Sunday, May 15, 2011

Fair Trade Revealed As Feel-Good Hoax

I have for some time been a basher and hater of "Fair Trade," in coffee and other commodities. In fact, as far as I'm concerned, Russ Roberts and I podcastrated the whole issue nearly four years ago. Sarah Marchmont wrote a very fair-minded article about it.

Here is the basic economics--a rent is being created: a price above market price is being charged. In countries where property rights, contracts, and rule of law is tenuous, feel-gooders and scam artists have put together an unholy coalition. The feel-gooders create something called "Fair Trade" certification, which means that the farmers get paid well above market price for the coffee they produce.

Not surprisingly, many farmers want to get in on this action. But less than all can be certified "fair trade" recipients, since a price that much above the market price would create a surplus. The fair trade feel-gooders would never be able to sell the glut of coffee if EVERYONE gets fair trade certification.

So, the feel-gooders stick their fingers in their ears and shout "LA-LA-LA-LA-LA" and pretend that their partners the scam artists are doing the right thing when they hand out the "fair trade" certifications.

But remember that these are countries with little rule of law, and shoddy police enforcement. So what the scam artists in effect do is sell off the rent (the high price of fair trade certification) to the highest bidder.

The result is that, after a fairly short period, three years at most, the "fair trade" farmers are getting no more, and maybe less, than everyone else, and no more than they got before the "fair trade" scam was started. The scam artists, it's true, are skimming the profits, but the competition to become a scam artist then becomes the valuable commodity, and rent-seeking to get to be the guy who certifies "fair trade" then also dissipates THAT rent. Some government official in the country, the one who licenses the guy who licenses the guy who certifies "fair trade" farmers ends up sucking down the rent.

Consumers pay more, and feel good about themselves. The feel-gooders who started the program move on to abuse some other group of farmers with false promises. And the results are a substantial increase in dead-weight loss.

Don't believe me? Article in the National Post, by Lawrence Solomon, founder of Green Beanery in Toronto, a suburb of Buffalo.

And the German study that really reveals how it all works. In fact, as the Hohenheimers note, the certification process is so corrupt many don't even bother, and just mislabel the coffee as "fair trade" from the get-go.

All you need to know to figure out why "fair trade" and similar feel good programs are dumb is have lunch with Bob Tollison once, and have him explain what rent-seeking is. Or you can read this, I suppose, though Bob is a better bet. (Dr. Henderson gives a nice short history.) The point is that once you understand rent-seeking, you can PREDICT that stuff like "fair trade" won't work. It can't work. And it doesn't work.

UPDATE: Dalibor Rohac has a nice piece on same subject. Thanks for the tip, DR!


Scott from Canada said...

...Toronto, a suburb of Buffalo.

I hope it's not a moral defect on my part for me to be more troubled by your wanton use of "suburb" than by others' wanton use of "free trade".

Anonymous said...

"podcastrated"? Yikes.

xteeth said...

So you hate anyone that tries to make things better for farmers. What else is new? As there are no facts here other than your assertions, I assume that you are just a nasty, selfish, rich person trying to make themselves look better by belittling other's efforts. How Republicant of you.

Jade said...

You had me until "Toronto, a suburb of Buffalo." Then I was just confused, wondering where this "Buffalo" was and why I should care.

pacificwaters said...

Apparently xteeth's comprehension abilities are in disarray. The article clearly gave 2 references that can be checked. I have seen the same issue in Ecuador. Farmers who choose not to join whatever co-op has signed on to the scheme are denied certification because they haven't chipped in for the fee. It is a scam and less to do with helping the farmers than helping the certifier.

Anonymous said...

The solution: Upper-class tax cuts!

Shawn said...

xteeth, you're awesome. comment here more often, please.

also, please don't learn any economics, or it would just ruin your schtick.

Yannick said...

I have to agree with Mungowitz entirely. Congratulations on one of the very rare articles out there that do not glorify fair trade for something it isnt, i. e. FAIR. I'll certainly recommend this blog.

Best wishes from Switzerland!

Emil said...

@Shawn: Nothing in here has anything to do with economy, since no figures were cited, not even countries with "little rule of law" were named. This is old news anyway, since many of these certification schemes (organic, carbon neutral, etc) were proved before to be "feel good" schemes.

