Is Fair Trade Good or Bad for Economic Development
Is FairTrade Good or Bad for
The Aim of Fair Trade:
To offer the most disadvantaged producers in developing countries the opportunity
to move out of extreme poverty through creating market access under beneficial
rather than exploitive conditions. (Nicholls & Opal, 2005)
The objective is to empower producers to develop their own businesses and wider
communities through international trade.
Fair Trade offers a new model of the producer-consumer relationship that reconnects
production and consumption via an innovative supply chain model which
distributes its economic benefits more fairly between all stakeholders.
Fair Trade attempts to address the gross imbalances in information and power that
typify North-South supplier-buyer relationships by countering the current
failures evident in many global markets.
Different Meanings for Different People
“We wouldn’t be selling this stuff if there wasn’t something in it for us in the context of
sales benefits, the halo of Fair Trade, and brand benefits. So we started to get interested in
it and we felt, frankly, that it was a sector that was ripe for something to happen”
Hamish Renton, Tesco
“I used to live in a thatch hut with a mud floor. Now I have two concrete houses. And I
have been able to educate my children. Sophia is at university and Laurence is a teacher.
They had to work in a shrimp farm when they were younger, but my children now only go
to school. We don’t need them to work.”
Jeromino Tush, Cocoa Grower,
“Fair trade is about working with marginalized producers – people on the edge of the
international trading system. Its bringing them in and building their sustainability, their
understanding of selling and trading and allowing them to survive often in situations were
they normally wouldn’t. It’s about empowerment and the growth of output and quality for
the groups and to get to a point where they no longer need to engage with the Fair Trade
Diana Gayle, The Fair Trade
A History: Fairtrade Labelling
Fair Trade has been around for over 40 years, but was only given an official label during the late
1988 saw the launch of the first Fairtrade label, Max Havelaar, under the initiative of the Dutch
development agency Solidaridad. The first ‘Fairtrade’ coffee from Mexico was sold into Dutch
In the late ‘80s/early ’90s the Max Havelaar initiative is replicated in several other markets across
Europe and North America, including the “Fairtrade Mark” in the UK and Ireland.
In 1997 the Fairtrade Labelling Organizations International (FLO) was established in Bonn, Germany to
unite the labeling initiatives under one umbrella and establish worldwide standards and certfication.
In 2002 FLO launches a new International Fairtrade Certification Mark. The goals of the launch were
to improve the visibility of the Mark on supermarket shelves, facilitate cross border trade and simplify
export procedures for both producers and exporters.
By 2007, 21 Labelling Initiatives are members of FLO International. New additions include Mexico and
A History: Fairtrade Foundation
1992 saw the Fairtrade Foundation established by CAFOD, Christian Aid, Oxfam, Traidcraft and the World
Development Movement, which was later joined by the Women's Institute.
By 1994 The first Fairtrade certified product, Green & Black’s Maya Gold Chocolate made with cocoa from Belize is
In 1998 Bristol, Nottingham, Bath and Norwich City Councils become the first local authorities to convert to
Fairtrade coffee and tea.
In 2000 Fairtrade chocolate bar, Dubble, with the aid of Comic Relief was launched, with an award winning
education pack taking Fairtrade in 15,000 UK schools.
By 2004 the number of Fairtrade retail products reaches 350. The Fairtrade Mark celebrates its 10th Birthday and
the Fairtrade Foundation wins the Charity of the Year award. Marks & Spencer switches all the coffee sold in its 198
in-store Café Revives to Fairtrade .Tesco unveils its Own Label range of Fairtrade products.
In 2007 loose Fairtrade certified bananas are launched by Sainsbury’s and Waitrose. A TNS public survey
commissioned by the Fairtrade Foundation reveals that awareness of the FAIRTRADE Mark has risen to 57% of the
adult population. Sales of Fairtrade certified products top £500m.
In 2009 Cadbury Dairy Milk commits to going Fairtrade. Fairtrade beauty products are launched. Starbucks roll out
their 2008 announcement to go 100% Fairtrade for all espresso-based coffees in the UK and Ireland.
The Facts and Figures
Globally, consumers worldwide spent £1.6bn on Fair Trade certified
products in 2007. This is a 47% increase on the previous year
directly benefiting over 7 million people - farmers, workers and
their families in 58 developing countries.
The table below shows the amount of money that has been spent
on Fair Trade certified products in the UK measured in millions
The Economics of FairTrade
Below is a list of market failures that occur in the global trading
market. These failures lead to a gross imbalance in information
and power between consumers and producers.
• Imperfect information
• Lack of access to financial markets
• Lack of access to credit
• Inability to switch to other sources of income generation
• Weak legal systems and enforcement of laws
Fair Trade directly addresses these problems to give producers
access to information and the opportunity to gain bargaining
power against Fair Trade product retailers.
How does FairTrade Work?
The basic principles of Fair Trade include:
1. Direct purchasing from producers
2. Transparent and long-term trading partnerships
3. Agreed minimum prices
4. Focus on development and technical assistance via the payment
to suppliers of an agreed social premium.
Within these four principles, direct trade and long term trading can
improve the functioning of the export market for producers in
developing countries and hence contribute to economic
1. DirectTrade with Producers
Fair Trade importers must, wherever possible, buy directly from a
farming co-operative, a farming estate, or local producer group.
A co-operative structure is a situation where farmer members own
shares in an umbrella organization, with equity ownership.
While estates, plantations, and large scale craft and textile
manufacturers have historically enjoyed access to to export
markets, small scale producers are typically isolated from direct
export access unless organized into co-operatives.
To achieve of Fair Trade, microeconomic market failures must be
corrected through retailers working directly with co-operatives.
