The Adam Smith Institute is known for its robust support for free markets. Their blog is always interesting and often well-informed; and they enjoy taking unconventional positions on topical policy issues. But every so often, the position they take is not well thought through, and not consistent with their general philosophy. It feels as if they are just being contrary for the sake of it.
Today’s blog by Alex Singleton on Fair Trade is an example of this. He criticises Fair Trade, because he says it depresses world coffee prices.
Of the 2 pounds that you pay for a normal cappucino in London, the coffee producer may earn about 5p. Some consumers – me among them – prefer to buy products that pay a fair price to the producers who supply them; and are willing to pay extra for this. This is a legitimate preference. The Fairtrade system enables us to do this, by buying products that have a symbol that tells us that the producers have received more than the market price for the commodities they have produced.
Fair trade is a good example of the market supplying goods and services in response to demand. Consumers are not required to buy fair trade products; but if this is what we prefer, the fair trade certification system enables us to do so. The Adam Smith Institute should welcome the expansion of consumer choice that this provides us.
Fair traded coffee alone results in more than $30 million a year additional income for coffee producers, which in turn supports them, their families and their communities. I would have expected the Adam Smith Institute to support, not criticize, a mechanism that enables the poor to trade their way out of poverty.
With apologies for the length of the post, I think it is worth rebutting each of Mr Singleton’s points in turn. In most cases, it is not that the point is factually inaccurate: just that Mr Singleton has drawn the wrong conclusion from it.
We do not have free trade in farming. Rich countries engage in unfree trade. Developing country farmers are held back by unfree trade, not free trade.
Agreed. The hypocrisy of rich country trading arrangements is one reason why some consumers in rich countries want to choose products which provide some redress, if only a little. It is entirely consistent to want to see the Common Agricultural Policy reformed or abolished, and to want to buy fair traded products.
Fairtrade appeals to a minority of buyers. Only 1% of the world’s coffee is Fairtrade. Most people buy according to price and quality.
It is true that fair traded products have a small market share, though this is changing fast. The market share for fair traded coffee is doubling every two years, and it is the fastest growing segment among speciality coffees. But in any case, why should the relatively small size of the market (so far) be a reason for consumers not to have this choice?
Fairtrade helps relieve middle-class guilt. By so doing, it takes the emphasis away from the real problem: Europe’s agricultural policies.
Fair trade and reform of the Common Agricultural Policy are basically unconnected. But if anything, the opposite is true. By buying Fairtrade, consumers are demonstrating that they care whether farmers in developing countries get a decent price for their product, and so adding to the pressure to reform Europe’s agricultural policies.
Mechanization means that only a small proportion of the world’s coffee producers are actually needed. In Brazil five people and a machine produce the same amount of coffee as 500 people in Guatemala. We should help people adapt, not encourage them to stay in outdated jobs.
Buying Fairtrade gives developing country producers additional income which enables them to invest, in themselves and their children, and so provides opportunities for them to adapt.
Coffee prices are low because there is too much being produced, not because of the actions of multinational companies. Companies like Starbucks have helped increase consumption of coffee, which is good for producers.
Absolutely. Fairtrade seeks to increase, not reduce coffee consumption. But it allows consumers to choose to buy and drink coffee that pays a fair return to coffee producers.
25% of the world’s Fairtrade coffee comes from Mexico, a relatively affluent country where the average income is $9000 (compared with $700 for Ethiopia). Mexico enjoys free trade agreements with the USA and Europe, and most of its jobs are industrial and service sector jobs. By helping Mexicans stay in the market, the Fairtrade scheme keeps the world price of coffee down and takes business away from poor coffee producers.
It is true that Mexico is, on average, richer than Ethiopia, though it is also very unequal, and there are still many poor people in Mexico. More than a quarter of Mexicans live on less than $2 per day. More importantly, it is economic nonsense to suggest that for consumers to be willing to pay more for coffee, in order to ensure a proper return for the producers, can somehow depress the world price of coffee.
Markets convey information through prices. The low price of coffee tells producers to produce more cheaply or exit the market. At the end of the day, too much coffee is being produced.
Markets do indeed convey information through prices. One piece of information that prices can convey is that some, though not all, consumers have a preference for products which have not been supplied at the expense of very low and uncertain returns to the producers. The Fairtrade scheme enables the market to translate this consumer preference into purchasing decisions. Without it, there would be no way for consumers to express this preference.
If too much coffee is being produced, it is not because of fair trade coffee. (If the Adam Smith Institute wants to make a well-informed point about this, it could look more closely at World Bank subsidies to coffee production in Viet Nam, which may well have depressed world coffee prices; but that is a quite separate debate).