@Mungowitz: Why was the "Toronto, suburb of Buffalo" was inserted here? You're from Buffalo? Why would anyone live in Buffalo?

Anonymous said...

Aside from the obvious rude comment about Toronto, what you're saying is that feel-good capitalism doesn't work and that it doesn't change anything.

Using the present legal and capitalist and political system to try and reform the system to make it fair is impossible and will never work because, as you have shown, the process will be perverted by the rest of the system.

In our society, we have this weird idea that just by making a law or a certification that it makes something so.

The feel-gooders are the ones who don't really care about the oppression that goes on. The best way to have fair trade and to enrich farmers in other countries is to cut farming subsidies in the United States and to restrict farming exports in order for their local industries to grow.

Hiding the problem doesn't fix the problem.

Shawn said...

@Emil, you're also awesome. You need to not read any Adam smith, or you might come away thinking that there's more to economics than "figures," and that would ruin YOUR schtick.

Also, don't bother with the genres of humor, sarcasm, or blogging in general. Keep treating things as academic journal submissions, and criticize them accordingly., Canadian Bacon had to resort to saying that Canadian beer sucked to start a fight. Apparently, disrespecting Toronto was the way to start a kerfuffle.

Adam said...

The link to the German study is broken :-/

Anonymous said...

I read Sarah's article that was published more than a year ago. Although a probably a "fair" analysis, might I point out our country and the "free" markets are FULL of middlemen and our workers (production) have seen decreasing wages or stagnant wages for sometime, all the while the fat cats at the top are raking in their bonuses and obese salaries.
Perhaps a little more research into what and who you make your purchases from would be a more logical arguement.
Oh, don't bother responding either - I for one don't fall for the Capitalism in America line -
because Capitalism has become Corporatism.

Anonymous said...

Not to pile on, but here is another (working) paper on the benefits delivered by Fair Trade:

Pretty damning.

Anonymous said...

Toronto is not a suburb of Buffalo. Buffalo is Toronto's ghetto.

Anonymous said...

Bad linky to the German study.

MMW said...

Fair trade coffee is horrible before you get to the corruption though. Work out FT to its logical end: what happens if everyone who drinks coffee drinks FT coffee?

The price of coffee goes up so folks will generally drink less coffee right? With less being purchased, do you really think there will somehow be more, higher paying jobs in coffee producing regions?

It's stupid on the face of it. Well intentioned, but stupid.

If you want to improve the lot of coffee producers (and they are terribly poor), it seems like you'd want to encourage them to make either a better product that commands a higher price or be more efficient at producing the beans.

Fortunately, there is a movement within the specialty coffee world where industry types are taking the time and effort to seek out the best farms and deal directly with them. These guys get *much* better pricing than FT but they produce a much better product as well. (See the Farm Gate program from ,Sweet Maria's for just one example)

Anonymous said...

This also happens in China with ISO certificates. Companies want the proof that they are "high quality" so they start to shop around.

Special firms pop up that will give you the certification you want, and they compete not just on price but on "convenience."

Michael said...

This is... astounding. There's not much you got right here... I mean, this isn't even remotely how Fairtrade certification works.

- It's a demand-driven market, meaning the coffee sells as Fair Trade if there's a buyer willing to buy it. If not, it sells through any of a number of other channels

- It has nothing to do with weak property rights and contract enforcement. In fact, it's hard to imagine how it could function in that sort of environment

- Farmers, their co-ops actually, are certified if (a) they want to be, and (b) they meet the standards. There's nobody keeping them out to prevent some sort of glut, which doesn't even make sense in light of the above point on what happens if coffee isn't sold as Fair Trade

- Where the hell does three years come from? Seriously.... The first co-op connected to the Fairtrade system, before it was even a certification system, is still in there after almost 25 years. If it wasn't working out for them, you'd think they'd have left by now.

- Governments aren't really involved at all... certainly not in the certification process. Plus, there's no quota on available certifications, so it can hardly be sold "to the highest bidder"....

- The Lawrence Solomon editorial is nonsense for more reasons than can be addressed here. But here's a response to it:

(also, note that Solomon markets his own coffee as Fair Trade Certified, attempting to free ride on the same system he condemns in the National Post piece)

- You've completely misrepresented the Hohenheim study - it says nothing about corruption or mislabeling... it's not even what the study was looking at. You link to it and it's only nine pages... did you even read it?

Wow. Just... wow.

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