A note on teaching about fair trade.

Brock, John R. ; Lopus, Jane S.

Introductory economics courses traditionally teach about free trade. This is often done both in the context of exchange between individuals within a country and trade between individuals in different nations. Most college textbooks include chapters (most often at the end of the books) that address free trade and that include numerical comparative advantage examples to demonstrate gains from trade. Discussions of trade barriers and the winners and losers from these barriers are also included.

At the same time, students as consumers are frequently confronted with the concept of fair trade as they shop for coffee, tea, chocolate and other products imported from developing countries. From informal surveys of our university students, we find that there is considerable ignorance and confusion about the differences between the economic concept of free trade and the social movement of fair trade. We also find, not surprisingly, that economists use the expression "fair trade" to refer to concepts other than the popularly recognized social movement. Perhaps adding to the confusion, we find that principles of economics textbooks usually do not address the topic of fair trade and those that do use the term in different ways.

Understanding free trade and its benefits to both sides of a transaction and to society is a fundamental and essential principle of economics. We believe that not addressing the differences between free trade and the fair trade movement upfront may interfere with students' understanding of free trade, and perhaps of the goals and consequences of the fair trade movement as well. For these reasons, we suggest that principles of economics instructors address, if only briefly, the issue of the fair trade movement and distinguish it from the concept of free trade.

Background

There is widespread agreement among economists about the meaning and importance of free

trade. When referring to international trade, free trade means trade between people of different nations without artificial or government-imposed barriers. For over two centuries economists have endorsed free trade as the best trade policy and as a matter of common sense, despite skepticism and disbelief from others (Blinder 2008). Following the insights of Adam Smith and David Ricardo, economists generally agree that free trade provides overall benefits to society and benefits both sides of voluntary trades. Trade barriers benefit some while hurting others and result in overall welfare losses.

The discussion of fair trade is not as straightforward. While probably no one would advocate for unfair trade, the use of the term "fair trade" differs both in and out of the economics profession. In their book Fair Trade for All, Stiglitz and Charlton (2005) use the term to refer to trade policies that would benefit developing countries. Through a proposed Development Round in the Doha Round of the World Trade Organization's trade negotiations, Stiglitz and Charlton suggest that "... any agreement that differentially hurts developing countries or provides disproportionate benefits to developed countries should be presumptively viewed as unfair and as being against the spirit of the Development Round" (page 7; italics added).

While there is not one agreed-upon definition of fair trade as it pertains to fair traded products such as coffee, most definitions relating to fair traded products refer to a social movement where socially conscious consumers willingly pay above-market prices to support workers (often agricultural) in developing countries. More of the gains from trade are then theoretically diverted to workers and producers in developing countries. The fair trade movement supports small farmers and cooperatives over larger enterprises and is also seen to support causes such as social justice and environmental sustainability. Dragusanu, Giovannucci and Nunn (2014, 217) define fair trade as a "labeling initiative aimed at improving the lives of the poor in developing countries by offering better terms to producers and helping them to organize." Fair trade certification for products and receipt of the premium pay may require farmers to adhere to rules regarding pesticides, recycling, farming techniques and education for children (Downie 2007). In this paper, unless otherwise specified, we use the term "fair trade" to refer to this social movement.

The primary organizations in the global fair trade system are Fairtrade International (http://www .fairtrade.net/), an umbrella group of 28 Fairtrade organizations headquartered in Germany, that sets standards for all commodities, and FLOCERT, an independent certifier of the Fairtrade certification marks. Fairtrade International asserts that over 27,000 products sold in over 100 countries carry the Fairtrade certification. The World Fair Trade Organization (WFTO: http://www.wfto.com/) purports to be the "source of authentic fair trade" and is also an umbrella group of organizations in over 70 countries. There are also other well-known organizations that promote fair trade, including Fair Trade USA, a former member of Fairtrade International under the name Transfair USA, that separated from Fairtrade International in 2012. Some firms, such as Cadbury and Starbucks, have their own fair trade schemes that are perhaps similar to Fairtrade, or are perhaps what The Economist terms "Fairtradelite" in its January 31, 2008 issue.

There is a substantial literature on the economics of fair trade, much of it focusing on the effects of fair trade on specific products such as coffee (e.g., Elder, Zerriffi and Le Billon 2012) and in certain countries such as Rwanda. In surveying a broad set of studies, Dragusanu, Giovannucci, and Nunn (2014) conclude that "the balance of the evidence does suggest that Fair Trade works--but the evidence is admittedly both mixed and incomplete," and they note that the impacts are "on a comparatively modest scale." Claar and Haight (2015), however, are not as optimistic as Dragusanu, Giovannucci, and Nunn, maintaining that the high fees imposed upon fair trade coffee growers along with other factors may result in little benefit to poor farmers and potentially exacerbate inequality.

