On Fair Trade

by Don Boudreaux on November 29, 2006

in Trade

Everyone this side of sociopathy champions fairness.  But much disagreement exists about how to define, how to identify, instances of unfairness in reality.

In local, frequently recurring, familiar circumstances the disagreement is minimal.  For example, everyone agrees that if Jones agrees to pay Smith $25 to mow Jones’s lawn, and then if Smith mows the lawn in a good and timely fashion, it is unfair of Jones to give Smith only $20 — or of Smith to demand $30.

But the more abstract — the more ‘macro’ — the circumstances, the more our intuitions fail us in understanding what is and isn’t fair.  This point was driven home to me by the incredibly insightful Steven Landsburg, from page 49 of his 1993 book The Armchair Economist:

My dinner companion was passionate in her conviction that the rich pay less than their fair share of taxes. I didn’t understand what she meant by "fair," so I asked a clarifying question: Suppose that Jack and Jill draw equal amounts of water from a community well. Jack’s income is $10,000, of which he is taxed 10%, or $1,000, to support the well. Jill’s income is $100,000, of which she is taxed 5%, or $5,000, to support the well. In which direction is that tax policy unfair?

… I have thought about the issue in those terms quite a bit and am still unsure of my own answer. That’s why I hesitate to pronounce judgment on the fairness of tax policies. If I can’t tell what’s fair in a world with two people and one well, how can I tell what’s fair in a country with 250 million people and tens of thousands of government services.

And so it is with all the talk of "fair trade."  No one believes that trade should be unfair, or that unfair trade should be tolerated.  But those persons who bleat most loudly and most incessant about "fair trade" cannot be allowed to win arguments simply by labeling patterns and instances of trade that they disapprove of as "unfair" and then insisting that all "unfair" trade be condemned and prohibited.

Relatedly, there is no reason to take any official or quasi-official government definition of "unfair trade" as valid and then pronouncing self-righteously "X’s trade with Y is an instance of what our government defines as ‘unfair trade.’  Being unfair, therefore, this trade is illegitimate and should be prevented."

Those persons who disagree with the point of the previous paragraph should ask themselves if they would trust government with the power to distinguish "fair" from "unfair" speech and to suppress or penalize all speech declared to be "unfair."

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{ 30 comments }

Umayyad November 29, 2006 at 6:39 pm

Am I missing something?

Jill pays a much lower fraction of a salary 10x higher than Jack. Jill probably has more disposable income, and fairness suggests she should at least pay the same 10% share.

Isn't the direction of the unfairness relatively obvious?

Scott November 29, 2006 at 6:47 pm

Umayyad,

Please explain how you think it's fair that one person has to pay $5,000 while another person has to pay $1,000? If they're both drawing the same amount of water, why shouldn't they pay the same amount?

Michael Sullivan November 29, 2006 at 7:16 pm

This is a sneaky example often used to justify using fees rather than taxes. At least Landsberg and Boudreaux here are both refusing to judge what is actually "fair".

When we are talking about real taxes to support an actual government, a lot of what is being supported is the market order (laws protecting property, enabling right of redress, etc.), which absolutely benefits people in proportion to their wealth and ability to create wealth under a market system. The closer we get to a libertarian government, the more true this is.

Under the current system it's still sort of true also even though itt's a fairly small fraction of government spending that goes to protection of property and maintenance of the legal order.

Partly because the more money you have, the more power, and the more likely you get the benefit of various government programs. Although the economies of scale in sucking the government teat are outrageously large. IOW, some of the already very rich end up receiving a staggering amount of pork from the government while the typical middle class person probably gets relatively little more (and maybe less) than a typical poor person.

beeper November 29, 2006 at 9:08 pm

There is nothing sneaky about this example except when people call it sneaky, trying to convince people that they are being tricked.

If you think Jill gets more benefit from her equal protion of water, then you can argue that she should pay more tax.

Why is that hard?

Michael Sullivan November 29, 2006 at 9:44 pm

I thought it clear from my followup (but perhaps it was not) that I consider the sneakiness to come in when this kind of simplistic example is implied to be analagous with taxes in a general sense. I've certainly seen it done that way, though I'm not ready to accuse either of the authors in question of that motive.

Rory Meakin November 29, 2006 at 10:07 pm

"Fairtrade" is stupid and harmful to those it's meant to help.

When a price falls, it is because there is more of the product and fewer buyers compared to when the old higher price existed. With lots of suppliers offering products, the buyer can be choosy and will demand a lower price. Rather than sell nothing, a seller will lower his price rather than let his customers buy elsewhere.

