Common Error No. 101


101. "We should help third world producers by buying Fair Trade goods."

Actually, we should help third world producers by buying more of everything they produce. 'Fair Trade' aims to give higher prices to approved producers in the developing world, inevitably at the expense of others. It tries to manage trade, setting the price it thinks more appropriate than the market price, and giving some of the extra money paid to producers who have signed up to its organization.

But only a small proportion of the price differential finds its way back to people in poorer countries. The movement is big on heart-warming individual anecdotes, but scores low on the overall statistics. Only a tiny proportion of goods are designated as 'fair trade,' and most of the higher prices paid are swallowed up before they reach the original third world producer.

It might make a few people feel good, but it is not going to be a significant factor in the drive of poor countries to become richer. They do that by selling goods that the world wants. Often this starts with primary products, but real development can come when they gradually add value to their products by such things as refining and marketing, and take more of the value back to their own country.

Countries do not stay poor because we all pay too little for our coffee. Coffee responds to market forces, and some of these countries over-expanded production, with an increased supply that caused a price fall. Some have sensibly moved into added value, doing the processing, packaging and branding themselves for greater returns. If 'fair trade' keeps more basic coffee-growers in business, it contributes to that over-supply and depressed price.

We could help poor countries most not by trying to manage a small part of the market at inflated prices, but by removing our tariffs and subsidies, and buying as many of their goods as we can.