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Fair trade

Certified Fair Trade quinoa farmers in Ecuador

Fair trade is an organized social movement and market-based approach that aims to help producers in developing countries obtain better trading conditions and promote sustainability. The movement advocates the payment of a higher price to producers as well as social and environmental standards. It focuses in particular on exports from developing countries to developed countries, most notably handicrafts, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit, chocolate, flowers and gold.[1]

Fairtrade certified sales in 2008 amounted to approximately US$4.08 billion (â2.9) worldwide, a 22% year-to-year increase.[2] While this represents a tiny fraction of world trade in physical merchandise,[3] some fair trade products account for 20-50% of all sales in their product categories.[2] In June 2008, Fairtrade Labelling Organizations International estimated that over 7.5 million producers and their families were benefiting from fair trade funded infrastructure, technical assistance and community development projects.[4]

The response to fair trade has been mixed. Fair trade's increasing popularity has drawn criticism from both ends of the political spectrum. The Adam Smith Institute sees "fair trade" as a type of subsidy or marketing ploy that impedes growth. Segments of the left, such as French author Christian Jacquiau, criticize fair trade for not adequately challenging the current trading system.

Contents

[edit] Definition

Although no universally accepted definition of fair trade exists, fair trade labeling organizations most commonly refer to a definition developed by FINE, an informal association of four international fair trade networks (Fairtrade Labelling Organizations International, World Fair Trade Organization, Network of European Worldshops and European Fair Trade Association): fair trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers â especially in the South. Fair trade organizations, backed by consumers, are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade.[5]

[edit] Key principles

Sorting and pulping coffee beans at a fair trade cooperative in Guatemala

Fair trade advocates typically espouse a number of guidelines. The movement intends to provide market access to otherwise marginalized producers, connecting them to customers and allowing access with fewer middlemen. It aims to provide higher wages than typically paid to producers as well as helping producers develop knowledge, skills and resources to improve their lives. Fair trade advocates also seek to raise awareness of the movement's philosophies among consumers in developed nations.[6] Fair trade products are traded and marketed either by an "MEDC supply chain" whereby products are imported and/or distributed by fair trade organizations (commonly referred to as alternative trading organizations) or by "product certification" whereby products complying with fair trade specifications are certified by them indicating that they have been produced, traded, processed and packaged in accordance with the standards[7].

[edit] General structure of the movement

Most fair trade import organizations are members of, or certified by one of several national or international federations. These federations coordinate, promote, and facilitate the work of fair trade organizations. The following are some of the largest:

In 1998, these four federations created together FINE, an informal association whose goal is to harmonize fair trade standards and guidelines, increase the quality and efficiency of fair trade monitoring systems, and advocate fair trade politically.

Student groups have also been increasingly active in the past years promoting fair trade products. Although hundreds of independent student organizations are active worldwide, most groups in North America are either affiliated with United Students for Fair Trade (USA) or the Canadian Student Fair Trade Network (Canada).

[edit] History

The first attempts to commercialize fair trade goods in Northern markets were initiated in the 1940s and 1950s by religious groups and various politically oriented non-governmental organizations (NGOs). Ten Thousand Villages, an NGO within the Mennonite Central Committee (MCC) and SERRV International were the first, in 1946 and 1949 respectively, to develop fair trade supply chains in developing countries.[10] The products, almost exclusively handicrafts ranging from jute goods to cross-stitch work, were mostly sold in churches or fairs. The goods themselves had often no other function than to indicate that a donation had been made.[11]

[edit] Solidarity trade

Fair Trade goods sold in Worldshops

The current fair trade movement was shaped in Europe in the 1960s. Fair trade during that period was often seen as a political gesture against neo-imperialism: radical student movements began targeting multinational corporations and concerns that traditional business models were fundamentally flawed started to emerge. The slogan at the time, âTrade not Aidâ, gained international recognition in 1968 when it was adopted by the UNCTAD (United Nations Conference on Trade and Development) to put the emphasis on the establishment of fair trade relations with the developing world.[12]