When the price falls, sellers might try to reduce their costs that have least impact upon production. That way, the least efficient part of their production is discontinued. When it falls low enough, the least efficient producers might decide (or be financially forced) out of business entirely. What buyers are prepared to pay for their product simply isn't worth what it takes to make it.

On the other hand, buyers normally increase their consumption when the price falls. Because it is cheaper, they can afford more and at a lower price, waste becomes less costly. That's how markets work, sending signals to all concerned. When there's lots of production, prices fall which sends a signal to sellers to produce less and a signal to buyers to consume more.

So-called "Fairtrade" attempts to stop these signals from working. It pays above the free-market price to inefficient sellers who would otherwise be forced out of business. In doing so, it keeps them producing and maintains the oversupply which causes the low prices in the first place. This means that those who aren't lucky enough to be blessed with Fairtrade's charity buying continue to suffer from low prices which would have risen again in a free market.

In effect, Fairtrade schemes help inefficient producers stay in business at the expense of keeping efficient ones poor. It would be better for all concerned if the premium price was used to help inefficient producers switch to making something else where they could make money without the need for quasi-charity.

Buying Fairtrade goods might give you a smug sense of superiority in what you imagine to be your ethical buying, but it won't do any good to poor producers in third world countries. Quite the opposite.

ben November 29, 2006 at 11:32 pm

Good post Don, I especially like the last paragraph.

My favorite chapter in Armchair Economist was, from memory, the last, in which he takes on a teacher passing on her environmentalist views to his kid. The argument was excellent, I thought, and applicable to any other kind of fundamentalist brainwashing.

TGGP November 30, 2006 at 12:42 am

I have often heard that it is good for our government to use protectionism as a stick to convince other countries to drop their protectionist policies in a quid pro quo deal. Is there any evidence for comparative effectiveness of that vs unilateral free trade? I suppose the Public Choice school would suggest that special interest groups that don't really care about free trade will disrupt things, but it would be nice if there was some information for which that was a non-factor.

Brad Hutchings November 30, 2006 at 1:46 am

Don, the fair traders typically follow up with 2 things that make trade "unfair": stricter environmental policies here and higher wages (labor standards) here. And you know, they are generally correct that these 2 issues contribute a whole bunch to the cost-effectiveness of having something manufactured a half world away and shipped here. It is a powerful opening sound bite, and to refute it requires diving into details that are beyond most people's attention spans or comprehension.

Perhaps we counter with… "Yes, but products from cars to computers to iPods are more affordable by more people." But then that sounds like picking nits and ignoring their issue.

I think it's best to just beat them to the punch with "Free trade has given us better products that are more affordable by more people. Example 1. Example 2. Example 3." Then, they have to counter with "but it isn't fair". Who is the whiner now?

Flash Gordon November 30, 2006 at 1:57 am

The top 50% of income earners pay about 95% of all income taxes. The bottom 50% pays only about 5% of total income taxes. But that bottom 50% has the voting power to impose higher taxes on the other 50% and to nearly exempt themselves from the system, which is what they have mostly done. They do this in the name of fairness. Problem is, it ain't one bit fair.

Mike November 30, 2006 at 8:50 am

Brad,

I think a more direct approach works. There is not evidence of a race to the bottom in environmental standards, nor in wages. Tim Harford has a nice summary of the former. Many books have been written on both.

Do you think people just ignore the evidence?

alex November 30, 2006 at 3:07 pm

Free trade isn't a problem. It has been clearly documented by countries with reasonable economic policies (East Asia comes to mind), that the incomes of people, barring unique circumstances, rise in tandem with productivity. There was a very good book I read, called Free Trade Under Fire, in which the author showed that wages in South Korea, Japan, and other developing countries, from the 1960's to 1990's, saw the wages of workers in industry and elsewhere rise by about the same amount as their productivity rose, which makes sense. Now, I don't see how people can say that free trade cuts wages. It doesn't. It redistributes employment and wages to places with comparative advantages, and the people working in those jobs see their wages increase. If there was a perfect free market, then of course wages in the developed countries would fall and wages in the developing contries would rise until they reached parity. However, because of the fact that markets are not efficient to that extent, and that the are always variables not being taken into account (like the fact that only a fraction of college graduates in China and India get an education and skills comparable to that of graduates in the US and Europe).

Randy November 30, 2006 at 3:29 pm

On taking a second look at the example of the well and taxes, I still go with my instinct that the standard of fairness is "agreement".

