The fair trade movement is more than 50 years old, but has only become prominent in the last 15 years or so. Now there is a vigorous campaign in the United States, Britain, and other affluent nations to encourage individuals and governments to convert to fair trade for the benefit of poor people who produce goods they consume. But does fair trade actually do much to help struggling farmers, or is it just another marketing gimmick to manipulate wealthy consumers into parting with somewhat more of their money?

In Fair Trade Without the Froth, economist Sushil Mohan has written exactly what his subtitle promises, namely a dispassionate examination of the fair trade movement. After analyzing the arguments and evidence, Mohan concludes that while fair trade has some beneficial effects for farmers, they are rather small and are accompanied by some offsetting costs. On the other hand, he does not regard fair trade as an assault on the free market — currently at least. While some fair trade advocates resort to anti-market rhetoric, as long as it remains voluntary, it is merely a niche sales strategy no different from other strategies like “buy green” or “buy union.” As we will see, however, there are reasons to worry that fair trade’s proponents will not remain content with a purely voluntary approach.

Principles | The key features of fair trade certification include the following:

• Traders must pay farmers a minimum price that covers their living costs and permits “sustainable” production, but if the free market price for the crop rises above that floor, then it prevails.
• Traders must also pay a “social premium” of 5–10 percent to the growers for technical assistance and development.
• Traders must buy from grower cooperatives, using long-term contracts to promote income stability.
• Producers must abide by stated social and environmental criteria, such as refraining from the use of child labor, not growing genetically modified crops, and employing only “organic” methods.

To ensure compliance, fair trade organizations (there are several) have established monitoring systems. The cost of those systems and of pro–fair trade advocacy consumes much of the higher prices paid by consumers, leading Mohan to state, “Fair Trade’s proponents try to convey the impression that almost all of the premium they are paying for fair trade products is passed on to the producer, while the reality is far different.” He contends that the producers actually receive just a small cut of the premium, citing research by Tim Harford of the Financial Times showing that, at the large British coffee seller Costa, only 10 percent of the premium went to the growers. The rest fattened Costa’s bottom line.

Mohan is also skeptical about the claim that fair trade does much to protect poor growers against market price fluctuations. He explains: “The guaranteed price can guarantee income only if there is also a guarantee of quantities that traders will buy from them. It is not possible for Fair Trade to guarantee the quantities that will be bought at the guaranteed price.” And when market demand falls, Mohan notes, fair trade buyers can easily escape their purchasing commitments without suffering any retaliation.

The unseen | As Regulation readers are well aware, programs meant to benefit some people usually have hidden, unintended costs and repercussions, either on the presumed beneficiaries, other people, or both. Mohan argues that fair trade is one of those programs.

One reason for this is that by increasing the production of coffee and other crops in the relatively affluent countries where fair trade currently operates (such as Central America), it may depress the market for poorer farmers in regions (especially sub-Saharan Africa) where it has yet to take hold and for farmers who are too poor to afford the cost of fair trade certification. Mohan says that there is no evidence that this is currently a significant problem, but suggests that if fair trade grows into a larger segment of the market, the adverse impact on those who remain outside the system could become important. In other words, fair trade is a zero-sum game with slight (but visible) benefits to some, offset by slight (but invisible) harms to others.

A second harmful effect of fair trade is that it substitutes decisions that are pleasing to wealthy consumers for decisions that the producers themselves would otherwise make — a sort of nanny-state cultural imperialism. Mohan gives several examples.

For one thing, growers wishing to obtain fair trade certification must agree not to use any child labor. Coffee drinkers in the United States, Britain, and other advanced countries probably think that they are rescuing children from lives of drudgery and helping them go to school by purchasing fair trade goods. Mohan replies: “Poor families do not send their children to work to be cruel to them, but to help provide a basic income for the family. A prohibition on child labor may be damaging for the families and also for children who may be forced into other dangerous occupations.”

Another instance of fair trade devotees imposing their values on the people they think they are helping is the ban on genetically modified crops. It has become an article of faith among well-to-do westerners that genetically modified crops “tamper with Mother Nature” and will backfire on us with the creation of “Frankenfoods.” Especially with regard to bananas, however, genetic modification may be a good choice for farmers because “normal” bananas are sterile and prone to disease, Mohan notes. The benefits of slightly higher prices could be easily negated by crop reductions or failures that might have been avoided.

Third, fair trade requires that growers join a cooperative if they want to be eligible for certification. Again, that sounds progressive to the target consumers, but cooperatives entail new costs and difficulties for growers, including a mandated middleman that many would rather not deal with. Mohan cites the experience of the largest fair trade cooperative in Guatemala, where an official admitted that after paying all of the co-op’s expenses, nothing of the fair trade premium was left to be distributed to growers. Also, since monitoring is haphazard, it is possible for co-op officials to put their own interests ahead of the farmers’. Mohan writes that they have been known to buy non–fair trade coffee on the open market and then sell it as the output of “their” farmers.

Coercion | Mohan’s case is persuasive that fair trade is far less advantageous to the world’s poor than its advocates would have us believe. Still, why be concerned about it? Fair trade is voluntary. Growers do not have to participate and consumers are free to buy non–fair trade goods. Fair trade may be little more than a marketing gimmick, but the commercial world is full of those.

What worries Mohan, and ought to worry the rest of us, is the possibility that fair trade zealots will turn to coercion to speed up the success of their movement. He points to efforts by fair trade proponents in the United Kingdom to exclude non–fair trade products from schools and churches. In Britain an organization called Fairtrade Foundation has managed to get some schools to embrace fair trade by agreeing to use fair trade goods whenever possible, to insinuate fair trade ideas into the curriculum, and to require students to engage in pro–fair trade actions in the community.

It is on the issue of the prospect for fair trade zealots turning to political activism that the book could have used some additional work. In the United States, the fair trade movement is widespread and energetic. Last May, the Chicago City Council voted to become a “fair trade town,” joining scores of other American and European cities. Its resolution states that the city will “encourage the purchase of fair trade certified products by city agencies, use of fair trade products by catering contractors, and publicize fair trade policy through the media.” Moreover, the mayor and city council will “promote awareness of fair trade issues” and “promote fair trade practices among local businesses and organizations.”

With Rahm Emanuel and friends doing all that encouraging and promoting, will any business or organization have the nerve to say “no”? And just as organized labor has used political influence to lock in place policies it favors (prevailing wage laws, for example), is it not likely that the fair trade movement will eventually turn to politics to start mandating or otherwise favoring fair trade goods?

Mohan concludes by making the case that free trade, which is often demonized by fair trade advocates, is a far better development policy for the world’s poor. By extending the market and bringing capital investment to third world nations, free trade increases production, thus leading to higher living standards. Fair trade does little or nothing to speed up economic development; by interfering with the decisions of farmers, it might impede it.

Fair Trade Without the Froth will make consumers think twice before they plunk down extra money for fair trade goods.