Fair Trade – Term Paper

Fair Trade: Consumerism for Global Justice Introduction The Fair Trade movement is rapidly becoming an emerging and dynamic strength to respond to the negative influence of globalization, or rather, to the contemporary international trade injustice. While on the other hand, there is criticism on fair trade, claiming that fair trade is not fair and it goes against free market theory. This term paper aims at introducing the development of fair trade, justifying its economical and ethical significance on the international trade and production chain, and also reflecting on its limitations from different respective.

The term paper is structured starting from conceptual framework, which focuses on defining the term of “fair trade”, introducing the related international organizations, and a brief overview of its current development. And then, the paper takes a close look at how fair trade functions under its own standards and price system. Furthermore, both the benefits and criticism of fair trade on producers, consumers and the intermediary are discussed, finally the conclusion is defined that fair trade is an effective marketing exercise but is not the mainstream market model. Conceptual framework Fair trade

Although there is no universally accepted definition of fair trade, Fair trade Labelling Organisations International (FLO) most commonly refer to a definition developed by FINE, an informal association of four international fair trade networks (Fair trade Labelling Organizations International, World Fair Trade Organization – formerly International Fair Trade Association, Network of European Worldshops and European Fair Trade Association): fair trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to ustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South. Fair trade organizations, backed by consumers, are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade (FINE, 2001). Sushil Mohan (2010) also defines Fair Trade as “an organized social movement which promotes environmental and labor standards and social policy objectives in areas related to the production and trading of Fair Trade labeled and unlabelled goods”.

By comparing the two definitions, it should be noted that the former one explicitly mentions political and ethical objectives. Besides, it’s crucial to know that the fair trade movement is not involved directly in commodity production or trade, but rather it provides producers and workers with particular forms of market structure and contractual terms that bring benefits to them. And also, it focuses in particular on exports from developing countries to developed countries.

During the past 50 years, the mainstreaming of fair trade product catalog goes beyond traditional products such as coffee, cocoa, tea, handicrafts, honey, etc. Fair trade is making inroads into other commodities as well. These new products include minor food items (quinoa), perishable fruits and vegetables (bananas, fruits, vegetables, nuts and seeds and horticultural produce), processed products (juices, wine, beer, chocolate, rice and sugar) and non-food products (Sushil Mohan, 2010, p. 23). In 2009, fair trade certified sales amounted to approximately 73. billion (about ? 2. 8 billion) worldwide, produced by over 1. 2 million producers and workers; producers also benefited from pre-financing of around 7100 million (? 83 million) (FLO, 2009). The table below (FLO, 2009) shows the level and growth in the sales of a sample of main fair trade products from 2004 to the end of 2009.

Fair trade consumerism In academic research, the word “Consumerism” has different meanings in different contexts. When associated with fair trade, consumerism can be defined as a moral doctrine in developed countries. According to this view, consumerism is the vehicle for freedom, power and happiness. All of these things lie in the consumer’s ability to choose, acquire, use and enjoy material objects and experiences (Gabriel Y and Lang T, 2002, p. 8).

Since long, consumption has been defied as “a private matter, indirectly, but firmly, linked to virtuous mechanisms in the public sphere” (Roberta Sassatelli 2006). And recent research shows that the importance of the self-identity as a determining factor in ethical consumption has been identified before (Shaw D & Shiu E, 2002), those findings indicate that practices on fair trade consumerism must themselves be seen as functional in the construction and expression of a self-identity which always has a moral dimension (Varul MZ and Wilson-Kovacs D, 2008, p. 2). How fair trade works Fair trade standards

FLO (2006) formulated two distinct sets of fair trade standards, which acknowledge different types of disadvantaged producers. One set of standards applies to small-scale producers, who don’t depend on hired workers all the time, but run their farm mainly on their own and their family’s labour. The other set applies to hired labors, whose employers pay decent wages, guarantee the right to join trade unions, ensure health and safety standards and provide adequate housing where relevant. The Standards Unit (SU) within FLO is responsible for developing and revising fair trade standards.

