The cat i' the adage

"The growth of knowledge depends entirely on disagreement" Karl Popper (1902 - 1994)

Wednesday, June 01, 2005

"Fair trade" or "Free trade"?

I came across this very clear exposition of the case against "Fair trade" in the comments section at Samizdata.


Suppose you buy Fair Trade marked coffee, with the idea that you wish to help the producers. Currently, around 25% of Fair Trade coffee is from Mexico. So, there's a good chance you've helped out a poor Mexican coffee farmer. Well done.

However, it's essential to also look at what else you could have bought, instead of the Mexican coffee.
Suppose you bought a packet of cheaper coffee from Ethiopia, not marked as Fair Trade. So, one would think that this is not as good, as surely the working conditions are not so nice etc.

But, and here's the point, average incomes in Mexico are $9000 a year compared with Ethiopia's $700. Also only 18% of Mexican labour is in the agricultural sector, compared with Ethiopia's 80%.

So what you are really doing is helping a Mexican farmer who, by Ethiopian standards, is rich. This comes at the expense of helping the genuinely poor Ethiopian farmer, by not buying the only product he can produce.

A better solution is to buy the cheapest coffee you can (keeping the quality constant, of course). So, in this scenario, we all buy Ethiopian coffee. The Mexican farmer will experience falling sales and so must either become more efficient or exit the coffee market.

In the former case, with such a labour intensive process, the Ethiopian farmer could probably still undercut the Mexican. So, the Mexican leaves the market. With the decrease in supply, the coffee price increases and so the Ethiopian benefits more.

With the increased trade with Ethiopia, the resulting growth in their economy will then eventually allow them to diversify away from agriculture and thus setting them on the path to an industrialised economy.


Thanks are due to James Silken for this example.

1 Comments:

At 2 June 2005 at 07:26, Blogger Jorgen said...

"With the increased trade with Ethiopia, the resulting growth in their economy will then eventually allow them to diversify away from agriculture and thus setting them on the path to an industrialised economy."

And, then, no more coffee?

 

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