The Unfairness of ‘Fair Trade’

What is so called ‘fair trade’?

To this day nobody has been able to give me a good (let alone consistent) explanation of what ‘fair trade’ supposedly means, other than implying that whatever it is, it is good for poor people in developing countries.

Of course this is a very old (and effective) tactic of defining something by its supposed outcome rather than by the actions that will produce such outcome. Who can argue against doing something that will help poor people?

One also notices how even the exact goals are rather vague and sometimes inconsistent. Some will claim that ‘fair trade’ will somehow help poor farmers make a ‘proper living’ from their work, but then some will claim that it will help them move away from farming into more productive work.

In any case, to be able to asses the real consequences and outcomes of so called ‘fair trade’ we will need to make some assumptions as to what it actually means in practice.

Amusing peculiarities of the ‘fair trade’ industry

One of the central claims is that producers in third world countries are often exploited by middlemen who pay them very little compared to the ‘real’ price of the products and keep all the profits.

Then one has to wonder if it is possible for ‘fair trade’ practitioners to bypass such middlemen why wouldn’t anyone have done so already? If it is true (and admittedly there is some evidence that it is the case) that producers are being paid well below the price goods are sold for, one has to ask why nobody has setup a business which pays better producers and at the same time sells at a lower price to consumers by bypassing the ‘middlemen’.

But this takes us to another ‘fair trade’ paradox: ‘fair trade’ products are invariably more expensive than their ‘unfair’ equivalents (if anyone has a counter example, please let me know).

At first this might seem reasonable, we have to pay more so the producers can get a ‘fairer’ pay… but if we think about it carefully, this would mean that the supposed profit margin for the ‘middlemen’ can’t be as big and ‘unfair’ as ‘fair trade’ advocates claim.

At best that would mean that it is us consumers who are keeping the profit (by paying lower prices). Of course it feels better if we blame someone else for what we see as an unjust situation rather than realize we are the main beneficiaries of the situation (though lower prices).

It is also amusing (and perhaps unsettling) to see well established companies that have added ‘fair trade’ products to their existing product lines, what is the implication here? That not only they have been practicing ‘unfair’ trade in the past, but that they will still practice it unless you want to pay a premium for their special ‘fair trade’ products? It almost stinks of racketeering.

Also one has to wonder how can these new ‘fair trade’ middlemen accommodate their clear conflict of interests, on the one hand, supposedly giving as much of the profits to the producers, but they are still for profits companies that have to try to maximize their own profits, in a free trade world there would be no such conflict of interests, but fair trade leaves produces at the mercy of the good will of ‘middlemen’ and consumers who are expected to give up their natural self interest for the supposed good of producers.

Possible unintended consequences of ‘fair trade’

All the peculiarities and inconsistent claims aside, it is reasonable to assume that ‘fair trade’ is in essence a subsidy to poor farmers (by paying them somehow more than the traditional market would). So it is reasonable to ask what are the consequences of such subsidies, and further, how ‘fair’ they are.

The consequences of subsidies have been well understood for a long time, they distort the natural market price signals, and cause among other things overproduction and inefficient resource allocation.

What does this mean in practice for farmers in third world countries? It means that ‘thanks’ to ‘fair trade’ more people in developing countries will remain (or even join) a farming industry that is inefficient and without long term viability.

And lets not forget all the additional monitoring and regulatory costs of enforcing ‘fair trade’ (whatever that happens to mean) which would create additional costs and further distort incentives.

Some will still claim that ‘in the short term’ farmers will be better off thanks to the extra money they get, but how fair is this? how fair it is to tie aid to people who supposedly need it to whatever they farm a certain product that has been subsidized?

Even given the disadvantages of any kind of aid (eg., creation of dependency and deincentivize real self sufficiency), it would be much more fair to give aid to anyone who needs it rather than to a rather restricted group of farmers who in many cases might already be way better off than other people in their communities.

At best ‘fair trade’ is a rather unfair way to distribute aid to people who might, or might not need it.

It would be interesting also to analyze the impact of ‘fair trade’ on local markets in the developing world, one would expect that it would raise the local price of goods (by moving resources to the production of subsidized products which have to be sold to first world markets), which would most negatively impact the poorest sections of such societies.

‘Fair Trade’ vs. ‘Free Trade’

Perhaps the most fundamental issue with ‘fair trade’ is its implication that ‘free trade’ is unfair.

Most advocates of fair trade like to blame capitalism and ‘unfettered free markets’ for the ills of the world. But they often like to ignore that what makes the market unfair is not free markets, but the lack of free markets.

It is policies like subsidies, tariffs, quotas, preferential access agreements and so on which create the distortions in the free market which make it less free and more unfair.

At its heart, a free market is a truly fair market, where producers are paid according to the demand for their products, and where consumers pay according to the supply of the goods they want.

As Milton Friedman so eloquently put it:

If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can only gain at the expense of another.

And that is the essence of a free market.

If only advocates of ‘fair trade’ would put use their efforts to try to accomplish a more free market rather than trying to undermine it the world, and specially the poor people in developing countries would be much better off in the short, medium and long term.

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