The Good and Bad of Fair-Trade Coffee: Is Our Helping Actually Hurting?

The following article is an excerpt from an essay by theologian Wayne Grudem and economist Barry Asmus in IFWE's new book Counting the Cost: Christian Perspectives on Capitalism. In their chapter, Grudem and Asmus examine whether capitalism or human sin is to blame for the exploitation of poor countries. In that context, they discuss whether solutions like "fair-trade coffee" can be an effective way for Christians to help the poor.

"Fair-trade coffee" is widely promoted as an alternative to raw capitalism and the unconstrained actions of the free market. The promise of the fair-trade movement is that coffee growers in poor nations will receive a higher price for coffee if it is produced in better working conditions with higher wages. Coffee that is marketed as "fair-trade" is sold at a higher price to consumers in wealthy nations.

The Case For and Against "Fair-Trade"

Here are some of the arguments in favor of fair-trade coffee:

• Unfair prices: Since coffee prices have plummeted in recent years, prices received by small farmers can be less than the costs of production. This is not fair to the farmers, who then cannot make any money growing coffee.
• Care for nature: Fair-trade coffee strives to be organic, bird-friendly, and shade-growth oriented.
• Some success: Thousands of fair-trade coffee growers have already been helped by this kind of program.

However, those arguments are not as persuasive as they first appear.

Unfair prices: One of the most basic concepts in economics, remembered by Economics 101 students long after they have forgotten everything else, is that prices are determined by the interaction of supply and demand. Prices are not determined by various people's thoughts of what would be a "fair" price.

This means that if a small coffee grower cannot pay his or her production costs and earn a living by growing coffee, there are only two ways to change the price: decrease the world's supply of coffee (but it is impossible for the farmer to do this in a significant way), or increase the world's demand for coffee (but this is also impossible for a single farmer to do).

If the world price cannot be changed by the farmer, then appealing to people to pay more than the world price is like begging; it is asking for a charitable donation. It might raise a bit of money for a few growers, but will not change the world price.

The best long-term solution is for the small coffee grower to switch to another kind of crop where he or she can earn a living, or even to leave farming for another occupation altogether.

Here is an analogy: suppose a man tries to earn a living by collecting used aluminum cans from trash bins and selling them to a recycling center. After several weeks he says, "I'm not getting a fair price for these cans. I work all day and only earn a few dollars."

Should the manager of the recycling center then say, "We'll help you get a fair price. We'll set up a network of 'fair-trade' recycled aluminum centers that will pay you more than the market price"? No, that would be foolish. If the recycling center truly wants to help him, it should say, "You need another occupation," and even, "We'll help get you some training in another skill."

Care for nature: We think that care for nature is an important issue, one that we discuss more fully in the section on "environmental damage" in our chapter in Counting the Cost: Christian Perspectives on Capitalism. But at this point we wish to point out that people can and do care for the natural world in many other ways than supporting fair-trade coffee. The fair-trade movement is not necessary to care for nature in effective ways.

Some success: Campaigns for fair-trade coffee, like all campaigns for charitable contributions, do bring some help for the people to whom the contributions are given. But that does not mean the benefits outweigh the harm that is done. It is also necessary to consider the harm that comes to all the other coffee growers in the world, who receive lower prices when the fair-trade movement increases production beyond what the world market demands, as indicated by the world price for coffee.

In addition, the fair-trade movement keeps its coffee growers in a crop that can provide them with an adequate living only so long as they keep receiving these charitable contributions from others. It discourages them from changing to another crop or another occupation where they could support themselves for a lifetime without depending on subsidies.

Is Our Helping Actually Hurting?

In Fair Trade? Its Prospects as a Poverty Solution, economist Victor Claar identifies an economic harm that comes from an artificial increase of the price of some coffee above what the world market will bear (that is, higher than the price set by world supply and demand). Paying some growers a higher price than the world market price for coffee encourages them to grow more coffee than the market actually demands. Claar writes:

Thus, while there is too much coffee being grown relative to global demand in general, there is also not sufficient demand to purchase, at the fair trade price, all of the coffee being grown as fair trade coffee. In both cases, there is simply too much coffee.

The larger supply of coffee then depresses the price for other coffee growers that are not part of the fair-trade movement. Claar goes on to say that artificially raising the price for coffee only prolongs the problem of too much coffee on the world market:

If the fundamental problem with the coffee market is that prices are low because there is too much coffee, then it would appear that the fair-trade movement may be making matters worse rather than better because it increases the incentives to grow more coffee.

In addition to Claar, Paul Collier, professor of economics at Oxford University and former director of development research at the World Bank, writes the following about fair-trade coffee in The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done about It (his arguments apply to "fair-trade" campaigns for other products as well):

The price premium in fair trade products is a form of charitable transfer, and there is evidently no harm in that. But the problem with it, as compared with just giving people the aid in other ways, is that it encourages recipients to stay doing what they are doing—producing coffee. . . . They get charity as long as they stay producing the crops that have locked them into poverty.

We agree with these economic assessments, and therefore we cannot recommend that people support the "fair-trade" movement. Charitable contributions to the poor are more efficiently given by other means, and such charitable transfers will never lead to a long-term solution for world poverty, or even for most growers of a single product, such as coffee.

This article is copied with permission from the Institute for Faith, Work & Economics (www.tifwe.org). The original article appeared here. IFWE is a Christian research organization committed to advancing biblical and economic principles that help individuals find fulfillment in their work and contribute to a free and flourishing society. Visithttps://tifwe.org/subscribe to subscribe to the free IFWE Daily Blog.

Wayne Grudem is currently research professor of theology and biblical studies at Phoenix Seminary. He has published over twenty books, including The Poverty of Nations: A Sustainable Solution. In 2008, Grudem served as the general editor for theESV Study Bible.