Co-Authored by Pegi Ylli.
In the past century, the world’s economies have grown at a phenomenal rate leading to rising standards of living across the world as billions of people have been lifted out of poverty. Despite these advances though, there remains an unfortunate regularity; income inequality remains uncomfortably high, while income and standards of living among the poor in the poorest countries lag far behind the high incomes and standards in the developed countries in the world. Clearly many people are being left behind, inspiring a search for solutions.
For some observers, the primary reason for the growth of living standards within developed economies is the expansion of markets and an international division of labor based on comparative advantage. One solution for poorer countries, then, is to facilitate their entry into the international trading system by promoting the liberalization of international trade and investment. This is the primary goal of the multilateral trading system embodied in the World Trade Organization (WTO).
Another approach to the lagging living standards in poorer developing countries is embodied in the alternative trade organizations that have arisen; most importantly the fair trade labeling initiatives. In this system, specific products that are traded internationally, such as coffee, tea and cocoa, can receive a Fair Trade label after a Fair Trade labeling organization has adjudged that a fairer share of the final price has accrued to the poorer farmers of the product and that the product is produced under fairer labor conditions. A fair price to the poorer farmers is usually a guaranteed minimum dollar amount per unit designed to provide the farmers with something closer to a living wage. Fairer labor conditions generally means the establishment of longer term contracts between intermediaries and the primary good producers and adherence to sustainable farming standards.
Proponents of each approach to economic development tend to view the alternative approach with suspicion. Thus, proponents of free trade and the WTO system tend to believe that fair trade is a subjective concept that does not translate into simple and widely acceptable policy guidelines. The guidelines that are used to justify a label are somewhat arbitrary and may lead to greater inefficiencies in production resulting in more harm than good. In contrast, some proponents of fair trade tend to consider the large inequalities in income to be caused largely by the promotion of freer international trade and believe that the WTO expansion contributes to the promotion of poverty. In their view, fair trade is a superior substitute to the multilateral trade system. Other supporters of fair trade, however, believe it is acceptable to “mainstream” fair trade products by working with large-scale multinational firms who benefit from the multilateral trading system. Under this view, fair trade is complementary to the system of multilateral trade liberalization, and the two can advance together. To better understand the interaction between these two systems, it is worth elaborating on the features of both.
Free Trade Promotion and the Multilateral Trading System
Some critics of the WTO contend that the poor nations of the South are “straitjacketed by … (the) trade rules in the WTO (and) cannot use import duties to protect their weak economies, their fledgling industries, or their small farmers from unfair international competition” (Jaffee, 2007). In this view, the WTO rules allow rich countries to take unfair advantage of poorer countries. However, this view is a misrepresentation of the WTO. In actuality, there are no WTO “rules;” instead there are promises made by each participating country to liberalize its own trade policies. These policies are liberalized not to some harmonized standard, but instead to a lower level than that same country had in place prior to the agreement. Developing countries are not expected to maintain the same low tariff barriers as developed countries; instead they are allowed much more flexibility in setting tariffs than the most advanced countries. For example, whereas average bound (or maximum) tariff rates in the US are about 3.5% and in the EU 5.2%, middle income countries are allowed to maintain higher tariff bindings (WTO). Brazil has bound tariffs at an average of 31.4%, Argentina at 31.9% and Chile at 25.1%. For poor developing countries, the negotiated maximums are even higher. In Guatemala, the average bound tariff is 41.2%, in Nicaragua 40.7% and in India 48.6%. Although developing countries currently set, or apply, their tariffs at a much lower rate (on average at about 12%), these countries have the ability to raise tariffs in times of trouble without violating their international WTO commitments.
The area of agricultural policies is where developing countries can rightfully complain about the multilateral trading system. Developed countries support their agricultural industries with a complex system of domestic support programs and export subsidies, usually to the benefit of entrenched interests and to the detriment of farmers in less developed countries. However, the WTO is a forum that can be used to pressure developed countries into liberalizing their agricultural industries via adjustment to the Agreement on Agriculture within the WTO. Indeed, because further WTO adjustments (like completion of the Doha round) can only occur if there is a consensus, coalitions of developing countries have been able to prevent a Doha deal if it does not include acceptable changes in agricultural policies. That there is no comprehensive Doha deal even after more than a decade of discussions is testament both to the new power of developing countries within the WTO system, as well as to the power of entrenched and resistant agricultural interests in the developed countries.
