Trade Diversion

It’s been a while since I blogged about fair trade. Luckily, Emmanuel is up-to-date on the latest salvos fired in that debate.

An Orange County Register editorial calls Democratic demands for labor and environmental standards “deal-breakers for genuinely freer trade.”

In a BBC interview (RealVideo), Cato’s Dan Ikenson says that the magnitude and timing of Democratic demands suggest they’re trying to terminate TPA rather than actually adopt their agenda.

The result of polling people in seventeen countries:

Strong majorities in developing nations around the world support requiring countries that sign trade agreements to meet minimum labor and environmental standards, a multinational poll finds. Nine in 10 Americans also support such protections.

If domestic constituents support labor and environmental regulations, why do they need to be tied to trade agreements?

Possible answers:

(1) Domestic constituents favor legislating these standards independent of trade agreements, but the survey didn’t ask the question in that form. Poor country policy makers aren’t responsive to their constituents’ opinion on this issue, in trade talks or otherwise.

(2) The meaning of the phrase “minimum standards” differs across users. Poor country governments reject strict standards designed to protect rich country proponents, but they would favor standards better tailored to their circumstances.

(3) Developing country citizens feel that international commerce differs in important ways from domestic economic activity and therefore should be conducted under different rules.

Other hypotheses?

National Post:

According to a CBC report published this week, TransFair Canada, the most prominent Canadian fair-trade monitor, is joining with fair-trade retailers to raise concerns about unethical rivals who are horning in on the label without, as it were, walking the walk. Anybody can slap a sticker reading “fair trade” onto a bag of coffee, and apparently it happens rather a lot. At least one coffee shop is pressing Ottawa to regulate fair trade certification.

The Economist has an excellent article (subscription required) this week on the appeal of organic foods and fair trade products. It also introduces us to the local-food movement, with which I was previously unfamiliar:

The rise of “Big Organic”, the large-scale production of organic food to meet growing demand, has produced a backlash and claims that the organic movement has sold its soul. Purists worry that the organic movement’s original ideals have been forgotten…

Local food need not be organic, but buying direct from small farmers short-circuits industrial production and distribution systems in the same way that buying organic used to. As a result, local food appears to be immune to being industrialised or corporatised.

The discussion of fair trade coffee echoes the objections documented in Kerry Howley’s piece for Reason, “Absolution in Your Cup.” So does the conclusion:

The idea of saving the world by shopping is appealing; but tackling climate change, boosting development and reforming the global trade system will require difficult political choices… Conventional political activity may not be as enjoyable as shopping, but it is far more likely to make a difference.

Bhagwati on fair trade:

The “fair trade” lobbying, on the other hand, is something that I find ill-advised. Oxfam and other charities use the phrase to argue that we should subsidize the producers so as to give them a “just” price that exceeds the market price. But we have two serious problems here. This phrase has been long used in United States discourse as a code word for protectionism. By bringing all kinds of extraneous issues as preconditions for freer trade, the proponents of so-called “fair trade” essentially mask their protectionism in the language of “fairness”, a tactic that has been exposed and denounced for decades in the U.S. but which now is in danger of being legitimated by the witless adoption of the “fair trade” terminology for altruism. Next, if the “fair trade” lobbies want to bamboozle us into being altruistic by channeling subsidies to the producers of commodities such as coffee designated as “fair trade” coffee, we then must confront the fact that many of us prefer to direct our altruism to the poor countries instead in myriad other ways which we consider to be both more desirable and even more efficacious. We need to look in the eye therefore the growing pressures on retailers to violate restraint-of-trade practices by stocking only “fair trade” goods.

Joe Stiglitz wants the World Trade Organization to label the United States’ non-participation in the Kyoto Protocol a “hidden subsidy” and allow countries to impose a countervailing duty on US energy-intensive exports.

I fear that once the litigation gates open, “hidden subsidy” will be a phrase that lawyers and protectionists love. Is the absence of labor standards in developing countries a “hidden subsidy” to exporters of labor-intensive manufactures? Is loose anti-trust enforcement a subsidy to exporters in industries with economies of scale? How are we to think about the costs of mandating or providing or failing to mandate various benefits to employees? Costs are subjective; social costs doubly so.

“One of the main purposes of the WTO is to create a level playing field,” says Stiglitz in Making Globalization Work. His previous book, Fair Trade For All, gave me the impression that the WTO has never sought such a goal.

Not a good week of press for Fairtrade. FT:

“Ethical” coffee is being produced in Peru, the world’s top exporter of Fairtrade coffee, by labourers paid less than the legal minimum wage. Industry insiders have also told the Financial Times of non-certified coffee being marked and exported as Fairtrade, and of certified coffee being illegally planted in areas of protected rainforest.

And more from Alex Singleton, who just visited Africa:

Out in rural Kenya last week, I found that there was some scepticism towards the traditional view the co-operatives are always forces for good. In fact, in Kenya, the coffee co-operatives have suffered from significant mismanagement, with individual farmers often exploited by the leaders of the co-operatives. In fairness, Kenya has been trying to help rebalance the situation, for example introducing six year term limits on co-operative leaders. I do worry that spokespeople for the Fairtrade movement suffer from a myopic romantic vision of the coffee farmer in a co-operative, which the truth such an existence is backbreaking and mired in exploitation.

Fair Trade:

There are 2 main types of FAIRTRADE standards for developing country producers – for smallholder producer organisations and for hired labour situations. Fairtrade standards for smallholder producer organisations include requirements for democratic decision making, ensuring that producers have a say in how the Fairtrade premiums are invested. They also include requirements for capacity building and economic strengthening of the organisation. Fairtrade standards for hired labour situations ensure that workers receive decent wages and enjoy the freedom of join unions and bargain collectively. Fairtrade certified plantations must also ensure that there is no forced or child labour and that health and safety requirements are met. In a hired labour situation, Fairtrade standards require a “joint body” to be set up with representatives from both management and workers. This joint body decides on how Fairtrade premiums will be spent to benefit plantation workers.

For some products, such as coffee, only Fairtrade standards for smallholder organisations are applicable. For others, such as tea, both smallholder producers and plantations can be certified.

Why is Fair Trade hostile to hired labor in the production of coffee but not tea?

As per my August post, I am confused by Alex Singleton’s take on fair trade:

Such policies, whether government enforced or done through consumer schemes, encourage more affluent producers to stay in the market. This kicks away the ladder from the poorest producers who have no choice but to stay in the market. A quarter of “fair trade” coffee comes from Mexico, a relatively affluent developing country, where only 18% of the workforce is employed in agriculture. Mexico is a country which, if it so chose, could easily exit the coffee market. Because of the incentive of “fair trade”, many producers have decided to stay producing coffee, even expanding production. This is a disaster for the poorest coffee producers, such as in Ethiopia, where drinking coffee was invented. [The Business]

How can a rightward shift in demand hurt suppliers? If we’re in econ 101 land, the demand shift raises the equilibrium price, inducing marginal suppliers to enter the market and also increasing the size of the producer surplus enjoyed by suppliers already present. What assumptions about market structure must we make to obtain Singleton’s result?