Coffee is grown mostly in LDCs but consumed mostly in high income countries. In coffee countries, the economic rents created by free trade are distributed unequally among distributors, plantation owners, growers, and harvest workers. But risk in this volatile industry is spread around pretty evenly. There is rightfully much concern for the economic welfare of the poorest, most economically vulnerable segments of the supply chain (viz. pickers, especially migrants).

Advocates of fair trade (I'll skip the scare quotes; HT McCloskey) promote their cause on the seemingly unobjectionable premise that consumers in rich countries ought voluntarily to pay a small premium for their coffee, which, when passed on to coffee workers in poor countries, will make a huge difference in their well being. An administrative process identifies worthy populations in coffee countries and arranges to target the surplus from your over-priced latte toward the poor folks we all want to help. Sounds great. Problem is you have political institutions allocating rents.

This is the message delivered in a new Mercatus Center working paper by Colleen Berndt, ABD in economics at GMU and my colleague at San Jose State. The paper, "Is Fair Trade Fair? Evidence from Costa Rican Coffee Farms," is the product of extensive field research supported by Mercatus Center's Global Prosperity Initiative. (Summary here.)

First, on what is fair trade:

Fair Trade covers artisans and farmers with goods which include coffee, tea, cocoa, bananas, sugar, honey, rice, flowers, cotton, even sports balls. Items become Fair Trade items through a certification process. The Fairtrade Labeling Organization (FLO), based in Germany, certifies producing organizations that comply with a "set of minimum standards for socially responsible production and trade." These standards...detail member farm size, electoral processes and democratic organization, contractual transparency and reporting, environmental standards, to name only a few. FLO is the only organization which certifies the producers. Other supporting organizations, such as TransFair USA, uphold the standards, certifying the products themselves, and the intervening organizations which bring the product from the producer to the consumer. TransFair USA's label allows the US consumer to identify goods produced under FLO's Fair Trade Standards.

Next, on why fair trade doesn't achieve the seemingly onobjectionable. The FLO business model relegates both membership decisions and rent distribution to a committee decision process.

Fair Trade regulations specify that individual farmers sell their beans to a Fair Trade cooperative. No other purchaser, such as a multinational corporation, is eligible for certification as a Fair Trade organization—only cooperatives are. The cooperative must employ democratic procedures to determine how the Fair Trade premium is distributed and to determine leadership. Members may opt to use the funds to build schools, medical clinics, to hold emergency funds to which members can apply in times of needs, or may disburse the funds to the member farmers.

Individual farms cannot be certified. Nor can farm workers. Only cooperatives. And joining a coop requires sinking substantial costs. Much of the rents created by the fair trade premium are absorbed by the coop's certification costs, standards enforcement, and administrative overhead. Even under ideal circumstances free from corruption and rent dissipation, the remaining rents accrue to coop members, who are overwhelmingly small landowners. Not the poorest and most vulnerable, e.g. migrant farm workers.

There's more to it than just a bad business model, of course. See the paper for yourself. Fun and very informative.

See also Ben Powell and David Skarbek on sweatshops.

Why do I care? It is difficult to find a good cup of non-fair trade coffee in my neighborhood.