Remember, Kids: "Fair" Is Just Another Four-Letter Word That Starts with "F"

Every time I walk into Starbucks to grab a venti triple skim latte, I get irked by the place's incessant moral preening about "fair trade" coffee - its walls papered with pictures and stories of happy Central American coffee growers, each picture/story letting me know that I should not - I repeat NOT - feel guilty about being stinkingly rich enough to regularly drop 5 bucks on a giant, steamy cup of caffeinated water and milk foam.  Starbucks is certainly not alone, and these purveyors have every right to produce, market and their products however they see fit.  But those of us who work in the trade field know all too well that "fair trade" is really just secret code for "the malicious use of subjective hokum to employ latent protectionism" or "the brazen imposition of developed country standards on the developing world" or, at best, "well-intentioned, but misguided (and economically ignorant) marketing efforts that do nothing but raise prices."  (Sometimes all three!)  So the sight of the "fair trade" label has never sat well with me.

I've always thought that it was this last definition - the well-meaning-but-economically-ignorant one - into which almost all "fair trade" coffee efforts fell, so when I walk into Starbucks, or pretty much any other hipster coffee hangout, I get irked (and smugly so), but not irked enough to walk out.  (I do love me some overpriced latte.)  While the marketing efforts were clearly feel-goodism gone awry, I never really thought that they were hurting anyone other than the dumb/lazy, rich consumers who were willing to pay a little bit more for our "fair trade" drinks.  However, after reading this illuminating piece by Duke University's Mike Munger about the troubling effects of the "fair trade movement" on poor local farmers, I might just need to start getting my sweet, sweet caffeine fix elsewhere:

Here is the basic economics--a rent is being created: a price above market price is being charged. In countries where property rights, contracts, and rule of law is tenuous, feel-gooders and scam artists have put together an unholy coalition. The feel-gooders create something called "Fair Trade" certification, which means that the farmers get paid well above market price for the coffee they produce.

Not surprisingly, many farmers want to get in on this action. But less than all can be certified "fair trade" recipients, since a price that much above the market price would create a surplus. The fair trade feel-gooders would never be able to sell the glut of coffee if EVERYONE gets fair trade certification.

So, the feel-gooders stick their fingers in their ears and shout "LA-LA-LA-LA-LA" and pretend that their partners the scam artists are doing the right thing when they hand out the "fair trade" certifications.

But remember that these are countries with little rule of law, and shoddy police enforcement. So what the scam artists in effect do is sell off the rent (the high price of fair trade certification) to the highest bidder.

The result is that, after a fairly short period, three years at most, the "fair trade" farmers are getting no more, and maybe less, than everyone else, and no more than they got before the "fair trade" scam was started. The scam artists, it's true, are skimming the profits, but the competition to become a scam artist then becomes the valuable commodity, and rent-seeking to get to be the guy who certifies "fair trade" then also dissipates THAT rent. Some government official in the country, the one who licenses the guy who licenses the guy who certifies "fair trade" farmers ends up sucking down the rent.

Consumers pay more, and feel good about themselves. The feel-gooders who started the program move on to abuse some other group of farmers with false promises. And the results are a substantial increase in dead-weight loss.

Don't believe me? Article in the National Post, by Lawrence Solomon, founder of Green Beanery in Toronto, a suburb of Buffalo.

And the German study that really reveals how it all works.  In fact, as the Hohenheimers note, the certification process is so corrupt many don't even bother, and just mislabel the coffee as "fair trade" from the get-go.

Solomon's National Post op-ed summarizes the German study and Solomon's own experiences with the fair trade coffee movement, and let me tell you, it ain't a pretty sight:

Today, on World Fair Trade Day, we have something else to feel guilty about. That fair-trade cup of coffee we savour may not only fail to ease the lot of poor farmers, it may actually help to impoverish them, according to a study out recently from Germany's University of Hohenheim.

The study, which followed hundreds of Nicaraguan coffee farmers over a decade, concluded that farmers producing for the fair-trade market "are more often found below the absolute poverty line than conventional producers.

