Fair Trade may not be so fair
Letter to the Editor | Monday, February 12, 2007
Over the past year or so there has been a lot of activism by various student groups to introduce Fair Trade coffee at Notre Dame. While I applaud these student groups for their effort in trying to help coffee farmers in developing countries, I think they are completely overlooking the negative repercussions of this campaign.
While Fair Trade sounds like a noble idea from a theoretical standpoint, the broader economic effects could actually be quite harmful to developing countries and their farmers. Without getting into complex economic theory, let me tell you why. For a start, commodities like coffee have a low price for one main reason: there is an overproduction. By paying farmers a guaranteed Fair Trade premium (which acts as a subsidy), it encourages other producers to enter the market, thereby driving overall prices further down and making non-Fair Trade producers in these countries poorer.
More importantly, with a guaranteed premium there becomes less incentive for governments and farmers in developing countries to diversify from coffee farming into other non-commodity sectors. Developing countries are often unable to achieve higher levels of economic growth for the very reason that their economies are too heavily dependent on primary products. This economic phenomenon is perhaps best explained by the Prebisch-Singer thesis which has proven that terms of trade for primary commodity exporters has a tendency to decline. In order for developing countries to achieve higher levels of economic growth they need to, among other things, transition from an agrarian economy into an economy that is based on manufacturing.
I am not saying that encouraging Fair Trade in and of itself is going to impede economic development. But surely with the Fair Trade subsidy it will take incentives away from farmers and governments to diversify their economies. I would urge the Student Senate to reexamine this issue more carefully before deciding to implement a change that may prove to be potentially counterproductive.