The fair-trade movement does more harm than good

Or so argue Amrita Narlikar and Dan Kim in a recent article in Foreign Affairs. A short summary of the Narlikar and Kim article reads,

Despite the claims of its champions, the fair-trade movement doesn't help alleviate poverty in developing countries. Even worse, it is just another direct farm subsidy of the kind most conscientious consumers despise. In the long term, the world needs free trade, not fair trade.

This article is the one discussed in the most recent EconTalk.

Narlikar and Kim open their essay by noting,

Although the concept of ethical trade has existed for a long time, the institutionalization of the fair-trade movement did not begin in earnest until the late 1980s. In 1989, the World Fair Trade Organization was founded, and in the years that followed, various fair-trade certification and labeling processes emerged. A product is granted a fair-trade label once its producers have met a list of social, economic, and environmental requirements. The stated purpose of the fair-trade movement is to give economic security to producers in developing countries -- often of unprocessed commodities such as fruits, live animals, and minerals -- by requiring companies and consumers to pay a premium on the market price.

Until now, any questioning of the fair-trade movement has been limited to the micro level. The movement has faced repeated criticisms, for example, for the relatively expensive fees that producers must pay to get a fair-trade label, which make it ineffective for many poor farmers. Another area of concern is just how lucrative the process is for middlemen and retailers. Finally, several studies show that very little of the premium that consumers pay actually reaches needy producers. Consumers might be surprised to learn that only one or two percent of the retail price of an expensive cup of “ethical” coffee goes directly to poor farmers.

The adverse effects of fair trade are even more worrying at the macro level. First, fair trade deflects attention from real, long-term solutions to rural poverty in developing countries; and second, it has the potential to fragment the world agricultural market and depress wages for non-fair-trade farm workers.

An interesting statistic is that in 2010, retail sales of fair-trade-labelled products totalled about $5.5 billion, with about $66 million premium -- or about 1.2 percent of total retail sales -- reaching the participating producers. There has to be a better way of helping poor farmers. Having only 1.2 cents out of every dollar spent on fair-trade products reach the target farmers is a hugely inefficient way of helping these people. If people wish to help these farmers there has to be charities out there that can transfer more than 1.2 cents per dollar to them.

Also a more efficient and straightforward way to help poor farmers is to remove the massive OECD subsidies and tariffs we see on agricultural products. In other words, a move towards free trade is needed.