"Over a period of 10 years, our analysis shows that organic and organic-fair trade farmers have become poorer relative to conventional producers."

These findings do not surprise me. I speak as someone who has had contact with various Third World producers in my capacity as president of Green Beanery, a company I founded seven years ago to raise funds for Energy Probe Research Foundation, a federally registered charity that I manage....

The fair-trade business is filled with contradictions.

For starters, it discriminates against the very poorest of the world's coffee farmers, most of whom are African, by requiring them to pay high certification fees. These fees -one of the factors that the German study cites as contributing to the farmers' impoverishment -are especially perverse, given that the majority of Third World farmers are not only too poor to pay the certification fees, they're also too poor to pay for the fertilizers and the pesticides that would disqualify coffee as certified organic.

Their coffee is organic by default, but because the farmers can't provide the fees that certification agencies demand to fly down and check on their operations, the farmers lose out on the premium prices that can be fetched by certified coffee.

To add to the perversity, it's an open secret that the certification process is lax and almost impossible to police, making it little more than a high-priced honour system. Although the certification associations have done their best to tighten flaws in the system, farmers and middlemen who want to get around the system inevitably do, bagging unearned profits. Those who remain scrupulous and follow the onerous and costly regulations -another source of inefficiency the German study notes in its analysis -lose out....

Most merchants of certified coffees are aware of these contradictions, but most won't be aware of other problems in the certification business. For Third World farmers to qualify as fair-trade producers, and thus obtain higher prices for their coffee, farmers must join co-operatives. In some Third World societies, farmers readily accept the compromises of communal enterprise. In others, they balk. In patriarchal African societies, for example, the small coffee farm is the family business, its management a source of pride to the male head of the household. Joining a co-operative, and being told when and what and how to plant entails loss of dignity....

Some believe that certified coffee is superior in some way. But it is not always so. The small-scale farms whose local ecologies produce distinctive, niche coffee beans can't operate on a scale that would justify official certification. As the German study notes, "Certified coffees have distinct production and marketing systems with different associated costs than the conventional system."

Neither is certified coffee different at all. In fact, at Green Beanery we have received bags of coffee, some labelled fair trade, some not, grown on the very same farm and identical in every respect. The fair-trade certified farmer himself can't tell which beans will be sold as fair trade and which not -that decision is made by the higher-ups.

Because the fair-trade associations are intent on keeping the price of fair-trade coffee up, they limit the supply of coffee that can be labelled as certified. To the certified farmer's chagrin, most of his fair-trade certified crop could end up being sold as uncertified conventional coffee.

And in this well-intentioned pricefixing game, the fair-trade farmer is the pawn and the joke is on the customer.

Be sure to read the whole op-ed.  It's well worth your time.  As the title of this blog post (crassly) states, in the trade world "fair" is just another four-letter word that starts with the letter "F."  And in the case of coffee, it looks like impoverished African and Latin American farmers are getting royally, ahem, faired just so rich coffee-drinkers can feel better about themselves.

(h/t Art Carden)

Monday Quick Hits

The eastern seaboard is clearly under attack from global cooling.  Here are some interesting links to get you through these dark and cold "spring" days.

• Chevy Volt: the car from Atlas Shrugged Motors.

• Sore losers implore the US to take their ball and go home.  I like to call this the "Cartman strategy."

• New 2004 UCLA study: FDR's statist policies prolonged the Great Depression by seven(!) years.

• Sarah Palin advocates import liberalization in India, further solidifying her free trade bona fides: "[I]n the early 1990′s, due to clear, commonsense, pro free-market reforms, India’s economy took off! [It] abolished import licenses; cut import duties; removed investment caps & broke the union’s grip on industry."

• The United States has the most progressive tax system in the industrialized world.  Key graf: "[T]he top 10 percent of households in the U.S. pays 45.1 percent of all income taxes (both personal income and payroll taxes combined) in the country. Italy is the only other country in which the top 10 percent of households pays more than 40 percent of the income tax burden (42.2%). Meanwhile, the average tax burden for the top decile of households in OECD countries is 31.6 percent."

