Flaws in Fair Trade
A few months ago I visited Padgett Station, a coffee shop in Carrboro, NC. Offering a wide selection of coffee, wine, beer, cigars, meats, and cheeses, it seems like the kind of place I'd love. And I did enjoy it, but the experience was marred by the store's self-righteous attitude about using Fair Trade products. One sign behind the counter, for example, says something like, "Fair or Unfair? It's that simple." No, it's not that simple.
A new paper by Jeremy Weber in the Cato Journal does a good job explaining why, presenting an interesting economic analysis of the system's flaws. For instance, how requirements that grower groups operate self-sufficiently force them to lose out on gains from trade:
Since Fair Trade eliminates “unnecessary” intermediaries, producer organizations must perform the tasks previously conducted by those intermediaries. In this arrangement, an organization must obtain financing to buy coffee from its members, sort and process coffee, and coordinate export logistics. Each of those activities generates expenses which, if not managed effectively and efficiently, can consume much of the higher Fair Trade price before it reaches growers. In some cases, organizations’ export costs have been high enough to induce member producers to sell to the local market instead of to their organization for the Fair Trade market.
There's also the predictable excess supply of eligible coffee created by setting a price floor:
Increased barriers to entry have made it increasingly difficult for marginalized producers, which Fair Trade supposedly targets, to participate. As in most industries, increasing barriers to entry benefits those already established in the market. Such is the case in the Fair Trade coffee market, which is dominated primarily by those privileged groups who entered the market in its less competitive days. The Fair Trade model based on a minimum price will inevitably produce a tension between concentrating market shares to a few groups, which leaves many out of the Fair Trade system, and distributing market shares to many groups, which results in each producer selling only a fraction of his production to the Fair Trade market.
Read the whole thing, in PDF, here.
Libertarians like to bash Fair Trade, primarily because of the stupid name that implies free trade is unfair. In truth, libertarians should embrace certification of various kinds as a free market tool consumers can use to advance their causes. That said, it's important to look beyond the stated goals of certification to its actual effects. As this paper and other critiques have shown, the Fair Trade label in particular is of limited application. At the very least, consumers shouldn't limit themselves to buying exclusively Fair Trade coffees. They'll be missing out on some great coffees from other dedicated growers.