Unfair Fair Trade

Jacek Spendel

February 2010
Ideological trolley

Politics is everywhere, not only in the White House or in Congress, but even in your

fridge. Every day, when we shop, we vote with our wallets who should and should not

produce and deliver products we buy. To make the vote we estimate which products represent

the best quality for the best price and make a decision. But the revolution is coming. The

leaders of the consumer revolution propose morally higher factors that should drive our

consumer behavior. For example, we should consider poor people who produce the products

we buy and “if the message is frequent, loud and consistent enough, then they (consumers –

JS) can actually change practices, and we see that happening on the ground”1, says Chris

Wille of the Rainforest Alliance, a conservation group. The assumption that not only price

and quality but the bad situation of marginalized producers in the developing world should

drive the consumers' behavior is the base for the new proposition for world trade.

One of the strategies to challenge the “injustice of low prices” is Fair Trade. Fair because the

main goal of this movement is to provide “fair wages” for producers. FINE is the umbrella

organization that unites four major fair trade groups (Fair Trade Labeling International,

International Federation for Alternative Trade, Network of European World Shops, and the

European Fair Trade Association). FINE defines fair trade as a

1
„Voting with Your Trolley”, The Economist, December 7, 2006
”Trading partnership, based on dialogue, transparency and respect, that seeks greater equality

in international trade. It contributes to sustainable development by offering better trading

conditions to, and securing the rights of, marginalized producers and workers – especially in

the South”2

But the essence of the Fair Trade movement is the way they seek to address these issues. It is

the idea of providing a “fair price”, that does not depend on market fluctuations and secure

producers and their “living wage”. The area where the Fair Trade label plays the most

important role is the coffee market, and therefore I will focus on it in this paper. Farmers who

are certified as Fair Trade producers receive a fixed minimum rate of $1.263 per pound for

their coffee, or $0.05 above it if the market price is higher than the floor rate. According to

the promises of the certifying organization, the special benefit should go to the producers and

be spent according to the wishes of the cooperative’s membership4. The market for Fair Trade

products is constantly growing but is based mostly on Western European countries and the

United States.

The promises of Fair Trade sound very interesting to western people, who believe that

through this smart institution they could help poor people and at the same time reward their

good work. Unfortunately, the reality is much more complicated, as any of these goals could

be met through Fair Trade, which seems to be the next purely ideological project with the

2
www.fairtrade-advocacy.org/.../FAIRTRADEDEFINITIONnewlayout2.pdf
3
http://www.transfairusa.org/content/resources/faq-advanced.php#minimum
4
Colleen Berndt „Is Fair Trade in coffee production fair and useful?”, Mercatus Policy Series, Mercatus Center,
George Mason University, June 2007, p.14
only goal being to destroy free market capitalism. As the evidence shows, Fair Trade not only

does not improve the living situation of poor people, but it preserves the undeveloped state of

third world economies. Moreover, fair trade is actually unfair, because it provides a better

price only for a limited number of farmers, leaving the others who could not meet their

standards in a worse position. In place of sustainable development, Fair Trade supports

corruption, bad quality production, and economic inefficiency. But the worst side of it is the

great lie that constitutes its relatively good market position. Consumers are being assured in

marketing material that Fair Trade is the best way to improve the standard of living in poor

countries. If they knew that 90% of the profits from Fair Trade comes to the retailers' pockets,

they would even not pay 1 cent for this initiative. The purpose of my paper is to uncover this

great lie to prevent prospective consumers, and broader, politicians from implementing Fair

Trade as law in future.

Cheated consumers, cheated producers

The old notion underlying Fair Trade is the Acquinian doctrine of “just price”. It

assumes that the free market does not provide just prices for goods and therefore there is a

need for government intervention. In the case of Fair Trade, we don’t deal with government,

but with a voluntary system which tries to set “just” standards of trade to make poor

producers better off. Even young people in Great Britain think that
“More and more people are keen to support Fair Trade because it really makes a difference in

the lives of the people who make the goods we consume.”5

This shows the important role of propaganda. The goal of the movement is to make people

feel guilty if they buy lower price products, by showing them how much it hurts poor people.

By linking buying cheap products with ethical issues they want to pressure consumers to buy

Fair Trade products. Harriet Lamb, Director of the Fairtrade Foundation says:

“It is so important that we have one open and rigorous system. If people really want to help,

then they should buy Fairtrade”6

Such misleading information led many conscious coffee drinkers to buy Fair Trade products

even though these assumptions were not examined7. Does Fair Trade really help poor people?

By any measure there is a large gap between promotional materials in defense of Fair Trade

and the reality the producers face. In fact, Fair Trade cannot guarantee anything to producers.