It is entirely possible that all parties to the well arrangement have agreed to it. Many agree to progressive taxation in spite of its additional cost to them personally. It is also possible that some or all parties have been forced. Many feel that their share of taxes is unfair if it is higher than zero.

If all parties have agreed, then the arrangement is entirely "fair" in spite of its inequalities. If some have been forced, then the agreement is "unfair", at least to the extent that some have been forced, and possibly to all.

If I apply this concept to the "fair trade" argument, I ask; Who if any of the participants to the trade arrangement are not in agreement with it as practiced?

ben November 30, 2006 at 5:28 pm

Brad

Martin Wolf demolishes the race to the bottom argument in his book "Why Globalization Works." The evidence actually points very strongly to a race to the top on environmental issues.

xteve November 30, 2006 at 9:37 pm

A big problem with the well analogy is that the well is community owned. That's where it all falls apart, both as an analogy for trade & as a model for determining fairness.

Russell Nelson December 1, 2006 at 1:29 am

Er, xteve, how did the well come to be community owned? It was either purchased, or dug. Either way the community pooled resources to create the well. How did they do that, and …. was it "fair"?

Bill December 1, 2006 at 1:35 pm

I guess when I think about fair trade I think about coffee pickers or some other incredibly hard, manual, labor, and maybe in some instances factory work, taking place in a developing nation.

I used to be extremely skeptical about fair trade as well, but as far as I understand it after learing from someone who went to Rawanda and Jamaica to study it, and after watching a news special on Dubai, here is my attempt to articulate an argument for "fair" trade, at least in some forms:

There are a lot of middle-man type organizations that are rent seeking, at the expense of the "little guy". In a country where the land is all owned by a dictator or corrupt officials, people are legitamately close to starving , they can be made to work for peanuts, just to survive, because they have no meaningful alternative.

If, on the other hand, you buy your coffee from the view parts in that country where pickers own the ladn they work, and they have been taught to do some of the value added work, they can sell directly, and make more money for themselves by selling at the same or even a lower price commodity price. A lot of our coffee comes from Columbia, Rwanda, Ethiopia, and Jamaica. While maybe we can't agree what "fair" trade is, we can probably agree that it is not likely to be going on in those countries.

In the news story I saw on Dubai, guest workers from places like Pakistan and Indonesia were working 12 hour days on construction sites, there were over 300 work accident deaths in a few months, and they had to pay high fees for shabby housing, and buy from a company store, and were often kept in debt for months just to work off the high fee charged to him for his trip. Their passports where also often held from them, and they were often paid a month or more late, so that if one quit, he would be immediately deported back and lose one month's pay. Yes, his home country's conditions were probably worse, but surely everyone thinks "fair" trade at least means reasonable freedom of contract, free from abusive coercion, etc.

Not that I want government to define what equals free trade, just don't scoff at free trade promotions at Starbucks.

Randy December 1, 2006 at 4:46 pm

Bill,

You do have a point. When I honestly think about that coffee picker working 12 hour days for very low wages and no benefits, it makes me think that maybe I shouldn't drink coffee. But then again, by extension of the same logic, there are many things I would have to stop doing. If I stop doing business with anyone who uses cheap labor (insert definition of cheap labor here), then I will have to start making my own clothes, growing my own food, walking, building my own house, producing the materials used for that house, producing my own computer chips, and on and on… And note that most of the people I would have to stop doing business with live and work within the borders of the US of A. If I cannot ethically do business with anyone who uses labor making lower wages or benefits than what I make, then I just won't be doing a lot of business – in fact, hardly any business. So who will benefit from my ethical stand? If no one, then how is my stand in any way ethical? Its one thing to imagine a better world, but another to bring it about. The road to hell and all that… Good intentions just put coffee pickers, transporters, whole salers, retailers, and their associates, out of work. So on second thought, I'll have another cup…

Michael Sullivan December 1, 2006 at 6:51 pm

If I know that the owner of a certain shop mistreats their employees in some way, basically does things I consider unethical or immoral, whether or not the employees in question in some fashion agree to it (perhaps because their other options are worse), is it really unreasonable cease doing business with that shop? To pay a slightly higher price for my product with someone else who does not treat their employees in a manner I find repugnant?

Let's distinguish people who choose to purchase "fair trade" products (by whatever definition), and those who would have us make laws to define "fair" trade and outlaw or tax trade that does not meet their criteria.

