Half a Cheer for Fair Trade Philip Booth and…

           Half a Cheer for Fair Trade



         Philip Booth and Linda Whetstone


                           3rd April 2007




       26th IEA CURRENT CONTROVERSIES PAPER



                   Institute of Economic Affairs
                        2 Lord North Street
                               London
                             SW1P 3LB



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                        HALF A CHEER FOR FAIR TRADE

                         Philip Booth1 and Linda Whetstone 2
Abstract

The fair trade movement claims that the products it provides are sourced
"justly" and that purchasing fair trade products brings economic benefits for
the poor. Whilst it is clear that fair trade might bring some benefits to particular
groups, whether it brings significant net benefits to the poor in general is
questionable. Moreover, the claim that fair trade transactions are more "just"
cannot be substantiated. Customers also might be surprised to learn that the
majority of the Fairtrade Foundation's income is spent on promoting its own
brand.

Introduction

The authors of this article had an innate sympathy for the "fair trade3
movement" at its inception. Fair trade organisations offer suppliers particular
forms of contractual terms that, it is claimed, bring particular benefits to
producers. Most so-called fair trade is conducted in countries where the legal
and institutional barriers to development are very high. In this environment,
fair trade may be an "enterprise solution to poverty". It is certainly better than
no trade at all. The institutions that are supported by the fair trade movement,
such as worker cooperatives, are a legitimate part of the rich tapestry of a
market economy. Whether they are efficient or not is beside the point. Like the
Co-operative movement, the John Lewis partnership, building societies and
mutual insurance companies in the UK, the corporate forms promoted by the
fair trade movement add to, rather than detract from, the institutional variety of
a market economy. Fair trade purchasers can enha nce the process of
competition where there is market dominance by large firms.

However, the fair trade movement goes further than wishing to add to the
variety of institutional and corporate forms that exists within the market
economy. It suggests that the production and purchase of fair trade produce
somehow lies on a higher moral plane than other business activity. Many
Christian groups have seized on and promoted this with alacrity. Churches
have become "fair trade churches" and voluntary aided Christian schools have
become "fair trade schools". There are even "fair trade towns". A suspicion
that all may not be right with the fair trade movement comes from looking at

1
  Philip Booth is Editorial and Programme Director of the Institute of Economic Affairs and Professor
of Insurance and Risk Management at Cass Business School, City University, London.
2
  Linda Whetstone is a Trustee of the Institute of Economic Affairs and of the International Policy
Network.
3
  In general we will use the words "fair trade" to refer to the concept of "fair trade" as understood by its
promoters and "Fairtrade" to refer to the UK Fairtrade Foundation and its associated products, though
the distinction is not always absolute or easy to make. In the USA "fair trade" is also used to refer to
regulations on trade that are often said to "level the trade playing field" such as anti-dumping duties.
This is a distinct use of the term and should not be confused with our use.


                                                     2
its broader political objectives. The movement seeks to reimpose the trade
restrictions on the coffee market that existed before 1989. This will be
discussed further below. But it is worth noting that it was only after these
controls were lifted that many, very poor countries began to produce coffee.

The fair trade movement is entitled to promote specific political beliefs, a
practise that is not uncommon with major commercial organisations (for
example, the Co-operative movement is affiliated to the Labour Party). But,
these political beliefs and the contribution of fair trade to economic w  elfare
should be analysed using the tools of the discipline of political economy. They
are certainly not moral positions. The way the fair trade movement moves
seamlessly from its own commercial activity to a political agenda campaigning
to re-regulate the coffee market should arouse suspicion. We regret the
implicit and explicit criticism of other aspects of the market economy by fair
trade organisations. The fair trade movement makes strong claims. These
claims should be subject to strong tests. Below we pose a number of
difficulties with the fair trade model of doing business that suggest, at best,
that those promoting fair trade should have the humility to accept that their
way of doing business is not objectively better for the poor than other ways of
doing business.

