1. Fair Trade: Fair or Unfair?

1. Fair Trade: Fair or Unfair?

Fair trade products, like coffee and chocolate, have skyrocketed in popularity and distribution over the past decade. It's hard to ignore the emotional tug to buy products that are labeled "fair." If you buy other products (usually cheaper by a decent amount), that would make you "unfair," right?

I have to admit, when I was first introduced to the concept, I thought it was an awesome idea. I, along with a lot of other people living in developed nations, started buying fair trade stuff. I felt good about it and myself. The contradictory feelings were introduced when I decided to study economics in college.

What I am requesting your help with is the interpretation of some information that I have come across during my research. We will discuss how fair trade is supposed to work, some different lines of thought on the topic, and some comments/questions that I have.

How Fair Trade is Supposed to Work

Fair trade is deceptive in that it seems relatively simple. The thought process might be: "We see a poor farmer from another country, we're told that he and his family need help, and we help by paying more for what he grows." 

It's much more difficult to wrap your head around than that. Trying to simplify it, it goes something like this: 

• An organization like Fair Trade USA or the Fair Trade Foundation (UK) offers membership to farmers in other countries. By joining this network of farmers, one can sell their product at a higher price than normal. Membership costs vary, but it isn't cheap for a farmer to join. 
• Upon approval (safety, labor wages, environmental factors, etc.), the farmer can sell his/her product at a cost that is higher than the market price. 
• Because he/she is selling at a higher price than other farmers, the concept is that he/she would be better off then they were before, thus, bringing them out of poverty. 

That explanation is simplified, a lot. If you would like to learn more about how fair trade works, I encourage you to read this linked post. 

Other Information

As I developed my knowledge of economics, the concept of fair trade came into light multiple different times (and under multiple different lights). I've heard proponents, opponents, and people that think it doesn't make a lick of difference speak on the topic. 

Proponents

Proponents are generally easy to identify with. While most are uninformed economically, there are a few proponents that know what the actual benefits being sought are. The concept of foreign aid has faced a lot of scrutiny (we'll talk about that in a later post), which led to the development of new ideas like fair trade.

The following quote can be found on Fair Trade USA's website:

We seek to empower family farmers and workers around the world, while enriching the lives of those struggling in poverty. Rather than creating dependency on aid, we use a market-based approach that empowers farmers to get a fair price for their harvest, helps workers create safe working conditions, provides a decent living wage and guarantees the right to organize. Through direct, equitable trade, farming and working families are able to eat better, keep their kids in school, improve health and housing, and invest in the future. Keeping families, local economies, the natural environment, and the larger community strong today and for generations to come; these are the results we seek through Fair Trade.

I underlined a few parts of that quote for discussion in this post (see below).

This is a noble cause, and the desire to help others is honorable. I applaud people who try to develop processes of helping others, but I often question their approach. A huge part of the fair trade advocates' argument is that globalization harms small and local business (in this case, farmers).

Because huge corporations (like Nestle who buys cocoa beans in mass quantities) have a lot of buying power, proponents of fair trade are concerned that these corporations will pay too little for produce. From an economics standpoint, this is accurate: prices will fall with global trade increasing. There are more suppliers for consumers (corporations in this example) to pick from, so prices will continue to be driven down (all else held constant). 

It's difficult to find anything economics related that is for fair trade, but it is quite easy to find emotional material related to the subject. I find this is often the case: people see problems, think that they have a solution, and are successful at implementing that potential solution simply because of the pathos element involved. For example, watch this video:

Who doesn't want to help build health clinics, provide education, or help the poor? 

Opponents

Opponents are generally people with economic backgrounds. The first thought that popped into my head about an opposing view was that of supply and demand. If price increases, so does supply. This results in the price being driven back down to market price. The problem is that prices normally increase due to an increase in demand, not due to fair trade prices being put in place. This is what economists call a price floor. Price floors are usually put in place by regulators, not by the free market. 

What's interesting about fair trade is that it's a voluntary price floor. My personal concern arose upon my realization of this:

• A voluntary price floor has been put in place for some of the population (those that prefer fair trade products)
• Fair trade products are increasing in supply and demand (resulting in more farmers being reliant upon fair trade prices and more farmers joining the already saturated market)
• What happens when we hit an economic downturn and people revert to buying the cheaper options (the farmers not getting fair trade prices)? Now that there are more farmers (suppliers), won't the prices plummet even further than before, resulting in increased relative poverty?

This is only one of the economic difficulties that fair trade faces, but it is a prominent one. There are plenty more difficulties that it faces, and to learn more about those challenges I encourage you to read 10 Reasons Fair-Trade Coffee Doesn't Work and Surprise! Fairtrade Doesn't Benefit The Poor Peasants. 

One of the most convincing arguments that I've heard against fair trade is presented in a simple video featuring economist and professor Don Boudreaux. If you don't want to watch the video the idea is quite simple. Because it is expensive for farmers to become fair trade certified, the poorest farmers are not able to get certified. This results in poor farmers in poor nations to seek employment opportunities that are actually worse than they were before they became farmers. Here's the video:

Neutral

Some economists are neutral about the effects of fair trade. Their main thought process is that the gains are offset by the costs. Their line of thought stems from the fact that fair trade is, in fact, part of a relatively free market decision on the part of the consumers. Since this is the case, fair trade will only do what the free market does with it. I personally don't see much validity in this argument because an economic impact of some sort will result from one group of people deciding to pay more for products made/grown by another group of people. I can see where this argument might stand up when we consider what the long-lasting results of fair trade will be. Who knows if it will have any impact, positive or negative, in the long run. 

Commentary

I've got a lot of thoughts and questions around the topic of free trade, and I would greatly appreciate your input on them. If you have an answer to my questions, you have a good source for information on the topic, or you just want to tell me that I'm a loon, feel free to let us all know!

"Market-Based Approach"

My first comment is on the information provided by Fair Trade USA (see above). The claim that they made, stating that they are using a market-based approach, doesn't seem accurate. Implementing an unsecured price-floor is actually in direct contrast to the concept of market economics. 

"Responsible Shopping"

Later on, on that same web page, you will find a statement that reads, "We envision a day when Fair Trade products are readily available in stores across the country, when U.S. consumers can choose a 'Fair Trade Lifestyle' and shop responsibly in every product category." 

My second thought is a question surrounding the statement that fair trade results in "responsible shopping." If you agree with the claim that fair trade benefits the poor, then this statement makes sense. For those of us that question its validity, how do we deal with emotional statements like this? I find it difficult to respond by saying, "I don't want to shop responsibly." In all seriousness, I think we face a serious problem with regards to emotional claims that support illegitimate solutions to economic difficulties. 

My Questions for You

1. Do you think that fair trade helps the poorest people escape poverty? If so, why? (I'm honestly interested in what you think; I'm not just going to combat you and say, "Well, you're wrong.")
2. How can we better incorporate economic theory with emotional problems and the solutions to those problems? 
3. What do you want me to research and write about next? (I've got a long list of stuff to ask you about, but I'd love to hear what you bring into question in your head.)