Fair Trade
This is a continaution of the conversation started in Hattie Ajderain: Fair Trade
"Fair trade bears a suspicious likeness to our old friend protection. Protection was dead and buried 30 years ago, but he has come out of the grave and is walking around in the broad light of day. But after long experience underground, he endeavours to look more attractive than he used to appear... and in consequence he found it convenient to assume a new name."
- William Gladstone (1809 - 1898)
No one would deny that there is a vast gulf in wealth and resources between the developed, and developing world. Indeed there is even consensus that trade rather than aid, is the best means for poverty alleviation. But there remains a fundamental debate regarding the type of trade policy that should be pursued.
Organizations such as the Fairtrade Foundation believe that Free Trade has not worked – the benefits are weighted heavily in favour of rich western superpowers, and smaller countries don’t stand a chance if forced into open competition, whilst farm subsidies remain for the superpowers. They’re right to argue for this, and their passion and sentiment is to be admired. However their solution is misguided, and potentially counter productive. Free Trade remains a viable alternative, as yet untried.
The Fairtrade label is a regulation that guarantees a certain wage to farm workers, governed by a multi-national collective agency. It is determined by covering the cost of production, plus an investment in the local community as a means to protect farmers from volatile prices. They argue that when US and EU farmers “dump” subsidised foods onto the global market, they depress the price, and put developing farmers out of business. How can third world farmers compete with Western, subsidized farms?
There is also another reason that would cause falling prices: mechanization. In Brazil, more successful developing farmers were able to substitute labour for capital, and increase their productivity. The reason developed nations got to be so rich is by following this very path to prosperity, but the consequences are that less people are needed to create the same amount of goods. With a free regime, those workers will be able to move into higher valued industries, and raise their living standards. By paying them to stay in Coffee, the Fairtrade foundation consigns them to poverty. The Fairtrade foundation are also misguided in assuming that developing farmers are only competing with developed ones: they also compete with each other. By forcing them into a collective, the more efficient farms are not allowed to expand, and end up redistributing their income with less productive farms. The two types will both benefit from Fair Trade, but we’re forgetting another category: those farmers that aren’t part of the club. These are the truly poor, who now have greater barriers to enter the global market: the cost of complying with Fairtrade regulation. Since Fair Trade remains a cartel, it can only survive by restricting supply. Workers at Fairtrade firms will benefit too, but such a wage floor will lead to unemployment affects. It will become harder to find a job. This is the consequence of viewing the market as a static state of affairs, susceptible to central planning, instead of a creative process where no one can posses enough knowledge to manage it. Attempts to do so, means that business success becomes driven by political connections rather than entrepreneurial ingenuity and hard work.
When such power is given over bureaucratic decisions, the incentives for corruption increase. And aside from the perverse affects on incentives, there is also an issue of knowledge : will the Fairtrade foundation have enough information to be able to control “the market?” By attempting to regulate the price of farm produce, you can be assured that perversions will follow – they always have. Consider our own “Fair Trade” agreement, the Common Agricultural Pact. The result is that farmers (who tend to be well off relative to other groups) receive subsidies to waste resources in producing mountains of butter. The original intention of helping a people that felt threatened by market forces was genuine, but it has created a highly powerful interest group that can hijack the political process to divert wealth to themselves, at the expense of their countrymen. We can do better than create such a scheme in countries where the political system is already less robust.
I am not arguing for the status quo: the global imbalance of trading power is a disgrace, and reforms must be made. Instead of fighting barriers with regulation, however, I advocate attacking the barriers head on. If we can redirect the passion and momentum of the Fair Trade movement toward a genuine Free Trade regime, we can allow more successful third world farmers to escape the agricultural sector, and we can permit more people in poverty to have a stake in prosperity. Before making matters worse, let’s give Free Trade a chance.
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