"Fair Trade Proving Anything But"

In a long and in-depth look at the fair trade movement, Bloomberg discovers that the movement's not all it's cracked up to be.  Color me... unsurprised:

The push to increase sales of goods deemed to be free of child labor and other practices has divided the [fair trade] movement, raised questions of whether going mainstream will undermine the cooperative farmers it was created to help and, most of all, strained the integrity of the certification systems that vouch for the fair-trade stamps that allow companies to charge consumers more. 

“The fair-trade movement has profoundly lost its way,” said Aidan McQuade, who has advised Cadbury on cocoa buying as director of London-based Anti-Slavery International, a human rights organization founded in 1839. “Its focus on volume -- unless they have got all their systems in place to address fundamental issues like ethical trade, child labor and child slavery -- is problematic.”... 

Fair trade is increasingly becoming a marketing strategy where the farmers’ poverty is a necessary ingredient to make consumers feel good about themselves, said Bill Fishbein, who founded Coffee Kids in 1988 to provide health and education services to poor coffee growers.
“We are way overpromising and under-delivering,” Fishbein said. “Those farmers have become a sales tool.”... 

The disagreement over how best to boost fair trade recently led to the departure of Fairtrade International’s U.S. affiliate. Paul Rice, an American who helped farmers during the Nicaraguan Sandinista revolution in the 1980s, wants his Fair Trade USA group to work much closer with large companies. He proposes certifying coffee grown on estates, rather than just on cooperatives.... 

Certifying larger coffee producers would cut small farmers off from international markets, said Merling Preza, president of the Latin American and Caribbean Coordinator of Small Fair Trade Producers, an association of cooperatives selling coffee, fruit and cocoa. Buyers will switch to larger, lower-cost farms able to invest in higher yields and deliver larger volumes than farmers who in some cases live on $2 a day, she said. 

“When someone big competes against someone very small, what we say in Nicaragua is that it’s a competition between a tethered donkey and a loose tiger,” Preza said. “It’s a threat for everyone. It would distort the fair-trade system.”... 

Juan Carlos Lopez, 24, an adviser to the Café Guerrero Maya cooperative in Chiapas, said he can quantify the cost to farmers if big companies win the day. The difference between the market price for coffee and prices paid for Arabica beans by intermediaries buying for Ecom’s Mexico unit, known as Amsa, amount to at least 30 percent of a farming family’s revenue, he said. 

“All they do is buy it cheap and sell it at a high price,” said Lopez, now an economics student at a university in Mexico City.... 

For Lopez, whose family depends on coffee for its only cash income, cutting out middlemen like [fair-trader] Esteve is key to improving living conditions in Chiapas.

“We have to find the best profit, which is through selling directly to the consumer and not some intermediary that pays whatever price they want,” he said.

Looks like plenty of trouble in :fair trade" paradise, but on the bright side it's further support for my (admittedly crass) rule that, in the trade world, "fair" is just another four-letter word that begins with "F."

Be sure to read the whole thing here.

More Commentary on the GOP Presidential Candidates, Trade and US Manufacturing Jobs

Last week I blogged on the GOP presidential debate in New Hampshire and the candidates' responses to a basic question on the decline of US manufacturing jobs.  Since then, several smart people have weighed in on the issue.  First, WorldTradeLaw.net's Simon Lester pointed out in the comments to my original post that Governor Pawlenty certainly isn't the only one who's been blaming trade for job losses:

Check this out from Romney the other day:

VAN SUSTEREN: The IMF is predicting that China's economy is going to surpass our own in the year 2016. First of all, how does -- what does that mean to us? What does that mean to the average American? How do we feel that? And secondly, why is China able to surpass us?

ROMNEY: China is able to surpass us in part because over last couple of decades, American policy has been so relaxed towards China. We've allowed them to manipulate their currency to make our products more expensive than theirs. And that has allowed them to come into our country and replace a lot of jobs in this country. …

We, frankly, have been turning a blind eye to China's policies with regards to our economy for far too long, and America has to get serious about saying, We want to make America the most attractive place for business in the world, not China. And the consequence of not doing that would be potentially seeing our standard of living decline and over time, seeing China build a military that could rival any in the world.

