Fair Trade vs. Its Critics: Is Aid Better than Trade?

By Jennifer Walske

A few weeks ago I met with Paul Rice, CEO of Fair Trade USA, and Bruce Wydick, economist and author of a new novel entitled A Taste of Many Mountains. We debated the role of fair trade in improving the lives of rural coffee growers around the world.

Paul Rice and Bruce WydickBruce Wydick and Paul Rice debate the merits of Fair Trade coffee

The U.S. fair-trade movement gained momentum in response to a series of coffee crises. In 1989, the International Coffee Agreement collapsed, resulting in a drop in coffee prices to about 80 cents per pound – the lowest level in decades. Small-time coffee farmers and their families, many of whom were already poor, were thrown into desperate poverty. Prices gradually recovered, only to crash a second time in 2001 to an even more  shocking low of 45 cents per pound. This second crisis was the result of a coffee surplus that had been created when coffee from Vietnam flooded the market. The International Monetary Fund (IMF) had provided financing for Vietnamese growers in the hope of lifting them out of poverty. The result was a surge of Vietnamese coffee that created an even larger poverty crisis among the world’s coffee growers.

During the 2001 crisis, consumers in the U.S. wanted a way to enjoy their daily morning coffee without feeling guilty about perpetuating unfair wages on impoverished farmers. While the Fairtrade Labeling Organization (FLO) served European consumers, there was no U.S. equivalent. Recognizing this, Paul Rice launched Fair Trade USA (originally known as TransFair USA) shortly after earning his MBA in 1996 at Berkeley-Haas. Since its founding in 1998, Fair Trade USA has certified over 1 billion pounds of coffee as well as a wide range of other agricultural products and even some manufactured goods.

Today, fifteen years after the launch of Fair Trade USA, Bruce Wydick’s book raises questions around the movement’s ability to help poor coffee farmers. In the novel, student researchers are tasked with tracking fair trade beans that originate with poor Guatemalan coffee growers. The beans travel through a network of cooperatives and roasters, ultimately ending up in the cups of Bay Area consumers.

The novel’s student researchers confirm that affluent consumers here are willing to pay upwards of fifty cents more for a cup of fair-trade coffee, but they calculate that less than one cent of that premium gets back to farmers. In essence, Wydick’s book argues that a disproportionate share of the profit from fair-trade coffee goes to first-world roasters and retailers rather than the third-world growers and cooperatives. Though the book is fiction, its criticisms are based on empirical research by UC Berkeley economists Alan de Janvry and Elizabeth Sadoulet.

Wydick also contends that fair-trade premiums can be illusory. Like any other commodity, he contends, fair-trade coffee is subject to the forces of supply and demand. If fair-trade coffee fetches a higher price, farmers will produce more of it and create an increase in supply that drives prices back down. Over time, Wydick argues, the inevitable equilibrium between coffee supply and demand will usually eliminate any real premium for fair-trade products. He suggests that Fair Trade-certification is only useful when coffee prices are low; when prices are high, fair-trade farmers lose the incentive to certify.   As a result, Wydick argues that aid is likely to be more effective than trade in helping impoverished farm communities.

Wydick’s critique raises a fundamental question: Which has more social impact, aid or trade?

Rice responds to the criticism with his own market-based argument, contending that fair trade offers farmers a unique opportunity to earn their way out of poverty. He also passionately argues that fair-trade cooperatives, the recipients of fair-trade premiums, are much more likely than individual farmers to make long-term investments in local schools and community services.

If the world indeed has a coffee surplus, says Rice, then fair-trade premiums could eventually reduce the surplus by paying for the education of coffee-growers’ children and allowing them to move beyond coffee-growing. Many fair trade cooperatives invest not only in the farmers’ children, but also the farmers themselves by offering classes in English, computer skills, trade skills, and assistance in completing their high school equivalency.

Rice agrees that it is important for farmers to diversify beyond coffee. To that end, Fair Trade USA is aggressively diversifying its certification program to include other consumer products, from tea and fruit to soccer balls.

