Prudent Press

0

Fundamentals of the Fair trade system

D.

The debate on trade policies has created a growing movement for Fair trade. This article analyzes the principles of Fair trade system.

 

Fair trade system

Fair trade is an ideological belief system within the international trade system and it’s goal is to reduce poverty and establish trade equality among producers (farmers) in developing countries.

The proponents of Fairtrade (A.K.A. Fairtraders) want to improve the labour conditions and increase income equality for farmers in developing countries.

Fair trade is primarily focused on helping producers in the agricultural sectors of developing countries.

In order to achieve their goal, Fairtraders want consumers to pay higher prices on foreign goods (i.e. Coffee) so that a portion of the higher price would be redistributed back to producers/farmers in developing countries to facilitate their social development.

There are numerous non-profit organizations that aim to bring social justice policies for much of the global south (southern developing countries).

The Fairtrade Labeling Organizations International (FLO) is one such organization that strives to promote the social development of producers.

 

The mandate of the FLO is to issue a set of international standards determining whether or not a good can be labeled as a Fairtrade product.

The FLO-Certification (FLO-CERT) certifies exporters, importers, and manufacturers of Fairtrade goods.

In order for goods to be certified as ‘Fairtrade’ they that pass Fairtrade certification.

Fairtrade certification is a guarantee that the product being sold;

  • Adheres to the United Nations (UN) charter of human rights
  • Adheres to the International Labour Organization (ILO) agreements
  • Commands a Fair market price

A fair market price is a price that

  • Covers the producer’s cost of production
  • Facilitates social development
  • Facilitates protection and conservation of the environment

Several types of food have received Fairtrade certification 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.

As of 2008, the products certified with Fairtrade certification, amounted to approximately US$4.98 billion worldwide, a 22% increase from 2000.

The popularity of Fair trade has been increasing as more products achieve Fairtrade certification.

The growth in the Fair trade movement has affected numerous countries around the world.

In 2010, the FLO published an annual sales report tracking the growth of Fair trade products in various countries around the world.

Their report presents the following graph showing the growth in the retail sales of Fair trade products around the world.

As the above graph indicates, since 2009 there was a 27% global increase in the buying and selling of Fair trade products.

 

Advantages of Fair trade

There are numerous advocates in favour of Fair trade, both in Canada and abroad, that outline the benefits of Fair-trade policies for society at large.

These benefits include;

  1. Providing Price Stability
  2. Facilitating Social Development

 

1. Providing Price Stability

Fairtrade advocates argue that Fair trade benefits producers and workers in developing countries by providing them with price stability for their products.

Price stability means that farmers are paid a fair market price for their products. This fair market price ensures that it can cover the producer’s cost of production.

Supporters of Fair trade also argue that Fair trade organizations (i.e. Fair Trade Licensing Organization International) also help producers gain access to marketing techniques thereby allowing them to receive a fair price for their products.

The fair market price provides support for farmers and allows them to continue producing sustainably.

2. Facilitating Social Development

Fair trade also remits a portion of the product price back to farmers to facilitate social development in the community.

Advocates argue that this extra income allows communities to improve their physical and social environment through the creation of schools, clinics and community centers.



In addition, advocates state that Fair trade promotes the conservation of the physical and social environment because it encourages environmental protection and discourages child labour and unsafe labour standards.

The rising popularity of Fair trade in recent years has brought an increased level of criticism as well.

 

Fair trade Counter-arguments

Many opponents of Fair trade argue that fair trade is unethical due to it;

  • Promoting Protectionism
  • Incentivising Corruption
  • Creating Inefficiencies
  • Facilitating Overproduction
  • Benefiting Wealthy landowners

 

1. Promoting Protectionism

Opponents argue that the extra cost of Fairtrade goods represents an unfair subsidy to foreign producers which undermines domestic producers.

Academic (PROF) James Bovard outlines the similarities between Fairtrade and protectionism in his paper titled The Immorality of Protectionism where he writes,

Fair trade is based on the doctrine that producers have rights and consumers have duties. Fair trade assumes that the consumer’s freedom of choice is an injustice to the producer. The soul of protectionism is that if a company cannot stand on its own two feet, government should force its customers to carry it.

Here, Bovard states that Fairtrade is a form of protectionism, which forces consumers to pay more for Fairtrade products.

