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Is Fair Trade Fair?

Posted By Russ Roberts On March 19, 2006 @ 3:07 pm In Trade | Comments Disabled

The "fair trade" label on coffee and other products purports to help poor farmers get more for their products by cutting out the middleman. Yet, it doesn’t always work that way as the New York Times reports in this story:

TIM TERMAN always looks for the black and white certified Fair Trade
logo when he buys bags of coffee from the Mountain People’s Co-op in
Morgantown, W. Va. He pays nearly twice as much — up to $10 a pound —
as he would for conventional coffee, hoping the extra dollars go to
struggling farmers.

That’s not always the case. Despite
good intentions, most consumers who shop according to their social
convictions don’t know how much of their money makes it to the people
they hope to help. Critics say too many fair trade dollars wind up in
the pockets of retailers and middlemen, including nonprofit
organizations.

But organizations involved in fair trade say the benefits do trickle
down. Paul Rice, chief executive of TransFair USA, which controls Fair
Trade certification in the United States, said the programs sometimes
eliminate as many as five middlemen — a local buyer, miller, exporter,
shipper and importer — and instead allow farmers to deal directly with
an American wholesaler. "It is empowering farmers to create a powerful
export business," he said. "When they do that, they can make
dramatically higher prices, often two to three times higher."

If
consumers pay a premium for those products, Mr. Rice said, it means the
concept is working. "They put their money where their mouth is and pay
a little more."

 
   

That’s an interesting measure of whether the concept is "working."   If consumers pay more, it’s working because their consciences are being salved. Mr. Rice seems to think it doesn’t really matter if farmers get any of the benefits of the higher prices.

TransFair describes its logo fees as amounting to just pennies on
the pound. The pennies add up. Last year, it generated $1.89 million in
licensing fees from companies that used the logo. It also spent $1.7
million on salaries, travel, conferences and publications for the
40-employee organization.

Some critics find such expenses
excessive. "Farmers often receive very little," said Lawrence Solomon,
managing director of the Energy Probe Research Foundation, a Canadian
firm that analyzes trade and consumer issues. "Often fair trade is sold
at a premium, but the entire premium goes to the middlemen."

Lovely, isn’t it? The fair trade organization replaces traditional middlemen with itself. The results don’t seem to be all that different:

Fair Trade labels don’t list the amount paid to farmers; that sum
requires research. The amount can vary depending on the commodity. An
analysis using information from TransFair shows that cocoa farmers get
3 cents of the $3.49 spent on a 3.5-ounce chocolate bar labeled
"organic fair trade" sold at Target [1]. Farmers receive 24 cents for a one-pound bag of fair trade sugar sold at Whole Foods for $3.79.

The
coffee farmer who produced the one-pound bag of coffee purchased by Mr.
Terman received $1.26, higher than the commodity rate of $1.10. But
whether Mr. Terman paid $10 or $6 for that fair trade coffee, the
farmer gets the same $1.26.

More bad news:

Fair Trade labels don’t list the amount paid to farmers; that sum
requires research. The amount can vary depending on the commodity. An
analysis using information from TransFair shows that cocoa farmers get
3 cents of the $3.49 spent on a 3.5-ounce chocolate bar labeled
"organic fair trade" sold at Target [1]. Farmers receive 24 cents for a one-pound bag of fair trade sugar sold at Whole Foods for $3.79.

The
coffee farmer who produced the one-pound bag of coffee purchased by Mr.
Terman received $1.26, higher than the commodity rate of $1.10. But
whether Mr. Terman paid $10 or $6 for that fair trade coffee, the
farmer gets the same $1.26.

At the heart of the fair trade idea is that small farmers are at the mercy of the marketplace:

SHOPPING activism in the United States has helped funnel $67 million to
fair trade farmers and farm workers throughout Latin America, Africa
and Asia since 1999, according to TransFair. Without fair trade,
supporters say, some farmers have no access to market information and
can often be duped into selling to middlemen at below-market prices or,
if prices fall, can be forced to quit farming.

The story seems to suggest that even with ‘fair trade,’ farmers can be duped. But the real question is whether international organizations such as Fairtrade can intervene in these markets without unintended consequences. The real solution to make poor people’s lives better is to buy a lot of their products. Low prices for consumers are the route to improving these people’s lives by increasing the demand for their products.

If ‘fair trade’ organizations really want to help poor farmers from being duped, maybe they’d do them a better turn by helping them get information about market prices and new innovations that could lower their costs. That would help farmers without raising prices to consumers, be intellectually honest and might actually make farmers’ lives better.

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