Fair Trade vs. Free Trade

By Caroline Santoro

     Fair Trade USA seeks to create more equitable trade for poor farmers around the world.  The organization tries to accomplish this by certifying and promoting products it deems to have complied with “rigorous social, environmental, and economic standards” (Fair Trade USA, 2018). Fair Trade commodities include coffee beans, cocoa, cotton, tea, and sugar. This approach seems like an effective way for mindful consumers to easily identify products that were made ethically. However, Fair Trade is a poor execution of good intentions, as it impedes free trade and hurts many of the people it is committed to help.

     The commodities eligible for Fair Trade certification are a part of perfectly competitive markets. This means that barriers to entry are low, there are many producers worldwide, and it is hard to differentiate the products from different providers (i.e., cotton is cotton). Firms in perfectly competitive markets are considered “price-takers” -a firm will sell nothing if its charges higher than the market-decided price, and therefore it must “take” the price that the market offers. Fair Trade creates an exclusive group of certified producers and ensures they are paid a certain price, creating a “price floor.” If the world price for any reason drops below the Fair Trade price, the exclusive group will get paid the higher price anyway.

     In order to be included in this group, producers must pay for certification, agree to standards, and pay “fair” wages to workers. To consumers, this sounds great, as their purchase rewards ethical producers by ensuring greater revenue. However, with some basic economic analysis, it becomes clear that the concept is flawed and may actually harm the economy more than it helps.

    Fair Trade does not help the poorest workers, and in many cases it actually hurts them. The countries with the most Fair Trade certifications do not tend to be the poorest countries with the worst working conditions, but instead those that are well connected in the global economy and have the money to become certified. According to The Huffington Post, “The poorest coffee-growing countries are in Africa: Ethiopia, Kenya, and Tanzania. Fair-trade exports from these countries represent less than 10 percent of coffee marketed through Fair Trade.” In addition, the consumer premium paid does not transfer well to the actual workers due to the middlemen who take a portion of the proceeds. “For each dollar paid by an American consumer for a fair-trade product, only three cents more are transferred to the country it came from than for the unlabelled alternative,” (The Economist, 2014).  In spite of the extra money paid by consumers, the workers ultimately don’t benefit. The process is not transparent, and Fair Trade has no way to guarantee that the workers are getting their fair share or being treated better. For example, Victoria’s Secret made a deal to buy Fair Trade cotton from Burkina Faso that, in reality, was made using child labor. This scandal (read more here) epitomizes the ability to abuse the program without making any ethical changes.  

     The Fair Trade system also attracts poor quality crops and incentivizes adulterating the market. Without Fair Trade, if a farmer grows bad coffee beans, he or she would have to sell them for a lower price, as consumers have too many options to buy better quality beans. With Fair Trade, however, farmers are incentivized to pump their lower quality beans into Fair Trade channels to get the higher price, which then lowers the price for the better beans. Since supply and demand move inversely, in order to drive prices up for producers, the market needs less production, not more.

     Although Fair Trade began with honorable intentions and a determination to make trade more ethical, it is mistargeted and fails to achieve its aim. Free trade is ultimately more effective and stable than Fair Trade, and government regulation should enforce ethical working conditions and environmental practices globally instead of distorting the market.

 

Works Cited

Fair Trade Foundation. (2018). Farmers and workers. Retrieved from

https://www.fairtrade.org.uk/Farmers-and-Workers

 

Fair Trade USA. (2018). Fair Trade Global Model. Retrieved from

https://www.fairtradecertified.org/why-fair-trade/our-global-model

 

Krupnick, E. (2017, December 07). Victoria’s Real Secret: African Child Labor. Retrieved from

https://www.huffingtonpost.com/2011/12/15/victorias-secret-child-labor_n_1150883.html

 

The Economist. (2014, July 05). Good thing, or bad? Retrieved from

https://www.economist.com/business-books-quarterly/2014/07/05/good-thing-or-bad

 

Wydick, B. (2016, January 28). 10 Reasons Fair-Trade Coffee Doesn’t Work. Retrieved from

https://www.huffingtonpost.com/bruce-wydick/10-reasons-fair-trade-coffee-doesnt-work_

B_5651663.html