Transcript Factor Markets

Free Trade Versus Fair Trade:
How Do You Take Your Coffee?
Dennis C. McCornac, PhD.
Sellinger School of Business
Loyola University Maryland
Baltimore, Maryland
[email protected]
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Benefits
• Global trade has clear benefits
• Developing countries can provide
new, valuable markets for goods,
services produced by developed
countries
• Technology, services, money from
developed nations can improve
public services, raise standard of
living of developing countries
Anti-Globalization
• Opponents argue process benefits
wealthy developed nations at expense
of developing nations
• Free trade encourages practices that
exploit workers, destroy environment
• Some promote fair trade, like fair trade
coffee movement guaranteeing fair
prices to coffee bean farmers
...the misery of being exploited by capitalists is nothing compared to the misery of not being
exploited at all. ^Joan Robinson
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Model of Free Trade
The assumption is made that in a system with open and free markets,
the economy will operate more efficiently with a higher level of
overall prosperity.
How does it work? The principle of comparative advantage. The
ability of a firm or individual to produce goods and/or services at a
lower opportunity cost than other firms or individuals.
A comparative advantage gives a company the ability to sell goods
and services at a lower price than its competitors and realize stronger
sales margins.
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Understanding the Boring Stuff
Employing the principle of comparative advantage will allow economic
specialization and therefore greater economic efficiency.
Not only will producers be experts at which they do, but they will also accrue
more profits.
With people paying less for higher quality goods, they have money to buy more
things.
With more money in circulation, more firms will succeed.
With more firms succeeding, more taxes will be available to infrastructure,
helping firms reduce costs, have better workers, & obtain more materials.
Open markets will assure competition among efficiency producers, assuring the
lowest possible prices at the highest.
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The Good and the Bad of Free Trade
Free trade generates winners & losers.
Whether it leads to greater general prosperity depends at least
to some degree on interpretation of data.
Disparities in income increase.
The powerful may gain inordinately at the expense of the
powerless.
Majority of power rests in the hand of multinational
corporations and rich countries
Minimize opportunities for vulnerable producers and
sometimes degrades the environment
Focuses of short-term profits; evades the full costs of
commerce, and overlooks the plight of marginalized people
and the environment
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The Model of Fair Trade
Paying a fair wage
Giving employees opportunities for advancement
Providing equal employment opportunities for all
people, particularly the most disadvantaged
Engaging in environmentally sustainable practices
Being open to public accountability
Building sustainable long-term trade relationships
Providing healthy and safe working conditions
Providing financial and technical assistance to
producers whenever possible
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General Principles of Fair Trade
Iain A Davies www.som.cranfield.ac.uk/som/dinamic-content/media/.../190608.ppt
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Free Trade & Fair Trade: Is There a Difference?
Free Trade
Most
Traditional = Capitalism /
Important “Neoliberalism”
Factor
PROFIT is most important
Nothing else (quality, human
rights, environment, etc.)
matters as much as PROFIT.
Main Goal Increase nations’ economic
growth
Focuses on: Trade policies between
countries
Primarily
benefits:
Multinational corporations;
Powerful business interests
Fair Trade
Profit = Quality = Human
Rights = Environmental
Sustainability = Justice
Empower marginalized
people; Improve the quality
of their lives
Commerce among individuals
and businesses
Vulnerable farmers, artisans
and worker in less
industrialized countries
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Free Trade
Fair Trade
Major Actions: Countries lower tariffs,
Businesses offer favorable
quotas, labor &
financing, long-term
environmental standards relationships, minimum prices
and higher labor and
environmental standards
Compensation: Market and government Living wage; community
determined policies
determined by improvement
costs
Supply Chain: Many parties between
Fewer parties; more direct
producer and consumer trade
Fair Trade
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Main Criticisms of Fair Trade
A main criticism to fair trade is that it would generate a price
distortion on the market price of a given commodity, say coffee,
providing a wrong incentive to producers to invest inefficiently
resources for a product for which there is scarce demand.
Fair trade producers increase production  excess supply 
lower market prices
According to the Adam Smith Institute,
<10% of the extra money paid by shoppers for Fair trade
goods makes it to the growers
The farmers are not the beneficiaries of the additional profit
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Counterarguments
Market price is a distortion (monopoly power of producers)
Does not take into account product differentiation
Fair trade remains the only guarantee for stable, agreed prices
paid to producers
Amounts are made known to public; decision to buy is up to
consumer
Benefits to non-Fair trade producers as well. E.g. funded
infrastructure and programs: processing, credit facilities,
quality improvement, crop diversification, conversion to
organic production
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Is Fair Trade Fairer?