VAN SUSTEREN: How do we actually, though, turn that around? China is our bank. We owe them, you know -- you know, so much money that it's almost breathtaking. They hold more of our debt than any other nation. You know, what do we actually do to sort of turn that around so that they don't take our jobs, so that our dollars aren't going there to get their cheaper goods?

ROMNEY: ….
… you have to make it very clear that to trade with America on the most favored basis that you have to honor our laws. You have to allow your currency to float. You have to make sure that the products that come into the U.S. have not been, if you will, pirated through technology that's been stolen by various companies in China. We're going to have to be serious with China about enforcing our laws, enforcing agreements that are fair and free and not giving them the kind of free ride that they've had so far.

I'd argue that Romney's response isn't as bad as Pawlenty's comments in New Hampshire, but still, it's a good catch by Simon and, well... ugh.

Next, Dan Drezner expressed similar concerns about what was said - and not said - at the GOP debate:

In presidential campaigns, this amounts to "don't expect to see any new trade deals anytime soon." As for the other dimensions of globalization, well, peruse the section on immigration provided you have a green card if you dare. No one said anything about the positive economic and demographic benefits America receives from immigration.

The other thing that was striking was what wasn't said during the debate. All of the candidates focused like sharks with frikkin' laser beams attached to them on the economy. The standard GOP litany of solutions for jump-starting the economy were offered: tax cuts, cutting regulation, tax cuts, cutting government spending, tax cuts, reigning in the Fed, tax cuts, ending Obamacare, tax cuts. Not one of the candidates, however, mentioned trade liberalization as part of their fornmula for getting America moving again.

To be fair, this isn't as bad as when Obama and Clinton were debating over who would eviscerate NAFTA faster in 2008 (and funny, isn't it, how that never happened). And it's not like I was a huge fan of Obama's trade policy. To be just as fair, howeever, at least the current president completed KORUS negotiations and signaled strong interest in the Trans-Pacific Partnership. I get the sense that no one in the GOP field is going to stick their neck out on international trade or investment. For the party that claims to be in favor of lower taxes and regulation, this is a travesty.

I commented on Dan's post when it was published, and I always refuse to admit I'm wrongtry to be consistent, so just I'll be lazy and just repeat my instant analysis here:

I think you're right to be concerned about Pawlenty's statements and the other GOP candidates' silence in the NH debate (hence, why I blogged about it).

However, I think you got two things sorta-wrong here:

(1) I wouldn't oversell the NH debate too much, especially as a forecast for any future GOP president's support for new FTAs or trade more generally. Almost all (if not all) of the candidates have come out in support of the pending FTAs with Korea, Colombia and Panama - even Pawlenty did so in his big economic speech at the UChicago last week. And a few have been even bolder (check the Club for Growth's reports on each candidate for a full rundown). Moreover, recall that a large majority (about 80%) of GOP House freshman (incl. lots of Tea Partiers) recently wrote a letter calling for passage of the pending FTAs. So the GOP still - it seems - supports free trade, with the usual mercantilist, "get tough" caveats (unfortunately).

(2) I think you're too optimistic about this President's "support" for free trade. First, he sat on the 3 FTAs for 2+ years and only began to consider moving them thru Congress after watering them down (raising tariffs, onerous labor and tax provisions, etc.) to appease Big Labor. Even now, he's holding the agreements hostage until the GOP relents on the bloated TAA expansion that was rammed thru as part of the Stimulus* Bill - another sop to labor, btw. Second, his big "push" for TPP has produced a lot of soundbites but very little substance, and seriously risks failure now that they've moved off their November 2011 deadline for a deal. Finally, Doha is - at best - comatose and more likely dead, and a big part of the blame must rest on the administration's refusal to submit an agressive offer on farm subsidies and industrial market access (coupled with pretty crazy demands on developing countries' participation in voluntary, plurilateral agreements).

Given these two things, I think it's very safe to say that a Republican president would be a pretty big step up from the current resident of 1600 Pennsylvania Avenue.

Of course, none of this changes your primary message - that GOP contenders who embrace snake-oil protectionism are betraying their fiscally conservative message, and that voters should be wary of these charlatans.

