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Does Fair Trade help the poor?

The Acton Institute’s Michael Miller writes that Fair Trade coffee is touted as a way to help the poor — a win-win for everybody with heart. Many Christian organizations connect fair trade to Christian values. Fair Trade positions itself as the solution to the injustice of free trade, but in some ways it creates obstacles to free competition by artificially establishing higher prices.

Dr. Michael Miller

Dr. Michael Miller

Fair Trade coffee is touted as a way to help the poor. It’s billed as a win-win for anybody with heart. For only a slight premium on our coffee, we help poor farmers while sitting in the comfort of a café.

Many Christian organizations — Catholic Relief Services, Presbyterian Church USA and Lutheran World Relief — connect fair trade to Christian values. The Fair Trade movement argues that the free market trading system hurts the poor by paying less than equitable prices for commodities. The movement aims to empower producers to become economically self-sufficient and to promote sustainable development, gender equality and environmental protection. Producers who meet fair trade standards of labor, development, and environmental sustainability become “certified” and thus receive higher than market prices for their goods.

While all of this sounds good, it still leaves me with questions. First, what makes it more “fair” than free trade? With free trade no one is coerced to enter into an exchange. If the trade is really free, then there are no subsidies to distort the market or to protect certain industries or sectors, thereby artificially raising prices. What makes trade unfair is when countries subsidize certain industries or put tariffs on foreign products and thereby artificially lower the price domestically so that foreign producers can’t compete. This is the case with U.S. farm subsidies and the Common Agricultural Policy of the European Union. If those subsidies were removed, farmers from developing nations could compete with American and European farmers on an equal playing field. This would not only lower prices for consumers, it would generate more income in developing countries.

Fair Trade positions itself as the solution to the injustice of free trade, but in some ways it creates obstacles to free competition by artificially establishing higher prices than the market would provide. In Economics in One Lesson, Henry Hazlitt defined economics as seeing the effects of a policy not only on one group but on many and paying attention to unintended consequences.

Consider the possible unintended consequences of Fair Trade coffee. First, only certain “Fair Trade Certified” farmers receive higher prices for their beans. This means that other farmers in the area find it harder to compete. It can create incentives for corruption because it is difficult to determine whether all of the beans came from the specific “certified” farm or whether that farmer bought them at a lower price from non-fair trade farms, including farms that might use slave labor.

Second, the artificially inflated prices create incentives for people to remain in coffee farming instead of moving into industries that will be more profitable in the long run. Fair Trade also creates incentives for more people to produce coffee which could create an oversupply, creating dire consequences.

Third, does fair trade help the poor move up the value chain into activities such as processing, roasting and packaging coffee? Or do the artificially higher prices create incentives for them only to grow the beans, leaving the value-added work to companies in the U.S. and Europe?

We need to be vigilant against exploitative labor practices, and for this the Fair Trade movement should be commended. Perhaps too, Fair Trade has genuinely helped some farmers, but any long-term success seems to rely on its remaining fashionable. Like many anti-market plans that have come and gone, Fair Trade will likely hurt the poor rather than helping them.

The best way to create sustainable long-term growth is not faddish movements like Fair Trade, but the same institutions that enabled the West to grow rich: secure private property, the rule of law and free exchange. When these are in place, trade becomes fair, more people benefit from trade, and the truly fair market unleashes the entrepreneurial spirit that is the source of wealth and prosperity. Free trade and markets have lifted more people out of poverty than all the fashionable political movements loaded with good intentions but pernicious consequences.

Michael Miller is the Director of Programs at the Acton Institute for the Study of Religion and Liberty in Grand Rapids, Mich.