Trade Week: Fair Trade Isn’t Fair

As I passed by the Commerce Department on my way in to work this morning, I saw the bureaucrats had erected a banner for Trade Week, declaring: “Exports, Growth, Jobs.” How typical of them, I thought, to ignore half of trade – the imports that we produce the exports to buy. Trade is about exchange, where each side gets something it wants. Concentrating only on one half of the exchange – the half you voluntarily give up — is an odd way to characterize trade.

Of course, the connection between trade and growth has long been recognized. Here’s a useful overview of the connection from Deutsche Bank in 2005:

Open economies benefit from the international exchange of ideas and thus permanently experience technological progress. This in turn is the key source of longterm economic growth. Greater openness also means fiercer competition. This obliges politicians to constantly improve the institutional framework and prompts companies to continually optimise their production processes and develop new products.

The corollary — that protectionism impedes growth,  and sacrifices jobs — is one that bears repeating. At a time when new jobs are still hard to come by, free trade is an important way to boost employment, allowing the optimal specialization by Americans, resulting in optimal benefit for us — and for our trade partners. Indeed, as Matt Ridley argues in The Rational Optimist, free trade seems to have been vital in the progress of mankind from nomadic practices to civilization.

Recently, however, a new concept has grown up — that trade ought to be “fair” rather than free. Conventional trade, the theory goes, exploits those who produce the export good by paying them far too little in return, and that paying more for trade goods that are produced according to our values – using sweatshop-free labor or in an “environmentally conscious” fashion, for example — represents a much better way to do business. Thus was born the phenomenon of “fair trade” goods, most often seen in the shape of “fair trade” coffee.

Unfortunately for this theory, there now comes empirical evidence that fair trade coffee producers are more likely to be mired in poverty:

Our quantitative household survey of 327 randomly selected members of conventional, organic and organic-fairtrade certified cooperatives in Nicaragua is complemented by over a hundred qualitative in-depth interviews. The results show that although farm-gate prices of certified coffees are higher than of conventional coffees, the profitability of certified coffee production and its subsequent effect on poverty levels is not clear-cut. Per capita net coffee incomes are insufficient to cover basic needs of all coffee producing households. Certified producers are more often found below the absolute poverty line than conventional producers. Over a period of ten years, our analysis shows that organic and organic-fairtrade farmers have become poorer relative to conventional producers. We conclude that coffee yield levels, profitability and efficiency need to be increased, because prices for certified coffee cannot compensate for low productivity, land or labor constraints.

This strongly suggests that the benefits of free trade do not just reside in the revenue from the sale of the good, but in pressures to become more efficient that lead to increased compensation. Subsidizing inefficiency — the real effect of “fair trade” — simply prolongs the poverty it is supposed to relieve. It should also be remembered that if free trade improves institutional arrangements, “fair trade” is likely to remove the pressure to improve institutions and therefore further prolong the conditions that caused the poverty in the first place.

In fact, as several people have observed, free trade is fair trade.