Next, AEI's Phil Levy did an excellent job elaborating on some of the problems that Dan, Simon and I noted with respect to the GOP candidates, trade and US manufacturing jobs, and he then throws down the gauntlet:

What are the early prospects for Republican presidential leadership on trade? Dan Drezner and Scott Lincicome last week took Gov. Tim Pawlenty to task for his debate remarks on the topic. Pawlenty espoused "fair trade" and increased enforcement as the primary response to the country's manufacturing employment woes....

[T]allying up each party's merits and demerits on trade is a distraction from the more important point. We know from two years of experience that President Obama is inclined, at best, to "lead from behind" on trade. At a time when global trade talks are engaged in a prolonged and dramatic death scene and U.S. foreign relations increasingly hinge on the ability to cement commercial ties, there is a desperate need for leadership of the sort that can only come from the White House. Dan and Scott are right to scrutinize the Republican candidates and see whether any of them might provide it.

There is a temptation to excuse statements like Pawlenty's. After all, in his call for "fair and open trade," he was hardly embracing protectionism. Fair trade is the sort of elastic term that means different things to different groups, but seems to poll well with all of them. Isn't this just smart politics on Pawlenty's part? Why should Republicans cede enforcement fervor and the embrace of fairness to the Democrats? This could be cast as the equivalent of a pro-motherhood, pro-apple pie platform.

Such temptation should be resisted. It is misleading to tell Americans that the prime cause of manufacturing job loss lies with imports. This offers the false hope that very real employment problems can be fixed with judicious application of trade barriers. As with any snake oil, there is the dual danger that the potion will not work and that reliance on the false cure will preclude a search for a true remedy. One of the great challenges that any American leader will face in coming years is how to structure the social safety net to meet a job market that is far more dynamic than in times past, one in which Americans will change both employers and perhaps their type of employment with greater frequency than ever before. Trade is one driver of this dynamism, but technological change and domestic competition are at least as important, likely more. Any candidate who misses the broader challenge and misattributes the problem to foreign cheating is not just pandering; they are failing to engage on a central economic issue and missing an opportunity to win a mandate for a much-needed policy response.

There has been an intriguing battle among Republican candidates, in the wake of Indiana Gov. Mitch Daniels's withdrawal from consideration, to claim the role of Teller of Difficult Truths. The first skirmishes have come over ethanol subsidies, which some candidates -- including Pawlenty -- have dared to oppose (though John Dickerson has questioned just how brave this stance really is). Trade offers the candidates another such opportunity. It may be too soon to render final judgment, but it will be telling to see which candidates use the opportunity to offer a vision for American engagement in modern commerce and which opt to pander to easy prejudices.

Great stuff, as usual, by Phil.

Finally, EconLog's David Henderson provides, in my opinion, the best response that a presidential candidate could give on American manufacturing jobs:

It's unlikely that we'll have more manufacturing jobs. The story of economic progress is one of doing more with less. This has been especially true in U.S. manufacturing, where the value of manufacturing, in inflation-adjusted terms, reached an all-time high before our current recession. And while that has happened, we've had fewer and fewer people becoming more and more productive. Moreover, every major manufacturing economy, including China's, has lost manufacturing jobs.

He then adds:

Manufacturing employment declined from the mid-1990s to 2002 in a number of countries whose economies are rapidly developing, including China, Brazil, and South Korea. In fact, China, Brazil, South Korea, and Japan had steeper percentage declines in manufacturing employment over that period than the United States.

This is from Economic Report of the President, 2004, p. 76.

So who's gonna step up and tell the American people these "hard truths"?

Is Tim Pawlenty Gunning to Be the GOP's Protectionist Candidate in 2012?

Last week, I lamented that GOP Presidential hopeful Tim Pawlenty's mercantilist statements on free trade were somewhat contradictory and really mundane.  His latest statements on trade, however, are more troubling and have him increasingly looking like the GOP's protectionist for 2012 (there's always at least one).

If you were (sane) like me, you didn't spend last night glued to CNN to watch the GOP Presidential Debate in New Hampshire.  But a quick search of the debate transcript (yes, I know, I need to rescind my previous allegation of sanity) reveals that the only comments on trade came from Pawlenty in response to a question on how the candidates "plan on returning manufacturing jobs to the United States":

PAWLENTY: There's a number of things we need to do. Restore manufacturing in this country. And I grew up if in a meat packing town. I grew up in a manufacturing town. I was in a union for six or seven years.