He argues that the premium price is a tariff which is used to benefit companies and producers that cannot stand on their own two feet.

Several supporters of Fairtrade counter-argue that Fairtrade is not protectionist, as long as consumers are willing to pay a higher premium for Fairtrade products.

The problem occurs when governments enforce Fairtrade regulations as has been the case in the Netherlands in 2007.

 

The Netherland’s Case

In 2007, coffee supplier Douwe Egberts (DE) sued the Dutch province of Groningen on the grounds that their legislation required coffee suppliers to meet fair trade criteria.

The legislation mandated that suppliers must pay a minimum price and a development premium to fairtrade producer cooperatives.

Douwe Egberts argued that the legislation requirements were discriminatory against non-Fairtrade products and challenged the Dutch provinces ability to enforce the Fairtrade legislation.

Ultimately, the court ruled in favour of the Dutch province, signifying  that fair trade policies can be regulated under provincial law.

 

2. Incentivizing Corruption

Another criticism of Fairtrade is that it incentivizes corruption.

Hal Weitzman, a journalist for the Financial Times, notes that many retailers falsely label coffee as Fairtrade certified.

Weitzman describes this in his paper titled: The Bitter Cost of ‘Fairtrade’ Coffee, where he writes

Some observers suggest that the capacity of [fair trade] certifiers to ensure their standards are met has not kept up with the growing demand for ‘ethical’ coffee. That was also one of the reasons…non-certified coffee [was] being falsely exported as Fairtrade.

Weitzman notes that coffee associations received Fairtrade certification despite illegally growing around 20 per cent of their coffee in protected national forest land.

 

3. Creating Inefficiencies

Another criticism on Fairtrade centers on its inefficiencies.

Many opponents argue that the extra cost of Fairtrade goods is not received by the producer since Fairtrade organizations do not monitor how much extra is charged for Fairtrade products.

As of yet, there have been no concrete studies that can accurately show how much money is being received by farmers of the developing countries.

Marketing economist Peter Griffiths notes that many producers of developing countries do not receive adequate compensation for Fairtrade goods.

Griffiths outlines these observations in his paper titled Ethical objections to Fairtrade where he writes,

In practice, retailers, wholesalers and manufacturers are free to charge whatever they wish for Fairtrade products. Fairtrade does not monitor or control how much extra they charge. It is almost never possible for a customer to determine how much extra is charged, because retailers almost never sell identical Fairtrade and non Fairtrade products side by side. Very occasionally it is possible to calculate how much extra is paid. One of the largest British café chains let it be known that they were charging 10 pence a cup extra for Fairtrade coffee, which made it possible to calculate that less than 1% of the extra price reached the Third World exporter. That is to say customers would have achieved at least 100 times as much if they had given the 10 pence to a reputable charity instead of buying Fairtrade.

Griffiths argues that it is very difficult to pinpoint the exact cost of Fairtrade goods.

He notes that the U.K. coffee chain, Costa, charged an extra 10 pence for Fairtrade coffee yet less than 1% of the extra price reached the farmers.

Researchers Valkila, Haaparanta and Niemi also found that consumers in Finland paid considerably more for Fairtrade certified coffee than for conventional coffee, but that only 11.5% of the extra paid went to the exporting country.

 

4. Facilitating Overproduction

Critics also argue that Fairtrade harms all farmers that are not part of the Fairtrade network.

Griffiths also notes this in his paper where he writes,

Fairtrade pays one million coffee farmers more than the going market price. [Fairtrade] also says a minimum price which means both a substantially higher average price and a reduced risk cost. It claims, too, to increase farmers’ output and yields, reducing costs and changing the supply function. Economists expect that this will mean more planting by Fairtrade farmers in good years, and less grubbing in bad years… the increased Fairtrade production means a reduced price for the other 24 million farmers.

In his paper, Griffith notes that this will adversely affect non-Fairtrade farmers because if Fairtrade farmers are paid more for producing certain crops, there is an incentive for them to overproduce.

The overproduction will result in an excess supply of crops which will drop the market price since supply will exceed demand.

 

5. Benefiting Wealthy landowners

Opponents argue that Fairtrade only benefits the rich farmers since they must join a Fairtrade cooperative in order to receive the benefits of Fairtrade.