Fair trade standards refer to: (a) generic standards, (b) product standards, (c) fair trade minimum prices (FTMP) and fair trade premiums (FTP). Producers and traders must meet applicable standards for their products to be certified as fair trade. Fair trade prices According to fair trade standards, most products have a fair trade price, which is the minimum that should be paid to the producers for their goods. This fair trade minimum price (FTMP) is intended to cover the average producers’ costs of sustainable production (COSP) per product.

If global or regional minimum prices are determined, otherwise national prices are set. Producers or workers (in the case of hired labour situations) of fair trade products also receive a fair trade premiums(FTP) in addition to the minimum price. The determination of a minimum price may involve the determination of the related premium (Andreas Kratz, 2010). Impact of fair trade Benefits to producers Stable income and long-term trading partnerships For most products, fair trade standards determine the price paid to producers.

The fair trade price acts as a safety net for farmers at times when world markets fall below a sustainable level. The fair trade standards also require that producers can obtain partial pre-payment of the contract, which ensures the small-scale farmers have sufficient cash flow. This allows them to plan ahead and invest in new technology or planting that should ultimately increase their income and help them to develop their businesses (Nicholls A and Opal C, 2005, p. 7). Table 2 Arabica Coffee Market 1989-2010: Comparison of Fairtrade and New York Prices [pic]

NB Fairtrade price = Fairtrade minimum price* of 125 cents/lb + 10 cents/lb Fairtrade premium** When the New York price is 125 cents or above, the Fairtrade price = New York price + 10 cents *Minimum price was increased from 121 cents/lb on 1 June 2008 **Premium was increased from 5 cents/lb on 1 June 2007 The NY price is the daily closing price of the second position Coffee ‘C’ futures contract at ICE Futures US (Source: FLO, 2010) Social premiums and ethical outcomes According to FLO, fair trade helps farmers and workers to tackle poverty, improve the quality of their lives and invest in their futures.

Throughout the unique trading chain, producers are empowered to participate in the decisions that affect themselves. Fair Trade Federation (FTF) also points out that, members seek to eliminate discrimination based on race, caste, national origin, religion, disability, gender, sexual orientation, union membership, political affiliation, age, marital, or health status. Members support workplaces free from physical, sexual, psychological, or verbal harassment or abuse. For instance, in 2006, the Kuapa Kokoo Cooperative in Ghana received a premium of US$150 per tonne of cocoa which is invested back into the communities.

This has helped to fund the drilling of about 300 boreholes, and the establishment of seven schools as well as funding links with the medical school in Ghana (International Development Committee, 2007, p. 21). Sustainable production According to Fair Trade Federation (FTF), fair trade seeks to offer current generations the ability to meet their needs without compromising the benefits of next generations. Members actively consider the implications of their decisions on the surroundings and promote sustainable production.

They reduce, reuse, reclaim, and recycle materials wherever possible. For instance, all farms and co-operatives must have resource management plans in place. Certain pesticides are prohibited on all farms. Many farms use fair trade premia to invest in organic certification, which demands a higher fair trade floor price (Nicholls A and Opal C, 2005, p. 7). Impact on consumers The Department for International Development of UK (DFID) points out that fair trade has made an important contribution to raising awareness among consumers about development and ethical trade issues.

Moreover, this awareness can create pressure for changes in favor of poor countries. For instance, Starbucks has made an excellent example in this respective. Starbucks began purchasing Fair Trade Certified™ coffee in 2000, helping grow the market for Fair Trade Certified™ coffee in the U. S. And in 2009, it increased the purchases to 40 million pounds – making it the largest purchaser of Fair Trade Certified™ coffee in the world. While increased awareness of ethical issues does not definitely turn into consumption actions, there has been a steady conscious increase in fair trade sales.

