Category Archives: Unintended Consequences

Losing Out, America

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The still-born free trade agreements between the United States and South Korea, Panama and Colombia got lost in the shuffle while the Congress and the Obama Administration played silly games that resulted in a credit downgrade for the United States. Not surprising, really. Partisan politics trumps the national interest now that the age of responsible statesmanship has passed. Who cares about jobs as long as your party gets theirs?

Prices dropping in Bogota. (Photo by Scott Bauer)

Yesterday saw the implementation of a new free trade agreement between Canada and Colombia. Washington needs to glom on to the fact that Canadian wheat just got 10% cheaper in Colombia’s markets. Guess whose farmers the Colombians are now most likely to buy from? Hmm, could this start some political fires in the mid-west?

I posted recently that European sales in South Korea had spiked 17% in the first month (July 2011) in which the new EU-Korea FTA had been implemented. Actually, the news is worse than that. EU sales in Korea took off by 45% in the first twenty days of the new agreement when compared with the same period in 2010. And Korean consumers are loving it. Admittedly, U.S. exports to South Korea grew in the same period, but by only by 8.5% – and that was assisted by a 14% drop in the dollar versus the won.

If one didn’t have faith in the superior American political system, one might be tempted to conclude that our politicians are doing everything they can to increase employment in Europe and Canada. Losing American jobs in the process. Could it be?

Let’s Tax The Poor!

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That is a battle cry you never hear from politicians, but that is, in fact, what they have done with America’s tariff system. Albert Gallatin would be appalled and ashamed. Who is he, you ask? Thomas Jefferson’s Treasury Secretary, who designed what became the United States customs duty system. In 1832, a long-retired Gallatin warned:

“If the duties on wines, silks, tea and coffee were repealed or reduced below the common average, whilst those of 50% to 100% on iron, salt, coal, sugar and coarse clothing were preserved, every substantial farmer or mechanic would pay more annually than men with an income of $5,000 a year; and with respect to the poorer classes, the tax levied on each individual would increase in proportion to his want of means.”

Allowing for inflation, his warning was right on target. Over two centuries, we have lowered tariffs on luxury products, while maintaining them on household goods (e.g., “coarse clothing”). And who gets hurt by this? Not the people consuming the luxury goods. No, the victims are the poorest of us, for whom spending on common household items is a major expense. Import duties have become America’s most regressive tax. If Congress is in a mood to cut taxes, this is where to begin.

You want an extra 48% on those? Are you nuts?

A paper issued last week by ProgressiveEconomy, The Re-Birth Of Pro-Shopper Populism: Affordable Shoes, Outdoor Apparel, and The Case for Tariff Reform, argues persuasively that America’s highest customs duties should be abolished if we are serious about helping the poor and the jobless. They argue that, though tariffs were the country’s first revenue source, they were implemented with the idea of keeping tariffs low on items that consumers really needed throughout the 19th century. It was only in the 1930s that we began to refocus the tariff system on demands for protection from foreign competition brought by certain firms and labor unions. Gradually, those interests came to control political decisions about tariffs and we see the imbalance we have today.

And what an imbalance it is! Here is a table from the “Re-Birth” report that needs no explanation, but is a shock to read:

But these tariff rates are hidden from consumers. They aren’t itemized in the check-out line. Imagine the reaction of the lower income lady who realizes she has to pay nearly 17% on her polyester bra, while the rich lady in the trophy house pays only 2.7% on her silk bras. Can you say “velvet revolution”? A 48% tariff on sneakers would mean a rapid removal from office if poor voters only realized how they are being screwed.

A few bi-partisan members of Congress have glommed onto this and are at the cutting edge, hopefully, to a return to our traditional pro-consumer populism. Two bills are before Congress that would mark a start in this direction: the U.S. OUTDOOR Act and the Affordable Footwear Act. Both would require drastic reductions in tariffs on goods that impact our poor most harshly. The object of the Affordable Footwear Act is self-explanatory. The OUTDOOR Act would reduce duties on apparel used for camping and hiking, but much of which are also used as work clothes by the working poor.

The revenue impact of the two bills will be minimal, perhaps $1 billion in lost tax revenue, but the bills should spark consumer spending of several billion dollars (the poor don’t tend to save the taxes they don’t pay, unlike the rich). That, in turn, will spark some redistribution of taxes to states, cities or counties that have a sales tax. The bills will also spur employment at the retailers who sell these household goods, actually putting Americans back to work. Perhaps our politicians can get behind that idea.

