Is Fair Trade fair?

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It’s 9:45 in the morning, she has dropped her two kids off at school, done an hour at spin class and now as she sits in her favorite coffee shop, wearing her LuLuLemon yoga pants sipping her coffee she is feeling quite satisfied.  You see not only has she taken care of her family, she is taking care of the poor coffee farmer because the coffee she is enjoying is Fair Trade.  But is Fair Trade really fair?

Unfortunately, I will never be able to feel that self satisfied smugness because I don’t drink coffee (no, I am not holier than thou, I just get my caffeine the natural way, through Diet Coke).  But I can still ask the question, is Fair Trade really all that it is cracked up to be? 

The mission of Fair Trade is to assure that the workers in the field are getting a “fair” wage.  This is easier said than done.  There are a number of unanswerable questions.

–       What is a “fair” wage?

–       How do you assure that the money is flowing to the workers?

–       What is the impact on the other important factors of working, like safety?

–       What about other economic factors like job growth and economic growth?

As a board member of a charity in India I know the frustration of trying to find practical answers to these questions.

Studies on both the micro and macro effects have been done and they aren’t encouraging.

On a micro level, studies have shown that that only 1% of the increase ends up going to the farmer in the field.   Not very compelling.  Additionally, even the little bit that ends up in the farmers pocket distorts the labor market because it discourages that farmer from trying to get a higher value job.

On the macro level it gets even more discouraging.

Running the certifying organization costs lots of money.  Standards need to be set and inspections need to be performed in some very remote areas on an ongoing basis.  These costs need to be covered through transaction costs in the supply chain.  Additionally, farmers spend a significant amount of money to obtain the certification.    Once they have that certification because they are receiving a price that is greater than the normal market clearing price they tend to expand how much they grow.  Moving out of one crop and into the new Fair Trade crop.  This shift in production tends to distort the market by depressing the price of the non Fair Trade products and in some cases even leaves an economy worse off because of over reliance on a specific crop. 

Additionally, after having this certification, as happens whenever humans find they have an advantage, they try to make sure that no one else can get the same advantage.  This manifests itself by the people with certification working to raise the standards so that no one else can get the same certification.

Many economists argue that the real problem in the agriculture market is the subsidies that are paid by the developed countries to their own farmers (over $250 Billion annually).  This protectionism distorts the market and the best way to improve the life of poor farmers across the world is to eliminate these subsidies and to allow markets to set the true prices for these commodities.  This will allow assets to flow towards their best use and everyone will be better off overall.

So which is better Fair Trade or Free Trade?  I would love to hear your thoughts.

For more information check out Econ Talk…

http://www.econtalk.org/archives/2013/07/narlikar_on_fai.html

http://www.econtalk.org/archives/2007/12/munger_on_fair.html

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