I've read various articles criticising and supporting fair trade over the years, but I've never found a good source that really explained how the Fair Trade scheme works, the costs to producers, what additional revenues they get and what evidence there is to support or disprove the effectiveness of Fair Trade. I decided to read 'The Fair Trade Scandal' by Ndongo Sylla, and as I found it to be a fairly well researched and presented book, I thought I'd summarise my takeaways from reading it.

Fair trade is a certification scheme, so producers in developing countries have to apply to become Fair Trade certified. The first practical step to understand is that the Fair Trade certification body can't possibly certify small farm holders individually because this would be far too much admin work, so they organise farmers into collectives. In areas where farmers were not originally organised into cooperatives this immediately creates a potential monopoly, as farmers within a cooperative can only sell their Fair Trade produce through that Cooperative. This compares to farmers who previously sold their produce without the fair trade label may have had multiple possible buyers and were in a better position to not be exploited price wise. 

The fair trade certification scheme has costs, ranging from $1,000 to $3,000 depending on the number of products being certified. This cost is prohibitively high for farmers in the poorest countries (mainly sub-Saharan Africa) which is one reason why the vast majority of Fair Trade products come from South American countries, or other lower middle income countries. in addition the Fair Trade standards also require farmers to embrace more 'sustainable' farming techniques and to adopt farming practices that generally increase their production costs.  

The scheme is structured so that Farmers receive a guaranteed minimum price for their Fair Trade certified products. If the marker price is higher then they sell at the market price, if the marker price is lower then they sell at the Fair Trade price. But like all things in life the devils in the detail. Firstly Fair Trade is just a certification, it is not a guarantee to buy any of the producers product. Farmers have to find their own buyers on the normal international market, but the buyer has to pay at least the Fair Trade minimum price. Unfortunately Fair trade sales are a tiny fraction of total food exports, so a huge number of farmers only manage to sell a small amount of their produce as Fair Trade produce, and the rest gets sold as non fair Trade produce (despite all of their crops having incurred the higher production costs and certification costs). 

Second the minimum price guaranteed by Fair Trade is denominated in the farmers local currency, but is not inflation indexed. Developing countries often experience rampant inflation and the minimum price set for Fair Trade products can rapidly become completely pointless. 

The author claims that on average farmers receive 10% of the sales price that you the consumer pay when buying the finished product (non Fair trade produce) but this is more like 13% for Fair Trade goods. So the farmers do receive extra revenue, however given that they incur significant extra costs the author thinks that on balance Fair Trade most likely produces no net benefit for farmers, though he acknowledges that it's very much dependent on the specific farmers circumstances.   

The author is pretty clear that he has the utmost respect for the motives of everyone involved in the Fair Trade movement and for the intentions of consumers buying the products to show solidarity with less well off farmers in developing countries. But he believes that international trade is fundamentally unfair in its structure, that wealthy countries have no tariffs on raw agriculture goods which can't easily be grown in northern climates, but that we have heavy tarriffs on the same goods (i.e. coffee, nuts etc.) if they have been in any way processed. This prevents developing nations from ever being able to capture market share in the far more profitable elements of the food supply chain and keeps them shackled to the role of cheap raw commodity producers (cheap because of their extremely low wages and living standards - i.e. a continued form of exploitation). 

You'll notice that I haven't quoted many facts and figures from the book. The author's work is attempting to be a meta-study of research into the effectiveness of Fair Trade and he claims that there have been no randomized research trials carried out, and that hard research is hard to come by. 

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I wrote THIS paper (with Joon) on one possible way in which the fair trade idea could be net beneficial, in theory, for “rational altruists”.

I tried to supplement it with some evidence on whether the premium paid by consumers was less, equal to, or more than the premium that the farmers were getting per unit. I never published the empirical part because the analysis was very hard to do; it was very hard to compare like-for-like in terms of the quality of fair trade and non-fair trade products.

Thank you for posting this! I've mentioned your post to people on the EA Supply Chain and Logistics Slack Group

I don’t know much about this, but isn’t the main draw of Fair-trade( especially for chocolate or coffee) that you aren’t supporting child slavery? I think it’s a major mistake to Only look at the farmers, and not the agricultural-laborers working beneath them.

Some things I used to think about when I was active about fair trade, and I wonder if they're discussed:

  • the premiums paid to fair trade growing communities?
  • dependence of communities, fair trade or not, on a single crop
  • alternative certifications e.g. UTZ