Fair trade initiatives do much less to help the poor than many think, write Arne Klau and Soraya Abouleish This time, George Clooney hasn't been so lucky. While he successfully avoided getting hurt by a falling piano, a badly fixed billboard knocked him out just seconds later. Quite popular on YouTube, the message of this rather well-done viral satire of a famous American coffee brand commercial is simple: this is how it feels to be exploited on a coffee farm. The thesis behind the video is that fair trade could change that. But can it really? No doubt, the commercial success of fair trade has been quite impressive. While fair trade products were niche goods for years, they appear to have finally broken into the mainstream. While in most developing countries fair trade goods include agricultural products such as coffee, tea and chocolate, Egyptian fair trade initiatives concentrate on handicrafts. The basic idea is simple: pay producers some extra money, and this will make a huge difference around the world. In particular, this will allow them to pay workers higher wages, while respecting both labour and environmental standards. Do-gooders can enjoy their latte to go with a clear conscience, as third world workers benefit. On the surface the principle is convincing. But a closer look at so-called fairly traded products can cast some doubts on this reading. First of all, there is an important difference between fair trade initiatives and bio or organic producers. In reality, both approaches may overlap as consumers buying organic are normally doing so due to an intrinsic characteristic of the good, from which they expect some added value. Fair trade consumers buy basically the same product because they want to support those they feel are needy. But are the do-gooders really doing good? In reality, they may not be, as a couple of studies analysing the impact of fair trade initiatives found. The first set of arguments deals with the concept of fair trade itself. Like the term "bio" (but unlike "organic" in the US), the labelling of a product as "fairly traded" does not have an official definition or certification process in any country in the world. Rather, it is left to the individual label owners and certifying organisations to set the standards. This brings with it a whole variety of labelling initiatives with different objectives and business approaches. What unites them is that producers or collectives of fair trade products are certified against these standards after the payment of a fee. This allows them to then carry a specific fair trade certification mark, while their products get identified as fairly traded. In fact, a study on the coffee sector in Guatemala and Costa Rica concluded that the costs of fair trade regulations absorb much of the fair trade mark-up consumers pay. These costs include the certification and inspection fees, but also costs incurred by switching to the organisational structure required by fair trade rules. As a result, very little of the extra money is actually passed on to farmers. A 2008 study published by the Adam Smith Institute puts this share at as little as 10 per cent. Although the exact number has been contested, fair trade organisations have normally not been sufficiently transparent to provide proof of a higher share. It is therefore not surprising that it has been frequently claimed that benefits for coffee-growers are mainly anecdotal. The second string of arguments criticising fair trade products is concerned with the concept's indirect economic consequences. Many of the labour opportunities offered by fair trade companies are highly inefficient, and by resisting mechanisation, diversification and quality improvement, workers and their families may remain trapped in an unproductive and badly paid activity. At the extreme, fair trade could even damage those it wants to help by giving incentives to unproductive activities and creating oversupply. Moreover, one of the requirements of some fair trade initiatives is that certified companies may not hire permanent full-time employees. This inhibits potentially efficient companies from growing. It is not surprising that fair trade initiatives usually fail to lift large numbers of people out of poverty. Many economists rightly claim that only free trade is truly fair. In the coffee sector, for example, coffee companies based in developing countries may only export their coffee tariff-free to the European Union if it is unprocessed. Roasted coffee carries a tariff of 7.5 per cent, while roasted and decaffeinated coffee is subject to a nine per cent tariff. The phenomenon that import duties increase with the stage of processing, also called tariff escalation, leads coffee companies to locate their roasting and packaging activities in Europe. As a result, the world's largest exporter of roasted coffee is neither Brazil, nor Colombia, nor Ethiopia. It is, in fact, Germany. The panorama is similar for other agricultural products. For example, more than 90 per cent of the world's cocoa is produced by developing countries, but less than five per cent of chocolate. Abolishing this perverse policy would allow coffee producers in third world countries to move up the value chain and help them much more than any well-intended fair trade initiative. But would such an idea warrant a satire featuring George Clooney, or gain the support of do-gooders? Coffee lover Arne Klau is adjunct professor of economics at the American University in Cairo (AUC). Soraya Abouleish is a student of economics at AUC.
