Why we need free trade, not Fairtrade

Just in time for Fairtrade fortnight, the Adam Smith Institute reports that the movement doesn't actually help the most impoverished farmers. In fact, scrapping tariffs and subsidies would do far more good.

This feature is part of our FREE daily Money Morning email. If you'd like to sign up, please click here: Sign up for Money Morning

If, amid all this Tesco competition commission business, you're getting a bit sick of being told what goods you should buy and where you should buy them from, I've got some bad news for you.

It's Fairtrade Fortnight. So you can expect to be bashed over the head about your consumer choices a lot more over the next two weeks.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

In case you didn't know, Fairtrade goods are those ones (usually bananas and coffee, but increasingly lots of other stuff as well) with the little blue, green and brown logo on them in the supermarket. Another way to tell the Fairtrade products is that they often cost you more, but offer no discernible improvement in quality over their cheaper, presumably UnFairtrade, cousins.

That's because you're not paying extra for better quality. You're paying extra so that the people who made the goods get more money, and thus a better quality of life.

A noble goal. Trouble is, apparently it doesn't go to the people who actually need the help most

Just in time for Fairtrade Fortnight, the Adam Smith Institute has come out with a report saying that the Fairtrade movement doesn't actually help the most impoverished farmers.

Now I have to make clear upfront that as you might be able to guess from the name the Adam Smith Institute is a free market think tank. As such, they are unlikely to publish a pamphlet singing the praises of a scheme devoted to economic intervention. But I suspect they have a point.

Why we'll pay more for a Fairtrade sticker

So what is Fairtrade anyway? The idea behind it is essentially that producers of goods in poor countries are given a better-than-market price for their products in order to give them a decent wage and ensure they can develop their business, rather than being gutted every time the bottom falls out of whichever market they're in.

Consumers have lapped it up. We bought nearly £300m worth of Fairtrade products in 2006, and £493m last year. Tate & Lyle has just said it's going to turn over its entire operation to Fairtrade sugar 40% of the cost of each bag of sugar will go to its growers and producers in Belize. Scotland has said it's going to try to become the world's first Fairtrade country (nice to know the Scottish Parliament is engaging with the issues that really matter to voters).

And why not? It's nice to feel that our consumer choices are doing some good. Most people don't want to exploit other human beings if they can avoid it at a minimal cost to themselves, particularly in a public arena where other people can scrutinise your choices.

Sure, they'd probably pay a domestic servant or a Polish plumber far less than the going rate if they can get away with it. But if you're talking about a few pence on the price of a cup of coffee, for which you get the pleasure of the till operator and other shoppers seeing that you've made the ethical' choice, then it's no surprise that Fairtrade has been a hit.

But there are issues with Fairtrade. For one thing, it's a major brand. And as the Adam Smith Institute points out, Fairtrade's rapid growth and the labelling of towns across the country as Fairtrade' towns means that other ethical brands' with different approaches are squeezed out. Not everyone agrees with Fairtrade's promotion of farming co-operatives, for example, which some argue are more inefficient and prevent people from developing beyond basic agriculture. If Scotland decided to declare itself a "Coca-cola" country, residents would be rightly annoyed.

Stop the unfair subsidies instead

The core problem is that in the end, Fairtrade comes down to hand-outs. The point of a free market, when it's allowed to function, is that the pricing mechanism shows people where there's a need and therefore a profitable opportunity to be fulfilled. Oil prices rise, we go and dig for more oil or find a substitute. Food prices rise, we grow more food. Coffee prices keep collapsing you find a better industry to work in.

As Ceri Dingle of educational charity WorldWrite tells The Telegraph: "Fairtrade is much more about satisfying the Western consumer's guilt. No country has ever become a successful economy by being a farm they need to industrialise."

However. It's easy to be cynical about these things, particularly when idiot celebrities swarm all over them waving plastic armbands and spouting nonsense about the evils of shareholders. And it's entirely true that as Tom Clougherty of the Adam Smith Institute says, what we really should be campaigning for is truly free trade, with tariffs and subsidies scrapped.

