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How Fair is Fair Trade?

Is it worth a hill of beans? Coffee and the quest for a fair price

James Solkin looks over an article from a recent issue of L'Actualité, the French-language equivalent of the news weekly Macleans. The piece argues that fair trade is simply smartly dressed charity, an inefficient way of helping the world's poor and a dangerous example of market intervention. Solkin shakes his head: "Bullshit."

Not far from where Solkin is sitting stand twenty large containers, each the size of a garbage can, all filled with fair-trade and organic coffee beans from places like Peru, Colombia, El Salvador and Mexico. Needless to say, he has a vested interest in the journalist's argument: Solkin is one of the co-founders of Santropol, an iconic Montreal café that has never really been just a café. What started out as a scheme to avoid eviction quickly became a symbol of alternative business success.

In 1997, Santropol became the first restaurant in Quebec to offer organic and fair-trade coffee. Since then, it has retained a dominant presence in the local fair-trade market. In 1999, Santropol opened a roasting house to cook up its own blends for a wide variety of clients.

"This kind of argument is a distortion, a form of dishonest rhetoric." Solkin speaks with a sort of rambling passion. He seems to renew his conviction every time he finishes a sentence. "Every year an article like this comes out," he says. "Every year I have to write a letter to the editor." He appears resigned to this fate, being the marginalized antidote in what he calls the "goofy" business of coffee beans.

"Goofy" is a good word to describe the world of coffee. More than 125 million people worldwide rely on coffee for their livelihoods, most of them farmers in developing countries. But coffee prices are about as stable as Tom Cruise in love or gas prices. A bizarre logic pervades the business. Any instance of bad luck where coffee is grown-frost, drought, civil war-means a spike in prices on the commodity markets in London and New York, where most coffee beans are traded. A spike on the commodity markets means more money and better times for growers, provided they are not operating in the area where a bad moon is rising.

While that may be a crude, reductive description, the laws of supply and demand are stubbornly relevant here. Less coffee, higher prices; more coffee, lower prices.

In early 1997, one pound of coffee was selling for US$1.80. By July 2001, a grower was lucky to get 40 cents for that pound of coffee. From 1997 until well into 2004, you may not have known it sitting at Starbucks, the world was in the throes of a major coffee crisis-the worst in one hundred years. The problem? Too much coffee.

At the height of the crisis, 113 million 130-pound bags of coffee were being produced annually, but coffee drinkers were only consuming about 106 million bags a year. Encouraged by loans from the World Bank and other aid agencies, Vietnam and Brazil suddenly emerged as major coffee suppliers, believing coffee cultivation would allow thousands to gain access to an income. Vietnam, a heretofore-unknown entity in the coffee business, became the world's second largest supplier almost overnight (behind Brazil and ahead of Colombia). The glut of beans on the market quickly chiselled the bottom out from under that 1997 high of US$1.80.

For coffee growers in other countries, it made more sense to embrace impending poverty by letting crops rot than to go through the humiliation of harvesting beans only to have to sell them at a fraction of their production cost. "Coffee farmers from Mexico have died trying to enter the USA illegally after abandoning their farms, and indebted coffee growers have been committing suicide in India," the International Coffee Organization wrote in a synopsis of those difficult years.

Sometime during the crisis, the idea of fair-trade coffee emerged as a sound answer to the goofiness and tragedy, for all involved.

The solution appeared simple: fix the price for a pound of certified fair-trade coffee beans at US$1.26 (higher, if you want certified-organic) and guarantee consumers that they're buying coffee produced under ethical conditions, exploitation-free, and that the farm workers receive the wages they need for a decent life.

And so, the success of the enterprise seemed like a given. In 1998, 47,577 pounds of fair-trade coffee were sold in Canada. By 2003, that number had risen to just under 1.5 million pounds. The plight of coffee farmers in the developing world appealed enough to Western consumers that they were willing to pay a premium for their coffee. For many farmers, it has made a quantifiable difference. "Fair trade really means the difference between going on and surviving or disappearing," Carlos Vargas writes to me in an e-mail.

Vargas grew up picking coffee beans on his parents' small farm in Monteverde, a town in the middle of Costa Rica's rainforest. He has been working with coffee co-ops for seventeen years and has been involved with fair trade almost since the beginning. Now, when he's not managing one of Costa Rica's largest coffee co-ops or tending to the small coffee plantation he keeps with his brothers, Vargas sits on the board of directors at TransFair USA, the principal American certification body for fair-trade and organic products. "I think the fair-trade coffee farmers have much more self-confidence because they have their own organizations, know the market and its requirements much better than small coffee farmers that are not organized and do not have access to the fair-trade market."

