Friday, March 09, 2007

Fair trade.

Here we find an article discussing the Fairtrade Mark and the associated organization, The Fairtrade Foundation. There are a couple of arguments made that I find interesting. First is by a group called Action Aid, a charity that works in developing countries (or so the article claims). The argument goes that Fairtrade is insufficiently ambitious, as it simply works within an inherently unfair system. The defense made by Fairtrade is that the inability to help everyone is no reason to not help someone. I agree. Even if radical change is better, small change can still be good.

But, there is an argument made to the effect that Fairtrade is not actually good. Fairtrade operates by enforcing labour and environmental standards on producers, as well as paying producers a premium for their products. Economically, though, this is a bad idea, for a handful of reasons. First, increasing the price artificially stabilizes the market. If demand for a product is plummeting, the optimal course of action is diversification of production. Price-fixing, even in the relative way Fairtrade does, just delays the need of diversify. Fairtrade tries to reject this argument, on the ground that diversifying requires investment, which requires money in itself. This is fine, but is disingenuous once one realizes (and the article does not make this clear) that Fairtrade does not require that Fairtrade premiums be used to help stabilize the economic processes generally. Instead, the premiums only have to be used to stabilize the current production. In other words, the system is actually set up to artificially stabilize itself, not to stabilize itself in accordance with basic laws of economics.

The second economic argument, however, is that increasing prices actually helps destabilize the market. Here's how it works. Producer makes Product. Product normally sells for $x/unit, but, with Fairtrade, sells for $x+y%/unit. The higher price thus results in higher profits for Producer. Producer, wanting even more profits, steps up production of Product. The increased volume of Product meets the (for the sake of argument) fixed level of demand for Product -- thus, the price goes down. Now, the price is $x-w%/unit. Thus, the Fairtrade price is no longer $x+y%/unit, but $(x-w)+y%/unit. Since y remains constant, the premium thus decreases, and thus profits decrease. So, unless production is held at a fixed rate (which Fairtrade not only doesn't guarantee, but seems to discourage), producers still end up screwed. In the example, Producer could, in theory, end up producing more Product but still making the same profit, at a lessened unit price. I see no way for a premium-based Fairtrade system to escape this problem.

This then suggests that Fairtrade premiums are a bad way to go.

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