Many Americans are seeking out so-called fair trade products in their local markets. They are willing to pay higher prices in hopes of improving incomes and working conditions for people in developing countries. But, in their paper “Fair Trade and Free Entry: Can a Disequilibrium Market Serve as a Development Tool?,” economists Alain de Janvry, Craig McIntosh and Elisabeth Sadoulet uncover a startling truth—fair trade is actually quite unfair.
The term “fair trade” can have different meanings. In this case, it refers to products from industries that comply with fair trade organization standards in order to be designated a fair trade employer.
These employers provide higher wages and benefits to their workers, and hope—because of “fair trade” branding—to command a higher price in the global market. This idea may seem enticing, but it doesn’t stand up to scrutiny. Fair trade practices are economically inefficient in the long run.
For example, Janvry’s, McIntosh’s and Sadoulets’ research shows what actually happens in the fair trade coffee market:
In the most common fair trade scenario, coffee growers pay additional fees and adhere to regulations in order to sell coffee at a guaranteed minimum price, or price floor. However, such price differentials don’t last. The study found that, typically, the market price adjusts, ending up being just as high as the fair trade price floor, so employers essentially incurred costs to be labeled “fair trade” for no additional profit.
In other cases, fair trade companies are able to sell their coffee at a higher price than the market and make higher profits for a time; in the long run, however, Janvry’s, McIntosh’s and Sadoulets’ study reveals that, as more and more coffee companies enter the fair trade market, coffee prices return to an equilibrium.
Each scenario demonstrates that fair trade does not boost profits in the long run, because prices naturally adjust to the market clearing price.
What about those higher prices paid by well-meaning consumers? Surely that helps someone! It turns out that most of those profits accrue to retailers here, not the growers in developing countries.
Moreover, fair trade can actually harm workers in the poorest developing countries. In his online video, professor of economics Don Boudreaux explains that only companies in relatively rich developing countries, such as Costa Rica, can afford the start-up fees for fair trade. Meanwhile, companies in extremely poor countries, such as Ethiopia, are not able to join fair trade markets. Therefore, fair trade singles out a few developing countries for short-term success while leaving the poorest countries by the wayside. Is that fair?
Basic economic principles indicate that fair trade does not help workers in the way that proponents had hoped. Even so, the question remains: What is the best way to improve wages in developing countries? The answer is: competition. Instead of isolating a few winners for short-term “fair” benefits, competition within a free market gives workers in all nations a shot to make a living wage. In the end, free trade is the fairest trade of all.
Addison Arnold is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.
