Saturday, July 26, 2014
Exit from comment view mode. Click to hide this space

Why Fair Trade?

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.

Read more from our "In Keynes's Footsteps" Focal Point.

Exit from comment view mode. Click to hide this space
Hide Comments Hide Comments Read Comments (4)

Please login or register to post a comment

  1. CommentedAlexis Lefranc

    Fair Trade was invented in the eighties to ensure raw material, in particular foodstuff, was bought from producers at a price reflecting the fluctuations of its bulk and retail value. In other words, it was a manner of trumping the distorting effects future speculation could have on the price of commodities, leading speculators to engross increasing profits while producers could be forced to sell at decreasing prices. This has actually happened a number of times since the 70s.

    Paradoxically, futures were invented in the early 20th century for precisely the same reasons: to bulwark US farmers against price fluctuations and the risks these entailed for the stability of their income.

    In any case, the Fair Trade movement does not envisage a "marriage in Heaven", but is designed to ensure small primary producers get a fair deal for their products in a globalised economy. Whether it achieves that goal remains in question, but not its primary aim.

    This should have been mentioned by Mr Skidelsky. Meanwhile, the statement according to which "the only serious policy for stabilising producers' income is to control supply" is not referenced, and certainly not considered as self evident in the literature on the subject as the author seems to think.

    In fact, as he himself points out: "the issue of price stabilisation has not gone away". One wonders then, why he thinks it is so easy to solve. A little more respect for movements aiming at making the economy fairer would be appreciated from an economist keen to appear in public as a proponent of fair opportunity thinking.

  2. CommentedJonathan Lam

    Gamesmith94134: why fair trade?

    After the effects of “barbed-wire barriers to imports” suggested by the businessmen and union members in US or the developed nations, they should understand the nature of their present financial crisis that they lost their competitiveness by a wide margin in the global term, and eliminate the choice for its people from affordability to growth because monopoly can level off its local innovation as well. Why can’t its industries be more effective or efficient to cut cost or lower price even after they met their competitions?
    Recently in China, I saw the railways imported from US, built in China in the 20s, they are still running. It was the top of technology for US, and we have the football team name Pittsburg Steelers----one of my favorite team. When the piece of the Oakland Bridge cracked, we must import it from China since we lost our competitiveness and effectiveness to pricing to the steel industry to China. Pittsburg Steelers turned into an icon for American Football and industry of its own, Subsequently, the township and its steel worker union had made the bureaucrats proud of the steel industry that even Americans cannot afford; but, they can complain the economists outsourcing the industries for profitability. I am not prudential in protectionism since I am not sure why people do not throw stone inside the glass house; but the greenhouse effect for labor is costly, and the consequence of protectionism is anemic to growth in all terms of all imports or exports due to the loss of local innovations or the profitability under the labor cost that industries compete both fair and unfair competitions including anti-dumping or tariffs.
    In the recent years after we reckon the deficits wrecked the developed nations, and the surpluses prospers the emerging market nations. Many suggested the zero sum fair trade that many developed nations are dumping their technologies like green industries with high prices to the emerging nations in order to create its equilibrium; however, the resistance is high since its benefits to its consumers are minimal. Therefore, I would expect the bases of its consumers must be expanded first that the low-earning labors in these nations must achieve its sustainable living standard to be benefited to the technology transfers; then, the level of consumerism should meet its need in order to create the chain reaction of the supply and demand. Perhaps, they also need education to gain control systematically through the structural developments based on the foundation of necessity and affordability. Otherwise, the ClubMed syndrome will repeat to spread throughout the emerging market nations too; and, it was how the PIIGS got affected since 92’ that tourism did not help them to produce much to the bases of consumers, instead, they were subdued by the corruption and deficits as well.
    “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.”
    In assuring the outcome of the FAIRTRADE can be the coming generation, we must develop the appropriate system or superstructure for monitoring the process in opening the commodity markets for those developing countries. Perhaps, in order to stretch the safety net for the poor farmers or labor, I think the organizing the groups in common interest may use the cooperative system that the group of small farmers can bundle up in their corps or commodities to set their corporation to market their goods. However, I would recommend the Development Bank of the United Nations as the free agent for Fair Trade which these developments can be invested in the open markets, and the organized grower or producers can grow into corporations with co-operatives; since some of the developments may have involved with international financial system and assisted in the market system during the transactions. Also, there must be a representative for the grower and producer like Africa Union, ASEAN or EU to represent and ensure the normalcy of its productivity and transparency on the transaction of these commodities.
    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. Finally, if we must open the bases for new consumers, we must give the poor farmer and labors a chance to taste the FAIR TRADE and move away from poverty, we must stop the monopoly and give free trade a chance; then these new consumers can save us from the present financial crisis. If we accept the fact that we do need to trade honestly and share generously among nations and countries of people; there must be a system to protect the coming generation of grower and producer and a superstructure of networks to assure everyone is applying at will.

  3. CommentedHenk van Trigt

    Fair trade, when including sustainability standards geared to mainstream retail like Utz Certified and Rainforest Alliance, is big in the Netherlands. Notably in chocolate and coffee, market shares are substantial and growing fast.

    The original Fair Trade movement with the Max Havelaar brand was the launching pad for this success. The initiative had an appeal to Dutch consumers who did not simply accept the outcome of market processes, but looked beyond them. What is the effect on livelihoods for poor producers in developing countries, and can we improve it?

    This drive in consumer markets has definitely helped improve livelihoods in producer countries to some extent. Also with an appeal to corporate social responsibility pushing retailers to offer certified sustainable products. Helped by scarcity, market prices for good quality sustainable produce have generally been good over the past years.

    It is uncertain whether consumers are willing to indefinitely pay premium prices for sustainably produced commodities. Hence it is essential that commodity producers in developing countries get their act together and become more organised and entrepreneurial. Not only production and products but also understanding markets, and acting upon it including by managing supply, are key to a better future for them, in both the short and long run. The fair trade movement and initiatives from industry are assisting them also in this respect.

  4. CommentedZsolt Hermann

    Although "fair trade" is a nice idea it cannot work until there is a deeper foundation to it.
    Today the purist economist view prevails, which is based on our inherent nature: maximum profit for me for minimum investment.
    If I could get what I want without paying for it, I would take it happily without taking anybody else into consideration.
    This is not a crime, as mentioned it is simply originating from our subjective human nature living by the "pleasure/pain" principle.
    So can we ever achieve true fair trade, true social equality, especially when we see that our previous "self profit" motivated system is falling apart?
    There is only one way we could achieve a fair human system: when we all feel that we are actually part of a single, united, totally interconnected system, and that my personal prosperity, success, health is totally dependent on the optimal function of the whole system
    And this is exactly that we are learning through this global crisis.
    At the moment we are learning it in the hard way, as we stubbornly try to continue with our self calculating way we are sinking deeper and deeper into the crisis, flirting with very unpredictable and volatile consequences.
    The wiser way would be to finally take into consideration the countless scientific and professional opinions, publications describing how our new, global and integral world functions and start adapting to its laws.
    Superficial adjustments will not work, only a fundamentally different human system can work, which is based on mutual consideration.