For the sake of simplicity we focus on fair trade coffee in this article. We wish
to analyse the market where the arguments of the fair trade movement seem
to be at their strongest.

Fixing Coffee Prices

The Fairtrade Foundation is a UK organisation that certifies retailers and
wholesalers of fair trade products in the UK. It is part of an international
movement. The Fairtrade Labelling Organisation (FLO) certifies suppliers and
producers in under-developed countries. The Fairtrade contract involves fixing
prices to the producer so that a guaranteed price is received regardless of
supply and demand conditions at the time the product is delivered. This is
common in many markets and is a similar device to the futures and forwards
markets that exist in primary commodities4. However, the use of such
approaches is, by no means, unique to Fairtrade. Many purely commercial
organisations, including multinationals , guarantee prices to suppliers in order
to bring stability to the supply chain. Such contracts are unquestionably
welfare enhancing and bring benefits to both suppliers and customers ­ that is
why they are commonly used in primary product markets. However, they
cannot insulate growers from changes in market conditions. If there is a
demand shock, at least in the medium run, as the quantity to be exchanged at
the fixed price is not itself fixed, there will be a fall in the demand for the
Fairtrade grower's product. Indeed, the fall in demand may be greater
because of the existence of a fixed price. If there is a supply shock, the spot
price of coffee will fall relative to the fixed Fairtrade price and, either other
growers may suffer a greater fall in price or there will be a relative fall in
4
  Strictly speaking the contract offered is more like a put option because Fairtrade suppliers also
receive higher prices if the market price of coffee rises, though the quantity to be purchased is not
guaranteed (see below).


                                                    3
demand for Fairtrade produce because the price diffe rential between the
Fairtrade product and the product traded in the spot market will have
increased.

It should be noted that these scenarios have not yet been tested because
Faitrade produce has been a growing share of a market that has not recently
suffered from significant adverse shocks.

Fixed Prices for Everyone?

If fair-trade price floors are beneficial to those who supply coffee under such
contractual terms but detrimental to those who do not, why not fixed prices for
all coffee growers? In fact, the fair trade movement would like to move back to
regulated coffee markets. Regulating prices without also guaranteeing that
agreed quantities will be bought from farmers at those fixed prices will not
alter the fact that growers will suffer when demand falls or supply rises in a
particular year: farmers would simply suffer from fluctuations in the quantities
bought and sold rather than from fluctuations in the price. Where there are
fixed prices and guaranteed quantities, at times of positive supply or negative
demand shocks, there will be surpluses (as in the EU Common Agricultural
Policy). Methods then have to be found to restrict supply (again as happens in
the Common Agricultural Policy through set aside and milk quotas). Such
methods protect incumbents in the market to the detriment of aspiring
entrants ­ who possibly are much poorer than incumbents.

The benefit of the price-floor arrangement is almost certainly not significant
though it may assist growers in markets were hedging instruments are not
available.

Cheap Credit

Another important commercial aspect of Fairtrade coffee is that producers can
be paid before the y supply the product to intermediaries. The producers
effectively receive credit. This credit is available on reasonable terms. There
is no question that this is desirable. Much coffee is grown in countries that
have poorly developed credit markets and where credit is expensive. There
are many reasons for this, including the difficulty of obtaining secured loans in
countries were property rights are not properly recognised and enforced. The
provision of an alternative source of credit to growers is a highly desirable
market development, although a strengthening of property rights that provided
many more growers with a potential source of credit would be desirable too 5.




5
 A list of references here would be endless. One very practical piece relating to the particular problems
of credit for the very poor is Chamlee-Wright (2006). A more general source is de Soto (2000). As
usual it is disappointing that fair trade organisations blame the West and big business for problems that
are essentially the fault of governments of under-developed countries.


