"As Cato Institute associate policy analyst James Bovard said, "Fair trade means government officials decide what Americans should be allowed to buy and what prices they should be forced to pay. Fair trade is paternalism in international commerce." The American consumer is robbed of a fair price. And as a consequence of this, he will have less money to invest in productive industries, resulting in an overall decline in the American economy."
Except government isn't involved at all. Companies and producer organizations voluntarily participate in the system, and their compliance with standards is independently audited are communicated through the use of a regulated trademark (like any third party certification).
Consumers too are free to purchase coffee, or any other product, bearing the Fair Trade certification mark, or not. Given the wide range of prices for products both claiming to be Fair Trade and not, it's difficult to see where Bovard (and the author) have a point at all.
I feel the author is not very well informed about the inner workings of fair trade or economics. The price of fair trade is not set by some government body, rather market conditions. He is incorrect assumption that field prices (farmer) and market prices (finished product on shelf) are directly correlated. An example of this is: The price of coffee on your grocery shelf is constant, while the farmer has a harvest season where his crop price drops.
The floor price of the Fair Trade criteria acts as a safety net, protecting small farmers when fluctuating market prices fall extremely low. Currently, the floor price for conventionally grown Arabica beans is $1.26/pound and $1.41/pound if the coffee is certified organic. When the market price is above the floor price, as it was during the 1994-98 period, the Fair Trade price is an additional $0.05/pound premium above normal market price. This premium is sent directly back to the farmer, with no deductions. Therefore, the Fair Trade floor price is most relevant in times like the present, when the world market price hovers around $0.85/pound (meaning that most small farmers are only getting $0.20-0.40/pound). The Fair Trade floor prices were determined after considerable field research into production and living costs in various coffee-growing countries.
Also Starbucks made their own 'fair trade' system to avoid the cost of TransFair. Also Starbucks' system is not as open to verification as TransFair. Both systems work for environmental protection.
To the author: Please support your thoughts in the future.
Are coffee prices too low just because there is too much supply and therefore too many farmers? Does Fair Trade perpetuate this by promoting overproduction?
The common argument here is that too many coffee farmers growing too much coffee and that?s why farmers are getting very low prices. Fair Trade doesn?t help this and may actually encourage over-production.
First, it?s not just supply that determines price. The fact that commodity markets are often highly buyer-driven, with few very powerful buyers, can drive price to the farmer downwards.
Regarding the effect of supply on prices, economic convention would say that an excess of supply would create downward pressure on prices, which would cause some farmers to switch to other crops or livelihoods. However, for example in the coffee market, when prices are low, farmers generally grow more, to cushion against low prices in the future. This is partially because coffee trees take years before they start to produce so farmers have made an investment that they don?t want to just rip out of the ground if prices are going to rise again making their trees profitable. The result is that when prices are low supply increases. This is the opposite of what should theoretically happen. Preventing this would require widespread regulation, which the International Coffee Agreement did before it collapsed in the early 90s.
It?s also very difficult to diversify away from coffee if you?re already growing it. Farmers have made a significant investment in planting coffee trees. It also requires money and other resources, and knowledge. Fair Trade helps provide this, and Fair Trade farmers do start to diversify into things like bananas over time. Co-ops in Costa Rica have expanded export from just coffee to yucca and plantain chipsi, and a Nicaraguan co-op has diversified into eco-tourism in Nicaragua.ii
This entire argument is based on the problem being low prices to farmers. But often the main benefit that farmers see in Fair Trade is the predictable price (because there?s a minimum). The conventional price is actually often higher than the minimum Fair Trade price. It?s the extraordinary fluctuations in price (for example, from 40cents to 130cents for a pound of coffee) that are of primary concern because although the price on an average year might be acceptable, it?s so hard to plan or make it through tough years when it plummets so low.
An additional challenge to a farmers is that the unpredictability can even sometimes be disconnected from supply and demand of the commodity. For example, when there was uncertainty in the US economy, investors fled from US currency and invested in the commodity market, driving commodity prices up. This leaves the successes of producers in the hands of something arbitrary and disconnected from their realistic scope.
As for Fair Trade?s influence on this situation, the increased price could encourage farmers to grow more coffee or at least not switch to other crops when there is a glut in the coffee market. However, the Fair Trade market is currently too small to really distort market signals and increase production, and much of the premium is invested in the community not directly into the farmer?s pocket, which decreases the direct incentive to a farmer to greatly increase production. These are some outstanding questions to be answered as the Fair Trade movement grows, but they are not current issues.
I would agree with other commenters that the government is not involved in regulating fair trade. Additionally, prices for cash crops such as coffee, cocoa, sugar and bananas are *not* regulated purely by supply and demand; for example, if you Google "Nestle price fixing" you will come up with a host of links related to 87 lawsuits now being filed against the chocolate "cartel" with charges of price fixing. Fair trade programs are hardly a case of the big mean government intervening to ruin things for the honest, upright and just international corporations that sell cash crops.
I for one am very glad we have Pura Vida on campus.
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posted 11/10/09 @ 3:37 PM EST
"As Cato Institute associate policy analyst James Bovard said, "Fair trade means government officials decide what Americans should be allowed to buy and what prices they should be forced to pay. Fair trade is paternalism in international commerce." The American consumer is robbed of a fair price. And as a consequence of this, he will have less money to invest in productive industries, resulting in an overall decline in the American economy."
Bovard is correct with his statement.