According to the Fair Trade Foundation, price is not the only concern on people’s minds when they go to the supermarket. Mike Barry of Marks & Spencer in UK commented that the FAIRTRADE mark gave customers certainty about the origins of the product in the context of many different brands. He considered that there was a high level of trust in the FAIRTRADE brand (International Development Committee, 2007, p. 24). Impact on intermediary According to International Development Committee of UK, fair trade and the success of fair trade labeling, has led companies to think about the supply hain of the wider range of products they sell. Although the amount of fair trade products is still limited among the total sales, the concept of fair trade has begun to enter the mainstream in the supply chain and what’s more, the economic framework has been set up. Thus an important impact of fair trade may ultimately steam up other traders to perform their responsibilities. In response to the new trends of the coffee industry, the German Coffee Association took the initiative to create a Common Code for the Coffee Community.

Nestle, Sara Lee, Kraft and Tchibo, representing 40% of the world coffee-roasting market, have all signed the Common Code which seeks to improve working and environmental conditions on coffee farms. The Code requires producers to pay minimum wages to workers, not to use child labor, to allow union membership, and to protect the environment (International Development Committee, 2007, p. 9). Criticism on fair trade Perspective of intermediary Fair trade affirms non-economic values of cooperation and solidarity which challenge the capitalist imperatives of competition, accumulation, and profit-maximization. (Gavin Fridell, 2007)

In the market, every part wants to make their profit maximization. Nowadays, in the competition between the producers and intermediary, the intermediary is much stronger, so they use this power to minimize the price of the producer, and sell the products with a much higher price to the consumer market, to get most of the profit. In the fair trade system, Fair trade removes the unfair dealing away with the person doing most of the hard work. The intermediary must give the producer a fair price for them doing the sustainable production. Normally this “fair” price means a higher price than what the producer got before.

For this, the cost for the intermediary increases, if the consumer market price stays the same, intermediary’s profit decreases. But as every intermediary wants to keep their usual profit, then the decreasing profit became a problem. In order to solve this problem, the intermediaries either increase the price on the consumer market, or buy less fair trade products. The Adam Smith Institute claimed in 2008 that Fair trade has had little effect on the decreasing percentage of final sale value ending up with the producers as only a fraction of fair trade premiums reach producers.

This claim is based on a calculation that only 10% of the fair trade premium for a cup of coffee at a popular London chain goes to purchase fair trade coffee beans instead of standard beans (Marc Sidwell, 2008). This situation has led Tom Clougherty of the Adam Smith Institute, to describe fair trade as little more than a marketing ploy. Perspective of consumers “Fair trade reveals the social and environmental conditions under which goods are produced and brings producers and consumers together through ‘ethical consumerism,’ which challenges the commodification of goods into items with an independent life of their own. (Gavin Fridell, 2007). Basing on how the fair trade works, if the intermediary wants to keep the usual profit, one of the solutions is to increase the consumer market price, which is the reason why most of the fair trade goods are priced higher than the normal market price. When consumers are making their purchasing decision, the key factors are not the product attributes anymore in favor of the alternative character- Fair Trade, to make the global commodification more justice. Even at the very beginning of Fair Trade Movement (back to 1960s), the slogan of it was “Trade not Aid”.

But when we take a closer look at fair trade, something can be found: This purchasing model is in conflict with the economic theory (under the certain budget line, consumers desire to buy as much products as possible, which means the consumers would like to buy the more cost-effective products). So this fair trade purchasing behavior does not benefit the consumers themselves that much, the main reason for the consumer to do it is the “ethical” reason. Therefore, the decommodification is through “ethical consumerism”.

Given the fact that ethical consumerism does not appeal directly to self-interested motivation, some people claim that the future growth of ethical markets is very limited. Perspective of producers The Adam Smith Institute sees “fair trade” as a type of subsidy that impedes growth. The price on fair trade market is not decided by the market, but the FLO or other fair trade organization with the lowest protection price. Furthermore, fair trade can resolve some poverty issues in some extend, but can not solve it fundamentally.

