Why fair trade doesnt work

Suppose you were a farmer who lived in an area with a high risk of weather shocks such as droughts or floods. Then you might try harder to get Fairtrade certification to give yourself a more stable income.

It may be that such farms do less well than non-Fairtrade farms, but better than they would have done without Fairtrade. The only way to learn what difference Fairtrade makes is to compare non-Fairtrade farms to Fairtrade farms that were otherwise identical before Fairtrade was introduced.

The best way would be to randomly select a sub-set of very similar farms to become Fairtrade, which could be quite difficult. At a minimum you would want to compare sites which were similar prior to the intervention, to minimize the risk that the areas are inherently different for reasons other than their Fairtrade certification.

Our CGD colleague Kim Elliott has written a comprehensive primer on Fairtrade markets and detailing some of the trade-offs faced by farmers seeking the certification.

Unfortunately not. The full report contains an important and careful descriptive analysis of the welfare effects of agricultural production across the twelve sites, but the design of the research means that it does not, and never could answer the million dollar causal question of what wages would look like without Fairtrade certification.

In order for PSM to work, you need to match on characteristics that are unaffected by Fairtrade certification. As measured, certification only differs across sites, but none of the controls available to the researchers accounts for other site-level differences.

The recent debate has also ignored previous evidence suggesting there are modest gains from certification schemes, although many of those studies are also susceptible to the critiques we make above.

While the SOAS report cannot provide clear evidence on the causal impact of certification, it does provide valuable insights into the lives of those working for certified farms. The cookies store information anonymously and assign a randomly generated number to identify unique visitors. The cookie is used to store information of how visitors use a website and helps in creating an analytics report of how the website is doing. The data collected including the number visitors, the source where they have come from, and the pages visted in an anonymous form.

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Please accept this use of cookies or go to settings. Cookie settings Accept. Manage consent. The flawed design of the system undermines its own benefits. Berkeley and Craig McIntosh at U. San Diego shows that when the world price of coffee falls and the advantages of selling through fair-trade channels increase , more borrowers choose to obtain fair-trade certification.

But this reduces the fraction of coffee that their cooperatives can sell at the fair-trade price. What they found after examining 13 years of data from cooperatives in Guatemala is that, on average, the economic benefits of participating in the fair-trade system are offset by the price the growers have to pay for fair-trade certification. In other words, they found that the long-term benefit over time from fair trade to be essentially zero.

Fair trade attracts bad beans. Every crop contains some beans that are of higher quality than others. As economists will lecture to you unceasingly, incentives matter.

As the bad beans are drawn into the fair-trade market what economics calls "adverse selection" , potential buyers eschew buying the coffee for fear of being stuck with the low-quality beans. This phenomenon has limited the market for fair-trade coffee.

Fair trade imposes significant costs on impoverished growers. This doesn't sound like much, but in some years it is greater than any price benefit brought by the higher fair-trade price. Moreover, while restrictions on growing practices might seem to meet worthy environmental and social objectives, University of Wisconsin economist Brad Barham and colleagues find that costs to growers imposed by these restrictions on fertilizers and other inputs add to the production costs of impoverished growers, diminish yields, and mitigate the benefits of free trade.

If coffee drinkers want to improve the environment, they should pay for it themselves, not impose added costs on impoverished coffee growers. Fair trade doesn't help the poorest growers. In a recent study in Costa Rica, economists Raluca Dragusanu and Nathan Nunn at Harvard University found the modest benefits generated from fair trade to be concentrated among the most skilled coffee growers.

They find no positive impact on coffee laborers, no positive impact on children's education, and negative impacts on the education of unskilled coffee workers' children.

In contrast, the "impact reports" created by Fair Trade USA , which are available on their home page, are a series of documents that merely describe the nature and scope of the fair-trade programs for various commodities. Coffee prices, which were already well below the cost of production in most countries at year lows, are expected to become more volatile as the pandemic unfolds.

Coffee farmers are deeply concerned about the future of their crops due to decreased commercial demand from restaurants, offices, hotels, etc. To top it off, the nature of the coffee industry leaves farmers especially vulnerable to income and food insecurity should a harvest not go as planned.

This is currently a significant risk because labor shortages in most coffee-growing regions have resulted in delayed and reduced harvests as farmers have not been able to pick all of their coffee. For these reasons, it's more relevant and crucial than ever to understand and seek out fair trade coffee.

Since that post, the price of coffee has hit yet another low. We are at a critical moment in the coffee industry.

At this price, coffee farmers are unable to cover even the most basic costs associated with coffee production. For many coffee farmers, conditions seem so hopeless that they are converting their farms to illicit crops like coca or abandoning farms altogether to seek better livelihoods in other countries.

Forbes reported that Guatemala is now the single largest source of migrants attempting to enter the United States, a major reason being the decline in coffee prices, which has caused many farmers to believe their circumstances are too desperate to remain in their country. When we opened our doors 20 years ago, there was a similar pricing crisis facing coffee farmers. A major goal for us is to provide information to help consumers and businesses make informed, ethical purchase decisions, and one way to do that is by dispelling misinformation about fair trade coffee that has come up over the years.

This article aims to clear some of that up. This perspective may originate from the quick growth of the fair trade model in the s and the incorporation of major brands and retailers as more and more consumers began to demand ethically responsible and sustainable coffees.

Sure, fair trade is valuable for businesses to the extent that it relies on purchases—if there were no purchases on fair trade terms there could be no fair trade impact. But what sets fair trade apart from other certifications is that it was established as part of joint effort of producers, consumer rights advocates, and the industry coming together to envision a better, more sustainable way of doing business.

The standards are driven in large part by small producer organizations to balance higher incomes with market share.