Needless to say, fair trade has enjoyed unparalleled currency among any number of social activists. It is a form of protest that speaks in the language of commerce. Away from the clamour of street demonstrations, the lefties have been beating the MBAs at their own game and proving that a progressive business model could be sustainable.

Yet, in spite of its success in convincing consumers that they can make a difference, fair-trade coffee has never seemed to be able to silence its critics. In recent years, a sizeable chorus of detractors has grown. Some dismiss the success as a fad, others lament the level of market intervention, others argue that the coffee simply tastes bad.

On the surface, these arguments may seem partisan or lacking in nuance, easily overshadowed by the rainbow of testimonials and statistics. However, some of the arguments are becoming harder to ignore, and what's worse, seem to throw the whole enterprise into question. "Fair trade may help some farmers in some places, but it certainly hurts farmers in many other places," admits Lawrence Solomon, the executive director of the Urban Renaissance Institute (a conservative environmental think-tank) and an importer of fair-trade coffee with a non-profit organization known as the Green Beanery."[Fair-trade coffee]'s a huge waste of time, and it's very unproductive" because it is aimed at guilt-ridden consumers and does little in fact to truly help coffee farmers (Solomon uses the proceeds from his fair-trade business dealings to fund some of the Institute's research). Make no mistake, the new critics of fair trade are not questioning the nobility of the enterprise's intention, but whether it does any good at all.

There is no denying fair trade is a captivating idea. It was central to economic thinking long before economics was recognized as a discipline in the late eighteenth century. The question of a "fair" price is quite possibly the first economic thought to interest human beings. "Nothing," wrote John Kenneth Galbraith in his popular history of the discipline, Economics in Perspective, "has so engaged economic attention over the centuries as the need to persuade people that the price given by the market has a justification superior to all ethical concern."

The modern fair-trade movement dates back to the nineteen-forties, when a number of churches in North America and Europe began trying out a new type of charity, one that created small markets for various handicrafts produced by refugee artisans. This eventually gave rise to a series of alternative trading organizations that ultimately gave birth to institutions like the Fair-Trade Labeling Organization, TransFair and the Equal Exchange.

Since these beginnings in the church basements of Middle America, fair trade has always been about giving producers a fair price. This now extends to a system of trade that attempts to get more profit into the pockets of the people actually making the product, be it coffee farmers, banana growers or beekeepers. Consumers can now even buy fair-trade soccer balls.

The problem is, people have had a hard time agreeing on what a fair price entails. Twelfth-century philosopher and theologian Saint Thomas Aquinas claimed that "to sell dearer or to buy cheaper than a thing is worth" is not only "unjust and unlawful," but downright "wholly sinful." Vargas offers his own definition: "A fair price is the one that allows the coffee farmer to cover all the production and processing costs and get some profit to invest in his family."

"For an economist, a fair price is the market price," counters Xavier de Vanssay. This is where the proverbial other shoe drops: 40 cents a pound is acceptable as long as the market says it is. De Vanssay teaches international business at York University in Toronto. In the summer of 2003, his short article "The myth of fair prices: A graphical analysis" was published in the Journal of Economic Education. Though only five pages long, the piece managed to catch the interest of mainstream media, sparking an editorial and a heated response in the pages of one Vancouver newspaper. De Vanssay argues that fair-trade policies are a "suboptimal" way of redistributing the wealth of concerned Westerners to impoverished farmers. Using the case of coffee, de Vanssay concludes that fair trade throws a spoke in the wheel of developing economies by only targeting certain segments of the population. He claims a serious distortion occurs in what economists refer to as "relative price," otherwise known as incentive. If, for example, coffee farmers adhering to fair-trade standards are guaranteed a fixed price that's higher than what's being offered on world markets, it follows that the poor guy tending his patch of non-fair-trade, free-market cucumbers will begin to wonder, "What's the point?" This has resulted in a multitude of farmers wanting to get in on the fair-trade game. Solkin tells me it's not unusual for co-ops to have waiting lists.

