Friday, 11 May 2007

The fairest drink on earth: a cup of free trade coffee

Jo Christie-Smith has questioned what non-"Fair Trade" coffee is if we don't have free trade. In doing so, she raises the whole question of “Fair” and free trade, and invites me to (finally!) write about one of my bugbears.

Ultimately, “Fair Trade” coffee is a misnomer, because it is no different in trade terms form any other coffee. The terms of trade are identical. The difference is that the wholesaler/distributor has chosen to pay above the market price for the product. This is not really “Fair Trade” but (depending upon one’s perspective) a form of charitable subsidy or a misguided means of convincing farmers to keep producing coffee when their labour would be more usefully turned to some other product. I think a more honest title would be “Generously paid for” coffee, or perhaps “We left a tip” coffee.

Note that this would not be the case if “Fair Trade” became a matter of policy, as the Trade Justice Movement would like. Then it would be either a subsidy or a tariff, depending how it was applied, and would be very different from freely traded coffee.

When provided by government, subsidies take money off taxpayers to pay producers to ignore the price signals in the market, which are telling them that they would be better off producing something else. If the price is artificially inflated (be it by a “Fair Trade” label or by a government tariff), it is consumers rather than taxpayers who are being… well… taxed.

Coffee is an excellent example of what causes this and the effect it has. The reason that the price farmers receive for coffee is so low is not (as anti-globalisation movements would have us believe) because nasty Western firms are bullying the farmers into accepting lower payments. It is because there is overproduction of coffee in the world – a coffee glut, basically. What is needed is less production, which would be achieved by letting marginal producers respond to the low prices by swapping to produce something else. Subsidies (voluntary or mandatory) disrupt the price signals farmers receive, so they keep producing, the glut continues, and the problem is perpetuated. Meanwhile, those not getting artificially inflated rates are left even poorer as the overproduction continues and even escalates.

The arguments being used by the Trade Justice Movement and others are basically the same as those used by domestic protectionists. They seek to get a better deal for the producer at the expense of the consumer. In the process, they actually harm the producer as well, because producers are discouraged from progressing to produce more lucrative products. Instead, they are encouraged to stay in a business that is reliant upon subsidy. If the subsidy is ever withdrawn, they are suddenly without a livelihood. They become subsidy addicts, supplicants at the doors of government or charities. On top of this, all of society suffers as well, because wealth is diverted from hard-working people to pay valuable workers to produce things that are not needed (in this case, too much coffee) when they could be producing more useful products and so enriching everyone.

My chosen solution is to stop the “Fair Trade” nonsense and encourage the Third World’s farmers to produce all the things that inefficient First World farmers are currently producing, but won’t be producing once we take away their subsidies and tariff protection.

It’s a great system.

It’s called “Free Trade”.

16 comments:

Tristan said...

I agree 100%

(what a surprise ;) )

I am rather fond of the statement 'The only fair trade is free trade'.

Of course, if people wish to spend above the market price for goods they are free to do so. Perhaps coffee grown in a certain manner or by certain people is of greater value to them. What they should not claim that it makes the world better and that it should be mandatory.
Fair trade is harmful in the long run, just as any sort of protectionism is though, so I wish they'd stop moralising.

Edis said...

I dissent in part on this but it is late night so some thoughts later
Edis (11 May 2245hr)

Tom Papworth said...

Tristan,

I wrote a whole paper on the Orwellian nature of "Fair trade" once: why is it fair to deny some people the right to trade with others simply because of where the are located?

If I ever got round to organising a proper website (instead of just blogging through Blogger) I'd make it available.

Tristan said...

Tom,

Yes, fair trade isn't very fair to those people who the Fair Trade organisation refuse to allow in the scheme because they don't fit in the ideological world view of the Fair Traders (perhaps they're not a cooperative or something).

I'd be interested in the paper. It seems to fit in with one of my pet peeves ;)

dreamingspire said...