I drink fair trade coffee, and the stuff I found is just better than most of the alternatives for a similar or lesser price. As far as I'm concerned the premium I'm paying for fair trade in this case is pretty small or zero, unless I don't care about the quality, that is. I certainly don't begrudge people who can't afford it that they purchase bottom dollar coffee which isn't "fair trade" any more than I begrudge them buying store brand ice cream rathher than Ben & Jerry's.

Brad Hutchings December 1, 2006 at 7:53 pm

Mike and Alex, Yeah, I know intuitively that perceived or real environmental standards have less to do with offshoring manufacturing than the cost of labor. I'm just saying that that is what the fair traders lead off with. It resonates with all soccer moms and every soccer dad who desires a sex life beyond his 20s. Like most populist causes, the case for "fair trade" is made with sound bites, not with evidence, nor with critical thinking. I'm just saying that on some level, we need to be prepared to play there. If "I'm a free trader" ever became half as cool as saying "I'm a Republican", we'd have at least 20 more people on our side ;-) .

Kam December 1, 2006 at 9:38 pm

The Well. Suppose there were a dozen people people paying their 10%, $1000. And all of them are needed to keep the well running and safe from the Visigoths over the hill. The 5% $5000 can join in the community and basically say, hey, I get to live here with these great people and enjoy the well, and the hit on my is only 5%. If I go over to them Visigoths, I can keep my $5000, but I do without the well, and the clean, friendly folks over here.

Why shouldn't the rational 5% person be glad to be a member of the well community even though he pays nominally more but proportionally less?

Laura December 2, 2006 at 5:37 pm

I believe that Fair Trade does work and is evidenced by pockets of people in developing countries who are making a living by producing a product that is traditional for their culture. We're not talking about cars and computer chips although I see no reason why any worker should ever be exploited, or treated in any way as less than. If a giant corporation goes into a small village in Mexico and hires people to sew their clothes and pays them a sub standard wage and gives them no health care or benefits of any kind and furthermore, bullies and mistreats them, how can that be considered a success story. It's only a success for the CEO who gets the 100 million dollar bonus that year. My belief is that all people have the right to fair wages and just because a giant corporation has the power to do what they do, does that make it right. Maybe if we were all less concerned with profit and more concerned with the greater good, there would be no argument.

Rory Meakin December 2, 2006 at 7:44 pm

Laura, “Fair Trade” does work in that it gives affluent types in rich countries a pleasant sense of smugness that’s well worth the few pennies premium on a cup of coffee. Sadly, it doesn’t work in its other aim, helping poor people in developing countries become richer, as I explained in my previous post. It boils down to what the brilliant French economist Frederic Bastiat described in his book “That Which is Seen and That Which is Not Seen.” The premium evidenced in the pockets of the coffee grower is Seen. The poverty of other growers as a result of the continuing low prices [caused by that same premium keeping the first grower in business] is Not Seen. (Scarcity always fetches a higher price than abundance.)

What would genuinely help them is more free trade, not less. If the EU and the US abandoned their evil farm subsidies, tariffs and import restrictions, the struggling coffee growers would have the option to switch to wheat, corn or other protected products. Poor Europeans and Americans would benefit from lower prices for food at the supermarkets, too. Sadly, rich American and European farmers would lose out so it’s unlikely to happen any time soon: they have more influence in Brussels and Washington than the poor.

Regarding your small village (does the size of the village make a difference?) in Mexico: if some giant corporation opens up a workshop there and, as you say, offers ‘sub standard wages’, how many Mexicans do you suppose would quit their jobs in favour of the lower wages being offered by the ‘giant corporation’? Mexicans aren’t as stupid as you might think. They too would only switch jobs if the new job were better than the old one. The truth is that Western companies in developing countries usually pay much higher wages than other jobs in the area. Poor people getting better wages: Isn't that a success story, Laura?

Randy December 2, 2006 at 7:48 pm

Laura,

Let's say I offer to mow your lawn for a fair wage. I think $45K per year for weekly mowing and trimming seems fair. The reason I think its fair is because that's what I need to support my family. Will you hire me? Should the choice even be yours? Perhaps the government should force you to hire me and to pay me what I think is fair. After all, what right do you have to be concerned about your profits. You should be more concerned with the greater good.