I understand what it's like to see the blue-collar communities and the struggles that they've had when manufacturing leaves. So I've seen that firsthand. But number one, we've got to have fair trade, and what's going on right now is not fair.


I'm for a fair and open trade but I'm not for being stupid and I'm not for being a chump. And we have individuals and organizations and countries around this world who are not following the rules when it comes to fair trade. We need a stronger president and somebody who's going to take on those issues.

Sigh.  I've already dismantled the "fair trade" and "everybody cheats" myths several times on this blog, so I won't do so again here.  And, frankly, Pawlenty's statements here are almost identical to the tough-guy chest-thumping that he's done in the past about free trade (as I noted last week), so his statements last night, while underwhelming, aren't really that disturbing or noteworthy.

What is disturbing and noteworthy, however, is that Pawlenty, when asked about manufacturing job losses, immediately resorted to scapegoating free trade as the primary driver of those losses.  And, by the way, he was the only GOP hopeful to do so.  Ron Paul (unsurprisingly) targeted US monetary policy; Michele Bachmann (quite rightly) attacked onerous US tax and regulatory policies; Rick Santorum also took a swipe at tax policy.  None of them blamed trade policy for manufacturing job losses.

Except Governor Pawlenty.

Of course, this stance is utter poppycock:  not only are most American manufacturing job losses the result of things like technology gains and changing consumer tastes, but they also have been happening for decades and are in no way unique to the United States.  Moreover, a lot of American manufacturers depend on trade (imports and exports) in order to remain globally competitive and/or to find new customers abroad.  So, if anything, our politicians should cite free trade policy as a solution to, not cause of, US industrial job-losses.  Thus, it's quite troubling that, when asked about those job losses, Tim Pawlenty's first thought was to blame trade - a strategy, by the way, that's right out of the protectionist playbook.  The unions do it; pandering Democratic politicians do it; and the professional anti-traders do it.

So why is a GOP presidential candidate - especially one who just recently championed free market fiscal policies that directly contradict such an anti-trade stance - doing it too?

I honestly have no idea.

Fortunately for Pawlenty, his trade statements received big praise from one pundit.  Unfortunately, it was MSNBC's Ed Schultz (start at the 3:30 mark):

Visit msnbc.com for breaking news, world news, and news about the economy

Err, congrats Governor.

Richard Epstein on Fair Trade and TAA

It's not too often that one of my law/policy idols writes on trade issues, so when Professor Epstein does, he gets his own blog post.  In his usual clear-and-brutal manner, Epstein dismantles the White House's Trade Adjustment Assistance demands and the case for "fair trade" more broadly.  Here's the best part, but the whole thing is definitely worth reading - twice:

So conduct this little thought experiment: what would be the state of play in the United States if every time a new firm opened up in one state it was required to fund trade assistance for workers at other firms who lost their jobs as a result? The need to compensate incumbent workers would drive out all new firms, and thus entrench inefficient firms in a near monopoly position. It is for that reason that the proper response is always to ignore these losses, and to deal with the question of unemployment through a generalized system of unemployment insurance that, of course, has massive difficulties of its own.

We have to take the same approach to international trade that we take to domestic trade. Those individuals who lose their jobs to foreign competitors are no better off than those who lose them to domestic competitors. These people should receive the same level of assistance, no more and no less.

In this universe of free trade, compensation takes place in a system-wide fashion, as the increased opportunities for labor help all workers alike, including those who have no jobs at all, those who lose their jobs, and those who hope to advance by finding better jobs for themselves. What is so tragically short-sighted in the Obama administration is that it is willing to sacrifice these systematic gains in favor of a tax-driven subsidy program that reduces all possibilities of gains from trade across the boards.

Given the Obama administration’s logic about trade assistance, it is fair to ask whether he and his union supporters are prepared to offer trade adjustment assistance to those nameless individuals whose own job prospects have been rendered bleaker by the president’s refusal to put these bilateral trade agreements to an up or down vote.

His answer would, of course, be in the negative, but for the worst of all possible reasons. Politicians don’t respond to real losses suffered by diffuse individuals who find themselves unable to organize interest-group pressure on their behalf. But these people should not be forgotten in the shuffle to hand out political goodies to the president’s allies.

