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 more strict standards and higher fair trade prices are needed. These arguments can be divided into different broad categories:

• The price distortion argument, advocated by the Adam Smith Institute,^[1] and The Economist magazine^[2] calling fair trade a "misguided attempt to make up for market failures" encouraging market inefficiencies and overproduction.^[3]
• The creation of insider/outsider markets argument, defended by the Institute of Economic Affairs^[4]. This argument does not explicitly criticize the ideals behind fair trade, but rather current certification, production and pricing systems.
• The mainstreaming argument, defended by French author Christian Jacquiau, which criticizes segments of 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.

[edit] Price Distortion Argument

Criticism: 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, as fair trade opponents claim, existing producers to produce more and new producers to enter the market, leading to excess supply.^[5] Through the laws of supply and demand, excess supply can lead to lower prices in the non-Fair Trade market.

In 2003, Cato Institute's vice president for research 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.^[6]Lindsey's comments echo the main criticisms of Fair Trade, claiming that it "leads fair trade producers to increase production." While benefiting a number of Fair Trade producers over the short run, fair trade critics worry about the impact on long run development and economic growth. An article in The Economist claimed that the reason coffee prices are so low on the world markets is that there is too much production, and that by encouraging even more supply of coffee, fair trade makes the world price fall further making the majority of coffee producers worse off.^[2]

Henry Hazlitt explains the economic results of artificial price supports for agricultural goods stating, "but if an attempt is made to keep up the price of an agricultural commodity and no artificial restriction of output is imposed, unsold surpluses of the overpriced commodity continue to pile up until the market for that product finally collapses..."

Response: The Fairtrade Foundation counters the price distortion argument by claiming that fair trade does not ‘fix prices’. It rather has a minimum floor price that ensures farmers can meet the costs of sustainable production should market prices fall below this level. The minimum price is not a fixed price but the starting point for a market-based price negotiation. Many fair trade growers routinely earn more than this for the quality, type of coffee bean (or other product) or the particular origin they offer. The minimum price mechanism provides the most vulnerable people in the supply chain the security to meet their basic costs in time of crisis. Effectively, it provides a safety net should markets fall below a level considered necessary for farmers to earn back the costs of sustainable production.^[7]

Moreoever, the fair trade minimum price only applies if the market price is lower than this. When market prices exceed the minimum price, traders must negotiate on the basis of market prices, not fair trade minimums.^[8]

Several academics, including Hayes^[9], Becchetti and Rosati^[10], also identify two other counterarguments to this criticism.

1. First, in many cases the exchange between producers and intermediaries does not occur in a competitive framework.^[10] In such case the market price is a distortion because it does not reflect the productivity of producers but their lower market power.^[11]
2. Second, the price distortion argument does not take into account the principles of product differentiation. Coffee, for example, cannot be compared to other commodities such as oil: there is not one single type of coffee but instead many different brands that are differentiated from one another in terms of quality, blends, packaging, and now also "social responsibility" features. Consumer demand and taste defines what different market prices are acceptable for each of these products.^[10] In this sense, fair trade can be considered as a market-driven innovation in the food industry that creates a new range of products for which a growing segment of consumers are willing to pay more based on environmental and social responsibility claims.^[10]

And finally, beyond these elements, it is also important to also take into account all the other non-price related potential benefits of the fair trade value chain in terms of technical assistance, democratization of markets through increasing consumer power, crop diversification programs, etc.^[10]

[edit] Impact on conventional producers debate

Criticism: In addition to the market not receiving the correct signals, critics such as The Economist claim fair trade can make non fair trade growers worse off.^[2] Critics claim that 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), ^[12] which is that too much coffee is being produced in the first place. Instead, it could even encourage more production.”

Response: The Fairtrade Foundation responds to the argument by claiming that "there is absolutely no evidence that fair trade makes other farmers worse off – in fact, co-operatives report that their increased knowledge about market prices makes it much more difficult for private traders to rip off farmers in the surrounding areas too, and that prices can be better as a result for everyone".^[13]

Nicolas Eberhart, researcher at the French NGO Agronomes et Vétérinaires sans frontières, argued 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 (Fair trade certified or not).^[14] 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.^[15]

[edit] Scope of fair trade debate

Criticism: 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.

Response: 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.^[16]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

Criticism: 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.^[2]

Response: 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 counters The Economists assertions 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.^{[citation needed]} There is at least one instance of a retailer actually reducing its profit margins in an effort to boost sales and improve its corporate image: in December 2006, British retailer Sainsbury's announced it would begin to offer only Fairtrade bananas at the same price that Sainsbury's had previously sold non-Fairtrade bananas.^[17]

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.^[18] 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.^[19]

[edit] Trade justice and fair trade debate

Criticism: 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.^[20]

[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.^[21]

[edit] References

[edit] See also

• Food price crisis