Why Fair Trade is Foul.

By Matthew Sanyour ‘11

Princeton’s fair-trade banana program is the latest product of a movement that has been assuaging the troubled consciences of guilty Westerners for the last half-century or so, with increasing visibility and intensity since the 1990s. The fundamental assumption of the fair-trade movement is that developing economies merit greater payment for their goods than market prices would indicate and that only certain producers merit certification for this price increase. Rather than fairness, the practice advantages certain producers over others, often giving healthy profit margins for everyone but the producers it is supposed to help.  Like the mendacious Ministry of Truth in George Orwell’s 1984, it is almost precisely the opposite of what it professes to be. Moreover, fair trade utterly fails to address the root causes of the poverty it seeks to alleviate; the inefficient practices that have lead to a lack of competitiveness in the first place. The patronage of fair trade is a misguided, paternalistic attempt to insulate a handful of producers from the world market that locks its recipients into a dependency trap, rather than equipping such producers to compete in the marketplace on their own through sound investment in innovation and development.

The criteria for inclusion as a fair-trade producer have varied over time, but have been standardized in recent decades by the authorities of the Fair-trade Labeling Organization (FLO), now the industry standard in the US market. The FLO requires inspections of production facilities and farms to guarantee such things as a minimum age for workers, workplace safety, the right of workers to unionize, and other provisions based upon the UN charter of human rights. In addition to all this, the FLO stipulates that whatever prices its sets must not only reflect the cost of production but also facilitate “social development” and the conservation of the environment. As wonderful as this sounds, in practice it largely fails, simply advantaging larger and more politically-connected agricultural producers over small farmers who are likely unaware of the peculiar trend among certain Westerners to willingly overpay for goods. Even if enforced perfectly, it would ignore the realities of production, unfairly advantage certain favored producers over competitors, and create an artificial price floor that hurts consumers and non-favored producers alike. In sufficiently large scale, it destroys the comparative advantage of a small economy and stifles development, reducing the unfortunate victims of such policies to a welfare colony, utterly dependent upon the largesse of its supposedly socially-aware customers.

The first of fair trade’s intrinsic problems is its imposition of blanket Western standards on producers whose practices may deviate from the letter of the law while still adhering to the principles of human rights. Not long ago in this country, it was common practice on small family holdings to have children help with the tasks of cultivation and harvesting; the summer school vacation is an artifact of this largely bygone social norm. Although the practice has diminished to only a few rural communities in the US today, no reasonable person would allege that a family farm is a violation of human rights. It is absurd to impose the same standards of labor-capital relations seen in a unionized economy on a small kinship-based workforce in a village that has never even heard of Karl Marx and are frankly much better off for it. Where the so-called capitalist is working alongside his employees, under the same conditions, it is an irrelevant and ridiculous imposition to introduce the divisiveness of “the right to unionize.” Of course, this does not detract from the condemnable and highly exploitive nature of actual abuses, but it certainly suggests the need for a more nuanced approach than the high-handed decrees of UN potentates. Ultimately, those in the best position to prevent labor abuses are local authorities, and absent the domestic political will to improve conditions, conditions will not improve.

The effect of fair-trade subsidies economically, meanwhile, is to draw increasingly inefficient producers into production. If a farmer has soil best-suited for cultivating papaya, but finds that he can make more money with the subsidized banana even though the new crop would yield less food per acre than papaya would, he will grow bananas instead even though he is a more inefficient producer than the farmers whose land is suited for bananas. Without the subsidy, he would have made more money with papaya crops, but thanks to fair trade, he can produce bananas inefficiently and make more money from the fair-trade consumers. The non-certified banana producers compete for a reduced demand from the remaining free-trade consumers with the same supply, lowering prices. Thus, by their own account, the FLO is hurting the non-certified farmers who are supposedly suffering the most due to their dearth of UN-decreed wonderments.

To be sure, fair trade subsidies have not yet impacted free trade prices; fair trade still accounts for a miniscule market share, and one can expect it to stay that way. While expansion of the fair-trade markets would create a price distortion among non-certified producers, the growth of fair-trade depends upon the continued goodwill of a small subset of consumers; fair trade as it currently stands is little more than a trend among the progressive elite, and fair-trade producers and retailers will be hard-pressed to convince the mainstream to overpay for the same goods. Absent government coercion, rational actors seek the best value for their money. That is why, despite liberal ire, Wal-Mart is the retailer of choice for many Americans – even some Princetonians.  In the end, it is difficult to envision such a market distortion expanding itself beyond coastal elites in the US, or surviving the world market as consumers in India and China, two developing countries that have lifted millions out of poverty by the ability to compete in the free market, account for an ever-increasing proportion of global demand. The new Asian powers rose up out of poverty through their own merits in the free market, and will not be keen on paying the rest of the developing world to do what they did on their own.

Far more distressing than the distortive effect of fair trade in the world markets is its effect on the developing countries it aims to help. The degree to which fair-trade price hikes actually help the producers themselves is debatable: the UK-based Adam Smith Institute conducted a study in 2006 suggesting that the vast majority of the premium of fair-trade goods goes to retailers and supply chain, not producers. Fair trade is more a cynical marketing tactic to fatten retail profits by preying on the misguided consciences of consumers than it is a genuine effort to aid the developing world. Even to the degree that fair trade does impact producers, it merely perpetuates inefficient agricultural practices and removes the incentive for innovation. It utterly fails to address the real cause of rural poverty, namely the lack of agricultural mechanization and industrial development that would make producers efficient and competitive in the free market. If labor-intensive agriculture is subsidized, local governments and capitalists are less likely to invest in the long-term benefits of development and innovation that would maximize the national comparative advantage because agriculture is being artificially supported vis-à-vis costly investments in agricultural machinery, or a transition to a new sector like tourism. If nineteenth-century American whalers had been subsidized so that they could outcompete the then-nascent petroleum industry, then the bright lights of Broadway would seem a bit dimmer, as they would still be illuminated by Shamu’s innards.

The perverse end result of fair-traders compassion is the perpetuation of underdevelopment and stagnation among the people they are trying to help. There are far more effective market-oriented strategies, such as micro-loans to developing world entrepreneurs that could pay for the irrigation and mechanization farmers need to compete on the world market, or private donations that bypass corrupt local governments and go directly to charity groups building schools and hospitals. We should seek to foster development and build economically sensible growth rather than undermine and retard innovation. If one is truly interested in the uplift of the developing world for the long-term, the best way is through market principles and maximization of their comparative advantage, not well-intentioned interventionalist schemes that perpetuate dependency by rewarding maladaptive practices.

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