3 Oct 2014

Fair trade does not help small producers

Theresa L writes:*

Fair trade is a very appealing concept to people who would like to see the world become a better place. Every fair cup of coffee or bar of chocolate helps the producers and employees in the Global South to live better lives. At least, this is what the big fair trade certification organizations like Fairtrade International like to tell us: "Fairtrade offers producers a better deal and improved terms of trade. This allows them the opportunity to improve their lives and plan for their future. Fairtrade offers consumers a powerful way to reduce poverty through their every day shopping."

Indeed, a quick look at the coffee prices for the cheapest fair trade coffee and the cheapest conventional coffee at the Dutch supermarket Albert Hein shows that consumers pay a quite high extra charge for fair trade products: the difference lies at € 1.98 per kilo. As the growing success of fair trade products shows, consumers are happy to pay this extra price as a kind of charitable act. But would they still do so knowing that fair trade, on the contrary to what is officially said, does not improve the farmers lives? Probably not. Yet, according to ever more researchers on the field, this is exactly what happens.

The logic of Fairtrade goes as follows: Producers receive a minimum price to protect them from unforeseen drops of the market price so they can make longterm plans and investments. For coffee, the minimum price currently lies at $ 1.40 per pound plus $ 0.20 fair trade premium and an extra $0.30 for organic coffee. If the market price is higher than the fair trade minimum price, the producers get paid the market price. Thus, in theory this should benefit the farmers in all cases.

Yet, researchers found that for example in Ethiopia and Uganda the expected effects of improved working conditions and higher wages fail to appear. To the contrary, "wages in other comparable areas and among comparable employers producing the same crops but where there was no Fairtrade certification were usually higher and working conditions better. In our research sites, Fairtrade has not been an effective mechanism for improving the lives of wage workers, the poorest rural people", said Christopher Cramer, an economics professor at SOAS, University of London, and one of the report's authors to The Guardian.

One could wonder why fair trade farmers, receiving high product prices at all times, don´t invest in an improvement of working conditions and wages. However, when looking into the details of fair trade contracts, it becomes apparent that the benefits of selling to Fairtrade are not higher than its costs. Fairtrade producers have to pay very high certification costs, composed of an application fee of € 525, an initial certification fee lying between € 1,430 and € 4,370, and an annual certification fee lying between € 1,170 to € 2,770, each depending on the size of the cooperation. The producers then have a right to sell under Fairtrade conditions, but in most cases, Fairtrade only buys a rather small percentage of the total produce. As a result, farmers pay for certification but still need to sell big parts of their production to the regular market.

Researchers from Berkley and San Diego University compared costs and benefits, in terms of minimum price, certification fees and percentage sold to fair trade, over thirteen years for coffee cooperatives in Central America. They found that there is almost no longterm benefit regarding producer rents in the fair trade system compared to regular producers.

Bottom Line: Fair trade consumers don´t pay higher prices to save the world. They pay to support organizations certifying fair trade.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.