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Fair trade, angel or demon ?

As citizens movements connect politically and economically, fair trade talks about itself. A fair and equitable trade, what is more decent in appearance ? But in order to determine the fair part of trade, we need beforehand to determine what we mean by this term.

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Solidarity ?

For many economists, solidarity has no place in trade relations. don’t you remember Adam Smith saying that in this area, we better contributed to the public interest by seeking his own interest ? Being supportive, is it for example insisting on buying such products from an ineffective producer ? Would it not be better for the latter to go bankrupt, so that capital and labor resources, previously misused, are redirected to more efficient firms ? Or is it helping those that technological dispossessed of their profession ? If we had been supportive to the water-carriers at the time of the urban pipelines extension, to the point of granting funds with bleeds money for their jobs now obsolete and useless, would they have made the effort to retrain and integrate the economy, to get involve with the development process? That we should help them to convert is not doubt, but do not necessarily contribute to maintain them in a position that does not suit them, or no longer suits them.

The fair trade activists often invoke Article 23 of the Universal Declaration of Human Rights: "Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity."Again, nice statement, but does it mean that until the moment where someone works, it is necessary, regardless of the work involved and the time it spends, that he be paid an income supporting his needs ? taking this principle to its limit, we perceive the absurdity: anyone for example could then "work" to watch cars on the street to conduct a study if popular colors, and require that the company pays him an income that allows him and his family a decent living...

Under noble intentions, fair trade is inherently discriminatory, and generates significant adverse effects.
Pierre Chaigneau

Discrimination

If it is to make trade "fair", the non-discrimination criterion becomes essential. Under the same conditions, all must be able to offer their products to the same markets. To do this, you will be told that there is nothing like the anonymity of the market mechanism to give everyone their chances without favoring one over another! ! The principles of fair trade lead instead to develop exclusive links between some producers and some consumers. Markets, disturbed in their normal operation, break up into multiple entities in which we are arbitrarily included or rejected according to criteria both questionable and difficult to verify. Difficult to establish a fair treatment of all stakeholders in these conditions as opposed to competitive equality [1].

One of the fair trade objectives is also about structuring producers between , in an union, similar to a cartel. That is a problem. Because a producer organization, whose objective is to maximize profit partner, is always at the expense of consumers who must accept a higher price

Adverse effect in long-term

if prices are fixed on the global market, a famous exchange place for example, therefore it ensures the efficient allocation of labor resources and capital worldwide. As producers for whom the price does not cover the cost of production get out of the market, and so the market equilibrium is guaranteed : all producers remaining in the market - those performing the most - are satisfied with the price, which ensures a maximum efficiency, adequate compensation to farmers, and an effort to fit exactly to the production opportunities available.

According to one of the main principles of fair trade, the production cost of the most needy farmers, so the smaller and less effective, determines the price. We call it a "guaranteed minimum price". Maintaining artificially a price too high introduces serious distortions , sources of more serious problems in the future: confronted to this biased incentive, producers enter the market while they should not, others continue to produce while they should not, and therefore overproduction is increasing (in 2005, 25 million people lived from coffee and could only survive thanks to this resource), accentuating the downward pressure on price. Compensation to producers must continually increase over time.

By maintaining some artificially high prices, fair trade encourages overproduction, which puts downward pressure on global prices.
Pierre Chaigneau

Some, most effective, such as multinationals, take advantage of this windfall : the reference price increasing, profits are much higher. Therefore They receive an income given an undue situation, levied on consumers who pay excessive prices (since the reference price is fixed so as to cover the costs of the least efficient producers; with this observation, Ricardo advocated trade liberalization, especially for agricultural products). meanwhile, small producers, still increasing, barely manage to survive (Mathus already criticized the assistance for the poor by showing that it kept them in their situation and favored them to have poor children in the future): Indeed, this high price prevents the cultural, social and economic changes from taking place. Coffee producers in Guatemala have an average of 8 children. In these conditions, How do you shape the future, by investing in human capital, including (children education) ? The economy is breeding, the problems are delayed in time, with more poor people without qualifications to assist, having been made dependent on the price of the only resource they are even using. Is it necessary to help farmers with archaic methods, offering them an income out of proportion to their productive contribution, and thus hinder the development of modern agriculture, and even other activities in these countries ?Because a man who lives decently in a country, will not seek to get out. the solution: increase the elasticity of supply to price changes, by promoting the mobility of production factors and the free market exit, opening to small producers other opportunities for economic development. For the economist Arvind Panagariya, " « the solution to poverty even among farmers is to be found outside farming. » [2]

What will be the effects of fair trade ? short-term improvement in the well-being of certain populations in the South, supported by those in the North ? It is possible. Hindrance to economic development in the long-term for the countries concerned ? Probably. In a world in which the North-South power relations were tough similar, Southeast Asian countries did not need that for emerging at an impressive rate from their under-development and meeting an unprecedented human and economic development.

For the economist Paul Collier, author of the Bottom Billion, only countries with some governance can set up a credible certification. He takes the example of Costa Rica. The least well-governed countries, which are also the poorest, are not those producing coffee certified fair trade. However, fair trade moves coffee demand to the certified coffee, at the expense of the basic coffee. Therefore, he says " Fair trade is a redistribution from the very poor to the poor."

It seems that with philanthropic intentions, it does not disturb the functioning of the global economy, but especially enclosing the producers that we would like to help in dead ends and false solutions. Liberal economists have long warned against the many adverse effects of these seductive programs using more the heart impulses or charity than the wise counsel of reason. As Bastiat would say, there is what is seen, and what is not seen. The economy is a complex science. be careful not to play sorcerer’s apprentice

EE , Pierre Chaigneau , July 2011

Article also available in : English EN | français FR

Footnotes

[1] We shall mention the market segmentation, the lack of homogeneity of the product following the introduction of a new dimension of differentiation, and finally the agreement on the price outside of market mechanisms, which is prohibited and penalized by the World Trade Organization.

[2] In the book India : the emerging giant, Oxford University Press, 2008.

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