• A fascinating study (and a related WSJ op-ed) from the UK think tank Policy Exchange on the impact of global trade on the effectiveness (or, more accurately, the impotence) of the EU's climate change regulations has me wondering whether our policymakers will (i) learn the right lesson from the EU's experience - and the one advocated by Policy Exchange ("to accelerate the development of technologies that will be genuinely competitive with fossil fuels" rather than "browbeat[ing] developing countries into going green") or (ii) use the study to justify their calls for eco-protectionism.  I'm hoping the former but cynically expecting the latter.

• US steelmaking giant Nucor recently broke ground on a new iron making facility in Louisiana that would employ hundreds.  The same site is also permitted for another iron facility, and many are guessing that a steel mill will also show up down there in the next few years.  Oddly, ABC News isn't doing a week's worth of news stories on the Nucor plant(s) or any of the many other industrial expansion efforts across the country.

• Why won't Sen. Sherrod Brown (D-OH) debate GMU's Don Boudreaux on the merits of free trade?  (Yes, that's a rhetorical question.  *cluck cluck*)

• Cato's Dan Griswold points out that the easiest way to decrease American income inequality appears to be destroying the US economy.  (Obvious response: Shh, dude, don't give anyone any bright ideas.)

• So much for the silly myth of "McJobs" in the service industry.  According to this handy primer from the National Retail Federation, the import-dependent retail industry in 2009 employed 330,000 managers who earned an average annual salary of $91,650.  And there are another 300,000 or so well-paid folks in other positions.  (This isn't new, but it's worth mentioning here anyway.)

• Finally, Jonah Goldberg at AEI points us to an awesome video from Hans Rosling about the amazing improvements in global wealth and health over the last few decades.  All of it is cool and worth watching, but for our purposes, the most relevant point is around the 10:00 mark when Rosling unequivocally credits the dramatic, disproportionate (relative to other African nations) improvement of Mauritius on the country's embrace of free trade.

 Enjoy!

Sen. Sessions Supports Lowering Corporate Taxes, Except When They're Called "Tariffs"

NRO's Andrew Stiles reports that Sen. Jeff Sessions (R-AL) has decided to vocally champion the much-needed reform of America's embarrassing corporate tax system:

During a Senate Budget Committee hearing today titled “Tax Reform: A Necessary Component for Restoring Fiscal Responsibility,” ranking member Jeff Sessions (R., Ala.) made an impassioned case for why corporate-tax rates must be significantly reduced — in addition to any general reform measures designed to simplify the tax code — if the United States wants to remain an attractive place to do business. Simply doing that, he argued, would go a long way toward bringing down the unemployment rate....

"The problem is far more serious than that. We have, even in real rate terms, one of the highest, if not the highest corporate [tax] rate in the developed world. Corporations are making decisions every day: where to expand, where to hire workers…"

"This is not academic. This is going on every day. We have an unemployment rate that is unacceptable and to have the highest corporate tax rate virtually in the world — and other nations are seeing the light in reducing it — and we remain high?"

"So even if we eliminate certain deductions and have a flat rate that appears lower, it seems to my simple mind that we’ve got no less real burden on the corporate community than we had before."

As readers of this blog know, I agree wholeheartedly with Sen. Sessions that we need to reduce taxes (and other government-induced burdens) on American companies to help them better compete and thrive in today's global economy.  However, Sen. Sessions' views on reducing corporate "burdens" would be a lot more believable if he weren't singlehandedly responsible for increasing taxes on American business to the tune of several hundred million dollars per year.

As I noted in December, Sen. Sessions alone blocked the 2011 extension of the Generalized System of Preferences (GSP) - a longstanding program that lowers or eliminates tariffs (which are taxes, of course) on developing country imports, including a lot of industrial inputs and equipment used by American businesses - because he couldn't get Congress and the administration to agree to increase tariffs (taxes) under the GSP on sleeping bags from Bangladesh in order to protect a small Alabama sleeping bag manufacturer from duty-free import competition.  So he pitched a fit, put a "hold" on the GSP legislation, and the program expired.  (And per the New York Times, it appears that he's still at it.)