The year 1965 saw the creation of the first Alternative Trading Organization (ATO): that year, British NGO Oxfam launched "Helping-by-Selling", a program which sold imported handicrafts in Oxfam stores in the UK and from mail-order catalogues.[13]

In 1969, the first Worldshop opened its doors in the Netherlands. The initiative aimed at bringing the principles of fair trade to the retail sector by selling almost exclusively goods produced under fair trade terms in âunderdeveloped regionsâ. The first shop was run by volunteers and was so successful that dozens of similar shops soon went into business in the Benelux countries, Germany, and in other Western European countries.

Throughout the 1960s and 1970s, important segments of the fair trade movement worked to find markets for products from countries that were excluded from the mainstream trading channels for political reasons. Thousands of volunteers sold coffee from Angola and Nicaragua in Worldshops, in the back of churches, from their homes, and from stands in public places, using the products as a vehicle to deliver their message: give disadvantaged producers in developing countries a fair chance on the worldâs market, and support their self-determined sustainable development. The alternative trade movement blossomed, if not in sales, then at least in terms of dozens of ATOs being established on both sides of the Atlantic, of scores of Worldshops being set up, and of well-organized actions and campaigns attacking exploitation and foreign domination, and promoting the ideals of Nelson Mandela, Julius Nyerere, and the Nicaraguan Sandinistas: the right to independence and self-determination, to equitable access to the worldâs markets and consumers.

[edit] Handicrafts vs. agricultural goods

In the early 1980s, Alternative Trading Organizations faced major challenges: the novelty of some fair trade products began to wear off, demand reached a plateau, and some handicrafts began to look âtired and old fashionedâ in the marketplace.[14] The decline of segments of the handicrafts market forced fair trade supporters to rethink their business model and their goals. Moreover, fair trade supporters during this period became increasingly worried by the impact on small farmers of structural reforms in the agricultural sector as well as the fall in commodity prices . Many then believed it was the movement's responsibility to address the issue and to find innovative remedies to react to the ongoing crisis in the industry.

In the subsequent years, fair trade agricultural commodities played an important role in the growth of many ATOs: successful on the market, they offered a much-needed, renewable source of income for producers and provided Alternative Trading Organizations a perfect complement to the handicrafts market. The first fair trade agricultural products were tea and coffee, quickly followed by dried fruits, cocoa, sugar, fruit juices, rice, spices, and nuts. While in 1992, a sales value ratio of 80% handcrafts to 20% agricultural goods was the norm, in 2002 handcrafts amounted to 25.4% of fair trade sales while commodity food lines were up at 69.4%.[15]

[edit] Rise of labeling initiatives

Early Fairtrade Certifications Marks

Sales of fair trade products only really took off with the arrival of the first Fairtrade certification initiatives. Although buoyed by ever growing sales, fair trade had been generally contained to relatively small Worldshops scattered across Europe and to a lesser extent, North America. Some felt that these shops were too disconnected from the rhythm and the lifestyle of contemporary developed societies. The inconvenience of going to them to buy only a product or two was too high even for the most dedicated customers. The only way to increase sale opportunities was to start offering fair trade products where consumers normally shop, in large distribution channels.[16] The problem was to find a way to expand distribution without compromising consumer trust in fair trade products and in their origins.

A solution was found in 1988, when the first Fairtrade certification initiative, Max Havelaar, was created in the Netherlands under the initiative of Nico Roozen, Frans Van Der Hoff, and Dutch development NGO Solidaridad. The independent certification allowed the goods to be sold outside the Worldshops and into the mainstream, reaching a larger consumer segment and boosting fair trade sales significantly. The labeling initiative also allowed customers and distributors alike to track the origin of the goods to confirm that the products were really benefiting the producers at the end of the supply chain.[17]

The concept caught on: in the ensuing years, similar non-profit Fairtrade labelling organizations were set up in other European countries and North America. In 1997, a process of convergence among labelling organizations â or âLIsâ (for âLabeling Initiativesâ) â led to the creation of Fairtrade Labelling Organizations International (FLO). FLO is an umbrella organization whose mission is to set the Fairtrade standards, support, inspect and certify disadvantaged producers, and harmonize the Fairtrade message across the movement[18].

