changes in supply and demand, not exploitation.

Despite what one may be led to believe by the growth in Starbucks® and Dunkin' Donuts® franchises, recent global demand for coffee has seen limited growth -- an average of 1%-1.5% a year. However, due to ever more efficient production methods and countries such as Vietnam -- a once-negligible producer now producing in excess of eight million bags a year -- and Brazil producing enormous amounts of coffee at low price, supply has soared. Global production has jumped from 108.5 million bags in 1998-99 to 122 million bags in 2002-3 [i] While this growth has been excellent for hundreds of thousands of workers now employed in Vietnam and Brazil, it has made it harder for coffee producers in other parts of the world, who cannot keep up with fast production methods and find that excess supply is driving down prices.

The problem for the coffee industry is clear. Supply is growing faster than demand, and this is driving down prices. The solution is in finding a way to stimulate demand and/or to ease supply -- normally by helping those who are no longer competitive to innovate or to find new industries. It is a harsh reality, but to deny the economic progress that has taken place in the coffee industry would be to deny opportunities for workers in Vietnam and Brazil. 

However, the Fair Trade movement has misdiagnosed the problem -- in part due to its anti-capitalist foundations -- seeking instead to place the blame on the free market. As a result, it tries to make the market "compassionate," and by doing so, it makes supply/demand difficulties even worse.

Supply

The Fair Trade movement subsidizes limited groups in certain areas who are unable to compete in the free market. Therefore, by (unfairly) offering subsidies to those who have inefficient production methods, it is first rewarding mediocrity and discouraging innovation and economic progress. It does not help the poor to grow and to innovate, but instead encourages stagnation. Secondly, by offering what are sometimes double market prices to certain privileged bubbles, it encourages those in those bubbles to flood the market with yet more coffee in order to take advantage of those subsidies, as they are shielded from the price signals normally sent out through the market.

Instead of easing supply, Fair Trade floods the market. This may be fine in the short term for those who are lucky enough to be inside the Fair Trade catchment areas, but it makes the situation even worse for those outside. This is because supply will jump even quicker than usual, dramatically reducing prices outside the Fair Trade catchment areas, giving those outside the catchment area less time to innovate or make the transition to new lines of business. Such flooding of the market will eventually have negative effects on those in the bubble as well, as Fair Trade groups can subsidize only so much coffee without running into difficulty themselves. Such a practice is not sustainable.

Demand

Advocates of Fair Trade have argued that it is possible to sell coffee to customers at higher prices, as they have a unique selling point that adds value to the product -- that of being "ethical." However, their approach only damages the industry further.

The first problem is that of quality and price. Fair Trade coffee, in order to provide higher-than-market-value wages, charges significantly more for its coffee. However, its concern for the actual quality and taste is secondary to its concern for "ethical" practices. Few, if any, drink Fair Trade coffee for the taste, and in fact, a great number of Fair Trade products have a reputation for being quite poor-tasting. In consequence, the consumer is being pressed to purchase a poorer-than-usual product for a higher-than-usual price. Although the selling point of a product being "ethical" may work in the short term, in the long term, it is not sustainable due to ethical fatigue amongst consumers, who will eventually turn back to the coffee they actually want to drink.

This leads to the second problem -- the damage Fair Trade does to non-Fair Trade brands.  The aggressive approach that the organization and its supporters take towards other brands of coffee means that it is common to see strong advertising slogans from Fair Trade, such as "How ethical is your shopping basket?" By doing this, they are implying that non-Fair Trade coffee is bad, exploitative, and unethical. This is made worse by various Fair Trade advocates often condemning non-Fair Trade brands explicitly. We all have a friend or colleague who gets angry when one gets coffee from a politically incorrect business.

If these values are internalized by a great number of coffee-buying consumers and there is a guilt attached to buying a product, then consumers will be caught in a trap -- buy an expensive product that they do not want, or buy a product they do want, but that makes them feel guilty and exploitative.

Such a combination of choices will not stimulate the demand that coffee producers so desperately need, and it is likely to actually reduce demand, which will hurt producers even more. Customers who are faced with a choice between a poor product and a product that makes them feel guilty may abandon coffee altogether and move on to tea, or to the growing market of energy drinks and caffeine substitutes. This would be disastrous for those struggling to get by in the coffee industry.

To conclude, Fair Trade is well-intentioned, but good intentions do not solve poverty. The coffee industry needs to limit supply and stimulate demand. Fair Trade does the opposite -- flooding the market with subsidized coffee and decreasing demand, and as a result, it must be rejected. Measures that help the market, not those that demonize it, are the answer. Authors from Milton Friedman[ii] to Deepak Lal[iii] have shown time and time again that the only way for those in poverty to rise out of it is through the free market. If you really wish to help poor coffee producers, go to your local retailer and buy the coffee you enjoy the most -- and buy lots of it!

Adam Shaw is a British-born conservative writer. His blog is The Anglo-American Debate and he can be contacted at adamchristophershaw@hotmail.com. Follow him on Twitter: @ACShaw  


[i] B Lindsey, "Grounds for Complaint? Understanding the 'Coffee Crisis.'" (Cato Institute: Center for Trade Policy Studies; 2003) p.4 Found at http://www.cato.org/pubs/tbp/tbp-016.pdf

[ii] M. Friedman, Free to Choose (London: Harcourt, 1980)

[iii] D. Lal, Reviving the Invisible Hand (Princeton: Princeton University Press, 2006)

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