Unfair Trade

Unfair Trade
The Fair-Trade Movement Does More Harm Than Good

Despite the claims of its champions, the fair-trade movement doesn't help alleviate poverty in developing countries.
Even worse, it is just another direct farm subsidy of the kind most conscientious consumers despise. In the long term,
the world needs free trade, not fair trade.
AMRITA NARLIKAR is Reader in International Political Economy at the University of Cambridge and the founding director
of the Centre for Rising Powers. DAN KIM is a Volkswagen Foundation postdoctoral research associate at the Centre for
Rising Powers at the University of Cambridge.
It is time to face reality: the current round of multilateral trade talks is doomed. Rather than try to revive it, argues a
former U.S. trade representative, world leaders should salvage a few smaller agreements and study what went wrong in
order to do better the next time around.
The most talked-about global economic trend in recent years has been “the rise of the rest,” with Brazil, Russia, India,
and China leading the charge. But international economic convergence is a myth. Few countries can sustain unusually
fast growth for a decade, and even fewer, for more than that. Now that the boom years are over, the BRICs are
crumbling; the international order will change less than expected.
Last month, the Fairtrade Foundation staged a march on the British Parliament, a campaign featuring various celebrities
and more than 13,000 petitioners, urging UK Prime Minister David Cameron to put issues of ethical consumerism at the
center of the upcoming G-8 summit. At first glance, the decision by self-proclaimed ethical consumers to buy fair-trade
products seems harmless. What could possibly be wrong if individuals, exercising their right as consumers, choose to
promote certain niche markets? Quite a bit, as it turns out.
Although the concept of ethical trade has existed for a long time, the institutionalization of the fair-trade movement did
not begin in earnest until the late 1980s. In 1989, the World Fair Trade Organization was founded, and in the years that
followed, various fair-trade certification and labeling processes emerged. A product is granted a fair-trade label once its
producers have met a list of social, economic, and environmental requirements. The stated purpose of the fair-trade
movement is to give economic security to producers in developing countries -- often of unprocessed commodities such
as fruits, live animals, and minerals -- by requiring companies and consumers to pay a premium on the market price.
Until now, any questioning of the fair-trade movement has been limited to the micro level. The movement has faced
repeated criticisms, for example, for the relatively expensive fees that producers must pay to get a fair-trade label,
which make it ineffective for many poor farmers. Another area of concern is just how lucrative the process is for
middlemen and retailers. Finally, several studies show that very little of the premium that consumers pay actually
reaches needy producers. Consumers might be surprised to learn that only one or two percent of the retail price of an
expensive cup of “ethical” coffee goes directly to poor farmers.
Fair trade is a form of protectionism, and it should not be allowed to hide behind the mask of morality.
The adverse effects of fair trade are even more worrying at the macro level. First, fair trade deflects attention from real,
long-term solutions to rural poverty in developing countries; and second, it has the potential to fragment the world
agricultural market and depress wages for non-fair-trade farm workers.
Consider the root of the problem that the fair-trade movement seeks to address: the fact that the agricultural
commodities market is volatile (characterized by large and frequent price fluctuations) and distorted (ridden with high
tariff barriers and subsidies). The volatility has several sources, but price distortions are a major contributor. The
distortions, in turn, are largely the result of policy choices by developed countries. In 2011, OECD governments doled
out approximately $252 billion worth of subsidies to domestic farmers. These subsidies, along with relatively high tariffs,
create a virtually impenetrable trade barrier for farmers in the developing world. Even producers that are potentially
more efficient than those in the West are blocked from entering lucrative Western markets. Meanwhile, food prices
consistently rise in the developed world, but poor and vulnerable farmers in developing countries are unable to take
advantage of them.
