The price of coffee plunged by more than 50 percent between 1997 and 2001, driving millions of growers into poverty. Fair Trade is a much-heralded micro-economic response that allows coffee-producing cooperatives to sell directly to importers and roasters in the consuming countries, bypassing the customary network of middlemen in their own countries. Consumers of Fair Trade coffee typically pay a premium, and cooperatives are guaranteed a floor price. In this paper, the author argues that Fair Trade is unlikely to improve growers' standard of living in the long term: As a subsidy it is inefficient, and it distorts growers' incentives to upgrade and diversify. The real problem is imperfect competition in intermediary markets; interventions should address the causes of this phenomenon rather than the symptoms.
Read the rebuttal from Paul Rice, CEO of Transfair USA, the leading promoter of fair trade.
Read author David Zehner’s Rice's response.