"Fair Trade" Is Fairly Flawed

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The Guardian's Andrew Chambers, reacting to Nestlé's decision to slap the Fairtrade logo on KitKat bars in Britain, offers a nice rundown of the essential problems with the fair-trade movement. Mainly, fair trade is a short-term solution to a long-term problem, and one that makes solving that problem—rural poverty in developing nations—more difficult.

Chambers writes that "some say" fair trade is "an example of Western feel-good tokenism that holds back modernization and entrenches agrarian poverty."

Fair trade sets minimum prices on certain commodities such as coffee and cocoa that are mainly grown in developing countries. Part of the price is set aside as a "social premium," which is invested in development programs. Fair trade is designed to give small farmers access to global markets.

But by messing with the central laws of economics—supply and demand—it ends up doing more harm than good (just like American and European subsidies do, in different ways). Farmers are forced to keep growing particular crops without regard to how much actual demand there might be for them. Minimum prices yield oversupply, which sends global prices downward—hurting farmers who don't take part. Fair-trade farmers have no incentive to grow crops that would fill actual demand and that would, in the long run, help the economies of their countries.

Fair trade "also appears wedded to an image of a notional anti-modernist rural idyll," Chambers writes. Rules dictate that farms remain tiny and, in effect, they aren't allowed to invest in modern equipment or hire full time workers.   

Refreshingly, Chambers recognizes that there are, or at least could be, benefits to fair trade. He writes that "as long as protectionist trade barriers limit commodities entering Western markets there will be a place for developing world trade subsidies." And since some poor farmers get more money for their crops, the minimum price "can provide a useful short-term hedge against commodity volatility."

But that's just it: The benefits are all short term, and in the long run, everyone loses except for Western food companies that get to put "fair trade" on their packages, making buyers think they are helping poor farmers around the world.