The Fair Trade Racket
“Fair Trade” coffee is promoted everywhere. But far from helping third world farmers, "fair trade" practices are luring the world's poor into a distorted market.
“Fair Trade” coffee is promoted everywhere, from companies such as Starbucks to my university's campus. Its advocates argue that the premium paid helps support the livelihoods of farmers and the quality of life in their communities. In reality “fair trade” hurts farmers by distorting the prices of the markets they work in and locking poor farmers out.
Imagine you are a farmer in Vietnam or Kenya deciding what market to get into. There is a vast excess of coffee suppliers so the price of coffee should be low and discouraging further entrants into the market. However, “fair trade” coffee is subsidized, and is sold at an artificially high price, and this entices more farmers to get into coffee production. This further feeds the already injurious surfeit of providers.
We’ve seen what happens when markets get distorted like this. The Coffee Crisis of the 1990s was characterized by plummeting and unstable prices. Coffee-producing nations rigged prices and subsidized local industry until the bubble eventually burst to the detriment of farmers worldwide.
The negative impacts of "fair trade" would not be mitigated by its universal adoption. Rather, this would compound the problems. Not only would supply increase but fewer farmers would be able to partake in the program. High entry fees (roughly $1600) and first world intermediaries taking almost 90 percent of premiums keep out the poorest farmers. Typically fair trade contracts are sent to areas that are already developed. A 2008 report by the Adam Smith institute sums it up well: “In practice, then, Fair trade pays to support relatively wealthy Mexican coffee farmers at the expense of poorer nations.”
Overall, by its nature, “fair trade” coffee creates a harmful set of incentives, luring the world’s poor into an already bloated market – the recurring trap of good intentions.