Lack of Access to Markets
Farmers in developing countries have a lack of access to markets due to low funds and
geographical location, making them reliant on middlemen to buy their products.
This link in the supply chain is exploitive as competition by buyers is rarely achieved
resulting in farmers only receiving one price offer.
In a co-operative structure, resources are pooled together to buy or rent trucks which
makes them less open to exploitation by middlemen and gives them greater access to
However, it may be considered inefficient. Middlemen are better at taking products to the
markets than top-heavy co-operatives.
Although they are more efficient, middlemen cartels means that farmers don’t receive as
high a price if middlemen were in competition.
Co-operative formation allows direct access to export markets, with a higher price and
hence higher incomes for producers.
Lack of Price Information
Farmers in remote locations do not know global market prices because of a lack
of information obtaining tools, such as telephones, newspapers, radio news or
the Internet. Information for these farmers is usually limited to one middleman
that visits the farm.
When co-operations pool together they can invest in telephones and faxes etc to
get more information from contracted retailers and other sources.
With this information producers are able to make decisions about the quantity
and the quality at which they produce, given the global market equilibrium
E.g. Cocoa farm in Ghana used co-op funds (only £100) to purchase scales to
protect themselves from exploitive middlemen with rigged scales resulting in
higher levels of income for the farm.
Lack of Quality Information
Small producers, on their own, have little direct market feedback from
retailers in the North, which results in a lack of information about industry
quality and general industry information.
Joining large export co-operatives open up many ways of direct
communication with the North:
• Hiring of English/German-speaking staff
• Flying to conventions to meet possible clients
•Hiring and training staff to send samples and descriptions of their
products to clients
Co-operative structures and direct trade allow small-scale low-income
farmers to deal directly with large traders in the north to address
information imbalances in the trading system.
Lack of Competitive Credit
Small scale producers borrow money during the panting season for seeds and fertilser and
pay the lender back, with interest, after they have sold their crop.
There is a lack of competition in the market for money borrowing. This means that
producers only have one option in terms of who they borrow money from.
The become reliant on one lender as there is no competing offers and these financing rate
can be as high as 100% per annum.
Farmers buy goods that they need on credit and are often expected to repay by selling
their product for a lower-than market price.
This mechanism means that farmers remain in a state of continued indebtedness which
places the trader in a position to sell products and buy producer products under
increasingly favourable conditions.
Fair Trade standards require importers to provide 60% of the contract amount if asked by
2. Long-TermTrading Relationships
Fair trade importers are required to sign long term trading contracts
which smoothes out income and correct information failures and
hence encourages constant growth and predictability.
Long term trading relationships improves the importer/producer
relationship. Importers support and work with producers to
overcome supply and quality problems. This also benefits
consumers as the products they purchase are consistent in quality
However, most of these contracts only extend from 6 to 12 months.
Many of the farmers are often left after the initial contract
causing problems bigger than they were before. Farmers not
caught in the Fair Trade safety net struggle against deflated
Fair trade cannot aid sustainable economic development, in
fact it promotes the opposite, allowing some communities to
settle in the primary sector and hold back from diversification
and mechanization necessary in growth.
It also leads to the dangerous situation of being over reliant
on the fragile commodities market.
3.The Floor Price
Fair Trade standards require that all producers are paid a minimum price
to cover costs which protects producers from volatile agricultural
commodity market prices which may fall below sustainable levels.
Fair Trade floor price=cost of production + cost of living + cost of
complying with Fair Trade standards.
When market prices rise above the Fair Trade price buyers must pay the
market price, although producers and traders can also negotiate price
contracts on basis of quality etc.
The floor price is necessary as market prices can fall below costs of
production and lead to chronic poverty and instability where these
exports account for the main source in income in a developing community
with few others resources.
The Floor-Price Drawbacks
a “well intentioned, interventionist scheme...doomed to end in failure."
1. The low prices of commodities such as coffee is due to overproduction.
Paying a guaranteed Fair Trade premium both prevents this signal from
getting through and, by raising the average price paid for coffee, encourages
more producers to enter the market. This then drives down the price of non –
Fair Trade coffee even further, making non-Fair Trade farmers poorer.
2. The floor price mechanism also encourages overproduction, according to
Brink Lindsey of the Cato Institute, as sales of their produce are guaranteed.
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
3. Labour intensive versus capital intensive.
4.The Social Premium
Social Fair Trade premium is paid on top of minimum price to give
producers an opportunity to improve social, economic and environmental
This can increase development through improved
health, education, infrastructure, and improvements to increase yield and
The use of this money is decided democratically by the cooperative
members so everyone gets a say in how their communities are improved.
Broader community can benefit from these improvements in social and
economic capital, not just the Fair Trade producers- multiplier effects.
The Social Premium Myth
The social fair trade premium is undoubtedly a superb
idea to provide underdeveloped communities with a
chance to grow.
Though not opposed to the idea, we are concerned that
global consumers are misled into believing that this
premium will be entirely used in the communities.
In fact it may be more efficient to donate directly to
charities in these countries as opposed to buying fair
Other Impacts of FairTrade
•FLO Fair Trade standards require farms and co-operatives who
employ significant numbers of workers to abide by International
Labour Organisation standards and domestic laws that regarding
child labour, the right to organise, the use of dangerous chemicals
and machinery, working hours, and other fundamental
This results in decreased child labour, increased unions, better
The fair Trade process is, thus, an independent verification of wage
and labour standards that may exist but which may not be enforced
in producing countries.
Alternatives to FairTrade
Reduce tariffs on imported goods
Early stages of Fair Trade, even so, it has grown very quickly and
seems to have a promising future.