                                                   4
The Fair Trade Premium ­ who pays what and where does it go?

"Fairtrade" aims to provide better trading conditions for excluded and
disadvantaged producers by improving market access, paying a better price,
providing longer-term contracts and requiring producers to provide minimum
working conditions.

Fair trade organisations certify producers who meet these criteria allowing
them to use the Fairtrade logo. In turn consumers are encouraged to buy
Fairtrade produce in preference to other brands that are generally cheaper. It
appears that many Western consumers are happy to spend a little more
because they want to help the poorest producers in the world.

Prima facie there would appear to be four reasons why fair trade coffee is
more expensive than alternatives. There is a "Fairtrade premium" which goes
towards welfare and educational projects amongst the coffee growers; a
charge is levied on coffee growers who sell the coffee; a charge is levied on
those selling Fairtrade produce into the UK market; and there are costs
resulting from inefficiencies in the corporate organisations that are allowed to
use the Fairtrade logo. The higher price of fair trade coffee is almost used as
a marketing tool attracting customers to shop in an "ethical" manner. Below
we examine the four aspects of the fair trade mark up.

       Fairtrade charges consumers directly...

The claims of those who believe that the higher price of fair trade produce
leads fair trade shoppers to be shopping "ethically" is easy to rebut using
basic economics. Assume that an individual wishes to donate 10% of their
income to charitable causes. The fair trade premium is distinct from the other
financial aspects of fair trade contracts as it is a straightforward transfer from
the (well off) consumer to the (presumably less well off) producer. Consumers
should regard this aspect of the mark up on fair trade coffee as a charitable
donation. There are rational reasons why consumers may wish to make
charitable donations in this manner rather than supporting charities directly.
They may feel that they are establishing relationships, however tenuous, with
the suppliers of their staple products. They may feel that the money will be
particularly well used. However, there is certainly nothing intrinsically more
efficient or more ethical about this method of helping the needy than other
methods of helping the needy. Indeed, other charities might reach people who
are more needy than coffee farmers and may be more transparent about how
that help is given.

It might be countered that people who buy "fair trade" products will be
providing additional help for the poor. The fair trade movement is providing an
additional vehicle for charitable giving that might do something to reduce the
"giving fatigue" that citizens of some well off countries appear to face. This
argument may be more valid in the UK, where philanthropy is a minor activity,
than in the USA where people take their charitable obligations more seriously.
But it does not alter the fundamental argument. It is not more ethical to buy
"fair trade" on the grounds that one is helping the poor through the fair trade


                                        5
premium than it is to buy Maxwell House coffee and pay the equivalent of the
fair trade premium to a charitable cause. The fair trade movement may have
found a successful marketing device for increasing philanthropy but that does
not make their products ethical.

Indeed, the use of fair trade as a marketing device is also integral to
understanding the economics of fair trade. Where it is practical all suppliers
try to segment their markets and charge consumers who have a low elasticity
of demand a higher price than those who have a higher elasticity of demand.
Such "price discrimination" explains why corporate entertainment packages at
cricket matches are generally very much more expensive than buying a group
of individual seats, for example. Thus fair trade can be seen as a device to
segment the retail coffee market to raise profits for retailers by charging a
higher price to those who are willing to pay. This is not a pedantic theoretical
point ­ increased profits for retailers from charging customers more who are
willing to pay more are a major feature of fair trade products. Again, this
practice cannot be described either as ethical or unethical: it is the market at
work.

           Fairtrade Charges Producers...

Becoming a Fairtrade producer presents challenges. Producers must be
certified by the International Fairtrade Labelling Organisation (FLO)6. It has an
extremely complicated 14 page document explaining the process for, and cost
of, certification. But this is only the start.

Producers must first form a group which complies with Fairtrade criteria,
usually a co-operative, although some employers are allowed in subject to
good wages and conditions. This group must obtain a letter of intent, from a
wholesaler or retailer, to buy some or all of their produce at the Fairtrade price
before applying for certification. As the Fairtrade price for Robusta coffee is
currently about 50 cents higher (nearly 100%) than the market price and that
for Arabica is 10 to 20 cents higher this is not easy to achieve and many fail to
do it.