Liberal should be live and let live. Markets tend to grind down, with quality suffering before people change to some other product or service. If I want to buck that by paying more for quality, you cannot deny my right to do that. Yes, there often have to be middlemen in the fair trade regime, and sometimes they are not perfect, but I have to live with that. Your pure free trade ethos would deny the concept of the minimum wage as well, yet you probably claim to want to alleviate poverty.

Tom Papworth said...

Dreamingspire,

Liberal does indeed mean "live and let live".

You are welcome to pay as much as you like for coffee; indeed, the point of free trade is that you can pay whatever you like (as long as somebody will accept the price). I never intended to deny you your right to pay over the market price for coffee. Why, you can even call it "Fair Trade" if it makes you happy.

My concern is that "Fair Trade" might become policy, forcing everbody to pay over the market price for goods, to the detriment of all.

rantingkraut said...

Nice one. For those who haven’t seen it: there is a worldwrite film (‘
The Bitter Aftertaste
’) on this topic available online.

Alicia said...

For those of you who are interested in the issue of Fair trade, there is a powerful documentary out called “Black Gold,” that documents the lives of Ethiopian coffee farmers and clearly demonstrates why all of us should be asking for Fair Trade coffee. The film was recently released in the theater but is now available to the public on DVD via California Newsreel. You can read more about the documentary or pick up a copy of it here at http://newsreel.org/

Bishop Hill said...

Alicia

You could tell us what the main arguments are.

Matt H said...

The association between Fairtrade pricing and low prices is one of my 'bugbears', mainly because there is no evidence to suggest that Fairtrade encourages overproduction or discourages diversification.

On overproduction, it is the existing free market-based system (New York and London coffee exchanges) that makes a far greater contribution to price swings. For example, coffee inventories decline and Brazil produces less coffee, as happened in 2004. The market rises by over 50%. The higher price encourages producers back into the market and prices inevitably drop.

On diversification, when Fairtrade producer cooperatives operate well they seek to invest in other products. There are numerous examples of this.

Finally, on a purely empirical level, Fairtrade volumes are simply too small still (perhaps not even 1% of global supply) to assess whether the pricing system causes artificially high prices.

Tom Papworth said...

Matt,

I'm not saying that "Fair Trade" creates artificially high prices overall. In fact, it is unlikely that it can. In a free market, as long as part of the supply is not dominated by price controls, prices will continue to be shaped by supply and demand (as they should be).

What I am saying is that those producers that are making a good living out of coffee would continue to produce coffee anyway. The “Fair Trade” subsidy merely encourages marginal producers to continue producing coffee when they would be better off producing something else.

At the end of the day, it’s a form of charity dressed up in the trappings of “justice”. If individual consumers want to buy over-priced coffee so as to spare distant farmers from having to make business decisions based on the evidence of supply and demand, they are of course free to do so (though it is a bit condescending).

My fear is that there is the move to make “Trade Justice” replace unfettered exchange, which will push up prices and so reduce overall demand. The result will be poorer First World consumers and more bankrupt Third World farms.

Malcolm said...

Really interesting article, but I'm going to keep buying fair trade coffee, as well as clinging to the belief that some forms of market distortion are worthwhile. For example, the minimum wage- artificial inflation of the price of labour. Also the National Health Service- artificial deflation of the price of healthcare.

matt h said...

Tom,

You say that prices 'should' be determined by supply and demand. However, the level of speculative money in the New York coffee exchange means that the market price is subject to high volatility that can force prices down below (or above) a price that might be determined purely by physical supply and demand in a free market situation. Fairtrade pricing came into force to try and address this.

On another point, I'm not sure that farmers would necessarily be better off producing something else. If there are serious economic alternatives these are probably already being explored. For example, some Fairtrade coffee producers I recently visited in Colombia grow (non-Fairtrade) sugar cane as well in order to provide an alternative income.