In 2002, FLO launched for the first time an International Fairtrade Certification Mark. The goals of the launch were to improve the visibility of the Mark on supermarket shelves, facilitate cross border trade, and simplify procedures for both producers and importers. At present, the certification mark is used in over 50 countries and on dozens of different products, based on FLOâs certification for coffee, tea, rice, bananas, mangoes, cocoa, cotton, sugar, honey, fruit juices, nuts, fresh fruit, quinoa, herbs and spices, wine, footballs, etc.

[edit] Product certification

Note: Customary spelling of Fairtrade is one word when referring to the FLO product labeling system, see Fairtrade certification

Fairtrade labelling (usually simply Fairtrade or Fair Trade Certified in the United States) is a certification system designed to allow consumers to identify goods which meet agreed standards. Overseen by a standard-setting body (FLO International) and a certification body (FLO-CERT), the system involves independent auditing of producers and traders to ensure the agreed standards are met.

For a product to carry either the International Fairtrade Certification Mark or the Fair Trade Certified Mark, it must come from FLO-CERT inspected and certified producer organizations. The crops must be grown and harvested in accordance with the international Fairtrade standards set by FLO International. The supply chain must also have been monitored by FLO-CERT, to ensure the integrity of labelled products.

Fairtrade certification purports to guarantee not only fair prices, but also the principles of ethical purchasing. These principles include adherence to ILO agreements such as those banning child and slave labour, guaranteeing a safe workplace and the right to unionise, adherence to the United Nations charter of human rights, a fair price that covers the cost of production and facilitates social development, and protection and conservation of the environment. The Fairtrade certification system also attempts to promote long-term business relationships between buyers and sellers, crop prefinancing, and greater transparency throughout the supply chain and more.

Adherence to fair trade standards by producers has been poor. Research by the Financial Times found that ten out of ten mills visited had sold uncertified coffee to co-operatives as certified. It reported that "The FT was also handed evidence of at least one coffee association that received Fairtrade certification despite illegally growing some 20 per cent of its coffee in protected national forest land," but the FLO has since set standards to bar such practices. [19] Enforcement of fair trade standards (such as through involuntary decertification) and handling of complaints from producers by certification bodies have not been publicized. However, fair trade principles (such as those regarding long term contracts and physical traceability for which adherence is optional) are stricter than fair trade rules.[20]

The Fairtrade certification system covers a growing range of products, including bananas, honey, coffee, oranges, cocoa, cotton, dried and fresh fruits and vegetables, juices, nuts and oil seeds, quinoa, rice, spices, sugar, tea, and wine. Companies offering products that meet the Fairtrade standards may apply for licences to use one of the Fairtrade Certification Marks for those products.

The International Fairtrade Certification Mark was launched in 2002 by FLO, and replaced twelve Marks used by various Fairtrade labelling initiatives. The new Certification Mark is currently used worldwide (with the exception of Canada and the United States). The Fair Trade Certified Mark, used in Canada and in the United States, also still identifies Fairtrade goods in both countries. Full transition to the new Mark should become reality in the future as it gradually replaces the old Certification Marks in both countries.

[edit] WFTO Fair Trade Organization membership

In an effort to complement the Fairtrade product certification system and allow most notably handcraft producers to also sell their products outside worldshops, the World Fair Trade Organization (WFTO) launched in 2004 a new Mark to identify fair trade organizations (as opposed to products in the case of FLO International and Fairtrade). Called the FTO Mark, it allows consumers to recognize registered Fair Trade Organizations worldwide and guarantees[dubious ] that standards are being implemented regarding working conditions, wages, child labour, and the environment. The FTO Mark gave for the first time all Fair Trade Organizations (including handcrafts producers) definable recognition amongst consumers, existing and new business partners, governments, and donors.

