Fair trade debate

Ethical basis of criticisms

Although there is evidence to suggest that consumers buy fair trade goods for a variety of reasons, some are willing to pay more for Fairtrade certified products – for example, in the belief that this helps the very poor. Critics of the Fairtrade brand have argued against the system on an ethical basis, stating that the system diverts profits from the poorest farmers, and that the profit is received by corporate firms. It has been argued that this causes "death and destitution". This has been used as evidence to doubt that much of the extra money paid reaches farmers, and that there is reason to believe that Fairtrade harms non-Fairtrade farmers. There are criticisms that false claims made for fair trade and the withholding of relevant information constitute Unfair Trading under EU law. There are also criticisms using many other criteria.

However, pro-Fairtrade researcher Alastair Smith claims that while some of these criticisms are grounded in acceptable standards of evidence (and deserve serious attention), others are less well elaborated, and that in a few cases, the criticisms presented are assertions with little or no credible evidence to support them. However, these claims have themselves been criticized on matters of fact, theory, methodology, use of evidence and incorrect citations.

Little money reaches the developing world

The evidence available suggests that little of the extra money paid by consumers actually reaches the farmers. The Fairtrade Foundation does not monitor how much more money retailers charge for Fairtrade goods. Furthermore, retailers almost never sell identical Fairtrade and non-Fairtrade lines side by side, so it is rarely possible to determine how much extra is charged or how much reaches the producers in spite of Unfair Trading legislation. In a very few cases, it has been possible to find out. One British café chain was passing less than one percent of the extra charged to the exporting cooperative; in Finland, Valkila, Haaparanta and Niemi found that consumers paid much more for Fairtrade, and that only 11.5% of that reached the exporter. Kilian, Jones, Pratt and Villalobos talk of US Fairtrade coffee getting $5 per lb extra at retail, of which the exporter would have received only 2%. Mendoza and Bastiaensen calculated that in the UK only 1.6% to 18% of the extra charged for one product line reached the farmer. Critics claim that many counter-examples would be needed to show that these are not typical. Since Fairtrade charges a 1.9% licensing fee at wholesale, the maximum that reaches the developing world, even if traders charge unrealistically low margins, is 50%, and a much smaller amount would reach the target farmers.

Less money reaches farmers

The Fairtrade Foundation does not monitor how much of the extra money paid to the exporting cooperatives reaches the farmer. The cooperatives incur certification and inspection fees, additional marketing costs, costs in meeting the Fairtrade political standards, and possibly costs arising from the monopoly power of the cooperative. Farmers also incur additional production costs on all of their production, even if only a small amount is sold at Fairtrade prices. Over the years, Fairtrade producers have only been able to sell 18% to 37% of their output as Fairtrade certified, selling the rest without certification at world prices. While both proponents and opponents of Fairtrade acknowledge this problem, there are scarce economic studies presenting the actual revenues of Fairtrade cooperatives and how they spend their money. Weber (2006) examined the additional marketing costs of some cooperatives and found, for example, that ‘. . . after six years Oro Verde can cover only 70 percent of its [additional marketing] costs with its current income stream’ and that the cooperative needs to double its current annual export volume in order to sustain its management team. At the time they were losing money on their Fairtrade membership. FLO figures show that 40% of the money reaching the developing world is spent on ‘business and production’, which includes the costs mentioned above as well as costs incurred by any inefficiency and corruption in the cooperative or the marketing system. The rest is spent on social projects, rather than being passed on to farmers.