Free Trade suggests a minimal price for cooperatives which represent groups of producers.

Cooperatives, as democratic bodies, decide in elections how to distribute the funds.8 They

may spend this money on different ends, but according to Fair Trade rules, the decision is

made by members who are small landowners. But laborers who are not small landowners are

5
„Fairtrade in Your School”, April 2005, Fairtrade Foundation, p. 5
6
„Fighting the Banana Wars”, 2008, Rider Books, p. 134
7
Jeremy Weber „Fair Trade Coffee Enthusiasts Should Confront Realisty”, Cato Journal vol. 27, p. 110
8
Colleen Berndt „Is Fair Trade in coffee production fair and useful?”, Mercatus Policy Series, Mercatus Center,
George Mason University, June 2007, p.27
actually the poorest part of coffee industry. Fair Trade rules make them even poorer by

requiring small landowners not to hire full-time employees. That drives farmers to employ

seasonal workers who very often work for less than the minimum wage.9Another

organization, FLO, does not oblige farmers to show payment records or to verify wages

during the inspection process or certification10 As migrant workers are not members of

cooperatives, they are not verified by inspection. This example shows the difficulty of

defending the thesis about Fair Trade serving the poorest class.

The other interesting case in this aspect is the origin of the Fair Trade farms. Mexico, where

the average salary is $9000 per year, is the biggest producer of Fair Trade coffee. At the same

time, most of the undeveloped economies that people think produce Fair Trade goods are

represented slightly or not at all. African countries, in comparison with central and southern

American countries, represent a very small percentage of the whole Fair Trade production.11

But the greatest demand on producers and uninformed consumers is the percent of the

premium that goes to retailers. According to the Adam Smith Institute, only an estimated 10%

of premiums reaches producers, while 90% of the revenue goes to retailers. Marc Sewell

summarizes: “Given that the consumer very likely pays the large Fair Trade premium on the

understanding that it is a direct charitable contribution, he would be willing to send far more

to poor farmers than farmers receive through the farmers certification process. The Fair Trade

9
Marc Sidwell” Unfair trade”, Adam Smith Institute, London 2008, p.15
10
Colleen Berndt „Is Fair Trade in coffee production fair and useful?”, Mercatus Policy Series, Mercatus Center,
George Mason University, June 2007, p.27
11
Marc Sidwell” Unfair trade”, Adam Smith Institute, London 2008, p. 11
tendency to discourage individuals from donating directly to charity arguably draws them

away from the most efficient way to give, in favour of Fair Trade, losing the producers'

money”

Myth of fixed price

It is not necessary to be a great economist to demonstrate that price controls mean

economic failure. Setting minimum prices was never a successful solution historically. Basic

economic principles tell us that the only consequence we should expect is artificially high

supply and lower demand that leads to overproduction. The case of Fair Trade coffee is not

different. The fixed price, which is in fact a subsidy, sets the average price of coffee

artificially high, which leads to overproduction. This results a lower price for non-Fair Trade

coffee, and makes these farmers poorer. Tyler Cowen described it in these words:

“What happens if there is an adjustment to world supply or demand and prices in one part of

the market are fixed? Prices in other parts of the market must fall by more – others suffer.

What happens to employees of large producers when fair trade consumption shifts away from

them towards small producers? They may have no alternative employment.”12

Fair Trade though gives false signals to the market that result in too much coffee production,

and therefore prevent farmers from growing other crops that might be economically

12
„Who benefits from Fair Trade?”, Marginal revolution website, available at
http://www.marginalrevolution.com/marginalrevolution/2005/12/who_benefits_fr.html
reasonable.13 The effect of such a policy is a surplus of Fair Trade coffee, resulting in price

drops and unsold inventories, and eventually the sale of Fair Trade coffee on the open market.

The significant difference between Fair Trade coffee supply and demand existed for more

than 10 years. Bob Thomson, the former director of Fair TradeMark Canada, affirmed in

1995 that Fair Trade producers had a productive capacity of 250,000 MT of coffee for

demand of only 11,000 MR14. That means that consumers on the market ordered only 13

percent of all Fair Trade coffee supplies.