Laura December 2, 2006 at 10:05 pm

Hi Rory,
First of all I don't agree with you that because a farmer is paid a fair price for his coffee other farmers suffer. What it does is stop the giant corporations from making giant profits on the backs of these small farmers. Secondly, it doesn't make sense that these coffee growers switch to wheat or anything else. Coffee is what they grow. Regarding Mexico: no,the size of the village is irrelevant I don't believe Mexicans are stupid at all and I actually take offense to that comment. Obviously no body would quit a better paying job for this imaginary factory job. But what if they didn't have a job to begin with. What if they took the factory job because that was the only job around and maybe it pays a few dollars more a week than the alternative, which is nothing. My point is does that make it right? It's not that I don't think a company of any kind should make a profit. It's just that profit should not be as important as people. A company can pay people a fair wage and still make a profit. I don't consider it a success for someone to work 12 to 18 hour days 6,7 days a week and still live in poverty. Better wages that still aren't enough is not a success.
Hi Randy,
If your lawn mowing services are worth 45,000 a year I would not be able to afford to hire you. I don't believe the govt should force me to hire you, but should the govt be able to force you to lower your price to 10,000 a year? Of course I am concerned with profit but not to the point that I would exploit you to make one. So if I can't afford your services I will do without them.

Russell Nelson December 3, 2006 at 12:12 am

Laura says " I see no reason why any worker should ever be exploited,"

I feel exactly the opposite. I think every capitalist should think he is exploiting his workers, AND every worker should think he is exploiting his employer. In this manner, both of them will think they're getting a great deal and will continue to work together. What more could you ask of a trade than that both sides think they're completely ripping off the other side?

Randy December 3, 2006 at 12:57 am

Laura,

So you can see that my need is not the standard by which you will pay me. You will pay me what my lawn services are worth to you (if anything). And if I try to charge more, you won't pay me at all. What we agree to, and only what we agree to, is what is fair.

Rory Meakin December 3, 2006 at 8:25 pm

Laura, I’m glad you accept that the Mexicans in your village are better off with their new jobs from that giant corporation (again, is the ‘giant’ size relevant? What about a plain large corporation, or a medium sized one?) than they would have been without them. Even if they don’t pay the kind of wages that you would deem ‘fair’. So, poor people in developing countries become better off. Unemployed poor villagers get their first job. But that’s ‘not a success’. I’d say anything that makes people better off, particularly poor people, is a success, even if things aren’t as wonderful as they might be a fairytale perfect world.

What I really want to address is the idea that because the misery and poverty something cause to people isn’t obvious then it doesn’t happen. Let’s imagine you run a café in a small town. You’re getting making a reasonable wage and your customers are satisfied. You have one competitor in the town, Old Cafe. You both charge $3 for a coffee and too make some profit, but not as much as their business isn’t so well run as yours, and is located a bit further away from the biggest office buildings. Then imagine a third café, New Café, opens which is even better run than yours, and in a slightly better location. They undercut you to tempt your customers away, charging $2.50 for a coffee and still make a profit, as they’re so well run. You realise that unless you cut your price to $2.50, you won’t get any of your customers back. And at a lower price, some customers will probably buy coffees more often than they used to. So you cut your price and then so does Old Café, so they don’t lose any more customers. At this new price Old Café starts losing money. He simply can’t manage to make a living out of the coffee business any more as the price is so low so he starts talking about closing down Old Cafe. You feel sorry for him as he doesn’t know how he’ll feed his family, but you’ll be relieved when it does close down because then you’ll be able to put your prices back up to $3 a cup and you’ll be earning a decent living again.

But then a foreign charity called “Fair Business” comes to town. They talk to Old Café and feel very sorry for them, and decide they’re not being paid a Fair Price for the coffee they sell. So they use their charitable funds to pay a premium to Old Café. For every cup of coffee they sell for $2.50, Fair Business gives Old Café an extra 50 cents. They’re thrilled at Old Café, and really appreciate the Fair Price premium paid to them by Fair Business. It means they’re back making the same profit as before New Café opened up, even though their customers are only paying $2.50 a cup. It’s not so great for you though, nor for New Café. If Old Café would have gone bust, both you and New Café could have afforded to lose a few customers by putting your prices up because some of Old Café’s customers would have gone to you. Then you’d be earning a better income again. Instead, you have to keep going, trying to make ends meet at $2.50 a cup. Still, your plight doesn’t concern those ethically-minded people at Fair Business. After all, their good work is evidenced by the pockets of the people in Old Café. And they don’t agree that because Old Café is paid a Fair Price, you would suffer. They just don’t believe it, Laura.

Laura December 4, 2006 at 2:36 pm

Rory,
I'm sorry but your analogy doesn't make any sense to me and I find your tone condescending.

Rory Meakin December 4, 2006 at 3:38 pm

Fair enough… I give up. I'll console myself by imagining you're winding me up and understand it all perfectly well.

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