2 cents - amount farmers on
conventional farms receive
from the average $3 latte,
according to Transfair USA
 10 cents - amount of social
premium paid on top of the per
kilo price to fair trade certified
coffee farmers
 20 cents - amount of social
premium paid on top of the per
kilo price to fair trade certified
coffee farmers for organic
coffee
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More Detail on Criticisms of Fair Trade
1. The flawed design of the system undermines its own benefits.
Recent research by development economists Alain de Janvry and
Betty Sadoulet at U.C. Berkeley and Craig McIntosh at U.C. San
Diego shows that when the world price of coffee falls (and the
advantages of selling through fair-trade channels increase), more
borrowers choose to obtain fair-trade certification. But this reduces
the fraction of coffee that their cooperatives can sell at the fairtrade price. The benefits of participating in the fair-trade system are
offset by the price the growers have to pay for fair-trade
certification. In other words, they found that the long-term benefit
over time from fair trade to be essentially zero.
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More Detail on Criticisms of Fair Trade
2. Fair trade imposes significant costs on impoverished
growers. The University of California study estimates that fairtrade certification costs about $0.03 per pound. This doesn't sound
like much, but in some years it is greater than any price benefit
brought by the higher fair-trade price.
Costs to growers imposed by these restrictions on fertilizers and
other inputs add to the production costs of impoverished growers,
diminish yields, and mitigate the benefits of free trade. If coffee
drinkers want to improve the environment, they should pay for it
themselves, not impose added costs on impoverished coffee
growers.
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More Detail on Criticisms of Fair Trade
3. Fair trade doesn't help the poorest growers. In a recent study in Costa
Rica, economists Raluca Dragusanu and Nathan Nunn at Harvard
University found the modest benefits generated from fair trade to be
concentrated among the most skilled coffee growers. They find no positive
impact on coffee laborers, no positive impact on children's education, and
negative impacts on the education of unskilled coffee workers' children.
4. Relatively little fair-trade coffee originates from the poorest
countries. The poorest coffee-growing countries are in Africa: Ethiopia,
Kenya, and Tanzania. Fair-trade exports from these countries represent less
than 10 percent of coffee marketed through fair trade, while the share of
fair-trade coffee from middle-income countries such as Mexico, Brazil, and
Columbia is many times higher. Effective poverty interventions should be
targeted at most poor, not the medium-poor.
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More Detail on Criticisms of Fair Trade
6. Purported benefits of the fair-trade system lack transparency. Although
fair trade pays a $0.20 premium over the world coffee price to growers for "social
and economic investments at the community and organizational level," how this
money is actually spent in the home country is vague at best. In an article in the
Stanford Social Innovation Review, California State University economist Colleen
Haight finds that many of these funds are invested in coffee cooperatives'
buildings and salaries, not in schools, which may explain why researchers fail to
uncover positive impacts from fair trade on local education.
7. The fair-trade system is inefficient at transferring coffee consumers'
goodwill to producers. In an experiment run by graduate students in San
Francisco (described in The Taste of Many Mountains), it was found that the
median coffee drinker is -- amazingly -- willing to pay a premium of 50 cents for
a cup of fair-trade coffee. However, we find that even in the best-case scenario for
fair trade, when world prices are at their lowest, the maximum amount a fair-trade
grower from that same cup of coffee would receive is only one third of a cent.
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Criticisms of Fair Trade
7. The fair-trade system is inefficient at transferring coffee
consumers' goodwill to producers. In an experiment run by my
graduate students in San Francisco (described in The Taste of
Many Mountains), we found that the median coffee drinker is -amazingly -- willing to pay a premium of 50 cents for a cup of fairtrade coffee. However, we find that even in the best-case scenario
for fair trade, when world prices are at their lowest, the maximum
amount a fair-trade grower from that same cup of coffee would
receive is only one third of a cent.
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AND ….
The most damaging aspect of the fair-trade coffee system
may be that it misleads well-meaning coffee consumers
into believing that by buying fair-trade coffee they are
doing something meaningful and helpful for the poor,
while the best evidence suggests that other types of
programs are far more effective.
And this tragically misdirects energy and attention away
from approaches to fighting poverty that actually work
quite well.
Perhaps a main reason that fair-trade coffee continues to
have credibility with many in the general population is the
immense marketing campaign undertaken by Fair Trade
USA, which continues to promote itself despite the selfneutralizing flaws in its poorly designed system.
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The Next Step: TPP (Trans - Pacific Partnership)
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Selected References
1. Elliot, Kimberly, (2012) “Is My Fair Trade Coffee Really
Fair? Trends and Challenges in Fair Trade Certification.” CGD
Policy Paper 017. Washington DC: Center for Global
Development.
2. Haight, Colleen, (Summer, 2011) “The Problem with Fair
Trade Coffee.” Stanford Social Innovation Review
3. Wydick, Bruce (August 10, 2014) “10 Reasons Fair-Trade
Coffee Doesn't Work.” www.huffingtonpost.com.
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