Ethical consumers should be commended for wanting to improve the plight of needy farmers in the so-called global
South, but fair trade is the wrong instrument to achieve this objective. The premiums charged for fair-trade products are
just another direct farm subsidy. Admittedly, those subsidies are miniscule in comparison with the ones that OECD
governments hand out. (In 2010, retail sales of fair-trade-labeled products totaled about $5.5 billion, with about $66
million premium -- or about 1.2 percent of total retail sales -- reaching the participating producers.) But there is irony
and inefficiency in counteracting one subsidy with another, especially since consumers in developed countries ultimately
pay both, either through taxes or at high-end supermarkets such as Whole Foods.
Surely, a more efficient and straightforward solution to distortion in agricultural markets is the removal of massive OECD
subsidies and tariffs -- in other words, free trade. Misguided Western consumers might find solace in purchasing fair-
trade products, yet they are actually harming those they mean to protect. The fair-trade movement claims to address
“the injustices of conventional trade, which traditionally discriminates against the poorest, weakest producers.” But in
fact, trade liberalization is the only force that can level the playing field for all producers around the world, guaranteeing
poor producers a fighting chance at long-term competitiveness by harnessing their comparative advantages without
relying on charity.
The macro-level problems with the fair-trade movement do not end there. The movement’s success in helping a small
number of poor farmers comes at a potentially high cost for the rest of the market. As the fair-trade movement grows
and provides more benefits to its producers, there is a real risk of market fragmentation. Fair-trade producers could split
away from the regular market, generating two sets of market prices -- a fair trade price and a regular price -- and, in
turn, creating two sets of market wages. Regular trade producers would likely end up with significantly lower wages.
Moreover, a guarantee of an above-market price for a portion of producers would lead to increased production,
resulting in lower overall commodities prices and, ultimately, decreased profits for all regular trade producers. Although
the problems created by fair-trade subsidies are not on the scale of those created by government subsidies in developed
countries, they are still large enough (and growing) to have a potentially seriously negative impact on producers in
developing countries.
One could perhaps turn a blind eye to the adverse effects of the fair-trade movement if it were catering only to a niche
market. Unfortunately, this is not the case. In the United Kingdom alone, total sales of fair-trade-certified products
(including coffee, tea, and cocoa) have increased from 50.5 million pounds sterling (almost $77 million) in 2001 to more
than 1.3 billion pounds sterling (almost $2 billion) in 2011 -- a staggering 2,612 percent increase in just a decade. The
fair-trade market is growing so rapidly that it is beginning to crowd out the regular trade market, which includes all
producers who compete without the benefits of subsidies.
Fair-trade enthusiasts might argue that the world would be better off if the fair-trade market replaced the free-trade
one. But in fact, such an outcome would destroy the livelihoods of millions of farmers who do not have the luxury of
paying for fair-trade certification. To survive, these farmers would likely have to stop planting basic crops, such as wheat,
corn, and rice, and shift to cash crops, such as coffee, tea, and fruits, which could bring in the income for certification.
The immediate effect would be a prohibitive hike in food prices. Further, as farmers shift their production, non-fair-
trade basic food products would become more vulnerable to price instability caused by supply and demand shocks,
because there would be fewer producers willing to take the risk of non-subsidized farming.
If the fair-trade movement eventually came to encompass all categories of agricultural production (including basic food
products), the price shocks would be even worse. Rather than responding to market prices, farmers in developing
countries would be incentivized to produce whatever products garner the greatest subsidies. With subsidies, not
consumer demand, dictating production, consumers in the developed and developing worlds would see further
increases in basic food prices.
Ultimately, of course, it is consumer demand that is fueling the fair trade movement. With the Doha Round of the World
Trade Organization foundering, some consumers might genuinely believe that fair trade offers a respectable second-
best option to free trade. At its minimum, however, fair trade detracts attention from the real solution and lulls
consumers into a false sense of satisfaction. And if the fair-trade movement continues to grow as quickly as it has in
recent years, it will likely produce huge efficiency losses.
Self-proclaimed ethical consumers need to start looking reality in the eye. Fair trade is a form of protectionism, and it
should not be allowed to hide behind the mask of morality. There is nothing ethical about privileging small groups of
producers while the majority are sinking deeper into poverty.