Another part of the story related to fixed price is a lack of incentive to innovation. The Fair

Trade system supports farmers who do not innovate. The Fair Trade system does not push

people to innovate, to look for new market niches, but rather rewards them for being

undeveloped15 . Inefficient, badly managed cooperatives are subsidized, so that they will

never get out of poverty. According to Oxfam, in the time it takes five hundred people in

Guatemala to fill a large container with coffee, the same amount of coffee can be picked in

Brazil by five people and a mechanical harvester.16

Cooperatives were designed as a tool to eliminate “unnecessary” agent costs between

producer and consumer. Actually, the reality proved to be more complicated than designers

predicted. The cost of sorting and processing coffee, and others related to export logistics,

13
„Voting with Your Trolley”, The Economist, December 7, 2006
14
Thomson B. „Lesson Learned: Fair Trade and CED”. Paper available at
www.globalexchange.org/campaigns/fairtrade/coffee/coffeebib.html
15
Marc Sidwell” Unfair trade”, Adam Smith Institute, London 2008, p. 13
16
„Mugged: Povery In your coffee cup”, Oxfam International, 2002, p.18
generated sums of money that in many cases consume a larger part of Fair Trade extra profits

so that this money does not reach farmers.17

The fixed price causes not only technological stagnation, but leads to bad quality of coffee

production as well. In Costa Rica, most of the Fair Trade cooperatives are located in the

places where prime coffee could not grow. These farmers would not be able to compete with

farmers from the parts of the country where the climate for coffee growing is much better.

Fair Trade with its fixed price mechanism gives them the opportunity to enter the market even

though the quality of coffee they grow is very poor.

“Fair Trade directs itself to organizations and regions where there is a degree of

marginality…we are talking about unfavorable climates (for coffee production)…regions

which are not competitive” explains Sean Eliecer Urena Prado of The School of Agricultural

Economics at the Universidad de Costa Rica18

The problem of the quality of the coffee is related to John Nash's game theory, as well.

Cooperatives which accumulate many producers in one place are some kind of social property

where nobody takes responsibility for the outcomes. The fact that all producers mix their

beans with those of other producers causes a free-rider effect where everybody wants the

maximum outcome with the minimal expense. Each producer will prefer to send the better

coffee to the open market, and sell the bad one as Fair Trade. The result is poor quality of

17
Jeremy Weber „Fair Trade Coffee Enthusiasts Should Confront Realisty”, Cato Journal vol. 27, p. 111
18
Colleen Berndt „Is Fair Trade in coffee production fair and useful?”, Mercatus Policy Series, Mercatus Center,
George Mason University, June 2007, p.18
coffee which may get Fair Trade certificate but not satisfied consumers. Colleen Berndt

describes this in a Mercatus research paper using this example:

“A producer has two bags of coffee to sell and only one can be sold as Fair Trade. He knows

bag A would be worth $1.40 on the open market and bag B $1.20. Which should he sell as

Fair Trade? If he sells A as Fair Trade, he earns $1.31 + $1.20, or $2.51. If he sells B as Fair

Trade, he earns $1.40 + $1.31, or $2.71. Therefore, to maximize his income, he will choose

to sell his worst beans, bag B, as Fair Trade”

This shows clearly how Fair Trade cares about its consumers selling them worse coffee for a

higher price. This also shows how socialism works, by rewarding mediocrity and encouraging

people to cheat the system. Thus the only market-based way to increase the price for products

is through quality and innovation.

Fair Trade as a bureaucratic mechanism

There are very high entry barriers for new cooperatives who are willing to join the Fair

Trade market. It is not only a question of meeting standards but as well questions related to

the assistance of development organizations and money they have to pay to became a

member. The fee at FLO is $3.200 but the pending organization must have an export contract

and enough money to export coffee. Most organizations need around $15,000 in financing to

export one container of coffee. Farmers need to spend their money to complement the pre-
financing offered by the Fair Trade importer. The FLO requires Fair Trade importers to

provide a minimum prefinancing of 60 percent of the value of the export contract19

“These certifications are very difficult for us because they become more and more

complicated due to the fact that there are many requirements that we can’t meet” explains

cooperative member Jesus Gonzales. He adds “They want a record to be kept of every daily

activity. With dates and names, products, etc. They want everything kept track of. The small

producers, on the other hand, can hardly write their own name”20

Moreover, there is some evidence of the danger of corruption in some Central American Fair

Trade cooperatives. It happened that they purchased a harvest from farmers for a low market

price, then sold it as Fair Trade and shared the premiums among cooperating managers.

Another corruptive practice was linked to the certification process when bribed managers

certified larger farmers who did not meet Fair Trade standards.21 Insufficiently clear standards

of certification encourage farmers to cheat by selling non-Fair Trade products with the Fair

Trade label for a higher price. Many industry insiders claimed that uncertified products were

exported as Fair Trade.

