by Maxford Nelsen
Whitworth is moving quickly toward becoming the first fair trade university in Washington. While the goal of helping disadvantaged workers in developing nations is laudable, fair trade is not an effective means of achieving positive results. Unfortunately, economics dictates that fair trade actually winds up producing the very types of negative consequences it purports to solve.
Fair trade goods are certified by organizations like Fairtrade International. Certification is supposed to indicate (1) that producers have been paid “fairly,” (2) that certain labor practices and management institutions are in place and (3) that efforts are underway to encourage development in areas like education, health care and farm improvements. According to proponents, all you have to do to be a conscientious consumer is buy Fair trade-certified goods.
However, basic economics reveals a number of serious problems with this scheme.
First, the most basic argument against fair trade is based on supply. According to The Economist, the reason the prices of agricultural products are so low is because of overproduction. Fair trade coffee is an instructive example. Increasing the price of coffee through fair trade with the intent to benefit existing growers will cause more producers to begin growing coffee to take advantage of the higher possible profits. As supply increases, the price will again begin to decrease, limiting or erasing the initial benefits to producers. Furthermore, encouraging additional coffee production with an artificially high price “could potentially inhibit the development of other economic activities,” according to The Economist.
However, fair trade often prevents new suppliers from reducing prices by setting a minimum price for goods. Still, becoming fair trade certified is expensive and difficult for producers: a whole host of new standards must be complied with and periodically verified. Jeremy Weber of the Cato Institute warns that, “if not managed effectively and efficiently,” the added expenses of fair trade certification “can consume much of the higher Fair Trade price before it reaches growers.” The unintended consequence of these higher standards is that “increased barriers to entry [into the market] have made it increasingly difficult for marginalized producers, which Fair Trade supposedly targets, to participate,” according to Weber.
Second, another potential unintended consequence of fair trade standards is that fewer workers would be employed. The increased cost of labor caused by fair trade practices creates an incentive for farm owners to “use more capital such as machines or fertilizer, and less labor than [they] would under less-stringent labor requirements,” according to Gene Callahan of the Foundation for Economic Education.
Thirdly, fair trade unintentionally undermines the very engine of economic growth in developing nations. Even noted liberal economist Paul Krugman once pointed out that developing nations can only compete with the industrialized world because of their ability to provide cheap labor. “Deny them that ability,” he argues, “and you might well deny them the prospect of continuing industrial growth, or even reverse the growth that has been achieved.” Krugman concludes that “a policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries.”
While the desire to try to help impoverished workers is understandable, the laws of economics cannot be changed. The root cause of poor wages and low prices for goods like coffee is excess supply. The only real solution is to let the market sort things out, even if it means that inefficient producers will go out of business and people will be unemployed. In the case of coffee, cheap and efficient coffee production in Brazil and Vietnam has cost the jobs of between 200,000 and 400,000 workers in Central America, according to Brink Lindsey of the Cato Institute. However, Lindsey points out that “in Vietnam, coffee related jobs have soared from 300,000 a decade ago to between 4 and 5 million today. The job losses and job gains go hand in hand.”
Simply because fair trade falls to deliver does not mean that nothing positive can be done. In a truly free market, those who transition out of coffee (or any good) because of excess supply would be able to switch to some other crop or occupation which would be more profitable and productive. However, “huge subsidies to farmers in parts of the West mean that farmers in poor countries cannot diversify their production, because they cannot access these markets. Poor farmers choose to produce coffee, cocoa and other commodities because they have few other options,” according to Kendra Okonski of the International Policy Network.
As Lindsey argues, if the U.S. and other developed nations moved toward freer trade by doing away with “high trade barriers and lavish subsidies on a wide variety of agricultural products,” then “coffee farmers would be better able to diversify into other crops.” Freer trade, not fair trade, is the smart way to improve the economic position of workers in the developing world.
While simple solutions like buying fair trade goods sound easy and appealing, real solutions are more complex and require more effort to implement. As Lindsey observes, “economic illiteracy leads again and again to the advocacy of measures that would actually exacerbate global poverty.” While that may not sit well in Whitworth’s culture of social slactivism, it is a necessary realization if we truly desire to make positive change in the world.
Contact Maxford Nelsen at firstname.lastname@example.org.