Fair-trade coffee beans dry in the sun in Nicaragua, 2004. (William Neuheisel / Flickr)

Last month, the Fairtrade Foundation staged a march on the British Parliament, a campaign featuring various celebrities and more than 13,000 petitioners, urging UK Prime Minister David Cameron to put issues of ethical consumerism at the center of the upcoming G-8 summit. At first glance, the decision by self-proclaimed ethical consumers to buy fair-trade products seems harmless. What could possibly be wrong if individuals, exercising their right as consumers, choose to promote certain niche markets? Quite a bit, as it turns out.

Although the concept of ethical trade has existed for a long time, the institutionalization of the fair-trade movement did not begin in earnest until the late 1980s. In 1989, the World Fair Trade Organization was founded, and in the years that followed, various fair-trade certification and labeling processes emerged. A product is granted a fair-trade label once its producers have met a list of social, economic, and environmental requirements. The stated purpose of the fair-trade movement is to give economic security to producers in developing countries -- often of unprocessed commodities such as fruits, live animals, and minerals -- by requiring companies and consumers to pay a premium on the market price.

Until now, any questioning of the fair-trade movement has been limited to the micro level. The movement has faced repeated criticisms, for example, for the relatively expensive fees that producers must pay to get a fair-trade label, which make it ineffective for many poor farmers. Another area of concern is just how lucrative the process is for middlemen and retailers. Finally, several studies show that very little of the premium that consumers pay actually reaches needy producers. Consumers might be surprised to learn that only one or two percent of the retail price of an expensive cup of “ethical” coffee goes directly to poor farmers.

The adverse effects of fair trade are even more worrying at the macro level. First, fair trade deflects attention from real, long-term solutions to rural poverty in developing countries; and second, it has the potential to fragment the world agricultural market and depress wages for non-fair-trade farm workers.

Consider the root of the problem that the fair-trade movement seeks to address: the fact that the agricultural commodities market is volatile (characterized by large and frequent price fluctuations) and distorted (ridden with high tariff barriers and subsidies). The volatility has several sources, but price distortions are a major contributor. The distortions, in turn, are largely the result of policy choices by developed countries. In 2011, OECD governments doled out approximately $252 billion worth of subsidies to domestic farmers. These subsidies, along with relatively high tariffs, create a virtually impenetrable trade barrier for farmers in the developing world. Even producers that are potentially more efficient than those in the West are blocked from entering lucrative Western markets. Meanwhile, food prices consistently rise in the developed world, but poor and vulnerable farmers in developing countries are unable to take advantage of them.

Ethical consumers should be commended for wanting to improve the plight of needy farmers in the so-called global South, but fair trade is the wrong instrument to achieve this objective. The premiums charged for fair-trade products are just another direct farm subsidy. Admittedly, those subsidies are miniscule in comparison with the ones that OECD governments hand out. (In 2010, retail sales of fair-trade-labeled products totaled about $5.5 billion, with about $66 million premium -- or about 1.2 percent of total retail sales -- reaching the participating producers.) But there is irony and inefficiency in counteracting one subsidy with another, especially since consumers in developed countries ultimately pay both, either through taxes or at high-end supermarkets such as Whole Foods.

Surely, a more efficient and straightforward solution to distortion in agricultural markets is the removal of massive OECD subsidies and tariffs -- in other words, free trade. Misguided Western consumers might find solace in purchasing fair-trade products, yet they are actually harming those they mean to protect. The fair-trade movement claims to address “the injustices of conventional trade, which traditionally discriminates against the poorest, weakest producers.” But in fact, trade liberalization is the only force that can level the playing field for all producers around the world, guaranteeing poor producers a fighting chance at long-term competitiveness by harnessing their comparative advantages without relying on charity.

The macro-level problems with the fair-trade movement do not end there. The movement’s success in helping a small number of poor farmers comes at a potentially high cost for the rest of the market. As the fair-trade movement grows and provides more benefits to its producers, there is a real risk of market fragmentation. Fair-trade producers could split away from the regular market, generating two sets of market prices -- a fair trade price and a regular price -- and, in turn, creating two sets of market wages. Regular trade producers would likely end up with significantly lower wages. Moreover, a guarantee of an above-market price for a portion of producers would lead to increased production, resulting in lower overall commodities prices and, ultimately, decreased profits for all regular trade producers. Although the problems created by fair-trade subsidies are not on the scale of those created by government subsidies in developed countries, they are still large enough (and growing) to have a potentially seriously negative impact on producers in developing countries.

One could perhaps turn a blind eye to the adverse effects of the fair-trade movement if it were catering only to a niche market. Unfortunately, this is not the case. In the United Kingdom alone, total sales of fair-trade-certified products (including coffee, tea, and cocoa) have increased from 50.5 million pounds sterling (almost $77 million) in 2001 to more than 1.3 billion pounds sterling (almost $2 billion) in 2011 -- a staggering 2,612 percent increase in just a decade. The fair-trade market is growing so rapidly that it is beginning to crowd out the regular trade market, which includes all producers who compete without the benefits of subsidies.

Fair-trade enthusiasts might argue that the world would be better off if the fair-trade market replaced the free-trade one. But in fact, such an outcome would destroy the livelihoods of millions of farmers who do not have the luxury of paying for fair-trade certification. To survive, these farmers would likely have to stop planting basic crops, such as wheat, corn, and rice, and shift to cash crops, such as coffee, tea, and fruits, which could bring in the income for certification. The immediate effect would be a prohibitive hike in food prices. Further, as farmers shift their production, non-fair-trade basic food products would become more vulnerable to price instability caused by supply and demand shocks, because there would be fewer producers willing to take the risk of non-subsidized farming.

If the fair-trade movement eventually came to encompass all categories of agricultural production (including basic food products), the price shocks would be even worse. Rather than responding to market prices, farmers in developing countries would be incentivized to produce whatever products garner the greatest subsidies. With subsidies, not consumer demand, dictating production, consumers in the developed and developing worlds would see further increases in basic food prices.

Ultimately, of course, it is consumer demand that is fueling the fair trade movement. With the Doha Round of the World Trade Organization foundering, some consumers might genuinely believe that fair trade offers a respectable second-best option to free trade. At its minimum, however, fair trade detracts attention from the real solution and lulls consumers into a false sense of satisfaction. And if the fair-trade movement continues to grow as quickly as it has in recent years, it will likely produce huge efficiency losses.

Self-proclaimed ethical consumers need to start looking reality in the eye. Fair trade is a form of protectionism, and it should not be allowed to hide behind the mask of morality. There is nothing ethical about privileging small groups of producers while the majority are sinking deeper into poverty.

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  • AMRITA NARLIKAR is Reader in International Political Economy at the University of Cambridge and the founding director of the Centre for Rising Powers. DAN KIM is a Volkswagen Foundation postdoctoral research associate at the Centre for Rising Powers at the University of Cambridge.
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