How fair is Fair Trade?
Fair Trade started as an alternative to free trade, focusing on socio-economic situations of producers in the Third World and dismissing the self-regulation of the free market by fixing prices for Fair Trade produce.
The Fair Trade movement is booming and becoming a major player in the international coffee market. It promises to pay farmers a minimum price
for their Fair Trade certified products regardless of the current market price to improve living standards.
There is no official definition of Fair Trade but in 2001 a network of the most important Fair Trade organisations called FINE, produced the following definition:
“Fair Trade is a trading partnership based on dialogue, transparency and respect, which 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 — especially in the South’ (FINE, 2001)
In recent years Fair Trade has provoked much controversy about just being a marketing device for capitalist companies to boost sales and leaving farmers in poor countries worse off.
In this essay the key ideas of three articles from academic journals are summarised for a better overview in order to compare and analyse their perspectives on Fair Trade.
In the journal article “Fair Trade is counterproductive- and unfair” Henderson states that Fair Trade is unfair to both the farmers in developing countries and the consumers in developed countries.
Consumers are lead to believe that by paying a higher price for Fair Trade products they directly support poor coffee farmers in Third world countries.
Although Fair Trade coffee is more expensive, Henderson argues it is of lower quality than coffee from the open market. The low quality results from the Fairtrade Labelling Organisations Internationals‘ (FLO) standards that do not establish criteria on the quality of coffee beans farmers deliver.
On the other hand to a producer the Fair Trade certification guarantees fixed prices for coffee beans. But only a small percentage of the price premium on Fair Trade products consumers pay reaches the producers directly.
Moreover, in order to participate in Fair Trade, farmers and small firms have to form co-operatives and share the profits from the Fair Trade price within the firm. The lion‘s share has the FLO to which the co-operatives have to pay high annual fees for certification and the rest of the gain is used to pay for the co-operatives‘ bureaucracy.
Because farmers are not left with significantly more profit due to these additional costs, Henderson concludes that the most effective way to poverty relief is free trade without trade barriers, such as import quotas and tariffs but certainly not Fair Trade.
According to Weber‘s article “Fair Trade coffee enthusiasts should confront reality“, the main issues that deter Fair Trade from being efficient
is the imbalance between supply and demand in the Fair Trade market and the marketing strategies of Fair Trade products. By setting a minimum price for Fair Trade produce above the market equilibrium price a price floor is created.
Because of the price premium paid co-operations have high incentives to become certified . Eventually, this increases supply and leads to a surplus of coffee in the market. Supply constantly exceeds demand in the Fair Trade coffee market, forcing farmers to sell more than half of their crops to the open market for a smaller price.
Moreover, Weber argues that Fair Trade marketing cannot live up to its promises. It advertises that poor farmers are guaranteed a living wage for participating in the Fair Trade programme in order to make western consumers feel better about their ethical conscience and- increase sales.
These claims are not the whole truth and indeed misleading.
Fair Trade only guarantees a minimum price for products to the co-operations which comprise of many producers. In reality, the poorest people, the seasonal plantation workers are mostly paid below the national minimum wage, because Fair Trade standards for temporary workers do not exist.
Nonetheless, many farmers have acquired benefits through the Fair Trade programme.
In Weber‘s opinion, Fair Trade can only be effective and sustainable if opens up for new ideas on the open market and effect compromises with non-Fair Trade organisations and support the co-operatives in establishing standards that serve their interest.
The third article “Half a cheer for Fair Trade“ by Philip Booth and Linda Whetstone, asserts that the Fair Trade business model is not necessarily more proficient as any other type of trade. The authors analyse the main advantages and disadvantages of Fair Trade as to whether Fair Trade is beneficial to producers in developing countries.
By creating price floors, Fair Trade certainly stabilises production and supply which is valuable to producers. On the downside, these benefits are outweighed by effects of price regulation.
Guaranteeing prices does not guarantee that quantities will be bought at fixed prices (Booth, Whetstone 2007). Suppliers‘ profits will depend on fluctuations in sales instead.
Fair Trade producers also have easy access to cheap credit which is difficult and expensive to obtain in developing countries.
The authors argue that it is not less ethical to buy non-fair trade products and donate the equivalent to a charity. The Fair Trade logo is purely used for marketing purposes as well as the higher price of Fair Trade products.
From a producer‘s point of view becoming certified is demanding. First, they have to form co-operatives and find wholesalers to sell their produce to. Then there are charges for certification and annual fees that are extremely high in relation to national average incomes. Retailers also have to pay fees if they want to use the Fair Trade brand name. This extra charge is already included in the price consumers pay for the products. The main income of FTOs consists of charges to wholesalers and is principally re-invested on promotion of the own brand.
The main reason for Fair Trade‘s ineffectiveness is the organisation in co-operatives which hinder producers from growing speciality coffee which could be sold at higher prices. Also co-operatives are not as ethically and democratically run as the FTO postulate. These circumstances can lead to abuse of power by managers, when e.g. cheaper coffee beans are mixed with Fair Trade coffee, but sold as Fair Trade certified. Overall, benefits from Fair Trade are limited and only affect a group of people in the short term. On the other hand a more effective long term solution that brings prosperity is free trade which has been proved throughout history when poor countries with free market economies became wealthy.
All articles seem to agree in the conclusion that Fair Trade is not as efficient as it claims to be. Henderson argues that it is simply unfair to producers, because “the gains from the Fair Trade price are eaten up by the fees that co-operatives must pay to the FLO to qualify…“ (Henderson, 2008, p63).
The main purpose of his article is to persuade the reader of the unproductiveness of Fair Trade, whereas Weber in his article intends to inform the reader about the reality of the movement.
Weber states that the imbalance between supply and demand leads Fair Trade to be unsuccessful. “FLO estimated that the supply of Fair Trade certified coffee in (..) was seven times greater than the quantity exported through Fair Trade channels“ (Weber 2007, p112).
Weber‘s article is based on his own research project working with farmers in Peru.
Weber (2008) mentions the APROECO, a producer association in Peru, that works together with private export companies as an alternative to the model of co-operations. This is information gives a new perspective on the problem of co-operatives and is a valuable part of his research that no other author of these three articles has contributed.
Similarly, the authors of the third article thoroughly analyse the question from different perspectives, such as the ethical, economic and commercial point of view.
All articles conclude that Fair Trade is better than no trade but free trade is the only solution to long-term development and poverty relief. Trade barriers and regulations have to be abolished in order for economies to grow. Fair Trade should focus on supporting the producers working for them rather than investing in their own brand.
Booth, P. and Whetstone, L.(2007) “Half a cheer for Fair Trade“ Economic Affairs, Vol. 27, p29-36
Henderson, D. (2008) “Fair Trade is counterproductive- and unfair” Economic Affairs, Vol. 28, p62-64
Weber, J. (2007) “Fair Trade coffee enthusiasts should confront reality“ CATO Journal, Vol. 27, p109-117