The coffee aisle at the supermarket has become the latest front in the crusade for “social justice.” Coffee roasters proudly tout their allegiance to the ideals of the fair-trade movement, which ostensibly aims to elevate the economic and social welfare of disadvantaged Third-World farmers.
Despite its meteoric rise in popularity, does fair trade translate its stated intentions into tangible results? Unfortunately, like a stale cup of coffee, fair trade can leave a bad taste in your mouth.
Fair trade positions itself as an alternative to the supposedly merciless nature of free trade and the free market. Trade in coffee has long been anything but free, however.
In his 1972 Wisconsin Law Review article “Ten Years of Land Reform in Colombia,” law professor Roger W. Findley noted, “When the Spanish and Portuguese colonized Latin America, beginning in the 16th century, they transplanted the organization of European feudal society by the device of large land grants to settlers of high rank.” For centuries, privileged landowners and coffee producers have enjoyed their favored status.
Over the last several decades, many Latin American governments have undertaken “land reform” programs with the professed goal of rectifying past injustices. The auspicious name belies what the schemes actually entail, namely, arbitrary expropriation and redistribution of land benefiting those with political connections. The absence of stable, well-defined property rights, combined with a corrupt and whimsical political class, has worked to the disadvantage of all but the most politically favored farmers. Coercive, deceitful, and involuntary practices have been commonplace.
In 1962 many of the world’s coffee importer and exporter nations entered into the International Coffee Agreement (ICA), a trade pact that established quotas on coffee exports. As a result, coffee producers enjoyed artificially high prices for their goods.
Following a paradigm shift in consumer preference from Robusta to Arabica beans, the ICA broke down in 1989. In the years following, the market underwent a necessary correction, and coffee prices fell as much as 70 percent. Those unique circumstances precipitated the ascendancy of fair trade, its proponents situating themselves as advocates of farmers in the face of economic hardship.
State-sponsored manipulations of the market and deviations from free trade created a situation in which fair trade could emerge. Like a quota, fair trade helps keep coffee prices artificially high; accordingly, it prolongs and enhances the negative effects of government intervention in the economy.
What fair trade is
To be a part of the fair-trade program, producers must become “certified.” Certification is granted to producers who satisfy rigid requirements set by Fairtrade International (www.fairtrade.net), the de facto governing body of the fair-trade movement.
The certification process is flawed from the outset. Small, disadvantaged producers — those whom fair trade seeks to help — are least likely to have access to certification. Many producers do not get certified simply because of the small size of their operations. Researchers Aurélie Carimentrand and Jérôme Ballet explain that “certification does not necessarily assist the most marginalized producers, and can in fact actually exclude them due to the high costs associated with certification.”
Certified producers are guaranteed a minimum (above-market) price for their goods. The purpose of the minimum price, says Fairtrade International, is to “ensure that producers can cover their average costs of sustainable production” and to act “as a safety net for farmers at times when world markets fall below a sustainable level.”
Respectable stated intentions notwithstanding, fair trade does not and cannot achieve its professed ends. Elementary economics exposes its faults.
Whenever the price of a good is artificially raised above its market level, a binding price floor is created. The price floor reduces demand for the good while simultaneously signaling to both current and potential producers that an increase in production is warranted.
Throughout history, price floors have invariably failed. Henry Hazlitt notes in Economics in One Lesson, “Attempts to lift the prices of particular commodities permanently above their natural market levels have failed so often, so disastrously, and so notoriously that sophisticated pressure groups, and the bureaucrats upon whom they apply the pressure, seldom openly avow that aim.”
Drawing an analogy, the fair-trade price floor resembles the minimum-wage law. Contrary to its purported goal, the minimum wage actually has the potential to increase unemployment, because it brings about an excess supply of labor. Anyone who is not worth $7.25 an hour is not hired. Likewise, a price floor that establishes an above-market price for a good (e.g., coffee) inevitably leads to an excess supply of that good.
In addition, a market for any good always contains “marginal” producers — producers who are the least efficient, either because of comparatively high production costs, comparatively low-quality goods, or both.
Raising prices above their market level allows a larger-than-optimal number of marginal producers to continue their operations, which can hinder progress. In his exhaustive study of fair trade, Marc Sidwell of the Adam Smith Institute writes, “Fair trade does not aid economic development. It operates to keep the poor in their place, sustaining uncompetitive farmers on their land and holding back diversification, mechanization, and moves up the value chain. This denies future generations the chance of a better life.”
The future of fair trade
Strong, bold, robust — in addition to describing a flawless cuppa Joe, these words also characterize the current virility of the fair-trade movement. Shrewd businessmen have taken full advantage of its vogue, and, as Jeffrey Tucker illustrates, there’s nothing wrong with that:
On the one hand, it is part of the genius of capitalism that it gives rise to a class of entrepreneurs that can use any fashionable culture shift to make a buck. Whether a cereal is called “Sugar Smacks” or “Earthen Honey Morsels” is neither here nor there to me, and if some marketing genius figures that the cereal company can make more money with one name over another, good for him and the company. Capitalism is so darn good at what it does that it can even bamboozle muddleheaded socialists to cough up money for its products; that’s wonderful.
Fashions are fleeting, however — the particular genus of social consciousness that is fair trade will inevitably wither as it is superseded by the next great pseudo-philanthropic movement. And when that happens, what will be the fate of the farmers who have come to rely on artificially high prices for their goods?
Five years ago in The Freeman, Gene Callahan wrote, “In short, I see the Fair Trade movement as embodying a mixture of sound ideas for improving the state of the coffee industry and well-meaning but misguided attempts to fight the realities of supply and demand.” While fair trade may be misguided, it is essentially innocuous.
But there is another side to the story. Right now, fair trade is voluntary for producers and consumers alike, but as the movement and its institutional organizations (e.g., the FLO) continue to gain momentum, an alliance with government could conceivably form. It is easy to imagine fair traders exerting enough influence over their legislators such that their system is mandated by force.
That’s what generally happens when economic illiteracy and sanctimonious audacity coalesce.
The other option
Striving to enhance economic and social welfare is a noble pursuit. Fair traders must ultimately realize, however, that there are flaws in their program. The only way
that disadvantaged third-world farmers will truly become better off is by the implementation of free trade, not fair trade. Free trade, together with well-defined, unwavering property rights, optimizes production and price levels, fosters technological progress, and creates opportunity for everyone.
It’s time for doubters of freedom to wake up and smell the coffee.
This article was originally published in the November 2013 edition of Future of Freedom.