Fairtrade cooperative is a farm or other organization that is owned and run jointly by its members, who share the collective profits and benefits.

Opponents state that Fairtrade cooperatives must meet quality and political standards which means their farmers must be relatively skillful, educated and well capitalized.

Critics point out that these farmers are, therefore, far from the poorest farmers and that they would be well off even without the “supposed” benefits of Fairtrade.

Griffiths notes that Fairtrade cooperatives receive money simply because they are labeled as Fairtrade and not because they aid disenfranchised farmers.

He outlines this argument later in his paper where he writes,

Fairtrade enthusiasts claim the ‘Honeypot Effect’ as a major benefit, that other organizations give money to cooperatives, just because they are Fairtrade. It is very tempting for an NGO, government, agency or donor government to deliver aid or charity through a cooperative that is already well managed, that already gets aid from other agencies, that have skilled and educated members, and that has a comfortable rest house for visitors. It is easier and faster to deliver health and education to a cooperative that has already spent a little money on building a clinic and a classroom, with the donor providing staff, equipment, books and medicines. It means that demonstrable results are easier to achieve in the short run. Fairtrade cooperatives expect to get funding from six to twelve other organizations. This means that money is diverted away from the neediest, causing Death and Destitution.

Here, Griffiths argues that Fairtrade cooperatives divert the donations from governments and NGOs which should be donated to marginalized farmers.

 

Fair trade movement in Canada

The popularity of Fair trade in Canada led to the establishment of Fairtrade Canada in 1997.

Fairtrade Canada is a non-profit organization certifying that Canadian products bearing the Fairtrade label must meet with international Fairtrade standards.

Fairtrade Canada also licenses Canadian companies that use the Fairtrade label on their products, and monitors companies to ensure that the labels are not used in a way that is misleading to the public.

The growth of the fair trade movement in Canada is well documented in a 2011 report issued by the Fairtrade Canada titled; Canadian Sales of (Labelled) Fairtrade Certified Products.

The report presents the following graphs which depict the growth of Fairtrade products in Canada.

 

As the above graphs indicate, there is a continual increase in the exchange of Fairtrade cocoa and coffee in Canada.

The growth of Fair trade sales  in Canada partly stems from the actions of the Canadian Student Fair Trade Network in 2005.

Within the network, student groups actively promoted the principles of Fair trade and encouraged the public to purchase Fairtrade products. These student groups increased public awareness on the issue of Fair trade in the market place.

Several political parties in Canada also promote the principles of Fair trade.

New Democratic Party (NDP) Trade critic Peter Julian argues strongly in favour of a fair trade model.

Julian outlines his arguments in the article titled: NDP pushes for Fair trade and transparency in EU Deal, where he states

We must move toward a fair trade model that would actually benefit the citizens of Canada and the EU, rather than catering to a handful of big corporate interests.

Julian’s call for Fair trade policies is also echoed by the current leader of the Green Party, Elizabeth May.

May advocates that Canada should support Fair trade since it places human rights and environmental protection as a top priority.

May outlines her support for Fair trade in her article titled; 5.17 Trade and sovereignty, where she writes

The Green Party supports fair trade that puts sovereignty, human rights, and the environment first and not trade agreements that put the rights of multi-national corporations first. We recognize that trade is an important component of a sustainable economy but that it cannot hamper or undermine sovereign efforts to protect and enhance local quality of life and build local economies. The Green Party is about transforming − shifting mind sets, shifting taxes, shifting emphasis in trade from a failed free trade model to a proven fair trade model, and it is about shifting emphasis from global to local development.

As noted above, several Canadian politicians seek  to reform the existing trade model.

Many individuals that want to reform the current trade system follow the Trade justice movement.

The next article examines the growing movement towards Trade justice.

Contents:

How Free Trade Costs Canada it’s Sovereignty – Pt 1

Fundamentals of the International Trading System – Pt 2

Binding Clauses and the Hidden Cost of Free Trade – Pt 3

Canada and US Debate Over Trade Disputes on Free Trade Agreements – Pt 4

The Social Cost of Free Trade Agreements – Pt 5

Canada’s Non-renewable Resources – Pt 6

The Debate Over Free Trade Agreements – Pt 7

Leave a Comment

Login to your account

Can't remember your Password ?

Register for this site!