When choosing a product in a grocery store the consumer is faced with vast amounts of information. What does this product cost, which brand is it from, is there any special deal on the product I am looking for, and so on. While many people opt for the cheapest product or one of a brand with which they have previous positive experience, lately it has become more common that consumers consider the environment and ethical production of the good in question. Take the rise of private labeling institutions. There are those, like The Rainforest Alliance which claim to guarantee that products with their label on them will have minimal ecological impact. The MSC label is put on seafood which is said to have been sustainably sourced, whilst Fairtrade is supposed to certify that the raw materials used to create a good has been ethically sourced, i.e. that the farmers producing the goods have received a “fair” price for their products. Recently however it has come to question whether Fairtrade products actually provide better and “fair” terms, to their suppliers. Is it really true that they are a force for good that will help bring EM farmers out of poverty? Does Fairtrade really do what it is supposed to and what kind of change would a farmer expect if he joined up in the program? These are the kinds of questions I will be discussing in the article.
One of the main benefits of joining in on the Fairtrade scheme is that you are guaranteed a minimum price for your good throughout the year. This helps avoid the creation of poverty from a rapid change in the prices of raw materials. Is the price however set at a level that is sustainable to farmers and how does this compare to the premiums paid for the goods in the developed world? According to research published by the Adam Smith institute “Fairtrade is Unfair” only 10% of the extra money consumers pay for Fairtrade goods, end up in the pockets of the suppliers. That is, 90% of the value added by the Fairtrade label goes to the middle men and end sellers, which from an economist’s point of view seems somewhat ineffective. It would be better to just buy the cheapest version of the product available and donate the difference to a charity that supports the EM farming community in question. Fairtrade even admits that “the return to the producer will inevitably make up a relatively small percentage of the retail price” (Fairtrade, Fairtrade FAQ, 2018) but claims that this is a result of high costs incurred in the processing/transporting stages of production. The trouble is that the problems with Fairtrade do not stop there, they get worse.
According to Philip Booth, at the Institute of Economics Affairs, it is even possible that Fairtrade is hurting some of the people in the communities they are trying to help. Imagine this scenario. You live in a village where there are a number of richer and poorer farmers. The richer ones can afford to use less harmful pesticides and agricultural practices and still sustain themselves on their crops, whilst the poorer ones have to opt for the cheapest means of production. In order to get your produce classified as fair trade, you need to pay a certification fee each year (3000$ for a nut farmer in India in 2012) (Sarah Morrision, “Fairtrade, is it really fair”, The Independent, 2012), as well as make sure that your farm fulfills a set of criterion, including specifics on how the crops are allowed to be produced. One of these is that your production to some degree has to be eco-friendly. This does not pose a problem for the richer farmers who can already afford to do this, whilst both the high certification fee and agricultural requirements exclude the poorest people who need the help the most. As the richer farms are awarded for following such ethical practises, they receive subsidies by other NGO:s to increase the attractiveness of such farming, which allows them to further improve their standard of living, while the poorest are once again left behind. The scenario described is called the honeypot theory. If you are certified, it is quite plausible that your standard of living will improve, but it will likely be at the cost of others. Instead of spreading money across all farmers in order to allow them to invest in capital and labour to increase production efficiency, now the money is concentrated to the folk who already are relatively better off. (Let’s remember that even the richer farmers are really poor by western standards.)
So what options are there, and what can be done? Recently there has been a shift towards direct trade where retailers cut out the middleman, which allows for a higher price to be paid to the consumers (Chris Woodford, “Fair trade”). Farmers have also started to team up with western investors to form their own companies to ensure that the premium earned from the ethical production of a good actually goes to the producers. One prominent example is called Choba Choba and it is an ethical chocolate company that was started by Peruvian farmers in association with UBS. The producers and western founders share the equity in the company which has contributed to a fairer and more efficient distribution of the money (Choba Choba, “Our revolution”, Choba Choba, 2018). And thanks to the high interest in ethically traded goods, it is also the case that a number of competing certifications have entered the market. It is possible that competition between the labels might help improve the terms for the ethical farmers in the long run.
All in all it seems that Fairtrade is relatively bad at achieving its goals. Even if they are providing price stability to farmers, it seems that unreasonable amounts of money are earned from the labeling, with the producers themselves receiving only a small part of the benefits. The honey pot effect might even worsen the situation for the poorest farmers. However there are alternatives, and it is possible that new fair trade practises can help shape the future of trade in a way that all, not mainly multinational companies, benefit from consumers’ good will.
References:
Choba Choba, “Our revolution”, Choba Choba, 2018,
https://www.chobachoba.com/ (14-11-18)
Chris Woodford, “Fair Trade”, Explainthatstuff, 2017,
https://www.explainthatstuff.com/fairtrade.html (14-11-18)
Sarah Morrision, “Fairtrade: Is it really fair”, The Independent, 2012,
https://www.independent.co.uk/news/world/politics/fairtrade-is-it-really-fair-7717624.html (14-11-18)
Fairtrade, “Fairtrade FAQ”, Fairtrade, 2018
https://www.fairtrade.org.uk/What-is-Fairtrade/FAQs (14-11-18)
Adam Smith Institute, “Fair Trade is Unfair”, Adam Smith Institute, 2008,
https://www.adamsmith.org/news/news/fair-trade-is-unfair (14-11-18)