Home › Features › Snapshots › Cyprus and Russia Did Not Just Break Up
Cyprus and Russia Did Not Just
Break Up
Why Moscow Is Playing the Long Game on the Island of Aphrodite
Yuri M. Zhukov
March 29, 2013
Article Summary and Author Biography
Russia recently turned down a deal to save Cyprus’ banking sector. At first glance, the move looked like a huge strategic blunder. In fact, a
credible offer was never on the table and Moscow needs no accord to secure its dominance on the island.
YURI M. ZHUKOV is a Fellow at the Weatherhead Center for International Affairs' Program on Global Society and Security and a Graduate
Associate at the Institute for Quantitative Social Science at Harvard University.


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(Courtesy Reuters)
On March 19, Michalis Sarris, Cyprus’ finance minister, flew to Moscow for emergency talks aimed at saving the island’s outsized banking
sector from collapse. In exchange for a loan extension and new financial aid, the story goes, Sarris offered Russia trade preferences in the
energy sector, gas exploration rights, and controlling shares in Cypriot banks. Two days later, he left Moscow empty-handed. Up against a
wall, on March 25, Cyprus and the EU agreed on a bailout package that will help pay the country’s bills but will also deduct billions of euros
from the savings accounts of wealthy Russians and leave billions more of Russian assets frozen in Cypriot banks.
To many Western observers, Moscow’s unwillingness to take Sarris’ initial offer appears to be a huge strategic blunder. It seems inexplicable
that Cyprus’ most heavily invested economic partner -- and the largest source of foreign deposits in the island’s banks -- would refuse a deal
on such apparently favorable terms. All the more confusing is Moscow’s apparent decision to forego a chance to solidify its strategic
foothold, given Russia’s geopolitical ambitions in the eastern Mediterranean.
There are three likely explanations for Russia’s behavior. First, it is not clear that there was ever a credible deal on the table. Second, Russia
did not believe that a last-minute agreement could change Cyprus’ fate. And third, Russian losses from the collapse of the Cypriot banking
sector will not be catastrophic. Put simply, Moscow’s decision to turn down a deal with Nicosia was in Russia’s long-term interests.
Cyprus’ current troubles were triggered by the eurozone debt crisis. The island’s banks accumulated a host of toxic assets from their Greek
branches and lost much of their capital during the restructuring of Greek debt. As a result, total bank liabilities are five times larger than the
nation’s GDP -- a ratio almost four times the EU average. Without an independent monetary policy or the financial means to pay down the
deficit and save the banks, Nicosia requested a 17.5 billion euro bailout from Brussels earlier this month.
Wary of rescuing the island’s unsustainably large banking sector, the troika of eurozone bailout creditors -- the European Commission, the
International Monetary Fund, and the European Central Bank -- insisted that Cyprus raise 5.8 billion euros before it could qualify for their
proposed 10 billion euro bailout. On March 16, Cypriot officials unveiled a controversial plan to raise these funds through a one-time tax (or
“haircut”) of 6.75 to 10 percent on all savings accounts. After a wave of popular protests and the Cypriot parliament’s rejection of the plan,
the ECB threatened to cut off all emergency financial support by March 25. Desperate, Cypriot officials turned to Moscow for help.
It remains unclear what Cyprus asked for and offered Russia. Sources close to the talks told Russian press that Sarris came to Moscow
unprepared, with neither firm numbers on the size of a potential aid package nor any concrete proposals that could serve as a baseline for
negotiations. The rushed talks didn’t help either: any potential deal between Cyprus and Russia would have required weeks of negotiations,
rather than the few days that remained before the ECB’s ultimatum expired. In addition, the eurozone troika sent clear signals that it did not
want Russia to be the savior of an EU member state, and German Chancellor Angela Merkel explicitly warned Cyprus against securing a side
deal. As a result, even if a bilateral agreement could be made, Moscow had reasons to doubt Nicosia’s ability to honor it. Given these
challenges, a bargain would have been exceedingly difficult to strike.
