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Fair Trade Without the Froth Fair Trade Without the Froth A Dispassionate Economic Analysis of ‘Fair Trade’ SUSHIL MOHAN The Institute of Economic Affairs conTenTs The author 7 First published in Great Britain in 2010 by Foreword 8 The Institute of Economic Affairs 2 Lord North Street Summary 11 Westminster Table 13 London sw1p 3lb in association with Profile Books Ltd 1 The theory of Fair Trade 17 The mission of the Institute of Economic Affairs is to improve public Introduction 17 understanding of the fundamental institutions of a free society, by analysing What is Fair Trade? 19 and expounding the role of markets in solving economic and social problems. Fair Trade: history and institutions 24 Copyright © The Institute of Economic Affairs 2010 Profile of Fair Trade sales and production 27 The moral right of the author has been asserted. Conclusions 32 All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a 2 Is Fair Trade free market? 34 retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written Introduction 34 permission of both the copyright owner and the publisher of this book. The individual consumer’s rational choice 35 A CIP catalogue record for this book is available from the British Library. The individual producer’s rational choice 37 isbn 978 0 255 36645 8 Fair Trade: an alternative speciality market distribution channel 41 Many IEA publications are translated into languages other than English or are reprinted. Permission to translate or to reprint should be sought from the Fair Trade mainstreaming 43 Director General at the address above. Conclusion 45 Typeset in Stone by MacGuru Ltd [email protected] 3 Benefits and detriments of Fair Trade 47 Printed and bound in Great Britain by Hobbs the Printers Introduction 47 5 Benefits of Fair Trade 48 The gap: promotional claims and reality 52 Some criticisms of Fair Trade 61 THe AUTHoR Conclusion 70 4 Alternatives to Fair Trade 73 Introduction 73 Private social labelling initiatives 74 Dr Sushil Mohan is an applied economist with research inter- The rise of corporate social standards 80 ests in issues relating to the interaction between agricultural Government-regulated social standards 83 commodity trade and economic development. He has published The proliferation of standards and labels raises many several papers on the problem of price risk faced by coffee questions 87 producers in developing countries and how they can manage this Fair Trade compared with other overtly socially risk. He has also published on the benefits for developing coun- responsible business practice 90 tries from reforming their agricultural trade. Sushil worked for Fairtrade ‘absolutism’ 94 over ten years at key levels in trade promotion agencies in London Conclusion 98 and India. He served as Consultant for the Commonwealth Secretariat for developing the coffee industry in the Republic of 5 Fair Trade as a long-term development Vanuatu; as Board Member (1993–7) of the UK Tea Council, Inter- strategy for the global south 101 national Tea Committee and International Coffee Organisation; Introduction 102 and in the Commerce Ministry of India dealing with trade policy Does Fair Trade really counteract the so-called social and development. problems caused or revealed by international trade? 104 Fair Trade and general economic development 107 Agricultural trade liberalisation 111 Conclusion 113 6 Conclusion 116 References 119 About the IeA 134 7 f o r e w o r d intrinsically deviate from the principles of free trade, the author then moves on to examine the claims of Fair Trade’s proponents. foRewoRd This examination is justified – indeed overdue. The claims that Fair Trade activists make are strong; the public esteem for the movement is very high; yet there is hardly any serious empir- ical analysis of the movement’s claims. Indeed, even this study stops short of a detailed, comprehensive and conclusive analysis The success of the Fair Trade movement has created an because the data simply do not exist to test the arguments of Fair intense debate in recent years. It has come under attack – espe- Trade advocates. cially from believers in free markets – for deviating from the The evidence that is gathered in this monograph, however, practice of free trade that has led so many people to emerge from does show that the claims of proponents of the Fair Trade poverty in recent years. In turn, many of the proponents of Fair movement are probably exaggerated. There are many other ways Trade passionately denounce free trade and big business, despite in which the benefits that Fair Trade brings to producers can their obvious contribution to reductions in poverty. This mono- be obtained – some of those ways have long been embedded in graph is to be commended for taking a dispassionate look at the conventional trade. Furthermore, it