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Who gains from fair trade schemes?

An examination by Robin Smith

Fairtrade is popular with consumers who like to support ethical trading
. The aim is that third world farmers should get a better deal. There is nothing wrong with that. But it does no harm to look at these things more objectively.

On the cynical view, Fairtrade is a brand targeted at middle-class consumers to salve their consciences
and make them feel they are doing their bit to make the world a better place, and, they hope, help to alleviate. No doubt those in the fair trade organisations genuinely believe this. But what is the real effect?

Much depends on the circumstances of the farmers
. If they are tenants on the land they farm, how does Fairtrade benefit them? We would suggest that it will not benefit them at all, in the end. And indeed, for those farmers who have not managed to get in on the scheme, “fairtrade” will mean they are ever more compelled to walk away from their farms, leaving them worse off than if “fairtrade” had never existed.

What is frustrating the good intentions? As usual, the Law of Rent intrudes. This states that any advantage due to location, such as a trading scheme like Fairtrade, will always be taken up by higher location values, in the form of increased rents. The landowner will squeeze as much as possible out of the tenant farmers, who will remain no better off. These tenant farmers will also need a perpetual supply of credit to remain in business or expand production as can be seen evidently, from the social banks that supply them with investment money.

How about tenant farmers who have not managed to join an advantageous fair trade scheme? They will now suffer an added disadvantage compared to those who have. They will have a reduced market for their produce, their income will fall below subsistence levels on the whole and eventually, short of migration, they will starve or seek work elsewhere from an employer at subsistence wages.

We would expect the effects of fair trade schemes to be as follows:

1. The tenant farmer gets the fair trade benefit. The margin of production falls
2. Less fertile land is brought into use at the margin
3. Rent on existing land in use rises in proportion because the landlord can take all the gain – otherwise the tenant is forced off the land
4. Earnings (after rent has been paid) from ever more productive harvests will not increase. Because increased production always goes to rent
5. Tenants farmers will not be able to accumulate capital of their own. They will have to apply for more credit to stay afloat
6. “Fair trade” farmers on the whole will remain close to subsistence living. Farmers not in a fair trade scheme will be swept away

We would like to see if there is any hard evidence for or against this prediction. The seemingly persistent requirement for credit suggests that this analysis describes what is happening. If landlords are claiming all additional earnings as rent, the tenant farmers will be unable to use surplus capital to increase production. If anyone can point us to the effects of “fairtrade” on farm rents, over say the past 10 years, this would be valuable to this enquiry.

On theoretical grounds, we would predict that all gains will go to the landlord in rent,
as they do even in modern, advanced, western economies. The same Law of Rent will be at work here, since it applies in all times and in all places. If this is so, then “fairtrade” is and can be no more than a palliative. We would expect this, since the deep roots of poverty are not being addressed by it.

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