Facts about FairTrade

by on December 12, 2009 at 11:24 am in Economics | Permalink

We might think of sub-Saharan subsistence economies when we think of
Fairtrade, but the biggest recipient of Fairtrade subsidy is actually
Mexico. Mexico is the biggest producer of Fairtrade coffee with about
23% market share. Indeed, as of 2002, 181 of the 300 Fairtrade coffee producers were located in South America and the Caribbean. As Marc Sidwell points out,
while Mexico has 51 Fairtrade producers, Burundi has none, Ethiopia
four and Rwanda just 10 – meaning that "Fairtrade pays to support
relatively wealthy Mexican coffee farmers at the expense of poorer
nations".

The article offers many other points of interest.  For instance:

By guaranteeing a minimum price, Fairtrade also encourages market
oversupply, which depresses global commodity prices. This locks
Fairtrade farmers into greater Fairtrade dependency and further
impoverishes farmers outside the Fairtrade umbrella. Economist Tyler
Cowen describes this as the "parallel exploitation coffee sector".

Coffee
farms must not be more than 12 acres in size and they are not allowed
to employ any full-time workers. This means that during harvest season
migrant workers must be employed on short-term contracts. These rural
poor are therefore expressly excluded from the stability of long-term
employment by Fairtrade rules.

In other words, it's mostly a marketing gimmick.

Vehical Driver December 12, 2009 at 11:42 am

We live in a world where conspicuous consumption of consumer goods is difficult. Anything that people start to like or becomes fashionable, someone will come along and figure out a way to sell it (or something nearly identical) dirt cheap at Walmart (and it will lose its status).

Fair Trade, by design, either has built in scarcity, or a least built in price-minimum (which is nearly the same thing), guaranteeing that no-one is ever going to figure out a way to make it cheap to the masses. Much like most “green” or “responsible” products, it is unattainable to the masses by design. Thus, it is a very effective form of conspicuous consumption.

K December 12, 2009 at 12:17 pm

This quote was from a collection linked by the guardian article, might provide a bit of an interesting comparison:

“Fair Trade is automatically considered to be much more expensive, but is rarely compared with quality brands. The real cost lies in our logistics, sourcing from villages in the majority world, coupled with the sourcing of environmentally friendly materials. We pay producers 50% in advance, which means we have extra costs of financing these loans. Most customers are not prepared to pay for this, so our team has to work really efficiently. The way forward is to build greater sales volume.”
Safia Minney, Managing Director, People Tree, fair trade clothing companyback to top

Jim December 12, 2009 at 1:01 pm

It takes some gumption to simultaneously argue that fair trade requirements are too onerous for producers and that it is encouraging massive oversupply on the world market. And it’s a testament to the strange obsession that some free-market types have with fair trade that they keep resurrecting the same old arguments against it, never mind that they have been gone over many times before. Owen Barder’s comments of nearly five years apparently haven’t sunk in yet:

“In simple aggregate terms, fair trade shifts the demand curve outwards, increasing both the quantity sold and and the average price (with upward sloping supply curves). A more sophisticated version would be that fair trade creates product and price differentiation, and so allows coffee producers to capture a greater share of consumer surplus, increasing the average price of coffee. (The reason that both prices and quantities increase is that this is a shift in the demand curve, not a movement along it.)

The way to think of this is that Fair Trade is a brand. When Coca Cola invests in increasing its brand value, eg through advertising, it does so because this increases both the volume of sales, and the price it can charge. I don’t think anyone at Coke complains that increasing the price they can charge for Coke makes them worse off. And though Coke’s competitors may lose market share, it is unlikely that the price of other colas falls when the price of Coke goes up (more likely, the opposite is true).

So uncertified producers may lose, as a result of a small lost of market share and possibly slightly lower prices, though at current fair trade volumes these effects will be small. But for coffee producers overall, average coffee prices will be higher, volumes higher, and coffee producers better off.”

John Pertz December 12, 2009 at 1:07 pm

I think the even bigger sham than Fair Trade branded coffee, which is an absolute absurdity in it’s own right, is rich world trade policy towards the poor world. That is why so many poor nations produce coffee as opposed to some other viable farm export. Coffee is not protected in the rich world. There are not giant farm interests trying to block the importation of coffee.

Therefore a ton of different poor areas try to grow it. Allow for the free importation of all agriculture products in Europe and the U.S and you will see better off 3rd world farmers.