But equally, from that point of view, it's hard to complain about consumers choosing to give select coffee growers in Mexico a few extra pennies in change when some of the richest European landowners are raking in millions of pounds a year from taxpayers, who have no choice in the matter at all.

The good thing about Fairtrade's success is that it shows that consumers given a free choice - are willing to pay a premium to back products which they believe are ethical and leading to sustainable development. So in the absence of any real effort by governments to get rid of the subsidies that really cause the pain in the developing world, then if we're going to object to Fairtrade, we should be looking for better models to follow.

For example, the ASI cites Caf Britt as a good non-Fairtrade alternative these Costa Rican coffee bean farmers have climbed the economic ladder' by doing all the roasting and processing as well as growing the beans. Or there's Ugandan group Good African Coffee, for anyone who'd rather buy from a genuinely developing country rather than the arguably pretty developed Mexico.

As Fairtrade grows bigger, scrutiny of its economic logic will only increase. The ethical sector is ripe for smart entrepreneurs to come up with genuine ways to benefit developing countries, while turning a profit and avoiding reliance on hand-outs. Fairtrade will find it has to compete for the ethical pound, which should be good news for the beneficiaries of ethical produce. That's the beauty of free markets.

Turning to the wider markets...

Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email

Nikkei up 3% on sovereign wealth fund rumours

In London, the blue-chip FTSE 100 index swung between a high of 5,970 and a low of 5,863 on Friday but eventually ended the day 43 points in the red, at 5,888. Mortgage bank Alliance & Leicester rebounded from previous days' losses to top the leaderboard, closely followed by Lloyds TSB. For a full market report, see: London market close.

On the Continent, the Paris CAC-40 closed 34 points lower, at 4,824, on Friday. In Frankfurt, the DAX-30 slumped 98 points to end the day at 6,806.

Across the Atlantic, stocks rallied in the final moments of trading after CNBC reported that banks were putting together a rescue bid for troubled bond insurer Ambac. The news saw Ambac shares jump by over 18% whilst the Dow Jones went on to close 96 points higher overall, at 12,381. The tech-rich Nasdaq was just 3 points higher, at 2,303, as software company Intuit weighed. And the S&P 500 was up 10 points, at 1,353.

In Asia, the Japanese Nikkei rose 414 points to hit a six-week closing high of 13,914. The rally followed newspaper reports that Chinese sovereign wealth funds planned to buy up as much as $10bn in Japanese stocks. In Hong Kong, the Hang Seng was down 35 points, at 23,699, as falls on the Chinese mainland hit investor sentiment, although HSBC rose on expectations of Ambac's rescue bid.

Hometrack: UK house prices fall for fifth month

Crude oil futures had risen to $99.29 this morning, as had Brent spot which was last trading at $97.55 in London.

Spot silver had hit a new 27-year high of $18.10 this morning, whilst spot gold was lastr trading around the $949 mark.

In the currency markets, sterling had risen to 1.9629 against the dollar as Friday's better-than-expected retail data diffused expectations of further UK rate cuts. Sterling was also at 0.3247 against the euro. And the dollar was at 0.6747 against the euro and 107.43 against the Japanese yen.

And in London this morning, a Hometrack report showed that UK house prices had fallen for a fifth consecutive month in February. The average cost of a home in England and Wales fell by 0.2% to £174,400. Hometrack - which bases its reports on surveys of estate agents and surveyors - added that any upward pressure on prices from lower mortgage rates would 'remain limited for the foreseeable future'.

Our recommended articles for today...

Could food riots ruin China's Olympic year?

- Chinese inflation jumped to 7.1% in January. Most of the increase is down to fast-rising food prices. So the authorities could see an historic year blighted by an overheating economy and civil unrest. For more on China's inflation worries, read: Could food riots ruin China's Olympic year?

Soft commodities still have further to go

US wheat stocks could fall to their lowest level in 30 years this summer. And across the globe, grain stockpiles are falling to their lowest levels since records began. To find out why, if you're not invested in agriculture yet, you'll live to regret it, read: Soft commodities still have further to go

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.