TCS Daily

Costly Conscience

By Nima Sanandaji - April 27, 2006 12:00 AM

A recent draft opinion for the European Parliament's Committees on International Trade and Development strongly embraces the principles of so-called "fair trade". Socialist MEP Jörg Leichtfried, calls on the European Commission to "promote educational programmes to raise awareness of the merits of fair trade". It wants the Commission to "undertake a study to examine how Fair Trade could develop into a model for a sustainable trade policy" and to "organise exploratory research to establish clear and widely-applicable criteria against which consumers assurance schemes can be assessed, underpinning consumer confidence in such schemes".

The draft opinion also "[r]eminds that, while international trade agreements fail to deliver for the poor countries, the Fair Trade system has proved to be effective for poverty reduction and sustainable development and believes that, in the long term, it could allow developing countries to fully participate in the multilateral trading system".

The so-called fair trade movement is gaining momentum in Europe, not least among EU politicians. (This at a time when a new World Trade Organization deal appears all but dead.) Consider the remarks made by EU Trade Commissioner Peter Mandelson in the European Parliament last June:

"Fair Trade has shown that those working in difficult conditions in commodity-dependent and poor developing countries can aspire to a better life for themselves and their families... The key lesson is that trade is not just about the dismal science of economics: it is especially not about saying that the laws of comparative advantage ensure that trade is at all times, in all cases, to the benefit of all. Trade is about people, their livelihoods, their families, sometimes their survival: Fair Trade reminds us of that strongly, and I am happy to continue the dialogue that Fair Trade movement has opened with me. It's good for me to be reminded of that."

Translation: Mandelson is rejecting the cold theories of economic sense in favor of a view of trade that is more based on social concerns.

Fair trade might be popular among some European consumers who view it as a way to clear their conscience, but in the long run it could actually harm developing economies as much as their current protectionist policies already do. When it's unclear how products are labeled as "fair trade", the result is often an unusually high price. Fair trade is thus a combination of trade and charity. Now, consumers certainly should have the freedom to spend their money as they wish, but there is a clear case to be made why charity should not be mixed with trade.

You cannot build an economy on what is not competitive. The reason so many countries in Africa or South America have remained poor is that their rulers have implemented socialist policies, attempting to "protect" their markets from competition. These policies have been applauded, not to say proposed, by Western left-leaning intellectuals. And the policies have all utterly failed. An industry that is "protected" from international competition will never become productive enough to compete in the global marketplace and cannot be the basis of a functional economy.

It's clear now that foreign aid has utterly failed in creating growth in Third World countries. While aid can be a good way of feeding the poor when a catastrophe appears, it is by no means a mechanism by which economic development can be achieved.

The massive aid money that has flowed to third world countries during the past decades has created dependence, corruption and massive government bureaucracies. It has rewarded dictators and created an atmosphere in which it is more tempting for local politicians to seek additional funding rather than implement a sensible economic policy.

Fair trade mixes foreign aid with trade. Might this not make it less harmful to economic incentives? Perhaps. But it is as likely that fair trade will disrupt the beneficial mechanisms of trade while also creating a dependency on them among Third World producers.

Leichtfried, Mandelson and other European policy makers should remember that trade and economics are about people. And people never prosper when they are constantly dependent on the good will of others. The only way that the developing world will grow is if poor countries can produce goods and services that are of value to others. Rich European consumers who pay unnaturally high prices are in the long run only helping their own conscience. Is the Third World yet again to suffer in the long run thanks to the naivete of the developed world?

The author is the president of the Swedish free market think tank Captus ( He is also a PhD student in biochemistry at the University of Cambridge.



Costly conscience
I disagree intensely with this notion : i'm quite sure that business should no longer be divorced from values. Just as our civilization has been equally built on economic development and on political and cultural development, we must endeavour to reintroduce our beliefs and principles into our business and markets. I believe the divorce of markets from values occurred over time, under the influence of excessive commercialism, decline of political thought and institutions, and technological change. I believe this divorce is the cause of many of today's problems.
Our market economy over the past thousand years owes just as much to wise regulation and political change, as to business acumen and technology. A complete business person is a responsible citizen.
If the word "fair" is troubling, use the word "just" or the French word "loyal" (as in "concurrence loyale"). I believe competition and business is good, but not that premier league teams should play third division - to pretend that the world economy is a huge homogeneous mass is abstract and erroneous. The truth is, the economy can be quite different, even on two sides of a single street.
No-one should have to play games without fair transparent rules.
Today, we have global corporate and government players : we have global responsibilities to do business and govern responsibly, all over the world, in its magnificent variety and diversity.

Not so costly after all
"Fair Trade" requires someone to set the rules, and, to no surprise, the rule setters in this case is a global socialist minded bureuacracy. That's my problem with so called fair trade: it's rules are set by people who doesn't believe that the market economy produces beneficial results (contrary to evidence). But there is another problem: any good society produces wealth from below. If the wealth is produced or gained from the top - think of oil, minerals, aid etc - you get a society with little freedom, a big and strong upper class, and little social mobility. "Fair trade" requires bureaucracy and thus benefits the big more than the small (family farmer vs big farms e.g.). Money from the top, dominance from a few big players and heavy bureaucracy doesn't sound like great expectations to me. Scrap fair trade now, and trade fair instead, i.e. with no or little barriers.

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