[edit] Alternative trading organizations

Cafedirect coffee shop on Regent Street, in central London

An alternative trading organization (ATO) is usually a non-governmental organization (NGO) or mission-driven business aligned with the Fair trade movement, aiming "to contribute to the alleviation of poverty in developing regions of the world by establishing a system of trade that allows marginalized producers in developing regions to gain access to developed markets".[21]

Alternative trading organizations have Fair Trade at the core of their mission and activities, using it as a development tool to support disadvantaged producers and to reduce poverty, and combine their marketing with awareness-raising and campaigning.

Alternative trading organizations are often, but not always, based in political and religious groups, though their secular purpose precludes sectarian identification and evangelical activity. Philosophically, the grassroots political-action agenda of these organizations associates them with progressive political causes active since the 1960s: foremost, a belief in collective action and commitment to moral principles based on social, economic and trade justice.

According to the European Fair Trade Association (EFTA), the defining characteristic of alternative trading organizations is that of equal partnership and respect - partnership between the developing region producers and importers, shops, labelling organizations, and consumers. Alternative trade "humanizes" the trade process - making the producer-consumer chain as short as possible so that consumers become aware of the culture, identity, and conditions in which producers live. All actors are committed to the principle of alternative trade, the need for advocacy in their working relations and the importance of awareness-raising and advocacy work.[21]

[edit] Worldshops

Oxfam shop on Drury Lane in Covent Garden, London.

Worldshops or Fair Trade Shops are specialized retail outlets offering and promoting Fair Trade products. Worldshops also typically organize various educational Fair Trade activities and play an active role in trade justice and other North-South political campaigns.

Worldshops are often not-for-profit organizations and run by locally based volunteer networks.

Although the movement emerged in Europe and a vast majority of worldshops are still based on the continent, worldshops can also be found today in North America, Australia and New Zealand.

Worldshops' aim is to make trade as direct and fair with the trading partners as possible. Usually, this means a producer in a developing country and consumers in industrialized countries. The worldshops' target is to pay the producers a fair price that guarantees substinence and guarantees positive social development. They often cut out any intermediaries in the import chain.

A web movement has recently begun to provide fair trade items at fair prices to the consumers. One popular one is Fair Trade a Day [3] where a different fair trade item is featured each day.

[edit] Impact studies

Several independent studies have recently measured the impact of fair trade on participating farmers and workers.

[edit] Politics

[edit] European Union

Display of Fairtrade products at the Derbyshire County Council head office

In 1994, the European Commission prepared the âMemo on alternative tradeâ in which it declared its support for strengthening Fair Trade in the South and North and its intention to establish an EC Working Group on Fair Trade. Furthermore, the same year, the European Parliament adopted the âResolution on promoting fairness and solidarity in North South tradeâ (OJ C 44, 14.2.1994), a resolution voicing its support for fair trade.

In 1996, the Economic and Social Committee adopted an âOpinion on the European âFair Tradeâ marking movementâ. A year later, in 1997, the document was followed by a resolution adopted by the European Parliament, calling on the Commission to support Fair Trade banana operators. The same year, the European Commission published a survey on âAttitudes of EU consumers to Fair Trade bananasâ, concluding that Fair Trade bananas would be commercially viable in several EU Member States.[22]

In 1998, the European Parliament adopted the âResolution on Fair Tradeâ (OJ C 226/73, 20.07.1998), which was followed by the Commission in 1999 that adopted the âCommunication from the Commission to the Council on âFair Tradeâ COM(1999) 619 final, 29.11.1999.

In 2000, public institutions in Europe started purchasing Fairtrade Certified coffee and tea. Furthermore, that year, the Cotonou Agreement made specific reference to the promotion of Fair Trade in article 23 g) and in the Compendium. The European Parliament and Council Directive 2000/36/EC also suggested promoting Fair Trade.[22]

In 2001 and 2002, several other EU papers explicitly mentioned fair trade, most notably the 2001 Green Paper on Corporate Social Responsibility and the 2002 Communication on Trade and Development.

