Fair Trade, the fresh fig leaf of business ethics?

By Julian Sudre




THE UNABATING flow of political ideas has urged multinational corporations to shake out their appearance by plumping for the new way of doing business. This is fair trade.

Fairtrade is a movement aimed at poverty alleviation and sustainable growth in Third World under-developed countries. The labelling of Fairtrade Solidaridad began at the initiative of Mexican coffee farmers in 1988. Since, it has spread out across the world and ushered in a new green revolution on the global markets.
Yet, under those undercurrents of benevolence, are lurking tinges of contradictions and undertow of resentments.
Proponents of the system are always good to point out the good it does, often on relying on evidence from particular communities that produce Fairtrade products and economists would tellingly concur that, as a niche brand, it would do more good than harm.
So does fair trade benefit the incumbent over the the very poor aspirant? I should cocoa.

The popularity of Fairtrade has drawn criticism from both ends of the political spectrum. The Adam Smith Institute claims that the system attempts to set a price floor for goods that is in many cases above the market price encourages existing producers to produce even more and new producers to enter the market, leading to excess supply. The scheme has appeared to be a re-hashed attempt to make up for market failures in which one flawed pricing structure is replaced with another. Opponents of the system believe that the reason why coffee prices are so low on the world markets is that there is too much production, Fairtrade makes the world price fall further making the majority of coffee producers worse off.
The exchange between producers and intermediaries does not occur in a competitive framework. The price distortion is relevant as the market price does not reflect the productivity of producers but their lower market power and it does not take into account the principles of products differentiation. In this sense Fairtrade can be considered as a market-driven innovation in the food industry.
Of course the mainstream argument that french author , Christian Jacquiau, exhorts about the lack of radicalness in the system such as higher fair trade prices should be implemented so as to maximize the impact, as most producers only sell a portion of their crop under fair trade terms.
Fair trade remains deficient in immediate trade policy changes that would have a larger impact on disadvantaged producers' lives. It is estimated that only 10 per cent of the premium paid for Fairtrade coffee in a coffee bar trickles down to the producer. Like the organic produce sold in supermarkets, Fairtrade coffee is used by retailers as a means of identifying price-insensitive consumers who will pay more.

Despite, its well-meaning intentions, the Fairtrade system cannot lift poor farmers out of poverty. At best, it makes some slightly less poor at the expense of others while drawing energy away from the possibility of genuine economic development. The system seeks to reduce voluntary exchange to a government-controlled privilege and to refuse agrarian societies the opportunity to become rich.
Another noteworthy point illuminates the lack of consistency with fair trade; most of the farmers helped by the system are in Mexico but not in places like Ethiopia. Although it could be at time contributing to better producers' lives by providing them with information and hence bringing forth more stability in the short term. The real issue lies in the failure of governments to provide legal infrastructure - rule of law, enforcement of property rights and the poor governance of many of the countries that fair trade ins involved in.

But there are two more niggling wrinkles that need mentioning; the first is what would happen to fair trade producers should the market price fall? If markets demand slumps then the producers of Fairtrade coffee for instance are simply left with spare produce on their hands that eventually will have to be sold into normal markets. Nonetheless, there is a guarantee in price-setting there is no conclusive guarantee that everything produced will be bought at the said price.
The second stumbling block is that the producers have to pay to join too. The minimum initial certification for the smallest cooperative of producers raises the bar at a level which is the antithesis of the ethical policy of Fairtrades. One would doubt if the implementation of a free trade by rich nations and transnational corporates in a third world country is a plausible solution to the annihilation of poverty.

On balance, Fairtrade has a very personal philosophy on enhancing and supporting developing countries, perhaps it helps resolve some prickly conflicts in the short term but one does only paper over the cracks and attempt to use prodigious PR companies to bring to light the very few smiles that it has given rise to.