Cato's Sallie James explains that the cause and effect of Sessions' actions are straightforward and significant:

The Generalized System of Preferences is a federal program that offers duty-free access to the U.S. market to certain goods from certain developing countries. Or, I should say, was a federal program, because it expired on December 31. My opinion of the program is ambivalent at best, but one cannot deny that the program brings real cost savings to American consumers and businesses -- to the tune of $580 million a year -- through lower import duties....

But those duty savings are, apparently, worthless in the face of special interest politics....

The GSP expired and millions of U.S. consumers and businesses (not to mention developing country exporters) are being penalized to save a hypothetical 20 (that's two-zero) jobs that don't even exist yet. The jobs being lost by businesses that depend on the GSP to keep them competitive are, apparently, not worth consideration. And as for consumers' buying power being eroded, well forget it.

By my math, that's about $29 million in increased taxes per hypothetical new job!  While that might beis probably a good deal by Washington standards, it's a pretty awful deal for the US business community, which is feeling real, not hypothetical, pain because of Sen. Sessions.  In fact, the Coalition for GSP has started a great new website chronicling the real American businesses that benefit - err, benefited - from the lower taxes on developing country imports made possible by GSP.  (It also provides a broader lesson about the benefits of free trade for US manufacturers and consumers, of course.)  Here's a taste:

Behr Dayton manufactures engine cooling and air conditioning technology for the automotive industry in a 1.1 million square foot facility in Dayton, Ohio. According to Heinz-J. Otto, President and CEO of Behr America, the 1,000 workers in Dayton “make engine-cooling and air-conditioning components and systems for cars built by GM, Ford and Chrysler, U.S.-built cars by BMW and Mercedes, and heavy trucks produced by Freightliner and International.”

In addition to being one of Dayton’s largest manufacturing employers, Behr is one of the most frequent importers of aluminum foil from Brazil. In the first 11 months of 2010, 99.98 percent of those imports entered the United States duty free under the GSP....

GSP saved manufacturers like Behr Dayton more than $2.5 million on imports from Brazil. Surprisingly, Brazil isn’t even the largest supplier of aluminum foil under GSP. That honor goes to tiny Armenia. About a quarter of the size of Ohio and with a population just over 3 million, Armenia exported more than $58 million worth of aluminum foil under GSP through November 2010 and saved American companies another $3 million.

Sen. Sessions selfish, nakedly-political actions have forced US manufacturers like Behr Dayton to face more than $5 million in new taxes in 2011.  Other manufacturers face similar pains, and even if (when?) GSP is eventually renewed and applied retroactively to January 2011, it's quite likely that many of these American companies will have already made other, more expensive sourcing plans (and that planning ain't exactly a costless exercise itself, you know).   And, naturally, with new taxes and more uncertainty come fewer jobs.

The junior Senator from Alabama talks a big game about eliminating taxes and other burdens on American businesses in order to improve the US economy and decrease unemployment.  And he's right: those burdens definitely need to be removed, and such reform could really help jumpstart our economy.  But if Sen. Sessions really believes all that great free market rhetoric, he can - and should - prove it.

Releasing his GSP hostages would be a great, and easy, place for the Senator to start.

UPDATE: The WSJ has more here.

Wednesday Quick Hits

Lots of interesting reading over the last few days, so let's spare the pleasantries:

• If you want to know how China's efforts to control the nominal RMB-USD exchange rate lead to serious inflation (and thus an increase in the real exchange rate) read this.  (And then ask yourself this: "Hmm, is this really indicative of a sound economy that will inevitably overtake the United States in the very near future?")  AEI's John Makin has more good data on China's inflation problem here, although I think his solution is a tad simplistic.

