•  

    Fair Trade

     

     
     
    © International Trade Centre, International Trade Forum - Issue 2/2006


    © Max Havelaar
    These posters from Max Havelaar, a fair trade organization, advocate for the social issues behind fair trade. They show how producers can pay for electricity, schools and medicines through higher prices for their goods.

    What does "fair trade" mean? You won't find one single answer. Here we look at the market profile of fair trade - the players, controversies, benefits and drawbacks.

    Fair trade in international commerce has two distinct meanings. In trade negotiations, the term is used broadly to argue that subsidies and disguised barriers skew the global trade system against developing countries and commodity producers. Former World Bank chief economist and Nobel Prize winner Joseph Stiglitz, for example, argues for "fair trade for all" in the context of the latest WTO round of trade liberalization, the Doha Development Agenda.

    Small share, big voice



    Meanwhile, small farmers in developing countries who produce some of the world's favourite fruit and beverages still find themselves getting pennies for products that sell for several dollars in the rich world's supermarkets. Even worse, their income fluctuates violently from season to season, sometimes from day to day, depending on commodity prices. Striving against other producers to keep up their revenues when prices are dropping can lead to collective impoverishment across the globe.

    This is where the other, more famous fair trade movement comes in. Unofficially reaching the age of 60 this year, this labelling, marketing and advocacy initiative seeks to ensure that producers in developing countries receive more of the profits from the price paid by consumers. This article tries to put the alternative fair trade movement into its trade development context.

    Fair trade often pays the producers one-quarter to one-third more than they can get on the open market. But only Fairtrade-labelled products - that is, those certified by Fairtrade Labelling Organizations (FLO) International - imply agreement on a minimum price. Most alternative fair trade agreements speak only of giving producers an unspecified "fair price" for their products to provide a living wage and sustainable costs of production (Fair Trade in Europe 2005).

    Sales through this new channel still represent less than 0.1% of all goods traded internationally, according to the United States-based Fair Trade Federation.

    So can this trade have a major impact? Will it survive competition from bigger players? The European-centred FLO points out: "Fair trade products [i.e., from all the alternative fair trade bodies] can now be found in 55,000 supermarkets all over Europe and the market share has become significant in some countries: 47% of all bananas, 28% of the flowers and 9% of the sugar sold in Switzerland are Fair Trade labelled. In the UK, a market with eight times the population of Switzerland, labelled products have achieved a 5% market share of tea, a 5.5% share of bananas and a 20% share of ground coffee."

    While market share may be very small, sales are growing fast. "Fair Trade sales in Europe have been growing at an average 20% per year since 2000. The annual net retail value of Fair Trade products sold in Europe now exceeds EUR 660 million. This is more than double the figure five years ago," notes FLO.

    Fair trade labelling initiatives are under way in 15 European countries, while fair trade producers are organized into some 3,000 grass-roots organizations, with umbrella structures present in over 50 developing countries. Apart from coffee, bananas and some other fruits and vegetables, fair trade producers also include artisanal goods.

    Europe represents most (60-70%) of the fair trade market. The trade importing organizations say 26% of their sales come from Africa, 40% from Asia and 34% from Latin America.

    The impact of fair trade products goes beyond its market share. Advocacy for alternative fair trade seeks to strike a chord among consumers by highlighting development goals that do not depend on traditional market solutions. Europe's fair trade organizers also argue in their most recent report, Fair Trade in Europe 2005, that: "Fair Trade has become much more than a niche market for socially-aware and middle-class Northern consumers. It is expanding into mainstream distribution channels and is increasingly being recognized by consumers, public authorities and even private companies as an efficient tool for poverty eradication and sustainable development."

    Critics of fair trade probably would not agree that it is an efficient tool to reduce poverty for any but a small number of producers (see "pros and cons" below). For the exporters, though, alternative fair trade represents a market niche opportunity. For trade development professionals, fair-traders represent potential partners in building the skills exporters need for world markets, such as those related to standards.

    Policy-makers must take notice, too. Fair-traders are a political force that have a much louder voice than their position in international trade statistics might lead you to believe. Their campaigns often highlight the social and environmental costs that anti-globalization advocates see in open markets. In this way, the fair trade movement ties in with the protests during WTO ministerial meetings at the way current trade negotiations are developing. Nevertheless, many fair-traders fully accept market realities and oppose all forms of disguised protectionism (see the interview with Paola Ghillani).