Is Fair Trade Fair?

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Is your coffee only fair?

At what point does “fair trade” become a rip-off? Trade blogger Scott Lincicome got me thinking about that with his post Monday about the “fair trade” movement and the dark liquid that Starbucks sells. Scott and I don’t agree about everything (I go for a large decaf with a couple shots of raspberry syrup, whereas his tastes run to venti triple skim lattes), but I follow along with what he said Monday.

Like Scott, I have tended to assume that the “fair trade” movement is a gimmick for selling overpriced coffee, but have not felt strongly enough about it to really look into it. I have also been in numerous stores that purport to sell “fair trade” knick-knacks from developing countries, insinuating that any knick-knack not sold by them is somehow not “fair” or profiting only big multinational corporations. It’s sort of being global while being anti-globalization. Notice that I put “fair trade” in quotes. That’s because so many people use it meaning very different things. Unions and politicians use it to justify trade restrictions, as if stopping trade is somehow “fairer” than expanding trade.

Scott’s post prompted me to look at what Starbucks has to say about “fair trade”, and it turns out that the company is talking about FairTrade instead. Quite different, though there is similarity in spelling and pronunciation. FairTrade is an organization in Germany that authorizes use of its name and logo for a fee – and fees apply to both big international companies and farmers in the developing world. Starbucks pays a healthy licensing fee and coffee coops in Indonesia pay a lower certification fee. What it amounts to is that FairTrade establishes production standards for farmers, sets minimum prices said to guarantee production to those standards, and charges retailers for the privilege of saying the products they sell meet those standards.

FairTrade strikes me as similar to the folks who thought up the Green Dot environmental symbol, which was sold as a guarantee of environmental quality and become indispensable to marketing in Western Europe. It also made the Green Dot organization immensely rich and powerful. FairTrade seems to follow the same pattern. That’s not to say FairTrade is useless.

FairTrade has established product standards for bananas, cocoa, coffee, dried and fresh fruit, fruit juices, herbs and spices, honey, nuts, oil seeds, quinoa, rice, cane sugar, soybeans and pulses, tea and grapes for wine – as well as a few non-food products: gold(!), flowers and plants, seed cotton, balls for sports, and timber.

Scott quoted extensively from an op-ed piece written for the NationalPost.com in Canada by Lawrence Solomon, owner and founder of GreenBeanery, a roaster and coffee shop in Toronto. Mr. Solomon, too, is in the “fair trade” business, but he refuses to use FairTrade or other competing operations and makes compelling arguments why. He quotes a study of “fair trade” by scholars at the University of Hohenheim in Germany, who have followed closely the growth of FairTrade and its competitors:

The study, which followed hundreds of Nicaraguan coffee farmers over a decade, concluded that farmers producing for the fair-trade market “are more often found below the absolute poverty line than conventional producers.

“Over a period of 10 years, our analysis shows that organic and organic-fair trade farmers have become poorer relative to conventional producers.”

Solomon and the Hohenheim study cite the certification fees as a prime reason for this counter-inutitive conclusion. While the certification fees may seem low to us, they are exorbitant for a subsistence farmer – and the costs of improving quality standards can seem other-worldly. FairTrade, according to its website, offers subsidies for standards improvement, but I am not in position to say these subsidies are adequate. The Hohenheim study suggests they are not. Thus, the FairTrade system – which claims to help poor farmers in the developing world – actually discriminates against the poorest farmers in those same countries, but probably boosts the income of more well-to-do producers who can afford their fees. In an aside, Solomon notes that the coffee produced by subsistence farmers is organic by default – they can’t afford the chemicals and fertilizers that would make them ineligible for an organic label, but they also can’t afford the cost of getting somebody to come certify their product as organic.

It gets worse, says Solomon:

… it’s an open secret that the certification process is lax and almost impossible to police, making it little more than a high-priced honour system. Although the certification associations have done their best to tighten flaws in the system, farmers and middlemen who want to get around the system inevitably do, bagging unearned profits. Those who remain scrupulous and follow the onerous and costly regulations … lose out….

There’s more, but you should read them for yourselves. In sum, FairTrade and its competitors are simply selling a bill of goods, or perhaps a label that makes unthinking companies and their customers feel good for a moment about spending an absurd amount for a cup of coffee. In Hawaii we have a word for that kind of business. It’s a “shibai”. It comes from Japan, where it means a play or dramatic performance. But in Hawaii, shibai connotes untrustworthy, less than truthful, perhaps a scam.