Instead of getting lost in these political diversions, we should keep our gaze firmly on this central truth: the larger the expanse of the market, the greater the competitive forces everywhere within the system. More product, higher wages, and greater growth are the predictable consequences of a system that lets capital and labor flow to the areas of their higher use. As overall unemployment rates remain stubbornly high, I am hard pressed to think of any counterargument to free trade that is inconsistent with this fundamental insight: free trade leads to economic growth.

Man, that's just plain excellent.

(h/t Don Boudreaux)

Remember, Kids: "Fair" Is Just Another Four-Letter Word That Starts with "F"

Every time I walk into Starbucks to grab a venti triple skim latte, I get irked by the place's incessant moral preening about "fair trade" coffee - its walls papered with pictures and stories of happy Central American coffee growers, each picture/story letting me know that I should not - I repeat NOT - feel guilty about being stinkingly rich enough to regularly drop 5 bucks on a giant, steamy cup of caffeinated water and milk foam.  Starbucks is certainly not alone, and these purveyors have every right to produce, market and their products however they see fit.  But those of us who work in the trade field know all too well that "fair trade" is really just secret code for "the malicious use of subjective hokum to employ latent protectionism" or "the brazen imposition of developed country standards on the developing world" or, at best, "well-intentioned, but misguided (and economically ignorant) marketing efforts that do nothing but raise prices."  (Sometimes all three!)  So the sight of the "fair trade" label has never sat well with me.

I've always thought that it was this last definition - the well-meaning-but-economically-ignorant one - into which almost all "fair trade" coffee efforts fell, so when I walk into Starbucks, or pretty much any other hipster coffee hangout, I get irked (and smugly so), but not irked enough to walk out.  (I do love me some overpriced latte.)  While the marketing efforts were clearly feel-goodism gone awry, I never really thought that they were hurting anyone other than the dumb/lazy, rich consumers who were willing to pay a little bit more for our "fair trade" drinks.  However, after reading this illuminating piece by Duke University's Mike Munger about the troubling effects of the "fair trade movement" on poor local farmers, I might just need to start getting my sweet, sweet caffeine fix elsewhere:

Here is the basic economics--a rent is being created: a price above market price is being charged. In countries where property rights, contracts, and rule of law is tenuous, feel-gooders and scam artists have put together an unholy coalition. The feel-gooders create something called "Fair Trade" certification, which means that the farmers get paid well above market price for the coffee they produce.

Not surprisingly, many farmers want to get in on this action. But less than all can be certified "fair trade" recipients, since a price that much above the market price would create a surplus. The fair trade feel-gooders would never be able to sell the glut of coffee if EVERYONE gets fair trade certification.

So, the feel-gooders stick their fingers in their ears and shout "LA-LA-LA-LA-LA" and pretend that their partners the scam artists are doing the right thing when they hand out the "fair trade" certifications.

But remember that these are countries with little rule of law, and shoddy police enforcement. So what the scam artists in effect do is sell off the rent (the high price of fair trade certification) to the highest bidder.

The result is that, after a fairly short period, three years at most, the "fair trade" farmers are getting no more, and maybe less, than everyone else, and no more than they got before the "fair trade" scam was started. The scam artists, it's true, are skimming the profits, but the competition to become a scam artist then becomes the valuable commodity, and rent-seeking to get to be the guy who certifies "fair trade" then also dissipates THAT rent. Some government official in the country, the one who licenses the guy who licenses the guy who certifies "fair trade" farmers ends up sucking down the rent.

Consumers pay more, and feel good about themselves. The feel-gooders who started the program move on to abuse some other group of farmers with false promises. And the results are a substantial increase in dead-weight loss.

Don't believe me? Article in the National Post, by Lawrence Solomon, founder of Green Beanery in Toronto, a suburb of Buffalo.

And the German study that really reveals how it all works.  In fact, as the Hohenheimers note, the certification process is so corrupt many don't even bother, and just mislabel the coffee as "fair trade" from the get-go.

Solomon's National Post op-ed summarizes the German study and Solomon's own experiences with the fair trade coffee movement, and let me tell you, it ain't a pretty sight:

Today, on World Fair Trade Day, we have something else to feel guilty about. That fair-trade cup of coffee we savour may not only fail to ease the lot of poor farmers, it may actually help to impoverish them, according to a study out recently from Germany's University of Hohenheim.

