Nick Hayns: Bitter truth about Fair Trade versus free trade

We coffee-lovers get to enjoy our daily fix and, by paying more than for a standard brew, a premium is apparently paid to a poor producer in the developing world. In addition, we get to feel a tad virtuous and maybe even a little smug. It is surely, in simple terms, a "good thing". However, take a peek behind the rhetoric and look at the actual outcomes, and the picture is not quite so clear.

The first thing to be tackled is the premium. That extra 40p you pay for the Fair Trade version of your skinny decaf cap? Fair Trade promoters, outside of wholly inadequate case studies, have never demonstrated how much of the additional price reaches producers, and even analysts sympathetic to the movement suggest that only 25 per cent will make its way through.

That means that, by even the best estimates, 30p of your virtuous coffee purchase will not be making its way to the person who picked the beans.

However, even if only 25 per cent of the premium reaches that poor producer, then surely we can still class it a "good thing", right? Well, again, there is an issue with the numbers. Fair Trade doesn't actually benefit the poorest producers, as the heavy administration requirements and fees required to become a certified producer provide a barrier to entry for many. In the first year the certification charge starts at $1,570, a figure large enough to preclude great swathes of struggling banana-farmers, coffee-growers, cotton-pickers and the like.

It is unsurprising then to find that Fair Trade penetration is highest in middle-income countries – the top four being Mexico, Columbia, Peru and South Africa – rather than those most desperately poor countries. In fact, those coffee-producing countries with the lowest average GDP per head have no Fair Trade presence at all.

One thing the Fair Trade movement does do very well is promotion. Its demand of exclusivity from schools etc. – which can actually damage other social labelling initiatives, such as the Rainforest Alliance, which may well also provide environmental and social benefits – adds to its sense of ubiquity.

In the UK – the top Fair Trade consuming market – such produce made up less than 0.5 per cent of all the food and non-alcoholic drink sales in 2007. Therefore, in spite of the clever marketing and the impression that Fair Trade is everywhere, the overall contribution to the poor is actually tiny. Looking at 2009 figures, total charitable contributions and remittances given to the developing world made up over 3,500 times the amount that the Fair Trade social premium remitted to producers. In terms of helping the poor, it is a drop in the ocean.

Of course, a drop is better than nothing but, ultimately, Fair Trade is not a long-term development strategy and the model is not appropriate for all producers. It can be beneficial for some; but only those within a specific set of circumstances. Tearing down trade barriers and actually engaging in free trade – including with each other – will help producers from the poorest countries far more. If all the companies and people involved in advocating Fair Trade put more of their efforts into these goals, far more would be achieved.

Fair Trade needn't operate in opposition to free trade – it is a private labelling initiative with good intentions – but too often its loudest advocates proclaim it as being a response to the failure of conventional trade. It isn't. The help that free trade has provided to developing countries swamps anything that Fair Trade can do. Fair Trade helps the few, free trade helps the many.

By all means continue to pay your Fair Trade premium – you can even feel a little bit better about yourself while doing so – but be aware that such well-intentioned purchasing is not going to solve the major challenges the developing world faces today.

Nick Hayns is a communications officer at the Institute of Economic Affairs.