    How fair trade works



    Fair trade organizations use five tools to contribute to development:

    • Price premiums. Fair trade products are sometimes priced higher than others. Part of the difference is ploughed back into producer communities in order to improve working conditions.
    • Certification and labelling. Standards aim to improve product quality, working conditions, environmental sustainability, business development and training. Labels in Europe (Max Havelaar, TransFair, Fairtrade Mark and Rättvisemärkt) are coordinated by FLO.
    • Microcredit helps small-scale producers get started on fair trade projects.
    • Technical support includes business development, trade information, advice on quality standards, training in new techniques, etc.
    • Advocacy is an important element in fair trade marketing, with the branding and fair trade message found on virtually every package. But not only the fair trade organizations benefit. Supermarkets find the fair trade label useful for marketing to niche consumers who are willing to pay extra for coffee that guarantees producers a fair price, for example.
    The appeal is not just to charity. Some fair-traders advocate strongly for fair trade as a business model, using environmental quality as the selling point, often at the same price as conventionally marketed products.

    Pros and cons



    Fair-traders point out these development advantages:

    • Producers get a decent living, gain necessary skills and knowledge, obtain access to credit, find technical assistance and market information, learn about trade and acquire experience in exporting.
    • Better prices for farmers do not increase consumer costs, since the fair trade organizations cut out intermediaries by handling all the operations between production and retailing themselves.
    • Consumers get an educational tool promoting thoughtful consumerism.
    Critics sometimes treat fair trade as if it were offering a comprehensive solution to development problems. This can mislead strategists who are considering whether fair-traders will make good partners for their development efforts. However, this much is admitted:

    • Market share is much too small to have a major impact on general living standards in developing countries. Even if it expands significantly, only 20% of consumers at a maximum seem ready to pay more for fair trade products. This limits possible expansion.
    • Producing more low-priced commodities for over-supplied markets postpones what is really needed for development: diversifying exports and adding value, rather than depending on commodities and crafts. Or finding new social solutions for upland communities whose economic viability remains in doubt.
    • Rich markets can do more for poor countries by allowing bigger quantities of normally priced products in their markets.
    • Labelling organizations may cut out middle traders, but they may not return the full savings back to the farmers. Fair trade is an expensive niche market to maintain, because it needs constant promotion and requires educated consumers. High marketing costs are one reason why all those fair trade premiums don't make it back to the producers.
    • Retailers may take advantage of consumers' social conscience. After looking at prices in his local coffee bar where fair trade cups of coffee are sold at a premium, Tim Harford, a World Bank economist, concluded in The Undercover Economist: "Charging an extra ten pence gave a misleading impression of how much it really cost to get hold of that fair trade coffee." Doubling a producer's family income should add less than one penny to the price of a cup in a UK coffee shop, he observes. The coffee shop later dropped the price differential.
    • There are many different standards and criteria, and little discussion outside the organizations themselves. So consumers cannot decide whether the trade really is fair. Not all fair-traders are members of FLO, e.g., Rugmark and the Clean Clothes Campaign. The standards themselves can cover working conditions and environmental measures (or not) as well as stable pricing.

    Challenges for fair-traders



    As for the alternative fair-traders themselves, they see a bright future but agree there are lots of improvements to make.

    • Fair trade organizations need to identify further sources of growth, gain credibility with consumers through better quality monitoring and find the balance between business and advocacy in their operations.
    • Importing organizations need to build greater brand loyalty in the face of competition, identify new sources of growth outside the supermarkets and cooperate more with each other.
    • Labelling organizations need to manage their fast growth, since this is likely to continue. They need to find innovative ways to cooperate with multinationals, in view of these companies' close interest in fair trade labelling, while remaining critical of standard trading practices. They also need to find a balance between standardization and over-regulation by fair trade's official bodies.
     


    Web resources on fair trade

     

    This article benefited from research and discussion with Natalie Domeisen, Prema de Sousa, Marija Stefanovic and Alexander Kasterine, ITC.

    They also consulted draft papers on fair trade prepared by ITC's Market Analysis Section and Export-led Poverty Reduction Programme.