In 2004, the European Union adopted the âAgricultural Commodity Chains, Dependence and Poverty â A proposal for an EU Action Planâ, with a specific reference to the Fair Trade movement which has âbeen setting the trend for a more socio-economically responsible trade.â (COM(2004)0089).

In 2005, in the European Commission communication âPolicy Coherence for Development â Accelerating progress towards attaining the Millennium Development Goalsâ, (COM(2005) 134 final, 12.04.2005), Fair Trade is mentioned as âa tool for poverty reduction and sustainable developmentâ.[22]

And finally, on July 6, 2006, the European Parliament unanimously adopted a resolution on Fair Trade, recognizing the benefits achieved by the Fair Trade movement, suggesting the development of an EU-wide policy on Fair Trade, defining criteria that need to be fulfilled under Fair Trade to protect it from abuse and calling for greater support to Fair Trade (EP resolution âFair Trade and developmentâ, 6 July 2006). "This resolution responds to the impressive growth of Fair Trade, showing the increasing interest of European consumers in responsible purchasing," said Green MEP Frithjof Schmidt during the plenary debate. Peter Mandelson, EU Commissioner for External Trade, responded that the resolution will be well-received at the Commission. "Fair Trade makes the consumers think and therefore it is even more valuable. We need to develop a coherent policy framework and this resolution will help us."[23]

[edit] France

In 2005, French parliament member Antoine Herth issued the report "40 proposals to sustain the development of Fair Trade". The report was followed the same year by a law, proposing to establish a commission to recognize fair trade Organisations (article 60 of law no. 2005-882, Small and Medium Enterprises, 2 August 2005).[22]

In parallel to the legislative developments, also in 2006, the French chapter of ISO (AFNOR) adopted a reference document on Fair Trade after five years of discussion.

[edit] Italy

In 2006, Italian lawmakers started debating how to introduce a law on fair trade in Parliament. A consultation process involving a wide range of stakeholders was launched in early October.[24] A common definition of fair trade was most notably developed. However, its adoption is still pending as the efforts were stalled by the 2008 Italian political crisis.

[edit] Netherlands

The Dutch province of Groningen was sued in 2007 by coffee supplier Douwe Egberts for explicitly requiring its coffee suppliers to meet fair trade criteria, most notably the payment of a minimum price and a development premium to producer cooperatives. Douwe Egberts, which sells a number of coffee brands under self-developed ethical criteria, believed the requirements were discriminatory. After several months of discussions and legal challenges, the province of Groningen prevailed in a well-publicized judgement. Coen de Ruiter, director of the Max Havelaar Foundation, called the victory a landmark event: "it provides governmental institutions the freedom in their purchasing policy to require suppliers to provide coffee that bears the fair trade criteria, so that a substantial and meaningful contribution is made in the fight against poverty through the daily cup of coffee".[25]

[edit] United Kingdom

In 2007, both Scottish and Welsh governments were actively attempting to become the "world's first fair trade country". In Wales, the campaign to make Wales the worldâs first Fair Trade country was launched in 2004 by the National Assembly for Wales. In June 2008 Wales became the worlds first Fair trade nation.[26] In Scotland, then-First Minister Jack McConnell pledged that Scotland will aim to become a "Fair Trade Nation".[27]

In June 2007, a parliamentary committee published the report Fair Trade and Development, criticising the government for "failing to adequately support fair trade despite having said it wanted to help poor countries trade their way out of poverty". The MPs, led by Malcolm Bruce, said the Department for International Development "had not kept pace with growing support for fair trade among the public and retailers".

