‘Made in Dignity’: the redistributive impact of Fair Trade

In this paper, we develop a model of North-South trade to investigate the impact of Fair Trade. In the absence of a label, Southern producers are exploited by monopsonisitic traders who export to Northern markets. The Fair Trade label, given to some existing traders, certifies the adoption of high labour standards or the payment of fair prices to producers in the South.We first show that such a label is never Pareto improving: the welfare of unlabeled and some label led producers in the South falls while the welfare of Northern consumers increases. An expansion of Fair Trade tends to exacerbate those effects. We also show that the consequences of fair trade are systematically dampened in environments where traders enjoy more market power. We also explore an alternative setting in which new Fair Trade cooperatives are introduced alongside private traders. The cooperatives maximize the welfare of the producers they trade with. We show that our main results also apply in this context.