The problem, de Vanssay explains, is that the world's demand for coffee doesn't change; it's "inelastic." More coffee producers only yield more coffee and its occasional twin: lower prices. As fair-trade organizations only target certain countries (mainly Latin American and some African nations), while you may be helping coffee growers in Kenya, you could be hurting the ones in Vietnam. "Fair trade is like acupuncture with a fork," de Vanssay says, borrowing a phrase used by economists to describe an inefficient way of doing things. "It helps, but there are better ways." It would make more sense, for instance, for farmers to receive direct-transfer payments or cash handouts-a reversal of the Bob Geldof School of Trade Not Aid that many have taken to be the right answer to the problem of African poverty.

De Vanssay, however, is no apologist for Western trade policies. "The West," he tells me over the phone from Toronto, "is totally guilty" of Africa's trade imbalance. He admits direct foreign aid has a terrible record and offers as a solution a new type of transfer payment known as "microcredit." Microcredit programs work by offering the world's poor small loans, just enough to allow a person to purchase the tools necessary to forge an income. The concept has created a buzz in many circles: repayment rates are high and many disadvantaged women have found it empowering. Perhaps a sign of its impending success, a coalition of advocates that includes investment companies and several UN agencies has declared 2005 the International Year of Microcredit.

But the macroeconomic issues are compounded by more micro-level concerns. Solomon, among others, has criticized fair-trade certification organizations for being overly bureaucratic, creating a situation where very little verification actually takes place. In an article in the National Post last year, Solomon accused TransFair Canada of doing little to ensure that participating farmers are meeting the required standards to be deemed fair-trade. In fact, according to its 2003-2004 annual report, TransFair Canada spends less than 3 percent of its $380,000 budget on monitoring visits and audits, but close to 40 percent of the budget is allocated to salaries and employee benefits. The amount of red tape not only means consumers can't be certain about the fairness of their coffee, but it also prevents otherwise-deserving farmers from being included in the program.

Solomon maintains many farmers can't, in fact, afford the extra charges associated with fair-trade accreditation. In many cases, he says, consumers can be more confident they're getting organic coffee from places like Burundi, even though it may not carry the TransFair logo-if only because farmers there are too poor to buy pesticides.

When Wal-Mart closed one of its Quebec stores recently, coincidentally shortly after its workers had managed to unionize, there was a significant public outcry. Bernard Landry, then leader of the Parti Québécois, even suggested a province-wide boycott of the company's stores. A journalist asked a management professor what the chances were that such a boycott could be successfully organized against the world's largest retailer and self-proclaimed champion of low prices. The professor answered with deflating accuracy: the boycott didn't stand a chance because people are consumers first and citizens second. Soon thereafter, Landry scuttled the boycott idea, but he was angry enough that he promised never to shop at Wal-Mart again.

The long-term success of fair-trade coffee, or any fair-trade commodity for that matter, rests on the hope that the dynamic the professor describes can be reversed. Buying fair costs more, and while that doesn't scare off the citizen, it will give pause to the consumer who wonders, "Is fair worth it?" Even though the demand for fair-trade goods has increased dramatically over the past decade, fair-traders have yet to capture a significant share of the market. Even co-op manager Carlos Vargas admits that fair-trade organizations still have a thing or two to learn about business, while Santropol's James Solkin says it's unrealistic to ever expect fair-trade coffee will replace your average cup of joe. However, he maintains the added value of fair trade makes it impossible to ignore. "(Fair trade) adds a certain dimensionality to the purchase other than simply the lowest price. Our purchasing power in some respects is the only power left in these kinds of economies. It might as well be used to a positive effect."

Western consumers owe a great debt to the fair-trade movement. By rallying social consciousness, the movement has carved out a place for social justice in the markets; it has opened our eyes about modes of production elsewhere in the world so we can comfortably enjoy coffee, tea or even diamonds. Simply having that option is invaluable. But objections raised against some fair-trade practices are significant, and the movement risks sacrificing its relevance if it refuses to examine itself critically. Fair trade could simply be an easy way for Westerners to feel better about themselves; meanwhile, in the name of relieved guilt, harm is being inflicted.

As the movement oscillates between enjoying widespread success and building a permanent home at the margins, it needs to do more to convince consumers that a healthy amount of good stems from every purchase. This could take the form of a massive overhaul of its business model or simply better marketing, depending on how critical that look in the mirror turns out to be. The real challenge now is not deciding on a fair price, but in proving that fair is worth the price and that ethics can be a good deal.