The committee report examined several ethical trading schemes and concluded that fair trade was "gold standard in terms of trading relations with producers". It called for greater support both domestically and internationally of fair trade organisations and recommended making a senior official responsible for fair trade within the government. The report also suggested to commission research on the feasibility of a labelling scheme which will force all retailers to show how much they paid farmers and workers in the developing world for each particular product.[28]

[edit] Common justifications

Fairtrade Certified Rice Producer in Thailand

Implicit and often explicit in fair trade is a criticism of the current organization of international trade as being unfair. Fair trade advocates argue in favor of the need for fair trade by mentioning the microeconomic market failures of the current system and the commodity crisis and its impact on developing country producers. According to Fair Trade umbrella organisations FLO International and WFTO: "Fair Trade is, fundamentally, a response to the failure of conventional trade to deliver sustainable livelihoods and development opportunities to people in the poorest countries of the world. Poverty and hardship limit peopleâs choices while market forces tend to further marginalise and exclude them. This makes them vulnerable to exploitation, whether as farmers and artisans in family-based production units or as hired workers within larger businesses.â[6]

[edit] Market failures

All FINE members and fair trade federations support in theory the principles of unhindered free trade. However, as Alex Nicholls, social entrepreneurship professor at Oxford University, states, the "key conditions on which classical and neo-liberal trade theories are based are notably absent in rural agricultural societies in many developing countries."[29] Perfect market information, perfect access to markets and credit, and the ability to switch production techniques and outputs in response to market information are fundamental assumptions which "are fallacious in the context of agricultural producers and workers in developing countries".[29]

The example of coffee is particularly telling: "since it takes from three to four years for a coffee plant to produce significant quantities of coffee, and up to seven years before the plant reaches peak productivity, it is difficult for coffee farmers to react quickly to price fluctuations. As a result, coffee supply often increases even as market prices plummet. Further, this leads to a collective action problem, where each farmer has an incentive to increase production as price falls in order to reduce per unit cost and increase his or her margins. In aggregate, this activity creates a positive feedback loop and further depresses the world price."[30]

Market power is also commonly mentioned as one of the most important market failures cited for agricultural markets. Consolidation and increased concentration in the food industry have been carefully documented for both the U.S. and Europe.[31] From early days, observations on market structure downstream from agricultural production have motivated empirical and theoretical attention to the issue of market power in agriculture. In addition to market structure concerns, Sexton and Rogers argue forcefully that several typical characteristics of raw agricultural commodity markets should make the analysis of imperfect competition in these markets routine. These characteristics include the bulky and perishable nature of agricultural products, producersâ geographic immobility, and the sunk cost aspect of specialized crops [32]. This is not to say that market power should be presumed in these markets. Rather, the point made by Sexton and Rogers is that policy for and analyses of agricultural markets must establish something about competition: In brief, that âimperfect competition matters to agricultural economistsâ [31]. Notably, imperfect competition consistently figures in any discussion of the crisis facing coffee producers.

According to Oxford's University Alex Nicholls, market failures such as these clearly shows how the absence of perfect microeconomic conditions can nullify or even reverse the potential gains to producers from trade. While Nicholls agrees that the win-win situation for all actors involved may be broadly correct in some markets, nevertheless, "within developing countries market conditions are not such that producers can unambiguously be declared to be better off through trade."[29] The existence of these market failures lessens the capacity trade has to lift developing countries out of poverty.

These conclusions were corroborated by a 2006 World Bank Policy Research Working Paper written by Loraine Ronchi, which found that "the failure of market power and low producer capacity in coffee markets in LDCs are identified as underlying causes of the low share of coffee returns faced by producers".[33]

Fair trade is seen as an attempt to address these purported market failures by providing producers a stable price for their crop, business support, access to premium Northern markets, and better general trading conditions. According to the 2006 World Bank study, Fair Trade seems to succeed in its aims: "in these respects at least, the role of Fairtrade is effective. Its support for cooperatives in mitigating market power is found not to be misplaced in Costa Rica. Fairtrade mills also improve the returns to farmers through the improved efficiency of their organizations".[33]