I recently returned from visiting two Fair Trade-certified pineapple farms (one organic and one non-organic) located in Cost Rica.

Dennis Gaughen Finca CorsicanaDennis Gaughen, a former student at UC Berkeley, is  General Manager of Finca Corsicana.

Finca Corsicana is an organic pineapple farm. It has a thriving fair-trade cooperative, which has built a community center that offers adult education, an Internet center, and a large basketball court. Once permits are granted from the Costa Rican government, land is being set aside for a nursery school. Notably, the employees of the farm, not the owners of the farm, prioritized these investments. The center serves more than just farm workers, offering the entire local community an array of fee-based services.

Finca corsicanaFinca Corsicana’s Fair Trade community center

Dole owned the second Costa Rican pineapple plantation that I visited. It also has a fair-trade cooperative, with similar plans for a community center. The Dole-affiliated cooperative spent $50,000 on free dental care for all of its members. Even though dental care is free in Costa Rica, there aren’t enough government-paid dentists to meet the population’s needs. A farmer can wait in line all day to see a dentist, missing an entire day of work, and still not get treatment. Many farm workers don’t even try to see a dentist and suffer instead from the daily pain of treatable infections.

Dole allowed dental work to be done on site, and it ensured that workers would not lose pay for the time they spent in the dental chair. The community centers and the enhanced health care are huge strides for both the employees and the companies that employ them.  They were financed in large part by the money from fair-trade price premiums. In addition, Dole and Finca Corsicana deeded land to the cooperatives for their community centers that was worth almost $300,000.

The farmers now see themselves as effective advocates for their own priorities. These developments are also important for the corporations, which are solving social problems in partnership with, rather than in opposition to, their employees.

Whole Foods bananasWhole Foods is the main buyer of Costa Rican Fair Trade-certified pineapples.

Let’s return to the question: Is aid better than trade? Are we better off teaching people to fish – or should we just give them fish? Aid often amounts to giving people fish. Poorly designed aid is like giving a person bait without a fishing pole. In contrast, assistance through fair trade amounts to teaching people to fish. Through cooperatives, farmers can reinvest their fair-trade premiums into their communities and create a better future for their children.

There is a catch, however. As Wydick warned, the supply of fair-trade goods often exceeds consumer demand.  As a result, farmers often sell fair-trade coffee as uncertified coffee, without any premium, simply to get it sold. To follow through on the analogy of fishing, people are being taught to fish but are catching more fish than anybody wants to eat or buy.

As consumers and donors, this is where we can play a role. Fair Trade USA, unlike OPEC, does not control the production of coffee worldwide. Today, fair-trade coffee still accounts for only about 6% of all coffee consumed within the U.S. But as consumers, we can and should demand that a higher percentage of our products come from sources that are Fair Trade-certified and that a higher amount of the profit from these goods gets back to farmers.

But I also propose that we combine trade with aid by finding creative ways to give aid directly to fair-trade cooperatives. This aid should be for initiatives that the cooperatives themselves have identified as top priorities. After all, the members of those cooperatives are more likely than distant aid officials to know their communities’ most urgent needs.

Aid in isolation is not the solution, but trade has shortcomings as well. Changes in trade practices and supply chains don’t happen overnight. For sure, consumer engagement and corporate education can be slow. But aid can also be problematic, especially when its not managed by the communities most in need. Local communities must be encouraged to identify their biggest problems and propose their own solutions if those solutions are to be successful in the long run.

Do I still plan to buy Fair Trade-certified products? Yes, absolutely. We need more of them, not fewer. So this holiday season I am going to continue to sip my fair-trade coffee and eat my fair-trade bananas. And as a result of my trip, I am also going to add delicious Costa Rican Fair Trade pineapple to my shopping cart.

Dr. Jennifer Walske is a Social Impact Fellow at Haas School of Business, as well as a Program Director and Assistant Professor at the University of San Francisco. She sits on the advisory boards of Fair Trade USA, the Global Social Venture Competition, Haas Impact Investing Network, and numerous other organizations.

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