Based on press reports, it seems the proposed deal offered little benefit to Russia. Nicosia requested a five-year extension of a 2011 Russian
loan of 2.5 billion euros and an additional 5 billion euros of support, in the form of a private investment fund in gas and banking assets. But
Russia’s two largest lenders -- Sberbank and VTB Group -- had little interest in acquiring banks that will likely be restructured as part of a
eurozone bailout deal. The Russian gas and oil giants Gazprom and Rosneft, meanwhile, were reluctant to negotiate investment in offshore
tenders under such a compressed time frame, before seismic survey work could be completed. An offer of trade preferences for Russian
companies in Cyprus’ energy sector was not enough to sweeten the deal.
There is an emerging consensus within Russia that Cyprus’ days as an offshore tax haven are over and that change has been on the horizon
for some time. Early warning signs appeared in 2010, when Nicosia requested its first 2.5 billion euro loan from Moscow. The total assets of
Cyprus’ domestic credit institutions have been declining ever since, dropping from a peak of 100 billion euros in 2010 to 83 billion in 2012 --
a difference equivalent to Cyprus’ total GDP. Russians are also aware that the coming EU bailout of Cyprus will fundamentally alter the
status quo. The EU has clearly signaled its intent to shrink Cyprus’ oversized banking sector and to end the island’s status as an offshore
financial center for rich Russians.
Facing a stark choice between losing a lucrative tax haven and throwing more money into a bottomless pit, Russia picked the strategy that it
hopes will minimize its potential losses. Russian assets in Cypriot banks total approximately ten billion euros and the most recent projections
of Russian losses are four to six billion euros. That is troublesome, but minor compared to the other problems Russia is facing right now: the
flight of capital cost the economy 44.5 billion euros in 2012 and 63 billion in 2011.
To be sure, Cyprus is part of the financial infrastructure routinely used by Russian companies and the bailout will change how they do
business. Yet many see this adjustment as inevitable and overdue. The current reliance on Cyprus originated in the early 1990s, when
Russia’s financial system was in disarray, payment in foreign currency was nearly impossible, and the ruble was inflated. Seeking financial
security, many Russians opened offshore accounts. The country’s financial system has since stabilized, but the use of offshore accounts has
stubbornly persisted.
In December 2012, President Vladimir Putin declared “deoffshorization” as a central policy priority. In keeping with this objective, Prime
Minister Dmitry Medvedev has proposed “domestic offshore” zones in the far eastern regions of Russia. This is not a new idea: Russia
already has over 20 special economic zones, which offer tax benefits on investment and business income. So far, however, most of these
zones have had trouble attracting investment. Low taxes do not compensate for Russia’s lack of adequate property rights protections,
independent judicial branch, or stable business climate -- the core reasons why so many Russians open offshore accounts in the first place.
But the EU’s growing opposition to Russian investment has created a new opportunity to lure capital back into Russia. The president of the
Euro Group, Jeroen Dijsselbloem, has suggested that the Cyprus experience may serve as a model for future EU-led Eastern European
bailouts. ECB officials have also reportedly warned Latvian banks not to accept outflows of Russian capital from Cyprus. Thus, Russian
investors are finding it increasingly difficult and risky to park their money in the West.
Still, all this does not mean that Russia’s days in Cyprus are over. The dismantling of Cyprus’ banking sector and the subsequent decline in
foreign investment and tourism are bound to push the country into a deep and protracted recession. Newly discovered gas bounties offer a
possible path to recovery. But maritime borders and exploration rights remain a major point of contention. As Cyprus braces for hard times,
its growing demand for external political support and technical expertise will compel it to rebuild ties with its former patron, whose
wealthiest citizens may now become the “big, angry shareholders” in Cyprus’ future. Sweetheart deals on energy and even naval basing
rights are possible. In the end, Russia’s exodus from the island of Aphrodite may prove brief.