The minimum charge for certification for the smallest group (under 100
producers or employees) is 2,200 (about £1,530) rising to £2,400 if the group
provides central services. Then there is an annual renewal fee of at least
1,260 (£867). The average Kenyan income is around £185 per annum so for
the poorest producers to find this money will be a challenge. Again, the
question must be asked whether the fair trade philosophy benefits the
incumbent at the expense of the aspirant.

More generally, as has been noted above, Fairtrade started because prices
were low and producers poor. Higher prices for some will help incumbents in
the short term but, if prices rise, farmers generally produce more and
consumers eventually consume less, pushing prices down again. So it is


6
    http://www.flo-cert.net


                                        6
difficult to see how it can benefit more than a few and probably only in the
medium term.

        Fairtrade Charges Wholesalers...

Wholesalers are charged 1.8% of turnover to use the Fairtrade brand name.
This cost will be passed directly on to the consumer. Whatever misgivings the
authors have about the efficacy of the Fairtrade principles and practices, we
understand why consumers might wish to pay a premium for Fairtrade
products. We assume that consumers expect the additional costs of products
to help guarantee prices, working conditions and living conditions for farmers.

The fees charged to wholesalers are the main source of income for the
Fairtrade Foundation (nearly 90% of unrestricted income in 2005) 7. 50% of
this income was spent on so-called educational activities and most of the
remainder was spent on certification, licensing and product development. In
fact, the educational activities involve campaigning and promoting the
Fairtrade brand through Fairtrade fortnight, promoting Fairtrade schools etc.
These are all activities that effectively promote Fairtrade's own brand. Of the
money spent on certification etc. about 40% was paid to FLO, with most of the
rest being spent on the administration of licensing procedures and product
development within the Fairtrade organisation itself. Fairtrade also has some
voluntary donations but the cost of generating voluntary income was 50% of
the value of those donations.

It is most unusual for a charitable foundation whose objectives are to help the
poor in under-developed countries to use such a large proportion of its
revenues on activities simply designed to increase its own size. It would be
surprising if Fairtrade customers were aware of this. 8

Even its educational activities proper 9 must be called into doubt. Its major
scholarly educational paper on the coffee industry was published in 2002
(Fairtrade Foundation, 2002). It is widely quoted by fair trade activists. Yet
many of the arguments within the paper have been completely undermined by
developments within the market since that time. The deregulation of the
coffee market has been described as leaving a situation that "penalises the
weakest". Since deregulation, farmers in countries such as Vietnam have
entered the market. There is certainly no evidence that deregulation has been
detrimental in those countries.


7
  See Fairtrade Published Statement of Financial Activities for the year to 31st December, 2005.
8
  It should be noted that Fairtrade's justification for this approach is clever and subtle. Fairtrade's
primary charitable objectives are to relieve poverty and provide education on the causes and effect of
poverty as they relate to trade. Its stated way of pursuing its objectives is by the promotion of the
Fairtrade mark (see annual reports and accounts, 2004 for example). Hence it could justify the very
high proportion of income spent on marketing. Two criticisms could be made. The first is that the role
of education could not possibly be pursued by simply promoting the brand. Secondly, any commercial
business could make the same claim ­ that the pursuit of its business, by creating wealth, helps the
poor. Should all businesses be allowed to be charities? Fairtrades' other main objective is a political
one, campaigning against (in its words), "the injustices of conventional trade."
9
  As opposed to the marketing of the brand.


