Is Fair Trade Coffee Bad for Trade?

I am preparing to record a podcast episode for my podcast Rocket to 30 about what it means to be a citizen of the world. For this reason, I am reading an economics book called “The Poverty of Nations” by Wayne Grudem and Barry Asmus. The book has made me question an assumption I had never thought about before: Is fair trade coffee a good idea from an economic perspective?

Fair trade coffee “seems to be a sensible way to help poor coffee growers earn more money. But the general consensus of economists is that it does not do much good and might even do some harm. Economist Victor Claar points out, ‘Fair trade coffee roughly represents just one percent of the coffee markets in the United States and Europe.’ But Claar points out an economic harm that comes from an artificial increase of the price of some coffee above what the world market will bear (that is, higher than the price set by the world supply and demand). Paying some growers a higher price than the world market price for coffee encourages them to grow more coffee than the market actually demands. Claar writes: Thus, while there is too much coffee being grown relative to global demand in general, there is also not sufficient demand to purchase, at the fair trade price, all of the coffee being grown as fair trade coffee. In both cases, there is simply too much coffee. The larger supply of coffee then depresses the price for other coffee growers that are not part of the fair-trade movement. (This is something like what occurs because of the agricultural subsidies that the United States pays to certain farmers, giving them a price above the world market price for their crops, and then ending up with surplus crops which it ‘dumps’ on the world market, depressing agricultural prices for other countries.) Claar goes on to say that artificially raising the price for coffee just prolongs the problem of too much coffee on the world market: If the fundamental problem with the coffee market is that prices are low because there is too much coffee, then it would appear that the fair trade movement may be making matters worse rather than better because it increases the incentives to grow more coffee. An additional problem is that, by paying a higher price than the world market price for coffee, the fair-trade movement encourages farmers to keep producing coffee when they would be much better off shifting to alternative crops for which there is more demand (he shows how Costa Rica shifted its production to new exports and significantly increased the value of its exports). We noted earlier that Paul Collier is professor of economics at Oxford University and former director of development research at the World Bank. He writes this about fair-trade coffee (but the arguments apply to ‘fair-trade’ campaigns for other products as well): The price premium in fair trade products is a form of charitable transfer, and there is evidently no harm in that. But the problem with it, as compared with just giving people the aid in other ways, is that it encourages recipients to stay doing what they are doing—producing coffee. . . . They get charity as long as they stay producing the crops that have locked them into poverty. We agree with these economic assessments, and therefore we cannot recommend that people support the ‘fair-trade’ movement. Charitable contributions to the poor are more efficiently given by other means, and such charitable transfers will never lead to a long-term solution for world poverty.”

These arguments are complex, and in some ways, hard to understand. As I have been reading this book, I have started to wonder if fair-trade is actually something that just makes rich people feel better about how they spend their disposable income. I’m sure that companies which support these farmers are not malicious and probably have the best intentions in mind, but if it is a broken system for solving poverty on a large scale because it is hurting other growers, how should I respond if I want to be a responsible and ethical agent for change as a Christian?

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