Fair trade debate

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Fair trade's increasing popularity has drawn criticism from both ends of the political spectrum. Different arguments are used by those who favour and by those who oppose fair trade, or feel that stricter standards and higher fair trade prices are needed. These arguments can be divided in four broad categories:

• The price distortion argument, advocated by the Adam Smith Institute, The Cato Institute, and The Economist magazine, calling fair trade a "misguided attempt to make up for market failures" encouraging market inefficiencies and overproduction.
• The scope of fair trade argument, not explicitly criticizing the ideals behind fair trade, but rather the current certification and pricing systems.
• The trade justice argument, championed by French author and broadcaster Jean-Pierre Boris, criticizing fair trade for stopping short of actively advocating immediate trade policy changes that would have a larger impact on disadvantaged producers' lives.
• The mainstreaming argument, defended by French author Christian Jacquiau, which criticizes the fair trade movement for working within the current system (i.e. partnerships with mass retailers, multinational corporations etc.) rather than establishing a new fairer, fully autonomous trading system.

Contents 1 Price Distortion Argument 2 Impact on conventional producers debate 3 Scope of fair trade debate 4 Retail pricing debate 5 Trade justice and fair trade debate 6 The mainstreaming of Fair trade debate 7 References 8 See also

[edit] Price Distortion Argument

An economy works best when prices are the direct reflection of supply and demand, not politically motivated and artificially determined. 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. As fair trade opponents argue, under free trade, an excessively low price sends a signal for producers to switch to more productive economic activities.^[1] For example, an extremely low coffee price would signal coffee growers to switch to new crops or completely new industries. Though the adjustment progress is difficult, this creative destruction is a core component of economic growth. By stopping price signals, fair trade encourages inefficient activities that will not lift the world's poor out of poverty.^[1] In 2003, Cato Institute senior fellow Brink Lindsey referred to fair trade as a “well 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.^[2]

On the other hand, some recent theoretical work in the field has questioned the price distortion argument: according to Becchetti and Rosati (2006), there are two theoretical fallacies behind this kind of reasoning.

1. First, in many cases the exchange between producers and intermediaries does not occur in a competitive framework. Under such circumstances, the actual market price (and not the fair trade price) is the distorted one because it does not reflect the productivity of producers but rather their lower market power.
2. Second, the food industry produces highly differentiated products with a continuous wave of innovations which create new varieties. There is not one single coffee but instead many different coffee products which are differentiated from one another in terms of quality, blends, packaging, and now also "social responsibility" features. For each of these products there exists a specific and different market price which is determined by consumer taste for that kind of product (which for fair trade coffees does not seem to be weak or declining). In this sense, fair trade is an innovation in the food industry which creates a new range of products.^[3]

Beyond these elements it is important to also take into account all the potential benefits of the fair trade value chain in terms of provision of local public goods, technical assistance which strengthens producers market capabilities, democratization of markets through increasing consumer power etc.^[3]

Fair trade organizations such as FLO International also respond to the oversupply argument by claiming that fair trade is very much a market-responsive model of trade: the farmers receive the Fairtrade minimum prices and premiums only if they have a buyer willing to pay them and many producer groups also sell in the conventional market. According to Luuk Zonneveld, Managing Director at FLO International, "our experience is that producers use their additional income from Fairtrade to improve their homes, send their children to school and improve the quality of their existing crop, rather than to increase production".^[4] Fair trade organizations have also long encouraged producers to invest in diversification and specialty crop development programs. Examples include coffee growers developing citrus or macadamia nuts, banana farmers moving into other premium tropical produce, or investment in alternative income-generation projects such as eco-tourism, or in community health and education programs.^[5] These services, offered through organizations such as TransFair USA's Global Producer Services (GPS) and FLO International's Producer Business Unit (PBU), are entirely funded by fair trade premiums.

[edit] Impact on conventional producers debate

In addition to the market not receiving the correct signals, The Economist claims fair trade can make non fair trade growers worse off. As it pointed out in "Voting with your trolley" on December 7th 2006^[6], when the signal does not get through, more farmers move into coffee, “This then drives down the price of non-Fairtrade coffee even further, making non-Fairtrade farmers poorer. Fairtrade does not address the basic problem, argues Tim Harford, author of “The Undercover Economist” (2005), ^[7] which is that too much coffee is being produced in the first place. Instead, it could even encourage more production.”