is not clear that Fair Trade subject. Indeed, it finds that this particular line of argument is a benefits the poorest producers, and the administration and fees dead end. Fair Trade arises from the free choices of producers and involved in becoming a certified producer are not trivial. The consumers: it is therefore very much a niche part of the system of main claims that the Fair Trade organisations make relating free trade. The basic principle of Fair Trade is that the organisa- to their ability to protect producers from price instability are tions involved label products (such as coffee, bananas and so on) exaggerated: few consumers will realise that, although there is a for which the producers fulfil certain conditions in the produc- price guarantee through Fair Trade, there is no guarantee of the tion process. These conditions generally include, for example, not quantity that can be sold at that price. employing child labour. The producers also receive a premium At the same time, the author finds that the claims of Fair above the market price for the product, as well as some form of Trade’s detractors are also exaggerated. Theoretical problems price guarantee should the market price fall below a particular with the model (for example, that it encourages overproduction) level. Consumers buy the products freely knowing that producers that are not serious problems in practice will often be brought up. are being treated ‘fairly’. None of this deviates from the princi- Those who read this monograph hoping for a wholesale ples of free trade – even if it were the case that the choices that denunciation of the Fair Trade movement will be disappointed. consumers make to buy Fair Trade products are misguided. Rightly, the author concludes on the basis of the limited evidence. Having established that Fair Trade products do not Nevertheless, the author’s nuanced position should itself be a 8 9 fair trade without the froth huge challenge to Fair Trade’s supporters. Fair Trade is not, the author finds, a long-term strategy for development; the objectives of Fair Trade are often fulfilled in conventional markets; the Fair Summary Trade rhetoric is not generally justified; the costs for producers of being involved in labelling initiatives are not inconsiderable; and there are many other labelling initiatives with overt social object- ives (such as the protection of rainforest). These other initiatives may suffer as a result of attempts by the Fair Trade movement to • Fair Trade is part of the market economy and is not, in any ensure that Fair Trade schools, parishes and so on use products way, in opposition to free trade. Fair Trade sales have grown with the particular Fairtrade label as opposed to other labels. enormously in the last few years. Overall, this monograph is an important contribution to a • Fair Trade brings certain benefits to producers, such as debate that tends to generate more heat than light. It is a long- guaranteed prices, a social premium and the enforcement of overdue, dispassionate analysis of the Fair Trade movement. particular labour conditions. philip booth • These benefits may not be as great as many of Fair Trade’s Editorial and Programme Director, Institute of Economic Affairs proponents imply. For example, if the market price falls Professor of Insurance and Risk Management, Cass Business School, below the guaranteed price level, though the guaranteed City University price will be paid for any Fair Trade purchases, the quantity September 2010 of produce that will be bought from the producer is not guaranteed. The views expressed in this Hobart Paper are, as in all IEA publi- • The benefits of Fair Trade also come at a cost. There is a cations, those of the author and not those of the Institute (which levy on the wholesaler as well as a certification charge for has no corporate view), its managing trustees, Academic Advisory producers. The certification charge starts at £1,570 in the Council members or senior staff. first year – a huge sum of money for producers in the poorest countries. • Fair Trade does not focus on the poorest countries. Fair Trade penetration is greater in middle-income than in poor countries. • Criticisms of Fair Trade are also exaggerated. At its current level of penetration it is likely to do little harm in terms of distorting markets. 10 11 fair trade without the froth • The benefits claimed by Fair Trade can also be obtained from the normal business relationships that exist between primary product producers and buyers. Attempts by proponents table of Fair Trade to denigrate free trade and normal market practices are not helpful and distort realities. • Primary product producers will often gain much more by selling speciality brands of their product than they will from adopting the Fair Trade label.

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