[edit] The commodity crisis

Fair trade advocates[who?] also often point out that unregulated competition in global commodity markets ever since the 1970s and 1980s has encouraged a price "race to the bottom". During the 1970-2000 period, prices for many of the main agricultural exports of developing countries, such as sugar, cotton, cocoa, and coffee, fell by 30 to 60 percent.[34] According to the European Commission, âthe abandonment of international intervention policies at the end of the 1980s and the commodity market reforms of the 1990s in the developing countries left the commodity sectors, and in particular small producers, largely to themselves in their struggle with the demands of the marketsâ. Today, âproducersâ live an unpredictable existence because the prices for a wide range of commodities are very volatile and in addition follow a declining long-term trendâ.[34] The total loss for developing countries due to falling commodity prices has been estimated by the Food and Agricultural Organisation (FAO) to total almost $250 billion during the 1980-2002 period.[22]

Millions of poor farmers are dependent on commodities and on the price they receive for their harvest. In about 50 developing countries, three or fewer primary commodity exports constitute the bulk of export revenue.[citation needed]

Many farmers, often without other means of subsistence, are obliged to produce more and more, no matter how low the prices are. Research has shown[citation needed] that those who suffer most from declines in commodity prices are the rural poor â i.e. the majority of people living in developing countries. Basic agriculture employs over 50% of the people in developing countries, and accounts for 33% of their GDP.[35]

Fair trade supporters believe current market prices do not properly reflect the true costs associated with production; they believe only a well-managed stable minimum price system can cover environmental and social production costs[citation needed].

[edit] Criticism

Fair trade's increasing popularity has drawn criticism from both ends of the political spectrum. Some economists and think tanks see "fair trade" as a type of subsidy that impedes growth. Segments of the left criticize fair trade for not adequately challenging the current trading system.

[edit] Price distortion argument

Effects of a Price Floor

Fair trade opponents such as the Adam Smith Institute claim that similar to other farm subsidies, fair trade attempts to set a price floor for a good that is in many cases above the market price and therefore encourages existing producers to produce more and new producers to enter the market, leading to excess supply.[36] Through the laws of supply and demand, excess supply can lead to lower prices in the non-Fair Trade market.[36]

In 2003, Cato Institute's vice president for research Brink Lindsey referred to fair trade as a âwell intentioned, interventionist scheme...doomed to end in failure." Fair trade, according to Lindsey, is a misguided attempt to make up for market failures in which one flawed pricing structure is replaced with another.[37] Lindsey's comments echo the main criticisms of Fair Trade, claiming that it "leads fair trade producers to increase production." While benefiting a number of Fair Trade producers over the short run, fair trade critics worry about the impact on long run development and economic growth. Economic theory suggests that when prices are low due to surplus production, adding a subsidy or otherwise artificially raising prices will only exacerbate the problem by encouraging more supply[38] and also encouraging workers into unproductive activities.[39]

Several academics, including Hayes,[40] Becchetti, and Rosati[41] identify two counterarguments to this criticism.

  1. First, in many cases the exchange between producers and intermediaries does not occur in a competitive framework.[41] In such case the market price is a distortion because it does not reflect the productivity of producers but their lower market power.[42]
  2. Second, the price distortion argument does not take into account the principles of product differentiation. Coffee, for example, cannot be compared to other commodities such as oil: there is not one single type of coffee but instead many different coffees that are differentiated from one another in terms of production techniques[43], seasonal or regional differences in quality, blending, packaging, handling, and now also "social responsibility" accounting. Consumer demand and taste define what different market prices are acceptable for each of these products.[41] In this sense, fair trade can be considered as a market-driven innovation in the food industry that creates a new range of products for which a growing segment of consumers are willing to pay more based on environmental and social responsibility claims.[41]

[edit] Insufficiently aggressive

In 2006, the Financial Times reported that some wage workers hired by fair trade producers in Peru were making 10 soles per day ($3) as opposed to 8 soles per day made on non fair trade farms. This higher wage was still less than the legal minimum wage of 11 soles (16 soles less 5 soles for room and board) in 4 out of the 5 farms visited, and violated Fairtradeâs standards.[19]

The Adam Smith Institute claimed in 2008 that Fair trade has had little effect on the decreasing percentage of final sale value ending up with the producers as only a fraction of fair trade premiums reach producers. This claim is based on a calculation that only 10% of the fair trade premium for a cup of coffee at a popular London chain goes to purchase fair trade coffee beans instead of standard beans.[44][45] . This situation has led Tom Clougherty of the Adam Smith Institute, to describe Fair Trade as little more than a marketing ploy.