Mike Giberson December 12, 2009 at 2:20 pm

Buying quality coffee, which may or may not be fair trade marked, probably does more for coffee farmers (if that is the coffee drinker’s goal). For example, look for specialty coffee’s with the “Cup of Excellence” designation – the program involves auction-based pricing for producers with pre-auction cupping/judging of the product. Cup of Excellence competition winners get paid many times the bulk coffee commodity price.

anon December 12, 2009 at 2:26 pm

Jim is right. FairTrade is a brand. It relies on consumer awareness of a few commodities, and thus it does deter diversification by certified producers, even as it lowers global commodity prices.

But this is a reflection of the underlying reality: people will pay “fair” prices for coffee or sugar, but not for palm oil biofuel, raw materials or manufactured goods.

You can call it a “marketing gimmick” if you want, and laugh at the image of idyllic small-scale farming. Nevertheless, this hardly negates the huge value that the FairTrade brand provides to producers who can meet its standards.

Bill December 12, 2009 at 2:58 pm

“Bill, I think what you might be missing is that it might be too expensive for the real poor people to compete on yet another dimension.”

??? If the purchaser of coffee beans has to pay more to “poor people” in order to compete for the right to use a mark, I still don’t understand, second order or no second order, why we are worse off. I acknowledge that there may be inframarginal land, but, land is land, and other uses attain to it.

Think of it this way: Ocean Spray is a coop owned by its cranberry member producers; it has a brand; its producers compress the margin of intervening layers because they own the facilities and brand; their income increases relative to other cranberry producers. I am happy about that, rather than having all cranberry producers have a lower earnings. And, there is no blockaded entry conditions, so other producers can develop their own mark, or integrate, or the processors can pay non-Ocean Spray cranberry growers more.

The people who have to be competing are those who now have to offer producers more. I don’t shed a tear for them. They’ll take care of themselves.

John Pertz December 12, 2009 at 3:44 pm

Again, at the global level the entire system is stupid. What the fair trade people are saying is lets foster an environment of paying coffee growers more just so we can.

The most socially optimal trade regime is one where all producers of agricultural wares can sell their products free of restrictions in foreign lands, I.E a regime of pure global free trade.

What we have done with Fair Trade is say that rich world trade policy is screwed up because it forces the 3rd world to have way too many coffee growers there by depressing the global price. Instead of reducing the impediments to trade lets burrow our heads in the sand and just invent some cheezy brand to help re-balance some of the inequity caused by 1st world farm policy.

The whole dialogue about fair trade policy is a waste, tantamount to throwing the deck chairs off the Titanic. What we should be talking about is how screwed up trade policy is in the 1st world!!!!!!!!!!!!!!

Barbara December 12, 2009 at 3:49 pm

Figures from 2002 are not particularly useful when appraising the impact of Fairtrade in 2009. For example, in 2004, the Ethiopian Fairtrade certified producer group Oromia Cooperative Union had just 35 coops of which 8 had been certified. Today there are over 100 with around 30 are certified – that’s because demand for their organic, Fairtrade coffee has grown. In 2005, only sugar from Malawi was certified – today there are groups certified to sell nuts and tea too. Fairtrade cotton – from very poor countries like Mali, Cameroon and Senegal, wasn’t around in 2002, but is now. In the Ivory Coast, one of the poorest countries in the world, there were no certified groups in 2002, but now there are 7 certified cocoa groups, 1 mango, 1 nut – and around 20 more applying to join Fairtrade, hopeful of a market on better terms. The challenge is actually creating the market to deliver the better deal from trade that they seek.

If Fairtrade doesn’t work, why are so many farmers queuing up to join in? Why are so many companies getting involved in paying Fairtrade premiums and submitting to its independent auditing? There are many cheaper, easier ways to greenwash their brands.

Anyone who has taken a proper look at how Fairtrade works will know that it operates as a supply-demand system – farmers groups can only get the better price it offers if there is a buyer willing to pay it. By putting companies and producers more closely in touch with each other, that means farmers have a much better idea of what they are going to be able to sell. So arguments about causing oversupply are, quite simply, rubbish.

Of course we need the wider trade reform too. For example, an end to the trade distorting cotton subsidies in the US, which with excess dumping estimated to have depressed world prices by some 14%, have massively undermined West African cotton industry. On this issue, it seems people calling for fair trade and those arguing for free trade, are at least aligned. Sadly, the US, arguably the biggest proponent of free trade in the world, like the EU, simply doesn’t practice what it preaches. Whilst this remains the case, why shouldn’t consumers take matters into their own hands by calling on companies to voluntarily pay farmers a decent price for their crop, and workers a decent wage?

anon December 12, 2009 at 5:01 pm

on the other hand you don’t get to buy a high-status good that way.

