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”.

No Panacea, but free trade is still vital for poor nations’ prosperity

Yesterday, Mark Valladares published a post in which he argued that free trade would harm the economic development of the people of Vanuatu, and so undermine their already fairly basic standard of living.

I replied with a comment to the post in which I disagreed. Sadly, this comment has not made it onto Mark’s blog. I hope this is due to a technical error, or that Mark has been too busy to approve it. I would hate to think that a Liberal Democrat blogger was censoring the comments on his site because he disagreed with the content.

(UPDATE: Edis tells me that Mark is in the South Pacific as we speak, which might explain why he isn't poised in front of a PC, like I am. I bet he's jealous though. I wonder if he's wearing a plain shirt, as he tends to wear Hawaiian ones when in the cold, dank recesses of Blighty.)

The reason that this so concerns me is that Mark opened his post by saying “I know that our International Development spokeperson (sic.) reads this blog feed, so if you have a moment, Lynne…” My comment replied that I hoped Lynne had not read his comments yet, as I wanted to ensure that she read my response too. As my comments have been lost to the ether, I will attempt to reproduce them below, so as to explain why Mark is mistaken in arguing that Vanuatu should not enter into a free trade with the European Union.

Vanuatu is a small, pacific island nation of approximately a quarter of a million people, with a subsistence economy and 70% unemployment. Its government is currently negotiating a free trade deal with the European Union, and Mark questions whether the EU is acting in good faith, as he believes that the benefits will be rather one-sided. “Vanuatu’s economy is dominated by Australian companies” he tells us. “Whilst the tourism industry still has a significant element of indigenous providers, this is likely to change as international hotel chains move in. Tourism requires initial investment, which is hard to come by in a subsistence economy.”

Mark suggests that “free and fair trade” would best be achieved by “allowing such small nations free access to our markets, without reciprocity.” This, he suggests “would allow these comparative micro nations to support their inhabitants and reduce their dependence on overseas aid.”

In essence, this is the classic “Fair Trade” argument promoted by the Trade Justice Movement, and it is fundamentally flawed. There are two basic errors which undermine Mark’s argument, and which result in it being a recipe for stagnation and perpetual poverty rather than growth and enrichment.

The first error is the belief that the benefits of trade come from exports. Mark’s explains that Vanuatu produces little or nothing that we would want in Europe, so whereas the EU will have a new market for its companies, Vanuatu will be able to sell little or nothing back to us. This is a founding belief of Mercantilism, which argues that nations are enriched by a positive balance of trade (exporting more than they import). Basically, it boils down to “Exports good; imports bad.” Nothing could be further from the truth.

By far and away the greater benefit from trade comes from imports. Imports are only possible if a supplier can meet demand better than domestic producers, perhaps by selling goods more cheaply or of a higher quality. The result is that consumers (for which, read everybody) can increase their standard of living. This does of course put pressure on domestic producers to be more competitive, but that is healthy. Inefficient production is no more useful in Vanuatu than in Nottingham.

Milton Friedman made the point pretty well in Free to Choose, when he noted that "We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports."

The second fallacy that underpins Mark’s concerns is the belief that because we can produce everything imaginable cheaper and more efficiently than the people of Vanuatu, we will undercut them in all things and destroy their home industry. In fact, as Ricardo made clear two centuries ago, it does not matter if one nation can produce everything more efficiently than another. What matters is that each concentrates on what they are best at and then exchanges goods.

To illustrate this, let us imagine two Vanuatu citizens, named (in traditional Polynesian manner) Andy and Bob. Andy is an excellent fisherman and a good boat maker. Bob is a fair boat-maker and a pretty lousy fisherman. By the logic of the Trade Justice Movement, Andy can out-produce Bob in both fish and boats, so Bob has nothing to gain by trading. However, as Ricardo demonstrated, it is far better for both parties if Andy concentrates of fishing while Bob makes boats. Andy is most efficient as a fisherman and Bob as a boat-maker, so if they both concentrate on what they are best at their combined yield is maximised, and they can then swap maritime equipment for fish in a mutually beneficial manner. Similarly with Vanuatu and the EU: as long as Vanuatu’s people produce what they are best at, it is worth the EU exchanging that for what the EU is best at – or rather, both make money selling what they produce best and buy what they are less good at producing.