Fair Trade as political project

19
Jeremy Weber „Fair Trade Coffee Enthusiasts Should Confront Realisty”, Cato Journal vol. 27, p. 114
20
Colleen Berndt „Is Fair Trade in coffee production fair and useful?”, Mercatus Policy Series, Mercatus Center,
George Mason University, June 2007, p.25
21
Ibidem, p.26
 Today Fair Trade is a volunteer-based project: only people who are willing to join, do

so. However, it is very important to inform them about the real effects of Fair Trade: the

economically wrong rules of this project affect only some market game participants. But

leaders of the Fair Trade movement do not hide the fact that their goal is to impose Fair Trade

rules nationwide. This is closely related to the broader idea of general replacement of the

global economic order – from free markets to “just” markets, with special agencies defining

“just” prices and “just” rules of trade. For consumers, who do not notice the antagonism to the

market in Fair Trade propaganda, this movement may present itself as very friendly and even

market oriented. But the research done just on voluntary-based Fair Trade clearly shows us

how big the economic damage can be the. The socialist theory of price controls sets the

dangerous agenda of this movement. I believe that the primary task for every person with

common sense today is to prevent, not spread, Fair Trade into new spheres of activity.

There is alternative

We can evaluate Fair Trade in two major respects: as an effective way to develop poor

economies or as a charity. Actually, in both areas, Fair Trade fails. The only fair trade is free

trade because only the free market system rewards the best (in consumers' eyes) players in the

market, and this is just. Only free trade may be implemented as an effective strategy to reduce

poverty in the third world. Developing countries have many strengths, with price competitive

products at the head, to offer the developed world. Fair Trade strategy with artificial high
prices, bad quality of products and lack of incentives to develop is just a regressive strategy.

There is a big job to do with global markets: we need to abolish trade barriers, to make the

market environment really open. The greatest threat for economic development of every

country, not only poor ones, is economic protectionism of the welfare state with its hypocrisy

manifested by the policy of defending domestic special interest groups on the one hand, and

giving alms to the poor world on the other.

Fair Trade can be treated as a charity program as its main aim is to help poor people. But it

does not work even in this sphere. As we saw, the vast majority of special profits go to

retailers; the small part does not necessarily reach the poorest people in the industry; and

finally, these coffee farms are not located in the economically weakest countries. However,

fortunately Fair Trade is not the only strategy to help people by contracting them to work.

Rainforest Alliance is one of them. The main difference between Fair Trade and Rainforest

Alliance is that the latter pursued innovation by providing training, advice and better access to

credit. People are willing to pay more for products with the RA logo, and not as a result of

price control. . Promoting greater efficiency by working with farmers and thus increasing

quality of the coffee is the main objective of Technoserve, another initiative working with

farmers in East Africa. Rise of quality may be the best answer for the farmers seeking for

market reward even higher than those provided by Fair Trade. Jeff Teter, the president of

Allegro Coffee, argues that market incentives and a focus on quality offer farmers a better

deal”
“To get great quality coffee, you pay the market price. Now in our stance, it’s a lot more than

what Fair Trade floor prices are. One hundred percent of what we bought was more than

$1.41…it’s not the Fair Trade price, it’s much higher”22

Fair Trade fails almost in every aspect it promise to make a difference. Researching every

single presumption brings us new evidence that shows that Fair Trade propaganda is simply

nothing more wishful thinking, if not to say: lies. Constantly rising number of people screwed

by PR magicians hired to advertise Fair Trade as the best program providing efficient solution

for poverty, tells us how confused people are. Our mission is to rectify this message to make

consumers conscious about their market choice. If we skip doing it the next step will be

political action and then we all will wake up one day in socialistic world with see of

unintended consequences. That is why it is so important to explain to people that the best way

to decrease the poverty in the world leads through free market incentives, the system based on

truth, unlike the lying system of fair trade.

22
Ibidem, p.29
For more information contact:

Jacek Spendel, Project Manager

spendel [at] globalizacja.org
Tel.: + 48 668 447 877

About the author:

Jacek Spendel, M.A. graduated in sociology at the University of Silesia.

Jacek was president of the KoLiber Association. In fall 2009 he studied at
the Georgetown University and served as an intern for the Eastman Kodak
Company. Earlier, Jacek worked for Institute for Free Enterprise based in
Berlin. He was main organizer of the Liberty English Camps in Poland in
2008 and 2009

Globalization Institute Foundation is a free-market think-tank focused

on globalization, climate change, healthcare, competition and new
technologies. Among its Board Members are Vladimir Bukowsky famous
Russian dissident, Prof. Marek Chodakiewicz from Institute of World
Politics or Tim Evans fro Libertarian Alliance. Globalization Institute is a
member of ATLAS Network and Stockholm Network. In 2009 received a
Templeton Freedom Award for a book “Mythology of Greenhouse Effect”.