/>Give me a break
This week, Nestle has announced that KitKat will be going Fairtrade, following Cadbury’s lead last year. I’m glad I prefer Twix.
Those who know me well are more than aware of my objections to the Fairtrade scheme. In brief, these objections include:
1. Minimum price guarantees incentivise wasteful production by distorting market signals. Farmers no longer respond to consumer demand, adjusting production accordingly (or exiting an industry where overcapacity exists). This is exactly how the CAP works. I doubt many supporters of Fairtrade would argue that CAP is a good idea, so why be overjoyed at the creation of another, albeit smaller, protectionist system?
2. Minimum price guarantees disincentivise technological innovation*. Why waste resources on new equipment when you’re guaranteed money for old rope?
3. Minimum price guarantees disincentivise improvements in quality of the product*. Actually, they incentivise the reverse – as a farmer, I can make a higher margin by allowing the quality of my product to degrade in the knowledge that I will continue to receive a minimum price.
4. The Fairtrade scheme creates an insider/outsider problem, which increases the living standards of some of the world’s poorest farm workers at the expense of those outside of the scheme, who become relatively less well off.
5. The Fairtrade scheme erodes entrepreneurialism. The scheme design creates a framework in which producers are incentivised to maximise their returns within the confines of the scheme, rather than what would be optimal within the economy as a whole.
Of course, some of these problems could be overcome if all participants within a market were part of the Fairtrade scheme – then competition between suppliers for contracts may at least partially reverse the effect on incentives the minimum price guarantee has. But in this scenario, the fair-trade foundation would set market prices, which is akin to command and control communism and thus not particularly attractive – resources are inefficiently allocated.
My biggest concern though relates to the implications of wholesale switching to fair-trade inputs by manufacturers. When multi-national organisations believe it is in their interest to switch to fair-trade inputs, they have obviously calculated that this will be commercially beneficial to them in the long run. In turn, this implies sufficient demand in the marketplace.
But increased demand amongst consumers implies they would rather pay more for the same product (and in some cases an inferior product) – the “guilt premium” – in order to alleviate the consequences of a fault with protectionist trade regimes, rather than put pressure on governments to dismantle the source of the problem (barriers to trade).
At the extreme, fair-trade consumerism absolves elected officials of the responsibilities to solve these problems at source. Surely this is a bad thing?
*I’m aware that the Fairtrade premium **could** be used for these ends, although it is not always the case that they are.
Alex, your arguments are straight out of an economic text book. Perhaps if you were to spend some time in some of these ravaged parts of the world you may change you thinking on the subject.
Protectionism in any case is not always a bad thing. You cannot lower trade barriers until nations are competing on a more level playing field. In some instances, for example, nations may need a certain degree of protection in order to nurture fledgling industry before they are able to open themselves up to the creative destruction wrought by market forces. If you open yourself up too early, these sprouting industries can be swept aside by leaner and more technologically advanced competitors from developed markets.