Markets, poverty, and Fair Trade


I was at the Burgess Hill Fair Trade Festival on Wednesday, debating whether Fair Trade was a help or a hindrance to the developing world. I must have surprised them by being quite ambivalent about the topic: I was supposed to be arguing against it, but I had some quite positive things to say about Fair Trade. What I really wanted to argue was that our trade structures have to change if we’re serious about fighting poverty on a respectable scale.

People have a tendency to pitch Fair Trade against free trade, as if there’s a tension between the two. Quite the opposite, really – Fair Trade is quite a good example of how consumers in a free market can use their buying power to effect change that they want. I think a lot of people on the free market side have (unfairly) seen Fair Trade as being anti-market, but I see no difference between paying for the satisfaction of giving money to a Fair Trade farmer, and paying for the satisfaction of driving a nicer car. It’s part of the market mechanism, and a very nice example of how individuals’ purchasing power can advance the social goals that they like. And it makes a nice change from the people who want the government to sort out the world's problems.

Nevertheless, Fair Trade is still a flawed system. Most Fair Trade farmers are in Latin America, even though poverty is generally far worse in Africa – so buying Fair Trade coffee over non-Fair Trade coffee can mean that your money goes to a Mexican rather than a Kenyan farmer. This may change, but right now the fact is that Fair Trade products can deprive the world’s poorest farmers of their income in favour of relatively well-off ones. And if it gets bigger, Fair Trade risks affecting global supply and disincentivising other types of production in the developing world. This probably isn’t a problem right now, because Fair Trade is a very small part of the market, but someday it might be.

There are also lots of alternatives to Fair Trade – in an excellent IEA report on the topic, Sushil Mohan points out that gourmet coffee growers in Rwanda have been able to achieve prices as high as $55/kilo, versus the market average of $1.30/kilo for ordinary-grade beans. To be fair to my debate opponent, he didn’t claim that Fair Trade was perfect. 

The most important point to remember when thinking about Fair Trade is that, while it’s a decent humanitarian mechanism, it won't do much to help poor countries' economic growth. For that, they need to be able to trade freely with us. The EU’s monstrous Common Agricultural Policy simultaneously subsidizes European farmers with one hand, and imposes extortionate tariffs on goods from the developing world on the other. The one comparative advantage that poor countries might have is thus nullified at taxpayers’ expense.

I'm relaxed about Fair Trade, and I admire its supporters' use of exchange-based market mechanisms to advance their goals. There's no contradiction between Fair Trade and free trade – but achieving the latter is a lot more important.