Fair
Trade the Wave of the Future or a Victim of its Own Success?
Steven Suranovic
In recent years
consumers at coffee shops, cafes, and supermarkets have been offered a new
type of coffee, tea, chocolate, fruit and rice. In terms of taste or quality,
these new goods are arguably indistinguishable from similar products, but
they share one distinct feature: a label that says "Fair Trade Certified."
A Fair Trade label signifies that the product conforms with certain standards of production that are considered socially just. Thus, fair trade certification is typically in accordance with 'fair value' minimum price or wage compensation to the producer, reasonable provisions of credit to small farmers, promotion of collective action, and an assurance that no child labor was used. The fair trade label serves to differentiate a product on the basis of the equity characteristics of the production process.
The Fair Trade Certification label is provided in the U.S. by TransFair USA,
a non-profit, non-governmental organization. The organization is one of twenty
national organizations around the world working under the Fairtrade Labeling
Organization International (FLO) to certify fair trade products. The certification
process bypasses national governments who are seen as limited in their ability
to influence the social outcomes of trade and business operations. Qualifying
producers are allowed to use the independently certified fair trade label,
and consumers worldwide are provided the choice of more socially responsible
consumerism. If enough consumers make the fair trade choice, a substantial
number of workers in poor countries could benefit from higher wages and improved
working conditions in a more compassionate trading system. These are laudable
goals, but are they feasible? .
Coffee, tea and other
fair trade products naturally compete with non-fair trade substitutes or 'regular'
versions. They are likely to sell at a premium price to cover higher worker
wages and extra promotional costs that may be small or large, but are almost
certain. The price of the fair trade product might not be higher than its
non-fair trade, regular substitute if the value chain includes middlemen,
such as wholesalers , with monopoly buying power whose profits are eroded.
Alternatively, the fair trade price might not be higher than the regular price
if some retailers agree to take a loss on fair trade products in the interest
of cultivating a socially responsible corporate image. But usually the fair
trade product will be more expensive.
Although fair trade product markets are growing at very high rates, this growth
occurs from a very small base. Currently fair trade products make up less
than 5% of national markets, with just a few exceptions. If fair trade product
markets do expand in size and scope, a number of market problems are likely
to arise. Success of this alternative trading system will greatly depend on
whether these problems can be overcome or minimized.
In order to sell fair trade products, consumers must demand the social characteristics
associated with the goods AND be willing to pay more for them. Several surveys
suggest that a majority of people would prefer to buy fairly traded products.
However, while many people express a concern for working conditions and a
willingness to buy fair trade products, the degree of willingness to pay will
vary. Some consumers will be willing to pay much more, some only a few cents
more than the non-fair trade substitute. Without a critical mass of consumers
willing to put their money where their mouths are the fair trade market can
never grow substantially.
Yet, if substantially more people buy fair trade products the likely effect is to reduce demand and depress market prices and worker wages in the non-fair trade product market Countering a core tenet of the fair trade system, this scenario features another set of workers driven deeper into poverty. The market forces that would take care of this and other problems, and truly further the ambitions of a fair trade regime, ultimately come into play only when a majority of global consumers buy into it. Consumers throughout the world must desire to be agents of social change AND be willing to pay at least the wage premium plus promotional and administrative costs to satisfy that desire when they shop. This outcome seems unrealistic because many people do not care enough, and because many people can not afford to.
So if fair trade is unlikely
to be effective, and if we care about low wages and poor working conditions
in poorer countries, then what's the alternative? The alternative is to promote
competitive markets and stimulate productivity growth. In competitive markets,
wages rise when labor productivity rises. Labor productivity rises with expansion
of the capital stock through investment and with increased education. Competitive
and flexible labor markets can ensure that wages rise along with productivity.
The ability and freedom of good workers to seek employment elsewhere is the
most effective way to ensure that firms pay a fair market price to keep them.
And as wages rise in growing economies, knowledge and information about working
conditions elsewhere can inspire positive change from within. Workers need
the opportunity to demand fair wages and better working conditions and these
opportunities are best provided when markets work competitively.
Steve Suranovic is an Associate Professor of Economics and International Affairs
at George Washington University.