Perspective of production chain [pic] From this chart, we can learn that: firstly, compared to the normal trade market, if the intermediary can keep their usual profit, there is not much difference between fair and unfair trade. So fair trade is just an alternative option for them to the different segment market. And the reality is that most fair trade farmer groups are currently only able to sell a fraction of their production on Fair Trade terms; they must sell the rest to conventional buyers and local traders at lower prices.

Secondly, the consumer is playing one more role in this Fair Trade business circle: monitoring whether the trade is fair, whether the producers get a fair price. Now the consumer outgoing is “Money” + “Monitor”, and the incoming is “Product” + “Ethic”, compared with the normal trade (outgoing: Money; incoming: Product). If we make a function about these, those would be: Fair trade market: U(Price-Fairtrade)+U(Monitor)=U(Pro)+U(Eth) Normal market: U(Price-Normal)=U(Pro) So U(Eth)=U(Monitor)+U(Pice-Fairtrade)-U(Price-Normal)= U(Monitor)+U(Price Difference)

This means buying the fair trade products, the ethic gain that consumers get should be equal to the price difference plus the additional monitoring responsibility that the consumers should take. If this function cannot be equal in a long term, the consumers would feel loss, then this business model cannot last for too long, or at least cannot be promoted widely in the whole world market. Conclusion It can be concluded that fair trade reflects a brand-new approach to producer-consumer transaction, which aims at maintaining the Fairtrade mark’s predominance in an increasingly competitive market for ethically-branded products.

On one hand, the movement is essential, since there is every reason for smart consumers to make other choices and the producers suffer from the decreasing market price. On the other hand, fair trade is working “in and against” the market, because it is involved what it needs to play to ethical assumptions that are implied by market practices. So fair trade is an alternate, branch trade model in the market compared to the mainstream model. Reference List Andreas Kratz (2010): SOP development of Fairtrade minimum price and premium, Fairtrade Labelling Organizations International, Internet: http://www. airtrade. net/fileadmin/user_upload/content/310510_SOP_Development_of_Fairtrade_Prices_and_Premiums. pdf Bacon, C. (2005): Confronting the coffee crisis: can Fair Trade, organic and speciality coffee reduce small-scale farmer vulnerability in northern Nicaragua? , World Development, 33(3): 497–511. Gabriel Y and Lang T (2002): The unmanageable consumer, p. 8, SAGE Publications, London. Gavin Fridell (2007): Fair trade coffee and commodity fetishism: The limits of market-driven social justice, Trent University, Canada.

International Development Committee (2007): Fair trade and development, Seventh Report of Session 2006–07, Volume 1, Great Britain. Koppel H. and Schulze G. (2008): Inefficient but effective? A field experiment on the effectiveness of direct and indirect transfer mechanisms, University of Freiburg, Germany. Marc Sidwell (2008): Unfair trade, Adam Smith Institute, London, p. 28. Nicholls A. and Opal C. (2005): Fair trade: market-driven ethical consumption, p. 7, SAGE Publications, London. Roberta Sassatelli (2006): Representing consumers: contesting claims and agendas, Palgrave, London.

Shaw D. and Shiu E. (2002): Ethics in consumer choice: a multivariate modelling approach, European Journal of Marketing, 37(10), 1485 – 1498. Sushil Mohan (2010): Fair trade without the froth, The Institute of Economic Affairs, Great Britain. Varul MZ. and Wilson-Kovacs D. (2008): Fair trade consumerism as an everyday ethical practice – A comparative perspective, University of Exeter, Great Britain, Internet: http://people. exeter. ac. uk/mzv201/FT%20Results. pdf ———————– Product Product Consumer Ethic Intermediary Money Producer Money Monitor