If you walk down the coffee aisle of your local Whole Foods Market, you will find a
dizzying array of whole-bean and ground coffees from around the world. You will
also discover that these products sport a bewildering variety of labels that identify
them as “Organic,” “Rainforest Alliance,” “Utz Certified” (and no, that’s not the
purveyor of potato chips), “Fair Trade,” and “Smithsonian Bird FriendlyW.” Some
coffees have multiple labels to indicate that producers and retailers were cognizant of
and sensitive to the needs of our fine-feather friends while also being concerned with
the development of “sustainable value chains.” Isn’t the market wonderful?
Such is the basic message of Sushil Mohan’s book Fair Trade Without the Froth:
A Dispassionate Economic Analysis of “Fair Trade,” a thoughtful, balanced, and,
yes, dispassionate discussion of the claims of fair-trade advocates and critics. Mohan
effectively argues that the fair-trade movement is a market-driven response to some
consumers’ demands for products that provide them with a set of benefits.
As long as consumers see some value in voluntarily exchanging a portion of their
income for a fair-trade product or for a product with one of the other certifications,
no one is worse off; the market has once again provided. Rather than see fair trade as
an aberration that distorts markets, Mohan sees it as a small part of the rich diversity
that a free-trade system encourages.
And this segment of the market is increasingly diverse. Demand for fair-trade
goods continues to expand, as does the variety of goods being certified. We learn that
coffee remains the most valuable product in the fair-trade stable (bananas are second),
but tea, rice, cosmetics, and handicrafts may also be certified. This market is
expanding because consumers want these goods.
Take coffee as an example. It is not news to point out that Americans are worlds
away from the experience of the 1970s and 1980s, when almost all of us drank coffee
that came out of a big blue can or a big red can. Today we confront an embarrassment
of riches. If you prefer to spend less and like the taste, you can buy a 33.9-ounce
container of Folger’s Classic Roast Medium Coffee for $9.59 ($0.28 per ounce).
However, if your palate is more refined or you want to impress your sweetheart, you
might be willing to spend considerably more. You may be looking for something like
the Jagong coffee from Sumatra that is the monthly feature at my local coffee shop.
Offered by retailer Counter Culture, Jagong is “Counter Culture Direct Trade Certified,”
“Certified Organic,” and “Shade Grown.” Selling at $10.75 for a 12-ounce
bag ($0.89 per ounce), it is a pricey cup of java, but certainly not the most expensive.
Think of fair-trade products as a type of luxury good. Many people consume
luxury goods in order to signal their fabulousness to others. Fair-trade consumers
have their own sense of what fabulousness entails: a firm commitment to conservation,
poverty alleviation, and the empowerment of developing-world producers—or
maybe they simply like the labels. Whatever motivates them, be it commitment to a
cause or love of the bo-ho lifestyle, growing numbers of consumers now choose
among a growing variety of “socially conscious” products.
Mohan does a good job in discussing the various alternatives to fair trade that
now exist. This competition is a response to the perceived weaknesses of the fair-trade
system itself—that the certification process imposes substantial costs on poor producers
and that it is not the best way to create direct relations between retailer and
producer. It is also a direct response to consumer demand: I may value protection of
the rain forest; you may value birds. Our purchases reflect our preferences, and
retailers and producers cater to our preferences.
For example, although Whole Foods sells fair-trade coffee, the company has
developed an alternative “Whole Trade” brand that cuts out the fair-trade certification
process, replacing it with a Whole Foods process. In most ways, the two are
similar: Whole Foods pays producers a premium, works with producers who provide
what the company sees as good job conditions, and supports environmentally beneficial
actions; but by taking the fair-trade middlemen out of the picture, Whole Foods
deals with these concerns at a lower cost. More such alternatives are springing up
all the time. Whether these standards eventually converge into one mega–“socially
conscious” brand remains to be seen. For now, though, fair trade competes with
other approaches to grab consumers’ attention.
