Taking Advantage of the Fair Trade Buzz

Michael Giberson

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:

A posting at Marginal Revolution spurred numerous comments, including some of the above thoughts.

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6 thoughts on “Taking Advantage of the Fair Trade Buzz

  1. Mike,

    Most consumers have no clue; and, most are not searching for one. They shop at WalMart, they shop price, they buy what they need and they use it until it is consumed or wears out. End of discussion.

    Most consumers, when they buy a product made in China: 1)don’t know, or care, where it was made; 2)don’t know, or care, whether it was made in a privately-owned and managed factory, a government-owned factory or a prison factory; and, 3)don’t know anything about the working conditions or pay of the workers who made the product.

    I accept that more progress might be made if we did care, but I have little confidence that much will change anytime soon.

  2. Mike,

    Most consumers have no clue; and, most are not searching for one. They shop at WalMart, they shop price, they buy what they need and they use it until it is consumed or wears out. End of discussion.

    Most consumers, when they buy a product made in China: 1)don’t know, or care, where it was made; 2)don’t know, or care, whether it was made in a privately-owned and managed factory, a government-owned factory or a prison factory; and, 3)don’t know anything about the working conditions or pay of the workers who made the product.

    I accept that more progress might be made if we did care, but I have little confidence that much will change anytime soon.

  3. “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.”

    I wished you were in a different mood.

    They say on their site that, “when prices are too low, a product’s offer will decrease by itself, causing prices to rise – the famous principle of elasticity of supply and demand.”

    I simply do not comprehend with this means. There is no such thing as a market clearing price that is “too low.” It may be too low for their liking, which is a heckuva good signal to get out of the business. If they claim that collusion is forcing equilibrium prices below market clearing prices and that consumers have not responded by drinking more (which in some backward way they claim should increase prices – a rather gross misunderstanding of the difference between demand and quantity demanded) it does not sound like the answer to your Hint is Yes.

    I’d love to see your take on this. Their comment is simply too convoluted to make up from down.

  4. “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.”

    I wished you were in a different mood.

    They say on their site that, “when prices are too low, a product’s offer will decrease by itself, causing prices to rise – the famous principle of elasticity of supply and demand.”

    I simply do not comprehend with this means. There is no such thing as a market clearing price that is “too low.” It may be too low for their liking, which is a heckuva good signal to get out of the business. If they claim that collusion is forcing equilibrium prices below market clearing prices and that consumers have not responded by drinking more (which in some backward way they claim should increase prices – a rather gross misunderstanding of the difference between demand and quantity demanded) it does not sound like the answer to your Hint is Yes.

    I’d love to see your take on this. Their comment is simply too convoluted to make up from down.

  5. “Most consumers have no clue; and, most are not searching for one. They shop at WalMart, they shop price”

    That seems harsh. If consumers were simply shopping price, wouldn’t they buy Dickies jeans rather than Levi’s? or KIA sedans rather than Toyota’s? or Emerson TV’s rather than Sony’s?

    Consumers associate certain brands with quality, and willingly pay for that quality.

    I agree that most consumers do not know who made their products and do not care – as long as the quality remains high.

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