                                                  7
Education, Education, Education...?

Fairtrade Foundation (2002), the Foundation's most important educational
paper, suggests that coffee market prices are controlled by roasters but, at
the same time, opines that fluctuating supply and demand conditions are
responsible for changes in prices. In fact, the evidence suggests that roasters
prefer to pay a higher price for coffee, not a lower price ­ and also charge a
higher price of course. Roaster groups are active in promoting the case for
higher coffee prices at ICO meetings, on the grounds that higher prices
prevent fluctuations in supply and improve quality. If roasters controlled
prices, they would keep them stable, whereas they are demonstrably not
stable. Of course, in a competitive market, the price will move to equilibrate
supply and demand. Given the desire of large roasters for higher prices it
would appear that it is the presence of competition, not of market power, that
keeps prices low. The document blames the free market for the volatility in
prices, yet it is clear from its analysis that the major share of the blame must
lie with aid agencies and central planners within governments who responded
to high prices in the mid 1990s by increasing the supply of coffee dramatically
through increased planting . Technological change, something that is outside
anybody's control, was also partly responsible for the fall in prices. The
market has now adjusted though and the spot price of Arabica coffee is within
5% of the Fairtrade price. Indeed, for much of 2005 it was equal to the
Fairtrade price. The price of Arabica coffee is now 120% higher than the level
at the time Fairtrade's main "educational" document was written. Such price
recovery is an entirely normal response in a market that has been subject to
successive supply shocks. Given the proportion of its budget spent on
"education", not updating its papers in these circumstances gives the
impression that Fairtrade is trying to distort the underlying message.

It is genuinely a pity that Fairtrade present their research in this way. Its
analysis of aspects of the market and the practical problems that growers face
is very helpful. Yet, nowhere is there any recognition that the key to prosperity
for farmers in under-developed countries is the ability to seek alternative
economic opportunities, underpinned by effective legal, political and economic
institutions within the countries concerned.

Another example of the way in which Fairtrade Foundation (2002) distorts
understanding of how markets operate appears under the heading,
Speculative Business (pages 9 and 10). The document describes the futures
market and strongly implies that the market makes the price of coffee more
volatile. Yet the typical transactions it describes could only make the market
price more stable. It suggests that the benefits of the futures markets are
obtained by the North and the costs fall on the producers in the South (page
10). Yet it is impossible to see from the description any rational way in which
costs for the South could arise from the operation of the futures market.

Given the proportion of its budget that Fairtrade uses for education to promote
its own brand, one would expect more objective and up-to-date analysis.


                                       8
Fairtrade restricts the corporate form of its suppliers...

In general, the fair trade movement only deals with cooperatives made up of
farms that are not reliant on hired labour. Child labour is generally not allowed
either. This model is damaging in many respects. Cooperatives are a
notoriously inefficient form of business organisation, particularly when made
up of small producers. They suppress incentives and efficiency and can make
the effective deployment of technology prohibitively expensive.

Also, child labour is essential to the welfare of many poor families in the
under-developed world (see Kis-Katos and Schulze, 2005). Its abolition and
restriction in some parts of the world has had well-documented catastrophic
effects on the poorest families. Its restriction can also prevent families from
being able to afford school fees for their children. Whilst there was legitimate
concern that farmers, with poor quality information about the value of their
crop, were being squeezed by middlemen in the coffee market, there is no
evidence that workers in a cooperative are treated any better than workers in
organisations with other corporate forms. Large commercial firms that hire
workers and treat their workers well are generally disqualified from the fair
trade model. This is despite the fact that larger, more productive farms that
have an incentive to use technology are likely to pay higher wages.

Cooperatives also prevent producers migrating up the quality chain into
speciality coffees (see Howley, 2006). If beans from different farms within the
same cooperative are blended, no individual producer has an incentive to
produce better beans and to migrate up the quality chain. Speciality coffees
are an important and growing business. In many respects the fair trade brand
represents a speciality coffee ­ but it is one that has a strict limit on the price
that the farmer can charge because the quality of the coffee is dictated by the
quality of the beans that the farmers produce in aggregate. Indeed, Starbucks
paid only marginally below the fair trade price and well above the average
market price for its high-quality, non-fair-trade coffee in 2004 (Howley, op.
cit.). Speciality coffee produced in Rwanda trades at around $2.25 per pound,
about 80% higher than the guaranteed price to fair trade producers
(Boudreaux, 2006).