Why are consumers drawn to the fair-trade approach? Some them seem to
“buy” the fair-trade hypothesis: by spending a little more, they help poor producers
earn more. As the World Fair Trade Organization puts it, “Fair Trade is fundamentally
a response to the failure of conventional trade to deliver sustainable livelihoods
and development opportunities to people in the poorest countries in the world”
(qtd. on p. 103). Fair trade is “fair,” according to its advocates, because it helps to
overcome the hardships, inequities, and exploitation inherent in the “free” market.
Fair trade claims that it provides poor producers tangible benefits in the form
of higher income, a better work environment, and support in bargaining with
buyers.
The accuracy of these claims is another matter. In the strongest section of the
book, Mohan identifies the various claims that fair-trade advocates make and examines
the evidence for and against them. He notes: “Fair Trade’s proponents try to
convey the impression that almost all the price premium they are paying for Fair Trade
products is passed on to the producer, while the reality is very different” (p. 52).
Unfortunately, the transaction costs associated with the certification process,
exporting, marketing, and retailing eat substantially into any benefits producers
might receive. Empirical evidence on this point is limited, but it seems that even in
the most generous scenario fair-trade producers retain only 25 percent of the price
premium; most probably retain significantly less.
Mohan rejects the claim that fair trade gives producers a guaranteed income that
helps them avoid the volatility of commodity markets. Unless producers are
guaranteed to sell a particular quantity, they have no meaningful income guarantee.
Fair trade guarantees a price to be paid, not an amount to be purchased. As prices for
fair-trade goods rise, buyers are free to look for less-expensive producers. So, contrary
to claims, it is not fair trade per se that guarantees producers a steady income; only
consumers can do so.
Mohan also considers the claims made by critics of fair trade. For example, some
critics of the movement feel that fair trade gives producers incentives to overproduce
because of the price premium they may earn, which may hurt other producers. This
claim, Mohan points out, is probably overblown because demand for fair-trade products,
though growing, remains relatively small. Most fair-trade producers sell only
10 percent to 30 percent of their inventory at fair-trade prices, not 100 percent.
Therefore, fair trade may not drive overproduction.
Critics also argue that fair trade in fact does not support the poorest of poor
farmers. Most fair-trade products come from Latin American, not from Asia or Africa,
which means that fair trade is helping relatively better-off Latinos. His argument here
might have focused more on the role that increasing competition from specialty
coffee plays in raising prices for producers in Africa and Asia (recall Jagong coffee as
an example). Specialty coffee is not necessarily fair trade. Instead, high-quality coffee
sells for a premium normally greater than the fair-trade premium. As more developing-
world producers build capacity to sell in this expanding market, concerns that fair
trade has a noticeable negative impact on non-Latin producers are allayed.
Mohan concludes the book with a section on fair trade as a long-term development
strategy. The takeaway here is that despite the claims made by advocates of fair
trade, any good these voluntary efforts accomplish is tiny compared to the good that
would be done if developing countries improved their institutional environment and
if agricultural subsidies and tariffs were removed so that trade in commodities really
were free. If developing countries made it easier to do business, and if they protected
property and created impartial courts that enforced contracts, poor farmers would
have better opportunities to move out of farming. If the United States and Europe
would get rid of tariffs that raise the costs of importing products, poor farmers would
be able to compete better with vastly wealthier developed-world farmers. Mohan
rightly points out that if fair trade’s goal is to improve the lot of poor farmers, “there
are other, often more efficient mechanisms for achieving this objective” (p. 109). In
the end, a strong and diversified market is likely to do much more good for the
world’s poor commodity producers than is the fair-trade movement.
Buy Fair Trade Without the Froth: A Dispassionate Economic Analysis of “Fair Trade” at Amazon.com for $18.00 (Paperback)
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Volume 16 Number 2
Fall 2011
Independent Review Articles on Related Subjects
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