BEYOND THE SUBSIDY: COYOTES, CREDIT AND FAIR TRADE COFFEE

Abstract

International trade economists have largely avoided undertaking analysis of the fair trade movement because of the fact that fair trade is generally viewed as a price subsidy. Standard international trade models show this type of trade policy to be inefficient, as it would cause oversupply and further depress world prices. The problem with applying a standard international trade model to fair trade in coffee is that the input markets associated with coffee production are not perfectly competitive. Since perfect competition is an assumption common to many models of international trade, the conclusions of these models are not applicable in this setting. In this paper, we examine three models of coffee production. In the first model, the problem for coffee farmers is examined as if all markets were perfectly competitive; in the second model, we examine coffee production with an inefficient credit market in the absence of fair trade; and in the third model, we examine coffee production with an inefficient credit market but with the possibility of fair trade. Farmer welfare is improved with fair trade at the expense of local middlemen, but total welfare is lower than what could be achieved with perfect competition. Copyright © 2011 John Wiley & Sons, Ltd.