un-Fair Trade

Walked by the body shop today and saw that famous old 'Fair Trade' poster and I couldn't help but recall one of the arguments from 'The Undercover Economist' about why this type of fair trade isn't a good idea.

The argument ran something like this:
(I'm going to use coffee in this case, because it is the best known)

Fair trade distorts markets. How does it do this? Well, when people buy fair trade coffee they are creating the illusion that producing coffee is actually more valuable than it is. Economics tells us that when prices rise, production rises. This means that more poor farmers in these countries enter into the coffee market.

This, in turn, forces the prices of coffee in non-fair-trade areas down (when supply goes up and demand remains the same, price goes down). So those people that enter into it hoping to get a fair trade deal but don't, end up being worse off than if fair trade had never existed in the first place (first off they are in a market they might not have entered otherwise and secondly the price of coffee is actually lower than it should be, because there are too many farmers in the market).

For this reason, fair trade doesn't work. That doesn't mean you should give up on trying to help poor people, it just means that you should try to help them in other ways. Don't buy fair trade coffee, instead invest money into some sort of farmer education fund (not tied to any specific product, like coffee, since that just encourages more farmers to enter that specific market). Then these farmers have the opportunity to learn another trade. That will really help them a great deal more than Fair trade.