A programme to rip out coffee trees (which take 4 years to mature) and plant something else would need more coordination than just a farmer switching overnight. These are people living on an immediate need for cash and do not have access to credit to invest. Ironically, a serious attempt to pursue alternative crops would probably need some form of government subsidy or international aid in order to work.

For overpriced coffee. Just remember that the difference in cost for a coffee bar selling Fairtrade coffee against conventional should currently be about 1 UScent per cup. For retail the cost should be an extra 15 cents per 1/2pound bag. This doesn't seem too much to me.

Robert said...

Tom,

Having read your post, I am filled with a deep sense of appreciation for what Franz Fanon referred to as “cathartic acts of violence.”

You article speaks of misnomers, yet you’ve equated fair trade with protectionism. Fair trade is instigated by the consumer, protectionism by producer. Fair trade enshrines the ‘liberal’ idea of free choice; protectionism relies on the enforcement of the law and is expressly designed to limit choice. Equating the two terms would constitute the creation of a misnomer.

You go on to assert, with great sense of benevolence I might add, that this type of trade policy ‘actually harms the producer as well’ by making coffee producers ‘subsidy addicts.’ If you are going to deride fair trade as protectionism you should think a little more about the implications of the term ‘subsidy addicts.’ Marginalism suggests that consumer demand drives the market. The price mechanism adjusts to this demand. Your article seems to convey a sense of despair that demand does not adjust to the price mechanism.

By this logic, the producers of Nike shoes, Louis Vuitton bags and host of other ‘premium’ items are all victims of the dreaded subsidy addiction. It would seem that in the case all products that are sold for a price above cost, ‘wealth is diverted from hard working people to pay valuable workers to produce things that are not needed…[] … when they could be producing more useful products and so enriching everyone.’

Tom Papworth said...

Robert,

Re-reading the article a little more carefully might assuage your violent tendencies.

The discussion of subsidies clearly follows the statement that “this would not be the case if ‘Fair Trade’ became a matter of policy, as the Trade Justice Movement would like.” The discussion which ensues is obviously about attempts to engrain ‘Fair Trade’ into policy, making it compulsory. Your criticism is therefore disingenuous. Where “Fair trade is instigated by the consumer”, it is an act of charity, not protectionism, as my article makes clear.

With regards the price mechanism, I wrote at the time that “The reason that the price farmers receive for coffee is so low is … because there is overproduction of coffee...” This was the result of rising consumer demand in the 1980s and 1990s, accompanied by the sudden opening of new markets in the 1990s. As producers rushed to supply the growing demand, over-production resulted. Normally, a balance would be restored as producers responded to price signals in the market, but this has not yet happened – partly because of government subsidies and partly because some consumers in First World countries have decided to, in effect, pay farmers to ignore those price signals. Far from despairing of the price mechanism, I wish people would let it operate.

As for the suggestion that producers of luxury goods that are in demand are victims of subsidy addiction, this makes no sense at all – unless you can find some ‘fair trade’ trainers. They are not subsidised because we are not paying above ‘cost’: both labour and profit are part of the costs. However, both the cost of labour and the amount of profit are controlled by competition. The hard working consumers are happy to pay for that labour and profit, so a fair exchange is taking place.

In a sense, a fair exchange is also taking place with ‘Fair Trade’ goods, too: farmers can avoid the disruption that comes from having to respond to market signals, and consumers buy a sense of self-satisfaction. As long as it does not affect trade rules, it is merely a private matter that in the long run is probably unsustainable. If ‘Trade Justice’ begins to affect policy, creating a system of tariffs and subsidies that force First World consumers to pay prices that NGO and government bureaucrats deem ‘fair’, it will impoverish everybody.

Francis Jeffrey said...

Having read your post, I am filled with a deep sense of appreciation for what Franz Fanon referred to as “cathartic acts of violence.”

Opinions founded on prejudice are always sustained with the greatest of violence.