Fairtrade Should Focus on its Core Objectives

The fair trade brand arose partly as a result of a desire to create transparency
for consumers and suppliers. This is probably its strongest card. The
relationships in the production chain are better understood by the consumer
than are relationships in the production chain of non-certified coffee.
Consumers do not need to have an ideological attachment to fair trade
principles to be attracted to the brand.

But, there are problems with the practical application of the principles. Howley
(op cit) argues that the farmer does not necessarily receive the price
guaranteed by the fair trade certifier. The price received by individual farmers


                                        9
is decided by the cooperative as a whole. There are also significant
opportunities for corruption within the fair trade cooperatives. There is little
available published evidence about the extent of corruption but there is strong
and increasing anecdotal evidence of problems. It appears that fair trade
certifiers are unable to police cooperatives adequately, despite the charges
that they levy. Firstly, it is possible for the head of a cooperative to mask from
the farmer the price that the cooperative receives ­ and then pay a lower price
per pound of coffee to the farmer. Secondly, it is possible for a cooperative to
buy coffee on the world market and add this to the coffee produced by the
cooperative's farmers. It is extremely difficult to police this practice. There are
very large payoffs from this kind of behaviour when the world price deviates
significantly from the fair trade price, whereas the chances of discovery and
the penalties are limited. Weitzman (2006) describes visits to five fair trade
suppliers in Peru. Four of the five farms paid less than the legal minimum
wage despite the requirement to do so under the agreement with fair trade
organisations . The reporter was also told by a number of industry insiders that
non-fair trade coffee was being mixed with fair trade coffee and sold as fair
trade coffee 10. The same article reported a Canadian NGO (using global
satellite imaging) that had found that one fifth of fair trade-certified coffee in
one association was illegally planted in protected virgin rain forest. Weitzman
was told of similar practices in Peru.

The Fairtrade Foundation states 11 that, "The uniqueness and rigour of our
certification system means that consumers trust the FAIRTRADE Mark."
Anecdotal evidence suggests, at best, that this trust should not be taken for
granted. The resources clearly exist, as a result of the premiums charged to
Fairtrade producers and wholesalers, to maintain good systems of inspection.
We would argue that this is more important than using those resources to
pursue continual expansion of the brand through recycling money into
campaigning projects ­ particularly if it is the expansion itself that is
undermining the auditing process.

A "Fair Price"?

The concept of a "fair" or a "just" price, in the eyes of many fair trade
supporters, particularly in churches, arises from the desire to reward labour
for the work that they have put into producing a product. The provision of a
"fair" price is precisely what the Fairtrade Foundation promise
(www.fairtrade.org.uk). However, the price of something reflects its value to
those who are purchasing the product, not the amount of labour that is put
into a product's production. Clearly there is a relationship between those two
concepts. The greater the cost of production of an item, the greater will be its
scarcity in the face of a particular shaped demand curve and the higher will be
its price. But there will be times when the market price of any product may fall
due to a lack of demand or an increase in supply and, therefore, times when
existing farmers will not be paid a price to which they are accustomed. In this

10
   The Fairtrade Foundation responded, suggesting that there was very little mixing of coffee occurring.
Indeed, it would be surprising if there were much mixing at current free-market prices. The system will
not be tested until the fair-trade price diverges from the free-market price.
11
   www.fairtrade.org.uk/suppliers_become_a_licensee.htm, page 7.


                                                  10
situation, roasters, who are the intermediaries in the market, have little option
but to pay lower prices. The mechanism of a market requires a reallocation of
economic resources when the price of a product falls below the cost of
production. The fact that such resources can lie unemployed, rather than be
reallocated to more productive sectors, in many of the countries from which
coffee is purchased, is a serious problem that cannot be overcome by fixing
prices.

