Sunday, 17 April 2011

Second Rejoinder to Eerlijke Handel on Fair Trade and Free Trade

This post is a response to Eerlijke Handel’s posts here and here, which are part of an ongoing debate about my original post Fair Trade or Free Trade: An Economic Analysis.  Eerlijke’s words are indented and in italics and my responses follow them.

I understand you value definitions.
Yes. Clear and mutually understood definitions are essential for constructive debates. I’m sure you agree.

One important distinction you are failing to make is between Fairtrade (the organization) and fair trade (the concept). You seem to use the terms interchangeably and this makes it unclear what you are saying.

Using your definition: Fairtrade is voluntary, and therefore free trade.

The organization Fairtrade is certainly one that engages only in voluntary, free trade. But I think what you meant to say was “fair trade” (the concept).

The concept fair trade is, as I explained in my original post, an arbitrary label used by a third-party about certain trades. Here it is in diagram form:

[Some people might refer to coerced trades as unfair as well (hence the dashed line), but we may disregard that in this debate. We can leave coerced trades out of our discussion from now on, because neither of us is talking about using coercion.]

So for our purposes, yes, fair trade and unfair trade are both arbitrary labels used by third-parties about certain free trades.

Since you managed to single out Fairtrade from free trade, your statetement rests on two assumptions:
1. Your introduction of the concept “charitable donation”, and
Ad 1:
A donation is a gift, something that is given to a charity, especially a sum of money. It differs from a trade by lack of reciprocal action.
Fairtrade is not a donation, it is an exchange, a way of doing business.
Fairtrade is a form of free trade. Unless you prove that I am coerced to (pay for and) buy fair trade products.
I accept your definition of a gift as characterized by the lack of reciprocal action. A charitable donation is just a kind of gift, namely a sum of money given away with the intention that that money reaches a specific recipient in need of assistance (in this case a poor person overseas) chosen by the gift-giver / donator.

In diagram form:

Note that gifts are a form of trade. The distinction between reciprocated actions and gifts is actually quite blurry. If I buy a round of drinks at a pub, it is a gift for sure, but then I kind of expect the people I’m buying for to buy me a drink in future, so is it really a gift? If I give my wife a present, I at least expect her to say thanks. There is certainly a grey area here, but the distinction is still meaningful. The important thing is that the term trade transcends this distinction, referring to all interpersonal exchanges, including gifts.

Fairtrade is an organization that markets itself on the basis that it is an effective way of helping poor people, namely third-world producers. I believe that many people when they buy Fairtrade products do so because they believe that buying Fairtrade products actually is an effective way of helping poor people and alleviating poverty. This belief is the “target” of my critique, as it were. It is the idea that Fairtrade is an effective way of alleviating poverty that I am criticizing; I am arguing that there are more effective means of doing this.

So in my opinion, using these definitions, such a person buying Fairtrade products IS making a charitable donation with part of the money he pays. He is paying extra because he believes the extra will reach or benefit in some way a chosen needy recipient: a poor third-world producer.

But let’s not let labels get in the way of the ideas we are discussing. I’ll come to a concrete example in a moment.
2. Fairtrade products will tend to lower the overall amount of charity that is delivered, all other things (i.e. the total amount of charity) being equal.
This is a conclusion, not an assumption. It is a conclusion based on economic logic and empirical evidence (according to the research cited in my original post, 75-90% of direct charity money reaches the desired recipients, while only 10% of Fairtrade extra money reaches the desired recipients).

You basically split the world in three parts: (1) Free trade, (2) Fairtrade and (3) Donations and then lump the latter two together. But according to the definition: Fairtrade (voluntary and reciprocal) should be put under Free trade.

If I view the world through your model:

Free Trade + Donations = Spending Power.

If we introduce a third component, we can either make it a part of Free Trade or a part of Donations.
Where you put it matters everything!
By definition Fairtrade should be put under Free Trade.
If Fairtrade competes with other forms of Free Trade, Donations stay the same (all else equal off course).

If that is the case: Free Trade should be split into: unfair trade + Fairtrade.