Since a goal of the fair trade movement is to provide higher incomes to farmers and other producers in developing countries to reduce poverty, some of the literature also investigates effects of fair trade on poverty reduction. Here again the evidence is mixed, with some studies finding that the overall effects of fair trade may be the opposite of those intended. Using coffee as an example, if the problem requiring fair trade is that coffee prices are too low, higher fair trade prices may provide incentives to increase supply, which would then exacerbate the problem (Claar 2012, 43-44). It is important to note, however, that since fair trade coffee represents only about one percent of the coffee market in the U.S. and Europe, any overall impact is likely to be relatively small (Claar 2012, 39). However, while fair trade coffee exports were only 1.8 percent of global coffee exports in 2009, growth has been very rapid over the past decade (Dragusanu, Giovannucci, and Nunn 2014, 217). Non fair trade producers in developing countries may suffer at the expense of those with fair trade affiliations, negating overall welfare gains to developing countries.

Yanchus and deVanssay (2003) provide a graphical analysis demonstrating that fair trade pricing strategies are a suboptimal way of transferring the gains from trade and are inefficient compared to direct transfers. The authors advocate teaching about fair trade pricing in international trade courses and suggest including a discussion of the costs of enforcing standards, raising revenue, and distributing the donations from benevolent consumers. While we agree that a thorough discussion of the theories of fair trade belongs in a course on international trade, we advocate mentioning the issue of the fair trade movement in principles of economics classes. This could clear up possible confusion between the terms and help students distinguish between the concepts.

Confusion Among Students

To informally test our hypothesis that there is ignorance or confusion about the differences between the concepts of free trade and fair trade, we asked students in two classes at our universities to respond to three questions about free trade and fair trade. The questions were:

1. Do you know what "free trade" is? (If yes, provide a brief definition of free trade.)

2. Do you know what "fair trade" is? (If yes, provide a brief definition of fair trade.)

3. In your opinion, do free trade and fair trade refer to the same concept? Are they connected? (If so, briefly explain.)

One class was a principles of economics class (18 respondents) and the other was an intermediate money and banking class (45 respondents). Table 1 shows responses to the core questions reported by course. Acknowledging that we are introducing no controls and that we are not attempting any formal statistical analysis, we nonetheless suggest that the responses do point to confusion about the topics of free trade and fair trade.

Overall, about half (32) of the respondents said that they knew what free trade was, representing about 75 percent of the principles' students and about 40 percent of the money and banking students. (1) Those who supplied definitions were mostly accurate in identifying that free trade meant trade without restrictions or barriers. About a third (23) of the students said that they knew what fair trade was. Of those who offered definitions, one suggested the Stiglitz idea of trade that does "not allow big countries to dominate small." A few mentioned trade that helped coffee producers or where "people are paid fair prices." But the majority of the respondents said something to the effect that fair trade was "trade that benefits both sides" and "both sides win not just one" or "trade that is equal," implying that the gains from trade are divided equally. Because most students later indicated that they do not believe that free trade and fair trade referred to the same concept, these responses were disappointing in part because they seem to indicate a lack of understanding that free trade benefits both sides of a transaction and that both sides to a trade can benefit without equal distribution of the gains from trade. Student comments on the third question validated this assumption, with several commenting that free trade is not fair, or that free trade should be fair but that it is not. Over a third of respondents believed that the two terms were connected, with most commenting that the connection was that they both referred to trade.

Coverage in Principles of Economics Textbooks

Because it is likely that textbook coverage of a topic leads to course coverage of a topic, we inspected a selection of 20 traditional principles of economics textbooks published between 2009 and 2011 for coverage of free trade and fair trade. (2) We did this initially by checking the textbook indexes for both terms. If we found coverage of fair trade, we then checked to see how the term was used in the text. Two of the twenty books, those by Mankiw and McConnell/Brue/ Flynn (hereafter McConnell), address both free trade and fair trade. Most of the 20 books (12) clearly list free trade in the index but not fair trade. Another six list some variation of free trade in the index, but make no reference to fair trade per se.

In his principles textbook, Mankiw uses the term fair trade in a way that is different from both Stiglitz and the fair trade social movement. He uses fair trade as a synonym for resale price maintenance, a "controversial business price" where retailers are required to charge a certain price for a product from a supplier with market power (Mankiw 2009, 380-381). McConnell, however, uses the term fair trade to refer to the fair trade social movement and includes a boxed feature titled Fair Trade Products at the end of the chapter titled The United States in the Global Economy (McConnell 2009, 106-107). The box goes into detail about the purposes of the fair trade movement and the questionable overall effectiveness of the movement from the perspective of most economists. It concludes that the overall demand for labor and the overall average pay for workers in developing nations have probably not increased due to the fair trade movement, although there have been shifts in labor demand within and among low-wage countries. Other methods of helping low-income countries are suggested, such as eliminating agricultural subsidies in high income areas such as the United States and Europe.

Suggestions for Teaching About Fair Trade in Principles Classes

Recognizing that principles of economics courses and textbooks are already burdened by an attempt to cover a wide variety of topics, we do not recommend that fair trade be introduced as a major topic in these courses. Doing so could also risk confusing students into thinking that fair trade is as basic an economic concept as understanding the gains from trade. However we believe that briefly mentioning fair trade (e.g., that it generally refers to a social movement designed to support some producers in developing countries) when introducing free trade may be sufficient to reduce confusion about the two concepts. In this context, we also suggest emphasizing that free trade is not, by definition, unfair.

