Free Trade, Not Fair Trade

Coffee BeansAlthough the life expectancy of fair trade might be limited in the current climate, the proponents of the theory are still dangerously persuasive in their advocacy of giving growers in Columbia a “fair wage”. However, fair trade could do more harm than good.

It should be noted that the beginnings of the campaign was dogged by controversy, as firms were accused of not passing on the premium paid by consumers to the producers. Although there is substantially more vigilance today, it’s questionable whether most consumers are actually aware of the benefits that fair trade yields for the Vietnamese farmer and especially of the distortionary effect on the global market.

Coffee prices have rallied since 2001, but there is no question as to the source of low prices worldwide. High supply has depressed prices and made it more difficult for farmers to support themselves. The solution should be for these farmers to diversify into other crops, and let the market find equilibrium. This is the only sustainable solution, and will benefit society at large as resources aimed at production are redeployed for other crops – contingent, of course, on their ability to sell these crops free from protectionist policy.

However, consumers are instead fooled into paying higher prices for their produce in the naïve belief that this will support farmers in the developing world. Instead, this campaign actually only serves to reduce real consumption of coffee by increasing the price (even if customers claim that they don’t reduce the amount that they drink – an increasingly fraudulent claim).

The premium paid meanwhile doesn’t actually support any farmers for the large part, and the decreased demand for coffee takes income from the farmers who aren’t lucky enough to be chosen by the fair trade initiative. Thus, the total income flowing into these countries is less than the would-be market equilibrium.

Alas, firms have probably found it extremely profitable to exploit the altruism of their customers, who want to feel good about themselves. They won’t be objecting. Farmers in the developing world are meanwhile paying the price, as there are fewer opportunities for them to make a living. They are painfully aware that there are better prospects of employment under free trade. Unfortunately for them, fair trade sounds good and the self-correcting mechanism isn’t in vogue at the moment.

© The Free Marketeer 2009

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