Free Trade= unfair trade + Fairtrade
I know you don’t like the wording, but something must give.
Then unfair trade must become less, the more people buy Fairtrade

So my argument runs as follows:
By definition Fairtrade is part of Free Trade, and the logical argument says that unfair trade must become less, the more people buy Fairtrade.
I’m afraid none of this makes sense to me. I hope you can see why from my definitions and diagrams above.

With respect to the definition “unfair” versus “fair”, I come back to the discussion we had about branding. The intent of the consumers is to buy something that they perceive to have more value than they pay for. The consumer perceives value for whatever (individual) reason. Generally a complex set of needs on which whole studies have been written.
Whatever consumers value, we are not the judge of that. Our opinion is, I quote: “arbitrary and subjective … it differs from person to person, place to place, and time to time”. Consumers weigh their individual (subjective) needs when making a purchase decision.
Every consumer can be their own judge about what they call “unfair” or “fair”.
I agree with all this. Note that what I am criticizing is not people’s choice of ends, but their choice of means.

It will be clear that I hope they choose for “fair”. Why?
Because I think that Fairtrade through long term commitment does help producers to make longer term decisions, that they would otherwise be unable to make. Simply by allowing them to see future revenues and accordingly make (capital) investments. The only way to climb the ladder, out of poverty towards wealth.
"Long-term commitment”? There is nothing in terms of “commitment” that Fairtrade can offer that other firms cannot. My original post explained how capital investment reaches the poorest people and communities more effectively when consumers make decisions without regard to the conditions under which laborers have worked to produce the goods. Nothing you have said challenges this economic conclusion.

My quick question to you in the comments of your post was an attempt to bring things back to a basic concrete example. I found your answer very interesting, and realized I had been taking some things for granted in my explanation.

"Eerlijke, do you agree that if someone switches to buying Fairtrade products, they have to pay more for them; and that if they cut back on their payments to Oxfam charity to be able to afford Fairtrade products, then less money overall will be delivered to poor people [due to the inefficiency of Fairtrade money reaching the poorest people, relative to Oxfam money]?"

Graham, good question. My answer is somewhat long, but I hope it answers your question.

I wonder: "pay more than what"? From where does your consumer switch?
Do they switch to Fairtrade from an identical unbranded product? Or do they switch from another branded product? It matters.

The consumer does not necessarily pay more. You must agree with me that there are many chocolate bars much more expensive than Fairtrade chocolate. They demand a premium because of the perceived brand value.
The consumer does necessarily pay more for Fairtrade products, than for equivalent products, assuming Fairtrade certification makes any difference at all to production processes. Let me explain this in some detail…

Consider two chocolate bars: SimpleChoc and FairChoc. In economics, we keep things constant to isolate individual effects (this is called the principle of ceteris paribus), so let us assume that these two chocolate bars taste, smell and look identical and are the same in every way except one: FairChoc has been produced according to the standards laid out by the Fairtrade organization.

All firms seek to minimize costs. The SimpleChoc Company does everything it can to keep all its costs down to the absolute minimum. But FairChoc, in response to a consumer fad for “fair trade” products, has chosen to incur extra costs by bringing its production facilities up to the standard required to get Fairtrade certified. In every other way, the production processes of the two firms are identical. (Otherwise we violate ceteris paribus). This one difference we have supposed necessarily makes FairChoc more costly to produce, because SimpleChoc by definition has found the least costly way of producing, so if Fairtrade certification makes any difference at all, it must increase production costs. Competition impels prices towards costs, ever-tending to eliminate economic profit, so it follows that FairChoc is necessarily more expensive than SimpleChoc.

The Fairtrade organization asserts that SimpleChoc treats its workers “unfairly”, using some arbitrary criteria for “fairness”. They try to convince consumers to buy FairChoc instead of SimpleChoc, on the basis that by doing so they will be helping to alleviate poverty. Since FairChoc is more expensive than SimpleChoc, this necessarily involves asking consumers to cut back on the amount they spend somewhere else.

Now let us consider some examples of where these cut backs may come from.

