Some consumers are willing to pay a little extra for a product, if they think they are supporting a good cause. It may be possible to get quality cookies at a lower price from the supermarket itself than from the Girl Scouts parked outside in the springtime, but since it is for a good cause many consumers will buy from the scouts.
This same bundling of charitable instincts and commercial trade is put to grander ends by fair trade groups. Fair trade organizations seek to commit producers in less-developed countries to improved wages and better conditions for workers, among other goals. Products that obtain a fair trade label typically sell for a premium, with the premium justified based upon the improvements in living standards it supports.
It seems to me that this premium stands on two legs: customer goodwill toward workers in less-developed countries and the customer’s ability to trust that the system effectively delivers positive changes. Both legs – trust and goodwill – are exposed to problems that could undermine the enterprise.
Continue reading this post for my attempt to explain why this is the case, why I think quality rather than charity provides a better approach, and some addition resources.
Trust: No matter how charitable the customer feels toward remote workers in difficult circumstances, if the customer does not believe that the premium will bring about improvements for such workers then the customer will not pay the premium. Because the processess of international trade are relatively abstract and hidden from the potential customer, this trust is likely based upon the existing commercial relationship between the retailer and customer and a trust in the fair trade organizations’ labels. The second half of this will be sensitive to newspaper reports of fraud or anything at all unsavory, since consumers will have little else to base beliefs on. Fair trade organizations can help maintain this trust by protecting their “brand name” capital, both policing use of their own certifications and also keeping an eye on other fair trade organizations. The relationship between retailer and customer could also be a source of problems, even without any fraud, if it appears that too much of the premium is not being passed along to the intended recipients.
Goodwill: To the extent that fair trade purchases rely upon the customers desire to provide a benefit, it seems like it will become limited by the depth of that desire. Fair trade shopping could wane due to “donor fatigue,” and in this respect the very success of fair trade and proliferation of fair trade products could produce the donor fatigue that diminishes the prospects for sustainability.
So while fair trade groups may well be contributing to the short term welfare of some workers, the sustainability of the enterprise depends on preserving consumer goodwill and trust for the longer term, and for the reasons cited I think it will be difficult to sustain fair trade.
It think quality, rather than customer goodwill and trust, will be the truly sustainable approach to providing a premium to small producers in less-developed nations. To that end, programs like the Cup of Excellence are the better approach. It provides a rigorous quality scoring system followed by auctions, with high scoring lots commanding significant premiums. Cup of Excellence says that about 85% of the auction price goes to the producer.
In somewhat indirect support of this position, I note that longer-established “public benefit” labeling projects – environmental labels, organic and natural foods, union labels, and so on – are often accompanied by explicit or implicit claims about quality. Consumers willing to pay a little extra – or sometime even a lot extra – get something of immediate value that doesn’t rely so much on trusting and goodwill.
More to read on fair trade:
- If I was in a different mood today, I’d make fun of the economic illiteracy in this piece on coffee posted on the Fairtrade Labelling Organizations International website. Hint: If a coffee drinker doesn’t drink more when the price goes down, will they drink less when the price goes up?
- AllAfrica.com posts an interview with David Robinson – the son of baseball legend Jackie Robinson and now co-founder and member of a Coffee growers cooperative in Tanzania.
- AllAfrica.com also presents a story on recent discussions in Nairobi on the Common Code for the Coffee Community, an initiative of the Germany-based Heinrich Boll Foundation.
- On Sunday, the Washington Post ran an article on “fair trade” shopping.
A posting at Marginal Revolution spurred numerous comments, including some of the above thoughts.