Only insofar as consumers in developed nations have “status” and producers in developing nations do not. If I’m buying coffee everyday, it is preposterous to say that I should always choose the lowest-priced brand and donate the difference to some other cause. The inconvenience costs alone would make this prohibitive.

Don the libertarian Democrat December 12, 2009 at 5:25 pm

It seems to me that the point of “Fair Trade” is to make consumers more aware of where the goods they buy come from and how they’re produced. Is something wrong with that?

Andrew December 12, 2009 at 6:20 pm

Of course they are free to choose, Bill.

But you try something and when the evidence roles in that it was a bad plan, you should be free to change your plan.

Two points, when there is a massive marketing machine, it isn’t really people choosing the best option.

And wouldn’t the best use of something called “fair trade” be to give your business to the most in need? Yes, people are still free to choose to not give their business to the really poor and instead give it to the middle class (in worldly terms) because they think the poor are being exploited I guess, but that makes no sense to me and I bet they don’t understand what they are doing.

We’ll never agree because it comes down to fundamental disagreement. Some people think it’s better to join a union because it makes that individual better off. But, they don’t believe that it makes their competition worse off because, well, they should join a union too.

Pat December 12, 2009 at 7:36 pm

Wonder what we can learn from this as they negotiate maximum drug price legislation?

andy December 13, 2009 at 5:08 am

Bill, if people get preference to buy more “Made in america”, my guess would be that people creating “made in china” would get less…
It is actually a charity combined with a product. Nothing bad with that. Only when I mentioned this to some local free-trade organizer, he felt I’m insinuating him – he felt that charity is something embarassing, while reworking a trade scheme is actually great way for these people.
My only problem with free trade is that it is marketed as as way to earn money to those people over there. It should be marketed as charity. People react very differently if you get higher price for your product or if you get low price + some money to educate yourself and get out of the coffee industry.

techpops December 13, 2009 at 11:42 pm

Ok I’m a guilty westerner, living in the UK who actually believed fair trade products were a good thing. I buy a lot of fair trade stuff.

So I’m not making any heap of positive difference by buying Fair trade according to this article and a lot of the comments. So what coffee do I buy? Are there are sources online of information that points guilty westerners like me to places where it isn’t practical or maybe even possible to source them locally?

t December 14, 2009 at 9:49 pm

It’s a voting with your wallet thing. If fair trade is successful, competitors that’ll hopefully do it better will emerge, and pressure will be put on ‘mainstream’ labels to match or improve upon the principles.

Varun December 16, 2009 at 1:08 am

Nathanael, you are wrong on 2.5/3 counts.

1. Forcing companies to hire only part-time workers is not the same thing as “Only allowing them to employ people to work when there is work to be done!”. But I agree that this may not be a “real problem” as total hours of employment stay the same.

2. So long as there are people who do not want to pay more for coffee for the sole purpose of giving charity (and let’s be honest, most people feel this way), Fair trade will never capture most, never mind all, of the global coffee market.

3. Tyler does not make it sound like Fair Trade is to the benefit of everyone involved. He makes it sound like a scam. And he is right, in that it is nothing more than dressed-up charity.

Learn some basic economics before posting rubbish.

Dangger December 19, 2009 at 6:16 pm

Fair Trade is:

1) A mere exhaustion valve, a cosmetic change (See Soper’s ideas on this).

2) Class specific (for middle and upper middle brackets). Fair Trade products are more expensive.

3) A latter day form of paternalism/post-colonialism. A movement that comes from the North to the Global South.

4) An oxymoron. the sole purpose of the system is producing more profit at the end of each trimester, let’s not kid ourselves.

5) Ineffective. Mouse steps don’t change anything, they just make people feel better.

And Joe is right: “FairTrade is just a way for guilty Westerners to think they are making a difference by paying higher prices.”

It goes with the idea that “I don’t really have to change my consumption habits, it’s ok, I’m doing my bit.”

AnnaLimpsy February 16, 2011 at 2:41 pm

I think that this quite true, but it could be solved by working with an affiliate network system. That way Mexico would still be the leader, but the leader would have to give away some of his profit to the people in the network. . . Hope you understand my point.

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