1. Adam buys SimpleChoc and decides to switch to FairChoc. To pay for this he will cut back his monthly donation to Oxfam. So here the Fairtrade advocates’ message to Adam amounts to “(1) stop helping the beneficiaries of Oxfam and (2) instead help the beneficiaries of Fairtrade”. I am glad we agree this would be counterproductive in terms of helping poor people.

2. Ben buys SimpleChoc and decides to switch to FairChoc. To pay for this he will cut back his spending on ice cream. So here the Fairtrade advocates’ message to Ben amounts to “(1) give up ice cream and (2) instead buy Fairtrade products to help the poor”.

3. Now consider LuxuryChoc, a high-quality brand of chocolate which is more expensive to produce than SimpleChoc. For simplicity, suppose LuxuryChoc is priced the same as FairChoc. Charlie buys LuxuryChoc and decides to switch to FairChoc. Since they are priced the same, the Fairtrade advocates’ message to Charlie amounts to “(1) give up high quality chocolate and (2) instead buy Fairtrade products to help the poor”.

In both Ben and Charlie’s case, you are asking them to lower their standard of living in order to help poor people. This is all well and good. But the question then arises: if Ben and Charlie have agreed to lower their standard of living, why not encourage them to give their saving to a direct charity, which is more efficient than Fairtrade? Ben should keep buying SimpleChoc, and if he wants to cut back his spending on ice cream, he should give his saving to Oxfam. If Charlie agrees to buy a lower quality chocolate, he should buy SimpleChoc, and give the money saved to Oxfam. This will be more effective for helping poor people.

4. Now consider TigerChoc. This chocolate is the same quality as SimpleChoc and FairChoc. It is produced using the same low cost methods as SimpleChoc, but the difference is that this chocolate is endorsed by Tiger Woods. Now obviously Tiger’s payment will mean TigerChoc has higher costs of production than SimpleChoc, so it will be priced higher. Again for simplicity, suppose TigerChoc is priced the same as FairChoc. Daniel buys TigerChoc and decides to switch to FairChoc. Since they are priced the same, the Fairtrade advocates’ message to Daniel is “(1) stop buying celebrity-branded products and (2) instead buy Fairtrade products to help the poor”.

Here you could argue that Daniel’s standard of living is not being lowered. But this would, strictly-speaking, be incorrect, because value is all subjective and revealed through action. Daniel must value the Tiger brand name (for some reason) so in fact it is lowering his standard of living if he gives this up. It is in essence no different from the Charlie case, except that Charlie’s decision to buy LuxuryChoc was based on “taste” and Daniel’s decision to buy TigerChoc was based on “coolness”. If Daniel agrees to give up this “coolness”, that is all well and good. But then he should buy not FairChoc but SimpleChoc instead and give the saved money to Oxfam. This will be more effective for helping poor people.

In short, Fairtrade certification imposes costs on producers, and therefore, ceteris paribus, Fairtrade products have a higher price than equivalent non-Fairtrade products. For a consumer to start buying Fairtrade products, he must cut back either on his direct charity donations (we agree this is bad), or by reducing his standard of living (whether this means cutting back on ice cream, eating lower quality chocolate, or giving up the coolness of celebrity-branded products, etc).

So given that you reject cutting back on charitable donations to pay for Fairtrade, you must recognize that you are asking people to reduce their standard of living in some way in order to help poor people. There’s nothing wrong with this, and in fact I support it. People should be more charitable in my opinion, and I would especially like it if people stopped valuing celebrity-branded products so much.

But this first part of the Fairtrade advocates’ message has nothing to do with Fairtrade per se. It is about persuading people to spend more money in general on helping poor people rather than spending it on themselves. I wholly support efforts to persuade people to be more generous.

The second part of the message is to take the money saved by reducing your standard of living and use it to buy Fairtrade products to help the poor. It is this part that I object to. Why not give the money saved to Oxfam? If you have successfully persuaded someone to reduce their standard of living in order to help poor people, then the money saved would in all cases be better spent by giving it directly to charity. When helping poor people is the desired end, there is simply no good argument for anyone to buy Fairtrade products as a means to achieving this, rather than donating to a charity that directly helps the poor.


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