Is fair trade wrongheaded?
Home .International Trade Is fair trade wrongheaded?
Is fair trade wrongheaded?
Wednesday, 14 April 2010 08:05

Since Robert Torrens and David Ricardo developed the theory of comparative advantage almost 200 years ago, virtually all economists have staunchly believed in the benefits and gains of free trade.  Just recently, WTO Director General Pascal Lamy felt the need to reiterate the mutual benefits from the specialization and trade between two nations which have differences in relative productivity.

 

So what should we make of the so-called “fair trade” movement?  I am sure that you have all seen Fairtrade products at Starbucks.

 

There are at least three strands in the fair trade movement.

 

First, fair trade (or unfair trade!) was basically used as an argument for protectionism in the 1880s.  As Nobel laureate Paul Samuelson once said there are thousands of important and intelligent men who have never been able to grasp the theory of comparative advantage for themselves or to believe it after it was explained to them.  This means that debates on trade are often wrongheaded.

 

Moreover, when a country opens itself to trade, there are winners and losers, even though a nation will have overall net benefits.  Thus, the term unfair trade came into use among Britain's mercantile lords and America's manufacturing titans, who were anxiously looking to guard their industries from the threat of a globalizing world at the time.

 

Fast forward to present times when we saw US presidential candidate, Barack Obama pledge in 2008 to fight for "trade that is free and fair for all," criticizing existing trade agreements such as NAFTA and vowing to pressure countries like China to desist from unfair trade practices.  And right today, China is being accused of currency manipulation by the US Congress and thereby unfair trade practices.

 

Second, there was the Oxfam led “Make Trade Fair” movement from 2002.  This report recognized the benefits of international trade, but claimed that the poor are being shut out from these benefits because of the policies of rich countries.  It argued that rich countries keep their markets closed, while poor countries are pressured by the International Monetary Fund and World Bank to open their markets at breakneck speed.  Commodity prices on which developing countries depend, are low and unstable.  And multinational enterprises are free to engage in investment and employment practices which contribute to poverty and insecurity.  Many of the WTO’s rules on intellectual property, investment, and services protect the interests of rich countries at the cost of the poor.  In short, world trade must be reformed for ending the deep social injustices that pervade globalization.

 

“It is time to end double standards and to make trade fair”.  This is Oxfam’s main message.  There is a lot of good sense in Oxfam’s arguments (particularly regarding rich countries’ agricultural protectionism), which was endorsed by Nobel prize winning economist Amartya Sen.

 

Third, there is the Starbucks-led fair trade movement for “yuppies” who require moral virtue along with their café latte.  This movement is concerned that farmers and workers at the beginning of the chain get a raw deal.

 

Since March this year, every cappuccino, latte, mocha and other espresso-based beverage served in Starbucks in Europe is Fairtrade Certified.  Starbucks is already the world’s largest purchaser of Fairtrade coffee.  Quite naturally, Starbucks is proud to announce its commitment to doing business in ways that are good to the earth and to each other -- from the way the company buys its coffee, to minimizing its environmental footprint, and being involved in local communities.

 

But how does the Fairtrade system work?

 

The Fair Trade Certified label allegedly guarantees consumers that strict economic, social and environmental criteria were met in the production and trade of an agricultural product like for example bananas, cocoa, coffee, cotton, flowers, fresh fruit, honey, juices, rice, spice and herbs, sports balls, sugar, tea and wine.  The following criteria must be abided by before a Fairtrade label can be put on a product -- fair prices; fair labor conditions (including freedom of association, safe working conditions, and living wages -- forced child labor is prohibited); direct trade eliminating unnecessary middlemen; democratic and transparent organizations meaning that farmers and farm workers decide how to invest Fair Trade revenues; community development investment of Fair Trade premiums; and environmental sustainability (harmful agrochemicals and GMOs are strictly prohibited).

 

In addition to being paid a price which covers the costs of sustainable production, producer organizations receive a Fairtrade Premium, additional income for community development projects. In 2008, the Fairtrade Premium contributed over 12 million Euros to Fairtrade coffee farmers and over 11 million Euros to Fairtrade banana farmers alone.

 

Under the Fairtrade Labeling Organizations (FLO), an international organization headquartered in Germany, there is a global network of organizations that perform many functions.  They develop and review the standards that Fairtrade producers must meet, and the terms of trade for importers, exporters and retailers.  They license retail suppliers like Starbucks to display the Fair Trade Certified label on products if they meet the relevant criteria.  They help producers to gain Fairtrade certification and to develop market opportunities.  They help raise consumer awareness and campaign for changes in the rules of conventional trade.