The often-suggested idea that roasters hold farmers to ransom by exercising
monopsony power is not, in general, true. Falling coffee prices at the turn of
the millennium were bound to hurt significant numbers of farmers, whatever
the market structure. If prices had not been allowed to fall there would have
been significant and continuing surpluses in the market. At various times, in
various markets, institutions have been put in place to prevent prices falling at
such times and to restrict supply. The regulated coffee markets before 1989,
milk markets in the EU and mediaeval guilds are three obvious examples.
These mechanisms are perceived to enable the producer to receive a "fair" or
"just" price. But there is a strong economic argument against their use. They
prevent the market adjusting and prevent resources reallocating. There are
also two strong political arguments against such mechanisms. Firstly they
benefit relatively well-off insiders in the market and penalise relatively poorly-
off outsiders. Secondly, there is a premium for being inside the market which
encourages corruption between people who wish to be "inside" and those who
police the perimeter of the market.

Fairtrade barking up the wrong tree

Given that a market such as that in coffee cannot be effectively "managed" to
guarantee all producers a "fair" price, what is required? Coffee producing
countries need to operate in an institutional setting that provides more
opportunities for employment and business. A viable long-term growth
strategy for a whole country cannot possibly be based upon charging prices
for products above spot market prices. Even studies sympathetic to the
concept of fair trade and by authors that favour re-regulation of the coffee
market find that the gains from fair trade, even to those whom would be
expected to benefit most directly, are limited (see: Calo and Wise, 2005).
Milford (2004) confirms the difficulty of using cooperatives in primary product
markets as a sustainable vehicle for development ­ even in the context of "fair
trade".

The root cause of fluctuations in coffee prices is the low price elasticity of
demand for coffee. This problem cannot be solved by so-called fair trade.
Also, coffee is an income inelastic product. This means that poverty is unlikely
to be alleviated through a country focusing resources on coffee production. It
is necessary instead to have the maximum possible degree of mobility of
labour in the context of free trade and a market economy so that resources
move into product areas where they are most valued. Both developed and
developing countries have a responsibility here ­ particularly in the promotion
of free trade.



                                       11
Free trade may be anathema to the fair trade movement but has proved
capable of lifting millions of people from poverty over hundreds of years. In
the 1990s, real income grew three times faster for developing countries that
significantly lowered their trade barriers than for those who lowered them less.
The potential benefits from liberalising world trade far exceed the combined
total of $80 billion of world wide foreign aid in 2005. Free trade brought
prosperity to Hong Kong which was poorer than many African countries at the
end of the Second World War but had overtaken the UK within thirty years.
Open economies such as post-war West Germany and South Vietnam
became prosperous whilst their protected neighbours, East Germany and
North Vietnam, languished. Trade brought prosperity to South Korea while
North Korea is one of the poorest places on earth. The examples are endless
(see Henderson, 2004).

Hypocrisy of global proportions prevents trade liberalisation. Politicians and
bureaucrats in poor countries like the income from tariffs and the potential for
bribes arising from trade regulation. Cynical western politicians weep
crocodile tears for the poor whilst often increasing their own protection from
developing country imports as a knee jerk reaction to the demands of
producers. Tariff protection means higher prices for consumers. Who could
possibly want that in poor countries? Despite the misdemeanours of
developed countries, regrettably it is poor countries that are generally the
most protectionist in the world.

Hypocrisy and cynicism reach new heights when rich nations subsidise their
farmers. For example, US subsidies to their 25,000 cotton farmers are
estimated by the Cotton Advisory Council to reduce cotton prices in the rest of
the world by 26%. This has devastated Central and West African countries
with 10 million people directly affected and this despite the fact that these
countries are amongst the lower cost cotton producers in the world. The value
of these subsidies exceeds the market value of cotton production in the US by
30% (see Watkins, 2002).