In practice, the world is resplendent with examples of where this has worked. Vanuatu’s poverty is irrelevant: South Korea was as poor as Ghana half a century ago, but as it opened up its markets it has risen to become the world’s twelfth richest nation. Neither is size a problem: Hong Kong was a tiny, poverty stricken island colony after the war, but an aggressive policy of free trade and low taxes made it one of the world’s best place to do business, and prosperity followed. In this global electronic age, even distance is no longer a problem: Vanuatu could attract financial services companies with low business taxes and a light touch regulatory regime.

In fact, it is worth asking what Vanuatu has to lose from freer trade. If, as Mark suggests, most of the population are subsistence farmers and fishermen, then the worst that can happen is that they continue to be subsistence farmers and fishermen. On the other hand, if he is right that “Tourism requires initial investment, which is hard to come by in a subsistence economy”, then the influx of foreign capital will fund hotels that will bring jobs to some of those 70% that are unemployed. Foreign firms dominated Hong Kong, they poured in to soak up China’s cheap labour, and they are buying up UK “national champions” at a rate that some find alarming. The result has been prosperity for the recipients of this movement in capital, not some new colonialism.

If the EU is currently negotiating a free trade agreement, the current scenario must be one in which trade is not free. This has clearly not produced prosperity for Vanuatu’s population. But Mark is correct to doubt that both parties will benefit equally from a free trade deal. The European Union has little to gain from a tiny island nation with a small population. Vanuatu’s citizens, on the other hand, will reap enormous benefits from trading freely with the largest economic bloc in the world.

Free trade is no panacea, it is true. With free trade one also needs a stable society, good governance, strong property rights, democratic institutions, a liberal economy and the rule of law. But free trade remains a vital ingredient in generating prosperity across the world, be it in the high towers of global financial capital or the low beaches of a pacific island nation. Anything else requires governments to tell their citizens that they may not associate freely with whomever they wish: that buying and selling from some people is wrong, just because they are far away. It is an illiberal and misguided policy, which is why the Liberal and Liberal Democratic parties have always supported free trade. Long may we continue.

More heat than light in organic food debate

I wonder whether David Miliband leaked Ruth Kelly’s decision to send her child to a private school as a means of distracting people from the adverse reaction to his interview with the Sunday Times in which he argued that the consumption of organic food was nothing more than a lifestyle choice. If so it would be very “New Labour”, but to be fair I doubt it. He knew exactly what he was doing and will stick by what he said.

I have been kicking myself for not writing about this yesterday, when I had the chance. Today I have been at work and so unable to post, except with a brief intervention on Duncan's and Tristan's sites. Some of what follows incorporates those comments, but I have added further thoughts as well.

To start with, I cannot see why the question of whether organic food it better for the consumer, the environment or the future of farming should be incompatible with its consumption being a lifestyle choice. When I used to go to the gym five times a week (Oh halcyon days!) it was a lifestyle choice even though it was good for me. Similarly, a friend of mine is motivated to compost his own waste (and I do mean his own waste) for environmental reasons, but it is nonetheless a lifestyle choice.

The real controversy about organic food is the wealth of unproven claims made by those who oppose modern farming methods. One of these is that modern farming methods harm the environment more than the organic alternative. In fact, all agriculture damages the environment, if one’s image of the environment is one of natural habitats. Agriculture is inherently unnatural because “unnatural” is a euphemism for things done by man but not other creatures; we destroy “natural” habitat to grow “unnatural” crops that would not exist without our efforts.

However, this “unnatural” process was integral to the birth of civilisation, a process which began in modern-day Iraq and Egypt and has now spread to Brazil. I know some people think that man is just a parasite but most of us want to live in a civilised society. Most of us also want to feed the earth’s 6 billion people, though again I’ve heard a few (some among my own party!) who would like to cull the population of the earth by two thirds.

If we are to feed 6 billion we need to embrace the Green Revolution of the 1960s (that’s “green” because of all the crops in the fields, rather than because it serves a nature goddess). This entails the use of fertilisers and insecticides. Only modern agriculture can sustain the population of our planet; it is this kind of agriculture that has meant that the age of mega-famines in India and China (prevalent until only a couple of generations ago) is over.

Organic production cannot produce the yields necessary to feed the earth at all, let alone at an affordable price. Thus the (Hobson’s) choice is either to plough over more natural habitat – the UN Food and Agriculture Organisation estimates that we would need to farm an additional area the size of South America to produce the same amount of food organically as we do now by modern means – or watch billions starve.