Although not completely dismissing the particular stance taken by Tom Clougherty of the Adam Smith Institute, Fairtrade supporters including UK charity the Lorna Young Foundation and Fair Trade entrepreneurs Jurang, argue that such a stance although true to some extent does not do justice to the fair trade movement as a whole and instead arguably exemplifies how Fairtrade as a brand, currently represented by the FLO International mark is not what Fair Trade is about. Rather they argue that Fair Trade is about committing to continuous efforts to shorten the supply chains, cutting out the middle men [46]. They also argue that consumers should not be satisfied by just the Fairtrade mark but instead educate themselves on issues of Trade Justice if a real difference is to be made[47].

In the 1990s the value of exported coffee was $11 billion and the retail value was $30 billion, while in 2007 the value of exported coffee was $5.5 billion and the retail value was $70 billion.[48] These numbers are however misleading in assessing Fair Trade considering only 3.3 percent of coffee sold in the United States - the world's largest market for Fair Trade certified products - in 2006 was certified fair trade.[49]

[edit] Notes and references

  1. ^ Brough, David. Briton finds ethical jewellery good as gold. Reuters Canada. January 10, 2008.
  2. ^ a b Fair Trade Labelling Organizations International (2009). Global Fairtrade sales increase yearly by 22%. URL accessed on Jan 3, 2010.
  3. ^ [1] p. 3, The World Trade Organization publishes annual figures on the world trade of goods and services.
  4. ^ Fairtrade Labelling Organizations International (2008). FLO International: Annual Report 2007. URL accessed on June 16, 2008.
  5. ^ European Fair Trade Association. (2009). [2] URL accessed on May 4, 2009.
  6. ^ a b Fairtrade Labelling Organizations International & International Fair Trade Association (2008). A Charter of Fair Trade Principles. URL accessed on August 2, 2006.
  7. ^ "Independent Appeal: Ecuador's yellow revolution"
  8. ^ FLO-CERT (2008). FLO-CERT. URL accessed on August 1, 2008.
  9. ^ http://www.fairtrade.net/generic_standards.html
  10. ^ International Fair Trade Association. (2005).Crafts and Food. URL accessed on August 2, 2006.
  11. ^ Hockerts, K. (2005). The Fair Trade Story. p1
  12. ^ "Where did it all begin?". WFTO. 2009-06-07. http://www.wfto.com/index.php?option=com_content&task=view&id=10&Itemid=17&limit=1&limitstart=1. Retrieved 2009-06-24. 
  13. ^ Fair trade history (Scott, Roy)
  14. ^ Redfern A. & Snedker P. (2002) Creating Market Opportunities for Small Enterprises: Experiences of the Fair Trade Movement. International Labor Office. p6
  15. ^ Nicholls, A. & Opal, C. (2004). Fair Trade: Market-Driven Ethical Consumption. London: Sage Publications.
  16. ^ Renard, M.-C., (2003). Fair Trade: quality, market and conventions. Journal of Rural Studies, 19, 87-96.
  17. ^ Redfern A. & Snedker P. (2002) Creating Market Opportunities for Small Enterprises: Experiences of the Fair Trade Movement. International Labor Office. p7
  18. ^ "FLO International: FLO's Main Tasks". FLO. 2006. http://www.fairtrade.net/tasks.html. Retrieved 2009-01-27. 
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[edit] See also

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Related topics in the Connexions Subject Index

Alternatives  –  Fair Trade  –  Left History  –  Libraries & Archives  –  Organizations & Movements formed 1900-1949  –  Social Change  –  Trade  –  Trade Agreements  –  Trade/Developing Countries  – 


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