Nicolas Eberhart, researcher at the French NGO Agronomes et Vétérinaires sans frontières, argues the opposite by explaining in his 2005 impact study "Etude d'impact du commerce équitable sur les organisations et familles paysannes et leurs territoires dans la filière café des Yungas de Bolivie" how rather than hurting conventional producers, fair trade can also have the opposite impact by raising local market prices. A case study of Bolivian coffee Fair Trade producers in 2005 concluded that Fair trade certification has had in the Yungas a positive impact on local coffee prices, thus economically benefiting all coffee producers (Fairtrade certified or not).^[8] This increase was most notably attributed to the fact that many non-fair trade producers benefited from fair trade funded infrastructure and programs: processing, credit facilities, quality improvement, crop diversification, conversion to organic production etc. In the case of Bolivia, conventional producers also benefited from greater political influence as a result of reforms pushed through by stronger, NGO supported, fair trade producer organizations.^[9]

[edit] Scope of fair trade debate

As The Economist magazine pointed out in its December 7th 2006 issue, “another objection to Fairtrade is that certification is predicated on political assumptions about the best way to organise labour. In particular, for some commodities (including coffee) certification is available only to co-operatives of small producers, who are deemed to be most likely to give workers a fair deal when deciding how to spend the Fairtrade premium. Coffee plantations or large family firms cannot be certified.

On the other hand, fair trade supporters, such as Oxford University professor Alex Nicholls, argue that the program was created in the first place to address market failures affecting small farmers' organizations. As opposed to plantations for example, 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 small farmers' organizations in the developing world.^[10]Fair trade is seen as an attempt to address these market failures by providing to the most in need a stable price for their crop, business support, access to premium Northern markets and better general trading conditions.

[edit] Retail pricing debate

In an article published in its December 7, 2006 issue, The Economist magazine criticized fair trade for being "an inefficient way to get money to poor producers". According to the magazine, retailers add their own enormous mark-ups to Fairtrade products and mislead consumers into thinking that all of the premium they are paying is passed on. The Economist estimated that only 10% of the premium paid for Fairtrade coffee in a coffee bar trickles down to the producer. Fairtrade coffee, like the organic produce sold in supermarkets, is used by retailers as a means of identifying price-insensitive consumers who will pay more.^[1]

Fair trade proponents such as the Fairtrade Foundation defend fair trade by arguing that under EU and US competition laws, it is illegal for them to intervene in price fixing discussions between retailers and importers. The Fairtrade Foundation further brushes off The Economist's attacks by citing a range of studies conducted in 2005 concluding that the majority of retailers do not increase their profit margins on fairtrade products, for fear of losing market share in the growing market. There are also numerous instances of retailers actually reducing their profit margins in an effort to boost sales and improve their corporate image: in December 2006, British retailer Sainsbury's announced for example it would offer from now on only Fairtrade bananas - and this was achieved without any increase in the cost paid by consumers.^[11]

According to the Fairtrade Foundation, fair trade remains the "only guarantee on the market that producers are receiving an agreed and stable price and money to invest in their communities". The amounts paid to the producer organizations are public, published in the Fairtrade standards and are checked by independent audit organizations.^[12] As explained on the Foundation's website, "it is ultimately down to all of us as individual shoppers to decide whether they feel products represent good value for them", knowing how much commodity producers are paid for under conventional or fair trade.^[13]

[edit] Trade justice and fair trade debate

Segments of the trade justice movement have also criticized fair trade in the past years for allegedly focusing too much on individual small producer groups while stopping short of advocating immediate trade policy changes that would have a larger impact on disadvantaged producers' lives. French author and RFI correspondent Jean-Pierre Boris championed this view in his 2005 book Commerce inéquitable.^[14]

[edit] The mainstreaming of Fair trade debate

And finally, on the other end of the spectrum, some believe the fair trade system is not radical enough. French author Christian Jacquiau, in his book Les coulisses du commerce équitable, calls for stricter fair trade standards and criticizes the fair trade movement for working within the current system (i.e. partnerships with mass retailers, multinational corporations etc.) rather than establishing a new fairer, fully autonomous trading system. Jacquiau is also a staunch supporter of significantly higher fair trade prices in order to maximize the impact, as most producers only sell a portion of their crop under fair trade terms.^[15]

[edit] References

[edit] See also

Fair trade topics	Fair trade | History of fair trade | Fairtrade certification | Fair trade and politics | Fair trade impact studies | Fair trade debate | Alternative trading organization | Trade justice | Worldshop | Black Gold (film) | One Cup (film)
Federations	Fairtrade Labelling Organizations International | International Fair Trade Association | Network of European Worldshops | European Fair Trade Association | FINE | Fair Trade Federation
Certification	FLO International (standard-setting & producer support) | FLO-CERT (inspection & certification) | International Fairtrade Certification Mark | Fair Trade Certified Mark
Campaigns	Fairtrade Town | List of Fairtrade settlements | Fairtrade fortnight | Make Trade Fair | World Fair Trade Day