 

The Fairtrade organizations do a commendable job, but they are invariably short of resources.  TransFair USA, the leading third-party certifier of Fair Trade products in the United States, recently received a $50,000 grant from Green Mountain Coffee, and a three-year commitment of $925,000 from the Green Mountain Coffee Roasters Foundation.  Let’s hope that TransFair USA can maintain its independence!

 

Towns can also be designated as “Fair Trade Town” if they have Fair Trade products available in local stores, an active citizen support network, business engagement, and local government support.  Currently, 13 U.S. municipalities have been recognized as Fair Trade Towns, including Amherst and Northampton (MA), Brattleboro and Burlington (VT), San Francisco and Chico (CA), Milwaukee (WI), Media (PA), Montclair and Highland Park (NJ), Bluffton (OH), Ballston Spa (NY), and Taos (NM).

 

Despite the global recession, worldwide sales of Fairtrade products grew by an impressive 22% in 2008 as consumers spent an estimated 2.9 billion Euros on Fairtrade products globally.  Global sales have doubled for Fairtrade tea (112%) and for Fairtrade cotton products (94%).  As the products with the highest sales volumes, Fairtrade coffee sales increased 14% to 66,000 metric tonnes (MT) and the market for Fairtrade bananas grew by 28% to 300,000 MT.

 

Ben & Jerry's announced its commitment to go fully Fair Trade across its entire global flavor portfolio. From Cherry Garcia to Chocolate Fudge Brownie, all of the flavors in all of the countries where Ben & Jerry's is sold will be converted to Fair Trade Certified ingredients by the end of 2013.  Ben & Jerry's was the first ice cream company in the world to use Fair Trade Certified ingredients starting in 2005.

 

Cadbury extended its commitment to Fairtrade by confirming that three more markets -- Canada, Australia and New Zealand -- are to receive Fairtrade certification for the flagship Cadbury Dairy Milk brand.  Combined with existing Fairtrade market in Britain and Ireland, the five markets will quadruple Fairtrade cocoa sales from Ghana.  Cadbury Dairy Milk has announced the investment plans for its first Fairtrade social premium to cocoa farmers in Ghana.  The first instalment of £500,000 will go directly into projects determined by the farmers themselves since receiving the funds. The programmes include building wells and mobile health clinics and funding for carbon reduction schemes.

 

Last but not least, Fairtrade is not just an affair between rich consumers and poor farmers.  Dominican Republic Fairtrade producers have been rallying to support their Haitian neighbours.  They sent much needed supplies of water, food and medication.

 

So what should we make of Starbucks led Fairtrade movement?  (i)A traditional economist might say that the Fairtrade movement artificially pushes up the price of Fairtrade products thereby minimizing their comparative advantages and adversely affecting the poor farmers.  No doubt, this does occur.  (ii) A cynic might say that unscrupulous companies are seeking to buy a good reputation.  Again, may be this is partly true.  (iii)  But many Western and other consumers are genuinely concerned about the ethical conditions under which their products are produced.  They want to buy not only a hot coffee, but a warm feeling for their heart and soul.  (iv)  And we have to recognize that this movement could actually improve the conditions of life for poor farmers.

 

On this latter point, Fairtrade has been brave enough to commission a study by the University of Greenwich on the impact of Fairtrade.  The study shows the “importance of Fairtrade in providing organised small farmers with the greater stability and security needed to make longer-term investments, in building their capacity and throwing them a lifeline in times of real hardship. Similarly, many Fairtrade co-operatives are becoming stronger, often showing greater ability to survive in difficult times and becoming more able to provide important services to their members.”

 

All of this goes to show that a simple phrase like “fair trade” can be dangerous with all of its possible interpretations.

 

 

References:

Facts and Fictions in International Trade Economics by Pascal Lamy, Director-General, World Trade Organization

http://www.wto.org/english/news_e/sppl_e/sppl152_e.htm

Anthropology of an Idea: Fair Trade by Elizabeth Dickinson.  Foreign Policy, January/February 2010.

http://www.foreignpolicy.com/articles/2010/01/04/anthropology_of_an_idea_fair_trade

Make Trade Fair, Oxfam

http://www.maketradefair.com/en/index.php?cat=4&file=25032002111113.htm&select=1&subcat=1

Fairtrade Labelling Organizations International

http://www.fairtrade.net/

Cadbury website

http://www.cadbury.com/Pages/Home.aspx

A review of the impact of Fairtrade over the last ten years by

Valerie Nelson and Barry Pound, Natural Resources Institute, University of Greenwich

http://www.fairtrade.org.uk/resources/natural_resources_institute.aspx

 

 


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