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Ensuring a Fair Share: An Economic Peek at Fair Trade

by Henry Mann

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“Embrace the power of the bean. Drink coffee. Do good.” The tagline, taken from the fair trade coffee, Thousand Hills, sums up the current frenzy to buy products that have been produced, bought and sold through fair trade markets. While the meaning of “fair trade” has evolved throughout the history of the U.S., the economic controversy surrounding the practice prevails.

Fair trade is often mistakenly compared and contrasted with free trade, an economic policy that has been a characteristic of the U.S. for centuries and is widely practiced around the globe. Free trade is the exchange of goods or services in which both sides of the trade freely engage without interference by the government or other parties. Economists tend to agree that the more economic freedom—through both domestic and international trade policies—a country enjoys, the more it prospers over time.

To clarify, fair trade once referred to policies in which the government imposed regulations or limitations on the amount of international trade conducted between the domestic country and its international trade partners. These policies were known as protectionism and have dotted the history of the U.S. and other countries. The general argument for this type of fair trade revolves around a defense of domestic workers whose jobs may be threatened by foreign products and workers. “Sometimes foreign competition has driven American producers out of the marketplace; more often, however, U.S. firms have responded by becoming more competitive,” says economist and philosopher Jay W. Richards.

In the modern context, fair trade is best defined by the authors of The Ethical Consumer as “products purchased under equitable trading agreements, involving cooperative rather than competitive trading principles, insuring a fair price and fair working conditions for producers and suppliers.” The goal of the fair trade initiative, spearheaded by World Fair Trade Organization (WFTO) and the Fairtrade Labelling Organizations International (FLO), is to guarantee that the producers of commodities, such as coffee, tea, bananas and sugar, are receiving more of the profits from the price paid by the consumers than they would in a free market. In order to accomplish this, fair trade products are sold at an established higher price than their competitors. The prevailing mindset is that the extra cost, which is set according to an estimate of how much the fair trade growers need to earn in order to reach a decent standard of living, is being funneled straight into the hands of the producers.

Many proponents of fair trade cite that the practice is a means of making the market more just and equitable for all of its participants, most especially the workers in developing countries. To begin with, the WFTO and the FLO seek to offer business development and training as well as establish industries that are environmentally-friendly and sustainable. Luis Fernando Vasquez, a coffee grower in Costa Rica on a fair trade farm, shares, “Before, a tree used to be an obstacle. Now, we are coming to understand that the tree plays a role, and it can coexist with our commercial coffee plantation.” The switch from years of implementing slash-and-burn farming techniques as well as applying pesticides to the crops comes with a cost. Thus, the extra cost for the fair trade products is delivered back to the producer communities in order to improve working conditions, wages and agricultural practices. As a part of a fair trade farm, Vasquez earns about 15 cents more per pound of coffee produced and sold. Though the environmental impacts of the farmers’ methods are not necessarily the focus of the fair trade cooperatives, they are a part of the long-term goal.

However, even the proponents of fair trade acknowledge its drawbacks. “If you count on everyone to [buy fair-trade] because of their ideological commitments, you’re going to be stuck in a niche market that doesn’t serve a broad range of people,” said Matt Warning, a development economist and professor at the University of Puget Sound, where he specializes in issues involving fair trade. Fair trade exchanges operate in the same “markets of empathy” as charities, which means that fair trade relies on the altruistic motivation of the consumers as opposed to the economic principles of supply and demand.

In a free market economy, dropping prices alert the producer that the good or service is no longer in demand. With this information, the producer can choose to reallocate resources, time and capital in order to adjust and increase the value of the good or service. However, because fair trade exchanges operate in a separate market sphere, they lack this information, which prevents them from responding to the changing consumer demand. Consumers may pay higher set prices for fair trade products, such as coffee, which in turn encourages farmers to enter or stay in the market when it may not be in their long-term advantage to do so. Bearing this is mind, many economists argue that fair trade causes prices to rise without benefiting the poor in the long-term.

Additionally, the small percentage of farmers—for example, only 3% of coffee farmers benefit from fair trade practices—who are served by the fair trade initiatives are favored over the significant population of farmers who lack access to such assistance. Arnab K. Basu, a visiting fellow at Cornell University, conducted a study on fair trade coffee initiatives and noted how difficult it can be for farmers to even be eligible to benefit from the program.

Thus, before reaching for the WFTO-labeled products at the grocery store or coffee shop, be sure to inform yourself on the nature of the fair trade initiative being supported. Challenge the organizations that are establishing and overseeing the projects. Ask yourself: What are the most effective means of serving the poor and reducing poverty in developing countries?

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