Because some instructors may choose to teach about fair trade and the economic issues involved with fair trade schemes, we note that fair trade could be included in a discussion of several economics concepts other than under the topic of trade itself. For example, fair trade provides an interesting application of price discrimination, with fair trade products priced above market prices and consumers choosing to pay the higher prices to purchase social justice along with the product. Fair trade can also be included as an application of demand and supply, or in a discussion of elasticity. Because both the demand and supply for coffee are price inelastic, this can lead to wide fluctuations in prices (Claar 2012, 10-12).

Fair trade could also be addressed in a discussion of ethics, or in the contexts of poverty and economic growth policies. It could be included in a discussion of responding to incentives and unintended consequences of interfering with market prices. Those producers with fair trade contracts may benefit at the expense of less fortunate producers in developing countries. And when producers respond to incentives of higher prices to seek out fair trade contracts, market supply may be distorted resulting in lower, not higher, world prices. Although helping small producers is a noble goal, it may be inefficient if it ignores economies of scale in the industry.

Summary and Conclusions

Many common products in US markets are advertised as being fair traded. An informal survey of our students uncovered a lack of knowledge about both free trade and fair trade as it pertains to fair traded products. When the two terms were juxtaposed, many students expressed the belief that free trade was not fair. It appears that some students may be confusing free trade and fair trade, concluding that since free trade is not the same as fair trade, free trade must not be fair. Most standard principles of economics texts cover free trade but do not address the fair trade movement. Since comparative advantage and free trade are core concepts in most principles texts and courses, brief exposure to the social movement of fair trade may strengthen student understanding of free trade.

References

Blinder, Alan S. 2008. "Free Trade." Library of Economics and Liberty. Retrieved 3/27/14 http://www.econlib.org/library/Enc/FreeTrade.html.

Claar, Victor V. 2012. Fair Trade? Its Prospects as a Poverty Solution. Grand Rapids, MI: Poverty Cure Series.

Claar, Victor V. and Colleen E. Haight. 2015. "Fair Trade Coffee: Correspondence." Journal of Economic Perspectives 29(1): 215-216.

"Cocoa farming: Fair Enough?" The Economist. Jan 31, 2008. Retrieved 3/27/14 at http://www .economist.com/node/10609020.

Downie, Andrew. 2007. "Fair Trade in Bloom." New York Times, October 2. Retrieved 3/27/14 at http://www.nytimes.eom/2007/l 0/02/business/ worldbusiness/02trade.html.

Dragusanu, Raluca, Daniele Govannucci and Nathan Nunn. 2014. "The Economics of Fair Trade." Journal of Economic Perspectives 28(3): 217-236.

Elder, Sara D, Hisham Zerriffi and Philippe Le Billon. 2012. "Effects of Fair Trade Certification on Social Capital: The Case of Rwandan Coffee Producers." World Development 40(11): 2355-2367.

Fairtrade International, http://www.fairtrade.net/.

Mankiw, N. Gregory. 2009. Economics 5th Edition. Mason OH: Cengage Learning.

McConnell, Campbell R., Staley L. Brue, and Sean M. Flynn. 2009. Economics 18th Edition. Boston: McGraw Hill Irwin.

Stiglitz, Joseph E. and Andrew Charlton. 2005. Fair Trade for All: How Trade Can Promote Development. New York: Oxford University Press.

World Fair Trade Organization, http://www.wfto.com.

Yanchus, Dennis and Xavier de Vanssay, 2003. "The Myth of Fair Prices: A Graphical Analysis." Journal of Economic Education 34(3): 235-240.

John R. Brock, Department of Economics and Center for Economic Education, University of Colorado Colorado Springs. 1420 Austin Bluffs Parkway, Colorado Springs, CO 80918. Email: jbrock@uccs.edu

Jane S. Lopus, Department of Economics and Center for Economic Education, California State University, East Bay. 25800 Carlos Bee Boulevard, Hayward, CA 94542. Email: jane.lopus@csueastbay.edu

The authors thank Paul Grimes and other session participants at the January 2013 annual meetings of the Allied Social Science Associations for helpful comments.

Notes

(1.) This overall result was disconcerting because the students in the principles class had already been taught about free trade at the beginning of the class. The students in the money and banking course had completed a macro principles course, which presumably covered the benefits of free trade and comparative advantage.

(2.) The books inspected were by Bade/Parkin; Baumol/Blinder; Case/Fair/Oster; Colander; Cowen/Tabarro; Dolan; Frank/Bernanke; Flail/Lieberman; Hubbard/O'Brien; Krugman/Wells; Mankiw; Mcconnell/Brue/Flynn; McEachern; Miller; O'Sullivan/Sheffrin/Perez; Samuelson/Nordhaus; Schiller; Slavin; Stone; and Taylor/Weerapana.

TABLE 1.
Students' Responses to Questions about
Free Trade and Fair Trade

                          Money &    Principles of
                          Banking    Economics
                          Course     Course

Question / Response       Yes   No   Yes   No
Know what free trade is   18    27   14    4
Know what fair trade is   17    25    6    12
Free trade and fair
  trade refer             16    22    4    14
  to same concept