• In a great NYT op-ed Harvard's Mark Wu provides three indisputable reasons why China's currency policies aren't the problem for the United States that many, like Sen. Chuck Schumer, breathlessly claim.  My favorite part: "I recently did an analysis of the top American exports to our 20 leading foreign markets, and found little evidence that an undervalued Chinese currency hurts American exports to third countries. This is mostly because there is little head-to-head competition between America and China. In less than 15 percent of top export products — for example, network routers and solar panels — are American and Chinese corporations competing directly against one another. By and large, we are going after entirely different product markets; we market things like airplanes and pharmaceuticals while China sells electronics and textiles."  Cato's Dan Griswold also pens a nice summary on the same issue, and NRO's Rich Lowry broadens the view a little.  [UPDATE: Fresh from Worldtradelaw.net's indispensable trade headlines comes a new CNN report on a debate between Fred Bergsten and Jim Chanos on whether the yuan is undervalued or overvalued.]

• Meanwhile, China's selling US Treasurys again.

• HotAir's Jazz Shaw provides an excellent example in the Ecuador-Chevron kerfuffle of why trade agreements' investor-state protections - such as the mandatory resort to third-party dispute settlement - aren't (as many misguided trade critics claim) pernicious and instead encourage foreign investment (and thus economic growth and, of course, jobs).

• At the request of the Chinese government, "China's five largest banks have pledged to lend more to government-subsidized housing projects in 2011."  What could go wrong?  Oh, right, that.

• Green trade disputes are suddenly a hot topic!  First, Sen. McCain tells Brazilians that US ethanol policies are ripe for a WTO challenge.  Then, Reuters wonders if a "solar trade war" is on the horizon because so many governments are subsidizing the heck out of their solar industries.  Finally, former WTO Appellate Body chair James Bacchus proposes that the US and China negotiate a pre-emptive ceasefire on gree trade disputes in order to avoid a serious conflagration.  If only someone had been warning us about all of these problems for, oh I don't know, the past 20 months or so.  If only....

• The Economist provides our super-cool graphic of the day, which shows that the key to cleaner energy consumption is economic development, not top-down government control.  Shocking, I know:

• The Seattle Times' Bruce Ramsey provides an excellent Korean history lesson which shows that Korean opposition to KORUS and other FTAs is pretty silly.

• Doug Holtz-Eakin, James Capretta and Joseph Antos write a must-read op-ed systematically debunking the liberal/Democrat talking point that repeal of ObamaCare will increase the US budget deficit.

• Finally, this is hilarious, and so is this.

Enjoy!

America's Development History

Courtesy of Cafe Hayek's Russ Roberts comes a fantastic lesson from NPR (of all places) about creative destructon and American wealth and innovation: "The Jobs Of Yesteryear: Obsolete Occupations." As Roberts notes, the slideshow, which includes supporting text and audio, demonstrates how most of America's jobs of yesteryear were "lost" because of technological advances, not foreign competition.

I'd add that the slideshow provides a few other good lessons. First, and as a corollary to Roberts' point, the realities of how many jobs really are "destroyed" in America - i.e., by becoming obsolete - shows that one can't focus only (or mainly) the sheer number of jobs created, but also the quality of those jobs. America could add a million jobs tomorrow by mandating the use of typists or elevator operators, but would we really be any better off? (If only someone would ask this question to the state of New Jersey, which still mandates that all gas stations be full service only!)

Second, the photo gallery shows just how predominant child labor was during America's years as a "developing country." Indeed, several of the jobs highlighted - copy boys, pinsetters, switchboard operators (before the kids' pranks became unbearable) - were done mostly by children. Knowing this reality of American development provides some much-needed context when we hear the loud concerns and judgments about child labor in places like India and China coming from people in advanced developed economies that had very similar labor practices during their development. Now, I'm not saying that such concerns/judgments are always insincere or unnecessary - that's obviously untrue - but they do require this historical context. (A point Mark Perry also makes today in discussing a very cool news story about China's workers.)

Finally, and on a more humorous note, it's quite telling that the job of "Lector" - basically a guy who would read the news aloud while people rolled cigars - hasn't been used in the United States for 100 years but, as the NPR slideshow notes, is still being used in Cuba. Ahh, Cuba: socialist paradise!