The study, which followed hundreds of Nicaraguan coffee farmers over a decade, concluded that farmers producing for the fair-trade market "are more often found below the absolute poverty line than conventional producers.

"Over a period of 10 years, our analysis shows that organic and organic-fair trade farmers have become poorer relative to conventional producers."

These findings do not surprise me. I speak as someone who has had contact with various Third World producers in my capacity as president of Green Beanery, a company I founded seven years ago to raise funds for Energy Probe Research Foundation, a federally registered charity that I manage....

The fair-trade business is filled with contradictions.

For starters, it discriminates against the very poorest of the world's coffee farmers, most of whom are African, by requiring them to pay high certification fees. These fees -one of the factors that the German study cites as contributing to the farmers' impoverishment -are especially perverse, given that the majority of Third World farmers are not only too poor to pay the certification fees, they're also too poor to pay for the fertilizers and the pesticides that would disqualify coffee as certified organic.

Their coffee is organic by default, but because the farmers can't provide the fees that certification agencies demand to fly down and check on their operations, the farmers lose out on the premium prices that can be fetched by certified coffee.

To add to the perversity, it's an open secret that the certification process is lax and almost impossible to police, making it little more than a high-priced honour system. Although the certification associations have done their best to tighten flaws in the system, farmers and middlemen who want to get around the system inevitably do, bagging unearned profits. Those who remain scrupulous and follow the onerous and costly regulations -another source of inefficiency the German study notes in its analysis -lose out....

Most merchants of certified coffees are aware of these contradictions, but most won't be aware of other problems in the certification business. For Third World farmers to qualify as fair-trade producers, and thus obtain higher prices for their coffee, farmers must join co-operatives. In some Third World societies, farmers readily accept the compromises of communal enterprise. In others, they balk. In patriarchal African societies, for example, the small coffee farm is the family business, its management a source of pride to the male head of the household. Joining a co-operative, and being told when and what and how to plant entails loss of dignity....

Some believe that certified coffee is superior in some way. But it is not always so. The small-scale farms whose local ecologies produce distinctive, niche coffee beans can't operate on a scale that would justify official certification. As the German study notes, "Certified coffees have distinct production and marketing systems with different associated costs than the conventional system."

Neither is certified coffee different at all. In fact, at Green Beanery we have received bags of coffee, some labelled fair trade, some not, grown on the very same farm and identical in every respect. The fair-trade certified farmer himself can't tell which beans will be sold as fair trade and which not -that decision is made by the higher-ups.

Because the fair-trade associations are intent on keeping the price of fair-trade coffee up, they limit the supply of coffee that can be labelled as certified. To the certified farmer's chagrin, most of his fair-trade certified crop could end up being sold as uncertified conventional coffee.

And in this well-intentioned pricefixing game, the fair-trade farmer is the pawn and the joke is on the customer.

Be sure to read the whole op-ed.  It's well worth your time.  As the title of this blog post (crassly) states, in the trade world "fair" is just another four-letter word that starts with the letter "F."  And in the case of coffee, it looks like impoverished African and Latin American farmers are getting royally, ahem, faired just so rich coffee-drinkers can feel better about themselves.

(h/t Art Carden)

Back-to-School Blues

From the Heritage Foundation comes a fantastic/distressing graphic showing why the kids shouldn't be the only ones upset while back-to-school shopping this August.  Indeed, mom and dad have plenty of reasons to be miffed too:

Nothing like adding a few hundred unnecessary bucks to American families' back-to-school budgets to really start the 2010 school year off right, huh?  Although I'm sure that these working moms and dads will, like, totally be comforted knowing that their hard-earned dollars are going to line the pockets of America's well-connected shoe/t-shirt/lunchbox/etc. producers and their unions. 

Riiiiiiight. 

And (as I've repeatedly noted) let's also not forget that these taxes are highly regressive, costing poor Americans a far greater percentage of their paychecks than wealthy Americans.  So the next time a protectionist talks about how these tariffs are necessary to ensure "fair trade," try not to laugh in his/her face, ok?

Happy shopping, everyone.

(h/t Andy Roth)

p.s. I've been traveling for business and the internet connection here hasn't afforded me much ability to blog since last week.  I'll be back online soon - there's plenty of new stuff to complain about.