There is no evidence that Fairtrade farmers get higher prices on average. Some anecdotes state farmers are paid more by traders than by Fairtrade cooperatives and some state that they were paid less. Few of these anecdotes address the problems of price reporting in developing world markets, and few appreciate the complexity of different price packages. A different price package may or may not include credit, harvesting, transport, processing, etc. Cooperatives typically average prices over the year, so they may pay more or less than traders, depending on the day. Bassett (2009) is able to compare prices only where Fairtrade and non-Fairtrade farmers have to sell cotton to the same monopsonistic ginneries, which pay low prices. Prices would have to be higher to compensate farmers for the increased costs of producing Fairtrade. For instance, when Fairtrade encouraged Nicaraguan farmers to switch to organic coffee, they earned a higher price per pound but a lower net income because of higher costs and lower yields. The claim that Fairtrade guarantees a ‘fair price’ for the producer is not supported by the evidence and although it is possible that Fair Trade may do so on occasions, there is no reason to believe that this is normal.

Lack of evidence of impact

Some critics argue that there have been very few Fair trade impact studies. Griffiths (2011) says that few of the attempts made meet the normal standards for an Impact evaluation, such as comparing the before and after situation, having meaningful control groups, allowing for the fact that Fairtrade recruits farmers who are already better off, allowing for the fact that a Fairtrade cooperative receives aid from a dozen other organizations – Government Departments, Aid Agencies, donor countries, and NGOs, and allowing for the fact that Fairtrade may harm other farmers. Other serious methodological problems arise in sampling, in comparing prices, and from the fact that the social projects of Fairtrade do not usually aim to produce economic benefits.

Indeed, due to the snapshot nature of research, few studies include how long producers have been involved with fair trade. A further significant problem is that most studies ignore the agency and perspective of producer decision makers, especially the farmers excluded from the Fairtrade system. Capturing such socially constructed benefit, including that of confidence in business relationships, is notoriously difficult to capture in social science research.

An important distinction when discussing Fairtrade is the difference between Impact studies and case studies. Case studies are valuable for, among other things, researching specific systems and sub-systems, for constructing models, and for identifying problems. However, the impacts noted cannot be extrapolated generally. For instance, if a hundred dairy farms lose money, this does not mean that all or most dairy farms do. There are a lot of case studies on Fairtrade, but many are erroneously referred to as impact studies.

An unpublished consultancy report prepared for Fairtrade claims to have found only 33 studies that met their criteria for impact studies (which accept studies that would not be acceptable to the World Bank etc. for instance). These included unpublished undergraduate and masters’ dissertations, unpublished theses, journalistic articles by employees or members of Fairtrade cooperatives, several reports on the same cooperatives, and one report cited under two different titles. Griffiths (2011) claims that most of these reports had significant methodological weaknesses, and that few, if any, met the normal criteria for impact studies. Further, most of the cases studied were atypical.

Inefficient marketing system

One reason for low prices is that Fairtrade farmers are forced to sell through a monopsonist cooperative, which may be inefficient or corrupt – certainly some private traders are more efficient than some cooperatives. They cannot choose the buyer who offers the best price, or switch when their cooperative is going bankrupt. There are also complaints that Fairtrade deviates from the free market ideal of some economists. Brink calls fair trade a “misguided attempt to make up for market failures” encouraging market inefficiencies and overproduction.

Corruption

Low prices may also occur because the Fair Trade marketing system provides more opportunities for corruption than the normal marketing system, and less possibility of, or incentive for, controlling it. Corruption has been noted in false labelling of coffee as Fairtrade by retailers and by packers in the developing countries, importers paying exporters less than the Fairtrade price for Fairtrade coffee (kickbacks) failure by importers to provide the credit and other services specified theft or preferential treatment for ruling elites of cooperatives not paying laborers the specified minimum wage.

Fairtrade helps the rich

Fair Trade is profitable for traders in rich countries. It is also aimed at richer farmers: in order to join Fairtrade, cooperatives must meet quality and political standards which means their farmers must be relatively skilful, educated and well capitalized, and critics point out that these farmers are, therefore, far from the poorest farmers. The majority of Fairtrade suppliers are in the higher income or middle income developing countries, such as Costa Rica and Mexico, with relatively few in the poorest countries. Mexico has 70 times the GNP per head of Sierra Leone, and very much larger coffee farms. The minimum wage of agricultural workers in Peru is $3 a day and the average income of Fairtrade farmers in Bolivia was US$900/year, very much higher than normal agricultural incomes in Africa and much of Asia. Again, critics say this is diverting money from the poorest farmers.

