Tuesday, 27th February 2007

In case you missed it, Fair Trade Fortnight started, alliteratively, on February 26th. Who could argue with Fair Trade? We all want to be fair. We all love to see photos of the smiling faces of indigenous coffee growers who have been helped by a new initiative from our friendly neighbourhood super­market (although it's odd that the same supermarket has rather less sympathy for the British dairy farmer!).

If only it were that simple. The "Fair Trade" concept brings with it all kinds of baggage. Much of the extra money involved will go on registration, administration, validation, traceability and so on. Worse still, manufacturers and retailers will see this as an easy way to build brand share, and perhaps to command premium prices. They may do it cynically. Some may even do it dishonestly, as seems to be happening in the rather comparable area of organic food.

But never mind the abuses which may gather around the Fair Trade scam. Even at face value it is economically illiterate. The very name implies a falsehood. It implies a distinction between free trade and fair trade. But the only way trade can be fair is when it is free.

The fact is that any intervention in a free market, no matter how well-intentioned, will create unintended consequences and perverse incentives, along with unfairness and injustice.

Suppose we decide that we want to ensure that poor producers in third world countries earn higher incomes (and leave aside the inevitable confusion this creates between trade and aid -- there is a case to be made for both trade and aid, but we muddy the water when try to mix them up).

So we offer an enhanced price to producers (let's say of coffee, as a typical example), to ensure their incomes. But as any first-year economics student will tell you, the immediate effect of raising the price of a commodity is to increase the supply. Producers of other commodities may switch to coffee, to take advantage of the new price. Marginal land may be brought into production. Previously unemployed people may decide to work in the plantations.

The immediate effect of increased supply is that the "natural" price goes down, and you require a greater subsidy to maintain the price you first thought of. And what are you to do with the increased supply? Logically there are only two things. You can buy the increased supply and store it in warehouses (until you can think what to do with it). Or you can tell some people to stop producing.

Neither is attractive. Storing excess production is hugely expensive, and merely postpones the problem. Telling some people they can't participate means that those left out will be even worse off -- since your own action has reduced the free-market price. And you have created all the patronage and nastiness (and potential for corruption) of administrators playing God, choosing who shall benefit and who shall lose out.

But hang on -- haven't we seen these problems somewhere before? "Buying into intervention"? Food mountains? Set-aside? Yes of course! It's the EU's Common Agricultural Policy all over again! You don't have to take my word for the inevitable consequences of imposed biases and distortions in free market prices. We've been there. We've done that. We've seen the movie. We know how it ends. And we're still living with the consequences!

And the key thing to remember about the CAP is that it is a protectionist measure that does huge damage to agricultural commodity producers in the third world. Buying food with a Fair Trade label may give us a warm, cuddly, fuzzy feeling, especially if we ignore the unintended consequences. But getting shot of the CAP would actually do some good for poor third-world farmers.

I remember speaking to the Development Minister of a poor Asian country, who said "If only you would open your markets to our commodities, we wouldn't need your aid".

Aid creates dependency and corruption. It destroys incentives (and "Fair Trade" is merely a disguised form of aid). Trade on the other hand creates opportunity and incentive and self-reliance and proper pride.

The problem with the Fair Trade campaign is that it gives us a warm feeling that we are doing some good to the poor, while actually distracting us from the real problem.

Fair trade is Free Trade. Anything else is a lie, and a distortion of the market.