Fair Trade Coffee

Tyler Cowen writes about Fair Trade Coffee.

It depends on the alternative to market segregation. It is possible that if only a single kind of coffee can be sold, the market would opt for the more expensive coffee, involving better treatment of all workers. Even if you don't expect this today, it might happen in a few years' time. If McDonald's can improve the treatment of all the chickens it buys, maybe Starbucks or some other force will force the coffee sector to clean up its act. So development optimists should be suspicious of fair trade. It could diminish long-run general progress by giving the conscientious an outlet for their charity. By splitting up the market, we are institutionalizing especially poor treatment for one class of workers. Furthermore the high profits from price discrimination imply that producers will be keen to continue such segregation rather than end it.
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By increasing output, fair trade can bid up wages for coffee producers. But fair trade also diverts some drinkers from Exploitation Coffee. If the switching effect is large, wages for producers of Exploitation Coffee can fall. Just as we have created two classes of market prices, so have we created two classes of market wages. If you believe that coffee producing firms have some degree of monopsony power, this is sustainable and again will increase profits but possibly worsen human misery for the poorest.

We talked quite a bit about Fair Trade coffees in a couple of my MBA classes. It always struck me as another case of people with their hearts in the right place causing more problems than they're solving. By artificially raising the price of coffee for certain farmers, they're lowering the price for those not in the club. Keep in mind, coffee bean farming is incredibly arduous work that requires long hours. However, it's the only work people can do in certain areas of the world. Fair Trade farmers get better treatment throughout their supply chain, which is a good thing, but it leaves those farmers not approved as a Fair Trade wholeseller out in the cold.

In addition to the inequities between Fair Trade farmers and non, Starbucks and other coffee companies have their own Fair Trade standard that competes with the brand Fair Trade. This further splits the coffee market that Tyler wrote about.

I think, when all is said and done, that Fair Trade will be a massive failure that will increase, not decrease, the number of coffee farmers and will end up lowering their already abysmal standard of living.