The overproduction argument

Critics argue that Fairtrade, but not all other Fair Trade businesses, harm all non-Fairtrade farmers. Fairtrade claims that its farmers are paid higher prices and are given special advice on better techniques, both of which will lead to increased output being sold on the global market. Economists assert that, as the demand for coffee, in particular, is highly inelastic, so an increased price for Fairtrade which produces a small increase in supply means a large fall in market price, so perhaps a million Fairtrade farmers get a higher price and 24 million others get a substantially lower price. In addition the Fairtrade minimum price means that when the world market price collapses, it is the non-Fairtrade farmers, and particularly the poorest, who have to cut down their coffee trees. This argument is supported by mainstream economists. This argument is often illustrated with the example of Vietnam paying its coffee farmers over the world price in the 1980s, planting lots of coffee, then flooding the world market in the 1990s. Smith (2010) questioned the relevance of the Vietnam example, and Griffiths published a sharp rejoinder.

The overproduction argument depends on the assumption that there is a significant increase in prices paid to Fairtrade farmers. The argument falls away if, as Fairtrade Labelling Organization and critics state, farmers do not get a higher price. This is not much of a defence however since saying only one of two serious flaws is possible at any one time still means the system is flawed.

Counterargument

Key principles of fair trade include transparency and capacity building. (WFTO Fair trade principles). Particularly in the developing world, it is very common for small-scale farmers to have only one or two buyers for their commodity products. Prices thus can be set by the buyers along with quality criteria. Normally buyers do not provide transparency as to the weighing and grading of product. Unless the buyers are linked to a quality supply chain (such as a fair trade or organic supply chain), the buyers normally do not provide any capacity building as to how to improve the quality of the product and thus gain a higher price. Fair trade when practiced well must provide full transparency in terms of pricing, weighing, and quality standards. Also as the end goal is a superior quality product in all ways, good fair trade organizations provide good capacity building in terms of best production, harvest, and post-harvest practices. From my personal experience (with Green Net, Thailand) and helping many other farmer groups to develop along this path in the region, it is clear that when one honest and transparent buyer enters the local market, it forces other buyers to be more honest and transparent. Additionally in communities where farmers talk to each other (regardless of whether one is a member of a fair trade group or not), I have witnessed that there is knowledge transfer. Thus non-fair trade farmers may and often do improve their production, harvest, and post-harvest practices, yielding a higher quality product, which merits a higher price. This combined with a freer and more transparent market, thanks to the entry of a buyer (the fair trade buyer), means that non-fair trade farmers now are much more likely to be paid for the quality of their products and at the real market prices.

Hayes identifies limitations in LeClaire’s (2002) formulation of this, both using what they agree is an unrealistic model.

Diverting aid from other farmers

Fairtrade supporters boast of ‘The Honeypot Effect’ – that cooperatives which become Fairtrade members then attract additional aid from other NGO charities, government and international donors as a result of their membership. Typically there are now six to twelve other donors. Critics point out that this inevitably means that resources are being removed from other, poorer, farmers. It also makes it impossible to argue that any positive or negative changes in the living standards of farmers are due to Fairtrade rather than to one of the other donors.

