Saturday, February 5, 2011

The unfairness of fair trade

I’m intrigued by the idea of so called fair trade as a development mechanism. Two of the most developed countries in the world (Canada and the U.S.) were initially heavily exploited and saddled with “unfair” terms of trade and yet here we are, near the top of the list in term of standard of living. Thus it can’t be a simple fact that unfair trade prevents development.

Let’s take a closer look at “fair” trade. In many cases fair trade involves the purchase of a product at a premium, if there were no premium it wouldn’t have to be marketed differently from plain old trade (I’m always amused when people tell me having to pay more is a good thing). The basis for the premium is that the trade is fair and the consumer gets to feel good about giving extra money to someone deserving (read less well off than they are themselves). So you’re really buying two goods, the coffee, knick knack, or what have you, and the belief you’re a good person. A large part of what you’re purchasing when you buy fair trade coffee is the warm feeling of doing good while getting your daily caffeination. So far no harm, no foul.

Here’s the catch, you only get the good feeling of helping someone who’s worse off. This means you’ll only be willing to pay the premium so long as the people on the other side of the exchange are poorer than you are. Think about it, have you ever seen anything promoting “fair trade” with the U.S. or France?

What’s the result? The people producing the good generally make just enough to keep them producing but not much more. With coffee you keep people working small plots using expensive (inefficient) techniques with little or no hope of improving their lot in life beyond what it is now.

Lots of people who promote fair trade argue that it improves the lives of the people actually producing the good compared to the opportunities offered by the heartless multinational corporations. And in general they’re right, in the short run. In the long run the people producing the fair trade good will remain stuck at a low level of absolute and relative income – they can’t change their techniques or increase the size of their operation to capture more of the value of their good – they won’t qualify for fair trade any more. Further they will always be dependent on the good will of those of us in the rich world. So keep buying your “fair” trade goods if you like the idea of making sure there’s somebody in the world less well off in the long run than you are.

But hey, in the long run we’re all dead anyways, right?


Gerald Saul said...

You make being "stuck" out to be such a bad thing. Why is that? Why do you assume that if someone is not progressing to ever increasing economic levels then they are somehow unsuccessful?

economistatlarge said...

Are you volunteering to forego all future pay increases? I'm not.

People are happiest when they are getting new stuff and new opportunities, or more accurately when they anticipate new things and opportunities. There are a few out there who can be happy in stasis, but not many.

economistatlarge said...

Also, remember this group of people is going to be "stuck" with a much lower income than you have now.

Anonymous said...

i'm sure that the other party on the "fair" trade deal would rather have higher resources (read incomes) than what they are getting.

i'm glad you put this up because last weekend's wall street journal had a good book review of the fair trade/deal game. a book i have ordered and awaiting to read. the fair trade game is about maximizing profit for one party MORE than the other. it's another marketing ploy that feeds on your emotions. yes, the other party may be treated a bit better but overall is there a significant change, the answer would be a no.
the premium on fair trade goods (read coffee, ala, starbucks) is a rip-off. how much of that premium goes to the other parties, little at best.
the bargaining power between fair trade partners is important in this situation. it is extremely uneven and in many situations and the division of benefits naturally follows that unevenness.

another aspect of the fair trade game that is often forgotten is that in addition to the income divisions....what about the environment? is it being done in sustainable way? is it efficient? usually (read coffee), fair trade items are sold as being natural/organic. is it? any monitoring? controls? audits?

fair trade is being confused with open trade (i don't like using "free" trade). you want help these people end their perpetual cycles of poverty. give/teach them the tools with no catches and have open trade where prices can be negotiated and influenced by the market. i'll bet you a pint of beer and hockey tickets that they'll do better in the latter situation.

economistatlarge said...

@ Anon - I'm not taking that bet, it sounds like a losing proposition to me. "Open trade"... I like it!

Anonymous said...

it might be a losing proposition just because of the market imperfections and bargaining power of the relative parties.....but you have to start somewhere.

this is where "a big gulp sound" governments might have a useful role to play to even out that imbalance in "power"....nothing beats the state :)

Anonymous said...

you know of any good books on prospect theory / game theory as it applies to economics that are clear to read?

economistatlarge said...

@ anon - Can't think of any books off hand that cover this stuff. I'm slogging through the academic journal versions. Most of this stuff is actually pretty well written with Kahneman and Tversky writing in a way that is generally pretty easy to read. (I might not be the best judge of that, however). Dan Ariely's "Predictably Irrational" covers some of this stuff, but I'm not thrilled with the tone of the piece.