April 01, 2007
Against the Democratic trade agenda
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.
Posted by Dingel at 09:59 AM | Comments (0)
March 22, 2007
Public opinion favors regulatory standards in trade agreements
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?
Posted by Dingel at 06:34 PM | Comments (0)
January 03, 2007
Fair trade fakers
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.
Posted by Dingel at 02:47 PM | Comments (0)
December 09, 2006
The Economist on food politics
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.
Posted by Dingel at 05:12 PM | Comments (3)
December 07, 2006
Two objections to 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.
Posted by Dingel at 10:09 AM | Comments (3)
October 01, 2006
CVDs on "hidden subsidies"
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.
Posted by Dingel at 10:40 AM | Comments (0)
September 12, 2006
Fairtrade problems on the ground
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.
Posted by Dingel at 10:51 PM | Comments (2)
March 28, 2006
Fair Trade and Hired Labor
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?
Posted by Dingel at 06:12 PM | Comments (0)
March 16, 2006
Singleton on fair trade coffee, again
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?
Posted by Dingel at 09:56 AM | Comments (3)
March 08, 2006
Fair Trade Coffee
Kerry Howley has a detail-packed article on fair trade coffe at Reason. An excellent primer on the subject.
Posted by Dingel at 06:33 PM | Comments (0)
August 20, 2005
Fair Trade Coffee: A Simple Supply and Demand Analysis
I was thinking of writing an op-ed for my school newspaper about Starbucks' Fairtrade coffee and planned to use an old post by Alex Singleton as one of my reference points. In reviewing the argument that Mexican farmers benefit from Fairtrade at the expense of Ethiopian farmers, however, I found the economic analysis unclear.
Singleton notes that the price of coffee has experienced a downward trend, signally that too much coffee is being produced. He cites mechanization and World Bank loans as decreasing the cost of production. These historical facts mean that the supply curve has previously shifted downward, but they play no role in a partial equilibrium analysis of Fairtrade's effects today.
As Mr. Singleton describes it, Mexican coffee producers are the marginal producers in the current equilibrium, due to their comparative disadvantage in the production of coffee (higher opportunity costs). A drop in demand would cause these marginal producers to exit.
Singleton argues that Fairtrade induces Mexican producers to stay in the coffee business and that if Mexican farmers switched to growing something other than coffee, Ethiopian farmers growing coffee would benefit. I think that this is incorrect.
Fairtrade is a manipulation of the demand curve, not the supply curve. Singleton agrees by describing participating consumers as willing to "pay a few pence extra for a cup of coffee." Therefore, the abolition of Fairtrade would cause consumers to offer a lower price at each quantity. This is a downward shift of the demand curve.
How does a downward shift in demand affect the supply curve? There is a change in quantity supplied, but not a change in the supply curve itself. As such, the marginal producers (Mexican coffee growers) will exit until equilibrium is reestablished. Does this help the Ethiopians?
Facing fewer competing firms may sound appealing at first, but it's not beneficial if competitors exited due to insufficient demand. Under Fairtrade, producers that export coffee at a cost below the market equilibrium price earn profits; this is the traditional producer surplus triangle. If it is true that Ethiopians are these lower cost producers, then they will remain in the market when demand falls, but their producer surplus will be reduced. The shaded rectangle is the welfare loss Ethiopians experience due to lower demand. The abolition of Fairtrade and exit of Mexican producers corresponds to lower profits for Ethiopians.
Of course, my analysis up to this point has treated coffee as a unified market. In fact, Fairtrade coffee comprises a small portion of total coffee consumption, so we have to draw separate supply-and-demand graphs for unsubsidized and subsidized coffee, which are substitutes.
Foregoing the actual illustrations, as one can easily imagine them, let's analyze the effect of increasing Fairtrade participation by consumers. This is an upward shift in the demand curve for Fairtrade coffee. However, as Fairtrade coffee substitutes for unsubsidized coffee, the change in consumer preferences causes a downward shift in the demand curve for unsubsidized coffee.
What are the effects upon producers? Producer surplus will increase in the Fairtrade market and decrease in the unsubsidized market. Thus, the result in ambiguous. Those suppliers that are Fairtrade-certified benefit, whilst non-participants lose profits. If Mexicans are more easily able to form a producer organisation eligible for the Fairtrade label (groups exporting more than 44,000 pounds of coffee per year and able to pay the $2,431 fee) than Ethiopians, then they will benefit at the expense of their African competitors. But if Ethiopians are able to join the Fairtrade program as easily as other coffee producers, then we should not expect Fairtrade's inflation of the demand curve to have disproportionate negative effects upon them.
The only way for Fairtrade to do no harm to coffee producers would be for all of them to participate. Non-participants do face reduced demand for their product. In its current form, Fairtrade may or may not be net benficial, depending upon the elasticities of the relevant curves and one's willingness to make interpersonal utility comparisons.
[Comments are open; please post suggestions and corrections.]
Posted by Dingel at 12:52 PM | Comments (3)
July 28, 2005
The Rise of Fair Trade
"Fair trade" means many different things to different people, but collectively, fair trade activists have made themselves a powerful constituency. See the opening sentence of USTR Rob Portman's press release on CAFTA:
Tonight is an historic night for American leadership on free and fair trade.
That's a throw-away line, so one can argue that the phrase was merely included to mollify fair traders who had criticized CAFTA. Regardless, it's both impressive and frustrating that fair traders have become so relevant to trade politics.
Posted by Dingel at 08:28 AM | Comments (0)