Secretiveness

Under EU law (Directive 2005/29/EC on Unfair Commercial Practices) the criminal offence of Unfair Trading is committed if (a) advertising or selling information 'contains false information and is therefore untruthful or in any way, including overall presentation, deceives or is likely to deceive the average consumer, even if the information is factually correct', (b) 'it omits material information that the average consumer needs ... and thereby causes or is likely to cause the average consumer to take a transactional decision that he would not have taken otherwise' or (c) 'fails to identify the commercial intent of the commercial practice ... [which] causes or is likely to cause the average consumer to take a transactional decision that he would not have taken otherwise.' Griffiths (2011) points to false claims that Fairtrade producers get higher prices, the almost universal failures to disclose the extra price charged for Fairtrade products, to disclose how much of this actually reaches the developing world, to disclose what this is spent on in the developing world, to disclose how much, if any, reaches farmers, and to disclose the harm that Fairtrade does to non-Fairtrade farmers. He also points to the failure to disclose when 'the primary commercial intent' is to make money for retailers and distributors in rich countries, which is, again, a criminal offence.

Imposing one's politics

The Fairtrade criteria presuppose a set of political values as to what economic, environmental, and social problems exist and how they are to be solved. Some critics state that it is unethical to bribe developing world producers to act according to political viewpoints that they may not agree with, and the consumers providing the money may not agree with. These critics also state that the unorthodox marketing system imposed, aiming to replace capitalism, may not tie in with the objectives of producers, consumers, importers or retailers.

Unethical selling techniques

Booth says that the selling techniques used by some sellers and some supporters of Fairtrade are bullying, misleading and unethical. There are problems with the use of boycott campaigns and other pressure to force sellers to stock a product they think ethically suspect. However, the opposite has been argued, that a more participatory and multi-stakeholder approach to auditing might improve the quality of the process. Some people argue that these practices are justifiable: that strategic use of labeling may help embarrass (or encourage) major suppliers into changing their practices. They may make transparent corporate vulnerabilities that activists can exploit. Or they may encourage ordinary people to get involved with broader projects of social change.

Misleading volunteers

A lot of people volunteer to work to support Fairtrade. They may do unpaid work for firms, or market Fairtrade in schools, universities, local governments or parliament. Sometimes they do not appreciate that most or all the benefit may go to businesses in rich countries. Davies and Crane report that Day Chocolate "made considerable use of unpaid volunteer workers for routine tasks, many of whom seemed to be under the (false) impression that they were helping out a charity. Not only might one question the sometimes quite excessive use of unpaid labour in a for-profit organisation, but the management team at Day appeared to have no intention of correcting the obvious misapprehensions of the volunteers. However, this did not appear to be acknowledged as a potential ethical problem at Day."

Failure to monitor standards

There have been complaints that Fairtrade standards are inappropriate and may harm producers, sometimes imposing months of additional work for little return.

There have been claims that adherence to fair trade standards by producers has been poor and that enforcement of standards by Fairtrade is very weak, notably by Christian Jacquiau. and by Paola Ghillani, who spent four years as president of Fairtrade Labelling Organizations. There is criticism of poor enforcement: labourers on Fairtrade farms in Peru are paid less than the minimum wage; some non-Fairtrade coffee is sold as Fairtrade; "the standards are not very strict in the case of seasonally hired labour in coffee production"; "some fair trade standards are not strictly enforced"; and supermarkets may avoid their responsibility. In 2006, a Financial Times journalist found that ten out of the ten mills they visited had sold uncertified coffee to co-operatives as certified. It reported that they were "also handed evidence of at least one coffee association that received Fairtrade certification despite illegally growing some 20 per cent of its coffee in protected national forest land.

Trade justice and fair trade

Segments of the trade justice movement have also criticized fair trade in the past years for 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.

Political objections

There have been largely political criticisms of Fairtrade, both from the left and the right. 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. It has been argued that the approach of the FairTrade system is too rooted in a Northern consumerist view of justice which Southern producers do not participate in setting. "A key issue is therefore to make explicit who possesses the power to define the terms of Fairtrade, that is who possesses the power to determine the need of an ethic in the first instance, and subsequently command a particular ethical vision as the truth." Some of the criticisms of Fairtrade from the free market approach to economics appear to be linked to right wing political approaches, but this does not mean that their analysis in this particular case is unacceptable to mainstream economists.