“Fair trade” revisited

The Fair Trade experiences of Costa Rica and Guatemala leave several lessons for producers, buyers, and consumers to consider:

i) A one-size-fits-all organizational structure, as imposed by Fair Trade rules, discourages competition in the global coffee market.

ii) The rules of Fair Trade, at least in the coffee industry, do nothing to address the situation of the industry’s poorest segment.

iii) Fair Trade may encourage the employment of scarce resources in high-cost, low-quality growing areas that could find better uses than coffee production, thereby limiting the long-term success of the individuals it is attempting to help.

iv) Only a small portion, if any, of the price increase goes directly to poor farmers.

v) Artificially raising the prices for coffee can lead to many unintended consequences, such as creating an incentive to increase supply, which would lead to even lower payments to farmers in the future.

Fair Trade coffee should be commended in so far as it is analogous to the efforts of voluntary private charity. However, if the desired goal is to alleviate poverty, Fair Trade is perhaps not the best way to achieve that goal in the long run. Indeed, it is unclear whether Fair Trade eventually leads to improving the lives of those it intends to help.

From a new mercatus-publication (pdf). HT: Overcomingbias.


June 25, 2007 - Posted by | Economics, tradeoffs

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