Why Fair Trade?

Project Syndicate / Robert Skidelsky, Mar 21, 2012

LONDON – Historically, the term “fair trade” has meant many things. The Fair Trade League was founded in Britain in 1881 to restrict imports from foreign countries. In the United States, businesses and labor unions use “fair trade” laws to construct what economist Joseph Stiglitz calls “barbed-wire barriers to imports.” These so called “anti-dumping” laws allow a company that suspects a foreign rival of selling a product below cost to request that the government impose special tariffs to protect it from “unfair” competition.

Such dark protectionist thoughts are far from the minds of the benevolent organizers of the United Kingdom’s annual “Fairtrade Fortnight,” during which I just bought two bars of fair-trade chocolate and a jar of fair-trade chunky peanut butter. Their worthy aim is to raise the price paid to developing-country farmers for their produce by excluding the inflated profits of the middlemen on whom they depend for getting their goods to distant markets. Fair-trade products like cocoa, coffee, tea, and bananas do not compete with domestic European production, and therefore do not have a protectionist motive.

This is how it works: In exchange for being paid a guaranteed price and meeting “agreed labor and environmental standards” (minimum wages, no pesticides), poor-country farming cooperatives receive a FAIRTRADE mark for their products, issued by the FAIRTRADE Labeling Organization. This certification enables supermarkets and other retailers to sell the products at a premium. Third-world farmers get a boost to their income, while first-world consumers get to feel virtuous: a marriage made in heaven.

The fair-trade movement, launched in the 1980’s, has been growing rapidly. In a notable breakthrough in 1997, the British House of Commons decided to serve only fair-trade coffee. By the end of 2007, more than 600 producers’ organizations, representing 1.4 million farmers in 58 countries, were selling fair-trade products. Today, a quarter of all bananas in UK supermarkets are sold under a FAIRTRADE mark. But FAIRTRADE-labeled products still represent a very small share – typically less than 1% – of global sales of cocoa, tea, coffee, etc.

The economic rationale for guaranteed prices is well known: stabilizing the prices of primary products, which are subject to sharp fluctuations, stabilizes their producers’ incomes. This argument inspired proposals – most famously by John Maynard Keynes in 1942 – to create “buffer stocks” for the main commodities, which would take supply off the market when prices fell, and add to supply when prices rose. Keynes’s proposal never made it into the Bretton Woods Agreement of 1944, and, while buffer-stock schemes re-surfaced in the 1970’s, they, too, went nowhere.

Left-wing economists like Raúl Prebisch, moreover, later advanced the theory of “declining terms of trade” for primary products: their prices’ long-run tendency to fall relative to the prices of manufactured goods. This tendency seemed to be at work from the mid-1980’s, as commodity producers experienced a persistent decline in prices. In addition, price fluctuations throughout that decade were huge, with dire effects on sub-Saharan African and other developing countries that were largely dependent on commodities for export earnings.

Since then, however, the price decline has been reversed. Food commodity prices have increased by 150% since 2001. This has raised farm producers’ income independently of the fair-trade movement’s efforts. The “declining terms of trade” argument has collapsed.

But primary-product prices remain much more volatile than the prices of manufactured goods and services, causing large fluctuations in producers’ incomes. This exaggerates the effects of booms and busts. So the issue of price stabilization has not gone away.

It is difficult to see how the fair-trade movement can contribute much to solving this problem, because the only serious policy for stabilizing producers’ incomes is to control supply. But that is beyond the scope of fair trade.

The target of all versions of fair trade is “free trade,” and the most damaging attacks on FAIRTRADE have come from free traders. In Unfair Trade, a pamphlet published in 2008 by the Adam Smith Institute, Mark Sidwell argues that FAIRTRADE keeps uncompetitive farmers on the land, holding back diversification and mechanization. According to Sidwell, the FAIRTRADE scheme turns developing countries into low-profit, labor-intensive agrarian ghettos, denying future generations the chance of a better life.

This is without considering the effect that FAIRTRADE has on the poorest people in these countries – not farmers but casual laborers – who are excluded from the scheme by its expensive regulations and labor standards. In other words, FAIRTRADE protects farmers against their rivals and against agricultural laborers.

Consumers, Sidwell argues, are also being duped. Only a tiny proportion – as little as 1% – of the premium that we pay for a FAIRTRADE chocolate bar will ever make it to cocoa producers. Nor is FAIRTRADE necessarily a guarantee of quality: because producers get a minimum price for fair-trade goods, they sell the best of their crop on the open market.

But, despite its shaky economics, the fair-trade movement should not be despised. While cynics say that its only achievement is to make consumers feel better about their purchases – rather like buying indulgences in the old Catholic Church – this is to sell fair trade short. In fact, the movement represents a spark of protest against mindless consumerism, grass-roots resistance against an impersonal logic, and an expression of communal activism.

That justification will not convince economists, who prefer a dryer sort of reasoning. But it is not out of place to remind ourselves that economists and bureaucrats need not always have things their own way.