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Fair Trade without the Froth

November 4th, 2010 Posted in International Development by

Today, the Institute of Economic Affairs has released a new research paper Fair Trade without the Froth: A Dispassionate Economic Analysis of “Fair Trade” by Sushil Mohan.

It concludes that claims by the Fair Trade movement are seriously exaggerated. The IEA says that “.. It is likely that producers end up with only a small fraction of the extra margin consumers pay , that Fair Trade doesn’t benefit the poorest producers due to heavy administration requirements and fees involved” and that “Fair Trade does not focus on the poorest countries”.

We agree with all those sentiments.

Buying Fair Trade eases the middle class conscience and little more.

If you really want to help the developing world, fight loud and hard for the removal of trade barriers.

Back in summer of 2009 a guest contibutor to Liberal Vision – Franklin Cudjoe – made many of the points the IEA makes today and having re-read his post this morning I thought it worthy of a second outing…. so here it is….

GUEST POST for Liberal Vision by Franklin Cudjoe 10th July 2009

franklinc

In the New Statesman’s “Observations on Fairtrade” I was quoted as saying that free trade, not Fairtrade, is the key to developing countries like my own. Here are a few reasons why this is so.

Most of the Fairtrade premium charged by supermarkets does not make it to the poor in developing countries. It has been estimated that only ten per cent filters down, most of it consumed by Western retailers. No wonder that many people suspect that supermarkets are granting monopolies to their own-brand Fairtrade-approved goods for the sake of their own profits. They convince consumers that they are morally obliged to buy Fairtrade stock, offer no alternative, then pocket the difference.

But more importantly, even the amounts that do trickle down will not help economies to develop. Any subsidies provide perverse incentives that can delay development. Increasing prices artificially causes an increase in supply which results in too much produce being grown. As Fairtrade growers only pass on about 20 per cent of their stock to the Fairtrade scheme, the results are quite dangerous, and can result in the market price actually coming down (due to surpluses).

Instead, people in less developed countries need to be able to follow price signals and adapt to changing demands – both from our own markets and those in the West.

Sadly both of these markets are blocked from us by trade barriers. Your governments are partially to blame for this – but even more culpable are our own self-interested politicians.

Trade barriers between African countries are an extreme impediment to our economic development. Shipping a car from Japan to Abidjan, Côte d’Ivoire, costs $1,500 – yet shipping the same car from Abidjan to Addis Ababa, Ethiopia, costs over three times as much – $5,000!

According to the World Bank, removing regional trade barriers would earn Africa an extra $1.2bn a year.

So what can concerned people in wealthier countries do to help? For a start, you can lobby your governments to stop setting a bad example by imposing trade barriers themselves. Many people in poor countries say “rich governments protect their industries, why shouldn’t we?”. The result is that we all lose – but poor countries suffer the most.

We now have a global trade war, arguably prompted by President Obama’s “Buy American” policies in the USA. Ministers at the G8 preach free trade while building up barriers back at home.

Buying Fairtrade is a feel-good scam. It does not help. Those who really want to help should urge their politicians and the G8 to bring down trade barriers – and make a lot of noise about it.

This post was first published on Liberal Vision 10th July 2009. Franklin Cudjoe is the founder and Executive Director of IMANI Center for Policy & Education, a think tank based in Ghana. His work has been cited in House of Commons debates on aid and development in Africa.

8 Responses to “Fair Trade without the Froth”

  1. Steve Cooke Says:

    Whilst I agree with the broad thrust of this article – bringing down trade barriers set up by the richest countries would have a bigger impact on improving things for poor countries than fair trade, two things sprung to mind whilst reading.

    One – a blanket refutation of fair trade goes a little too far: the principle that paying a fair price for goods is a good one, and I’m sure there are brands out there that treat their suppliers fairer than the big supermarkets do. I certainly don’t by fair trade products from Walmart or Nestle, because I don’t trust them not to be exploitative bastards using fair trade as a fig-leaf – but I do buy fair trade from more ethical companies. It all comes down to the consumer making being able to make properly informed choices.

    And two – the $1.2bn that you say Africa would earn if trade barriers were removed doesn’t seem like a very large amount of money in the grand scheme of things. To put it in context – the BBC’s pension fund is $3.2bn in deficit and Vodaphone’s profits in the year to March 31st were $12.5bn. If $1.2bn is all that all of Africa would gain then it doesn’t sound like those trade barriers are having a huge impact.


  2. Mark Hudson Says:

    The IEA report, while casting some doubt on the match between the claims of some of the more enthusiastic fair trade supporters and the actual benefits it delivers (it’s rare to find any rigorous economic analysis that says fair trade is single-handedly lifting producers out of poverty) is far from consistent with the analysis posted here. Mohan’s report actually claims that fair trade doesn’t distort conventional markets, isn’t in any way in opposition to free trade, and does provide meaningful benefits to producers, though they are disproportionately focused in middle-income countries (though that masks the fact that in some of these middle-income countries, like Mexico, the beneficiaries of fair trade are among the poorest part of the population).

    The fair trade minimum price does make a difference to those who would otherwise suffer the unmediated consequences of coffee price fluctuations. It enables some farmers to remain on their land where they would otherwise have been forced into migration (to growing urban slums, or, in the case of Mexico or C. America, to the US).


  3. Leslie K. Clark Says:

    I think Angela hits the nail on the head with her comment that buying Fair Trade mainly eases the consciences of the middle classes, the sort of credulous individuals that also pay over the odds for food at farmers’ markets – http://www.youtube.com/watch?v=Wtn1a-7TnOE

    It’s all a bit of a trendy fad.


  4. recycle Says:

    Thanks for blogging about this: Something else that’s related to your post is this video I saw on YouTube from the GreenopolisTV website. Check it out: http://www.youtube.com/watch?v=BDrwyY7jRCE.


  5. Deepak Says:

    I thoroughly enjoyed reading the report which is very balanced. It places fair trade in the right perspective i.e. it is just like any other speciality market trade and it helps producers know in the same way as a niche market helps a niche market producer. I think, the report makes a very important contribution towards understanding fair trade and what it does for the poor producers.


  6. Chris Says:

    I think something quite opposed – that attacking Fair Trade by saying it merely eases middle-class guilt in fact is a way of easing the conscience of the attacker for not coughing up the extra few pennies (in fact many products now aren’t any more expensive).

    I do however agree with Franklin in his assessment of trade rules, to an extent. But I think you will find many of the people involved in Fair Trade actively campaign on this very issue.

    Plus, making trade rules fairer (and freer) wouldn’t solve the whole problem. Developing world producers would still suffer from poor market access, lack of accurate pricing information and still be less powerful than the buyers that fleece them. These issues would still need to be tackled.

    I’m not nieve [sic!] enough to think Fair Trade is The Answer. But it does allow me to buy a product where ethics are taken into account, until rules and market access can be improved enough to allow a better future for many more people. Its a stop gap maybe, and one with its own flaws.


  7. Chris Says:

    Also –

    Nestle were famously found to use contractors producing the coco for KitKat bars that used slave/bonded labour. Nestle accepted this. They didn’t deny it. But they did nothing to stop it.

    Now, a few years later, Nestle has seen Fair Trade can be a powerful marketing tool. And now it’s KitKat bars are Fair Trade.

    So please don’t refuse to accept Fair Trade can and does have many positive impacts. Its not the whole answer – you could argue its a sticking plaster on a major wound. But it does have positive impacts.


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