Similarly the developed world tries to keep tariffs on processed products even
when they are reduced on raw materials. For instance high tariffs on
chocolate mean that 90% of cocoa is produced by developing countries but
only 4% of chocolate, thus denying poor countries this higher value added
activity and the opportunity of increasing returns on their raw materials.
Similarly, there are tariffs on the importation of processed coffee into the EU
and the USA. Even if the fair trade movement is correct in their analysis of the
coffee market, the gains from the de-regulation of other trade would be much
greater than the gains from a so-called fair trade regime in coffee. Freer trade
in basic processed goods would also help to disperse market power within the
coffee market. Indeed, Café Britt, which does not use fair trade coffee
because of the administrative costs it would impose on the small farmers from
which it buys, processes its coffee in the country in which it is grown but,
because of trade restrictions from the West and unfriendly business
environments within developing countries, this model is unusual12.

12
     See note by Alex Singleton, 17th March 2006, on www.globalisationinstitute.org .


                                                   12
Indeed, poor countries do not just need trade. They also need the correct
institutional framework within their own countries that allows prosperity to
arise from internal growth and greater business opportunities. On this count,
fair trade may hinder the development of a thriving business sector due to its
insistence on dealing with cooperatives. On the other hand, it could be argued
that the fair trade movement deepens relationships with Western business
institutions.

Conclusion

The desire to help others is a wonderful and important part of civil society but
if we genuinely want to help people, all people, escape from grinding poverty
we really must not ignore the facts. Fair trade may be fashionable and give
people a nice warm feeling but only free trade backed up by the rule of law
and the protection of private property have actually lifted entire populations
out of poverty for the long term. If consumers feel better as a result of
understanding the supply chain that gave rise to their cup of coffee, fair
enough. But that does not put their choices on a higher moral plane than the
choices of other consumers. Certainly, we should not generalise the model of
fair trade and re-regulate the coffee market. Instead, both developed and
developing countries should take the steps necessary to achieve enduring
prosperity.

Fair trade products offer certain advantages to some coffee suppliers, for
whom they widen the range of contracts available, providing insurance
against price fluctuations and making credit more easily available. They may
provide alternative purchasers for suppliers thus lessening market dominance.
But the system can only ever encompass a minority of producers and not
necessarily the poorest ones. It may also increase market instability for those
who are excluded.

The Fairtrade organisation is strongly critical of open markets in coffee yet it is
clear from their own studies that a major reason for the coffee glut and the fall
in prices at the beginning of the twenty-first century was the centrally planned
increase in coffee production, with incentives for planting being given by
development agencies.

Fair trade organisations should concentrate on delivering their promises to
consumers by properly inspecting their suppliers and providing appropriate
contractual terms. They should avoid putting themselves and their own
consumers on an elevated moral plane and trying to enforce their commercial
principles through government regulation. It is likely that fair trade does little
good in the long term, but we do not dispute that it may assist the suppliers
with which it deals in certain respects. We believe that Fairtrade consumers
would be surprised by the levies that the organisation charges farmers
through FLO and would be disappointed by the way in which the premium
charged to wholesalers is used to further the aims of Fairtrade as a
corporation in the UK.



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Calo, M. and Wise, T. (2005), Revaluing Peasant Coffee Production: organic
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De Soto, H. (2000), The Mystery of Capital: why capitalism triumphs in the
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Kis-Katos, K. and Schulze, G. G. (2005), Regulation of Child Labour,
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Milford, A. (2004), Coffee, Cooperatives and Competition: the impact of fair
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Watkins, K. (2002), Cultivating Poverty: the impact of US cotton subsidies on
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Weitzman, H. (2006), Financial Times, 9 th September 2006.

Philip Booth
IEA
2 Lord North Street
London
SW1P 2LB




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