Economy and Business U.S. World

How Fair Trade Policies Create Unfair Competition

Just like most politicians embellish the policies they want to push with cute names, such as pro-choice instead of pro-abortion or pro-life instead of anti-choice, Fair Trade advocates do the same thing in order to persuade the average voter to adopt their stance. In reality, Fair Trade is not fair at all. Fair Trade forces consumers to pay a higher price for imported goods that suppliers promise were produced by workers that were treated better, paid more, or worked less hours.

Engaging in Fair Trade has been seen as virtue in the past few decades, especially among wealthy nations. Nonetheless, after taking a deeper look at Fair Trade policies, it becomes clear that they do more damage than good. For clarification, I am not suggesting that anyone should boycott Fair Trade goods, I am only making the case that Fair Trade goods should compete in a free market just like all other goods. The only issue I have is when governments attempt to enforce Fair Trade policies, limiting consumer options to governments’ preferences. Ironically, such policies are particularly harmful to poor foreign workers whose circumstances do not permit them to meet Fair Trade environment standards, and are thus excluded from competing in the market.

The money spent on Fair Trade goods is not eventually paid to poor laborers, as people might assume. Most of the money ends up in the hands of retailers. In fact, some basic calculations will show that Fair Trade barely helps the poor at all. The market share of products certified by Fairtrade International as of 2016 represents more than US$8.2 billion in retail sales. Of the $8.2 billion, only $155 million reaches the certified Fair Trade producers, which provides less than US$0.04 per laborer per day. This pitiful sum surely will not contribute anything to the eradication of global poverty.

The increase in foreign good prices that Fair Trade causes inevitably decreases demand for foreign goods that are certified by Fair Trade labeling organizations. A marginal increase in price will naturally create a marginal decrease in demand, as rational consumers respond to price signals. This additional cost might be worth it for some individuals if the quality of the goods was considerably higher, but there is no evidence to suggest this is the case for Fair Trade-imported goods. In fact, there is evidence to suggest that Fair Trade can attract lower quality goods!

Furthermore, an increase in the prices of all foreign goods would drive many Americans to purchase local and national products instead of imported products. This is because most imported goods (ostensibly) have less desirable substitutes in the local market. When prices of foreign goods increase, the demand for substitutes also increases. An increase in the prices of foreign goods serves to make them less competitive in American markets. The Law of Demand explains why: increasing the price of imported foods decreases their demand, and reduced demand for imported goods reduces the income of foreign workers that we claim we want to help.

Moreover, while Fair Trade policy may help countries that have enough resources to meet Fair Trade labor standards, it frequently makes it more difficult for even poorer countries to compete in Western markets. The standards that only relatively wealthier developing nations can pass include affording to offer their workers a healthy environment, a higher wage, and more free time.

In order for the Fair Trade certification to be trustworthy, usually it has to take place in country which has a sufficient amount of trust, prosperous institutions, relative minimal corruption, and relatively high per capita income (compared to other developing nations). A good example of Fair Trade goods are coffee beans. A lot of Fair Trade coffee beans come from Costa Rica, a country with a GDP per capita of around $17,000 after adjusting for inflation.

On the other hand, Ethiopia is also a major coffee exporter, but it is a much poorer country, with a GDP per capita of $1900 after adjusting for inflation. Most areas in Ethiopia are too poor to meet Fair Trade standards, as opposed to other wealthier third world countries. Nonetheless, importing Ethiopian coffee does far more for the (very) poor than importing Costa Rican coffee, as an estimated 60% of Ethiopia’s foreign income relies on coffee, with about 15 million of the population depending on coffee production for their livelihood. Costa Rica is not nearly as dependent on coffee, with only 2.5% of their foreign income dependent on coffee. These unrealistic standards that Fair Trade imposes shift the demand to wealthier developing nations’ products, barring workers from poorer countries from competing in Western markets.

It is great that Fair Trade organizations favor goods made in healthier environments with better worker compensation, but enforcing Fair Trade policies to all imported foods would have disastrous unintended results. As Frederic Bastiat, The brilliant French economic journalist, noted in his famous essay What Is Seen and What is Unseen: “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” When dealing with policies that could influence hundreds of millions of people, it is important to rely on more than just intuition and at least attempt to foresee all possible adverse outcomes.

Fair Trade is a controversial policy that should not be enforced on any imports. Fair Trade options should exist in markets for those who are interested in buying their goods but limiting other people’s options to only Fair Trade goods potentially oppresses impoverished peoples around the world. Like many politicians, most Fair Trade policy supporters have the best of intentions. However, I would highlight that the road to hell is paved with good intentions. Fair Trade policy is no different; it presents itself as a social justice issue when it is really detrimental to the very people we want to help.

4 comments

  1. This is a good and thoughtful approach. If I were to ad anything, it would be to point out out the role of the state in any economy that operates above the subsistence level

    In the debate between “Fair Traders” and “Free Traders” , both sides tend to exaggerate an d to oversimplify. This point, more generally, applies to the debate between socialists and interventionists on one side and free marketeers and libertarians on the other. We should remember Joseph Schumpeter’s advice which is encapsulated in the aphorism: The faster is your car, the stronger he breaks you need

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    1. Dear Dr. Ahmad AlHassan,

      I’m glad you read my article. I appreciate your time!

      Can you expand on the interpretation of Schumpeter’s aphorism? Does he mean when the State operates with the goal of expediency, the breaks (say constitutional limitations) must be stricter?

      Though I am a Schumpeter Fellow at George Mason University, I have found many of his ideas stuck in the classical paradigm (at least in rhetoric and semantics).

      Like

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