In the UK, this is not the case. We are rich enough that we can always afford to pay a premium for produce that is grown by traditional (as opposed to by modern) means. This is a choice – a lifestyle choice. We can pay British farmers a premium so that they produce lower yields by methods that cause less harm to butterflies and song birds. However, if we do reduce the yields of British farmers, we will need to source more food abroad. We then have a mini-version of the Hobson’s choice: do we buy food that is intensively farmed or put more land (in the producing country, rather than our own) under the plough. To put it another way, do we export the use of artificial fertilizers and insecticides, or do we cultivate thousands of acres of foreign land.

The aim of this article is not to criticise those who wish to consume organically produced food. They are welcome to do so, and if they believe they are avoiding as-yet-unproven health hazards then that is a rational choice that they have made. I would not dream of curtailing their freedom to do so any more than I would expect them to curtail my freedom to eat food laden with 30 different chemicals.

The aim is to highlight the fact that many of the claims of the organic food lobby are spurious and probably have more to do with protecting their market share than the health of either their consumers or the environment. Meanwhile, many of those who have swallowed these claims (along with their organically produced tofu burger) react furiously when confronted with the (lack of) evidence. Many of these are in influential positions – as I have noted before, both organo-sceptic and free market arguments receive short shrift from the BBC.

What we need (domestically and globally) is free trade in agriculture (as in all things) and honesty in labelling, advertising and describing products. We also need a balanced debate about this important area of policy. Sadly, there is a lot of nonsense talked about food. David Miliband was right to point that out.

Ideology trumps journalism in BBC debate on “ethical shopping”

You know you’ve touched a raw nerve when everybody attacks you. So Kendra Okonski discovered when she was interviewed on the BBC this morning. The Environment Programme Director at the International Policy Network had been invited to appear to discuss a report in The Economist about the contradictions within the ethical shopping industry.

According to The Economist, organic production is less intensive than production that relies on chemical fertiliser, and so requires more land. Thus a greater reliance on organic production would require turning more of our natural environment into cultivated farmland. Ms. Okonski noted on the BBC that UN Food and Agriculture Organisation estimate that to turn the world’s farming over to organic production would require additionally farming an area of natural habitat size of South America.

“Fair Trade” is equally misguided. While it may demonstrate a caring heart that a consumer buys a product at above the market price and transfers the premium to the poor farmer, this is nothing more than a form of charity channelled through the purchase of tea, coffee or some other commodity. Prices are low because of overproduction – there is a glut of coffee on world markets, for example. “Fair Trade” encourages farmers to continue to supply an over-produced commodity where they would be better off shifting to producing different commodities. This further depresses the price, hurting those farmers not receiving the so-called “fair” price.

As for the new fad for locally produced food, as over half the “food miles” added to UK food production are generated by the purchaser, and most people live nearer the supermarket than the farmer’s market, buying locally can actually result in adding more food miles to a product. Furthermore, farming locally is inefficient: it uses less energy to raise lamb in New Zealand and fly it to the UK than to raise it in Britain, because farming in New Zealand is less energy intensive. The fad for local food is actually old-fashioned protectionism masquerading as ethical shopping.

The Economist has always produced articles under its title without naming contributors. Thus we have no idea whether Ms. Okonski contributed to the report. The BBC invited her to comment on the report, however, so one would have expected her to be treated neutrally. Sadly, it was not to be. Both Ms. Okonski and the Economist had clearly hit upon a sensitive subject at Broadcasting House. After her first comment, BBC presenter Susanna Reid flatly contradicted her: “No!” she said, dismissing Ms. Okonski’s opinion, before arguing the counter case. As the BBC had also invited another speaker to put the supposedly ethical case, this was unnecessary; Ms. Reid’s role was to facilitate the debate rather than take sides.

At the close of the item, Ms. Reid was seen to pull what one can only assume was her “What was all that about?” face, before moving on to advertise the following programme, Saturday Kitchen. There, chef James Martin – who was drafted into the programme after the infinitely superior Anthony Worrall Thompson defected to ITV – and his two guests proceeded also to rubbish the evidence and research of international institutions, think tanks and the media. Presuming that neither Mr. Martin nor his fellow chefs have a PhD in Environmental Science or several years experience in a research institute, one can only assume that they were pontificating about something of which they knew nothing.

If consumers are to make choices that are really environmentally conscious and serve the interests of the world’s poor, they need to be better informed. This requires serious debate. Sadly, serious debate is difficult on the BBC when the ill-informed but nonetheless entrenched opinions of its staff are challenged. Universal condemnation often confronts those who make unorthodox and challenging suggestions. The more roundly these new ideas are condemned, the more carefully they should be examined.