Many of the inequities and disadvantages for farmers in the South are because free trade does not prevail in those markets. Instead, powerful agricultural interests in the North work against the goal of trade liberalization in precisely those product areas in which the South has the greatest advantages. Although trade barriers are much lower in developed countries, they remain notably higher in agricultural goods and in textile and apparel products. The WTO goals are to reduce or eliminate these discrepancies, but unfortunately, despite decades of discussions to reduce or eliminate special protections for developed country agricultural industries, very little progress has been made.
The Fair Trade System
The goals of the fair trade system focus on one issue that is not a focal point of the free trade system, namely inequality. Laura Raynolds describes the movement as “a critique of historically rooted international trade inequalities and efforts to create more egalitarian commodity networks linking marginalized producers in the global South with progressive consumers in the global North” (Raynolds, 2009). This alternative trade model aims to establish better prices, long-term trade contracts, and resources for improving social and environmental standards for Southern producers of commodity goods. In short, fair trade is designed to provide compassionate consumers in the developed countries who care about poverty alleviation with a simple method to ensure that a greater share of commodity revenues goes towards improving the livelihoods of the poorest farmers.
Certification is central to how the fair trade system ensures product quality and production sustainability. Fairtrade International is an organization that monitors production, trade groups, and the Fairtrade certification process to assure that a set of principles is upheld.Fairtrade certification promotes these main principles: fair prices, fair and safe labor conditions, direct trade, democratic and transparent organizations, community development, and environmental sustainability (Fair Trade Resource Network). The Fairtrade label thereby assures Northern consumers that Southern producers were treated according to these principles and thus that their purchases will help alleviate poverty.
We may well ask why these goals of the fair trade movement are not satisfied by the multilateral trading system in the WTO. One reason is that free trade’s goal is not reducing inequality, per se, but rather the improvement of economic efficiency, which would generate a greater amount of goods and services available for consumption. This outcome could reduce poverty if the additional surplus were distributed to the world’s poor. However, if greater efficiency leads to production that is only consumed by the world’s wealthy, then the poor may be left further behind. For most free market advocates, improving world standards includes a twofold solution of maximizing production via free trade, then redistributing income so that the poor can enjoy a share of the extra benefits.
The fair trade system can complement to the free trade system because it offers a mechanism by which income can be transferred from rich to poor along a commodity chain. Because the fair trade system is voluntary, it does not violate any of the WTO trading principles and can operate independently alongside a free trade system. One problem with fair trade though is that the certification and monitoring process incurs extra costs that are then passed onto to the conscientious consumer. The lower these implementation costs can be maintained, the larger can be the transfer to poorer farmers. If these costs are too high though, the fair trade product premium will be higher, reducing the number of Northern consumers who would be willing to participate. One big advantage to fair trade, compared to outright foreign aid or charity, is that it does not look so much like charity.
A second reason that fair trade can complement the multilateral trading system is that it aims to correct for unfair outcomes. The poor may not be sharing the benefits of freer trade because free trade has not been achieved in many commodity markets. Already we have suggested that tariffs remain high for agricultural products. Protection reduces competition for import competing firms and results in economic inefficiencies. Additionally, many have argued that there is a concentration of market power along many commodity supply chains (Nicholls and Opal, 2005). These supply chains are like an hourglass, in which many producers supply many consumers on the other end, but the product must pass through the hands of a small number of wholesale intermediaries. If competitors cannot enter, these intermediary firms act like a monopsony, forcing a lower commodity price and taking advantage of poorer farmers while capturing a greater share of the surplus value generated by trade.
Imposing a minimum price floor for fair trade products raises the producer price closer to the price they would obtain in a truly competitive market, that is, a market in which intermediaries could not exercise their monopsony power. The fair trade labeling process therefore creates a non-governmental method of maintaining a minimum wage and can therefore correct for an unfair outcome (Hayes, 2006). In this case, the price floor guaranteed to farmers through the fair trade system helps create an outcome closer to what would have arisen with free trade in a competitive market.
This complementarity of fair trade with the multilateral trading system has prompted some in the fair trade movement to support “mainstreaming.” This involves partnering with big corporations and expanding marketing efforts through these new channels, thereby attracting a greater consumer base, increasing awareness, and giving producers more trading options. The promise of mainstreaming is the potential for rapid growth of the fair trade market.
However, fair trade purists believe that fair trade is a model for an alternative trading system that might one day substitute for the free trade multilateral system. In this view, “mainstreaming” is a sellout that threatens to divert fair trade away from its core values of establishing partnerships with like-minded organizations.
The Future of Fair Trade
Some resolution of the growing rift between the two approaches to fair trade may be necessary before fair trade can expand beyond its current niche market. In either case, expansion would require consumer acceptance of higher prices for commodity products and consumer awareness of alternative trading methods. An increase in the production of fair trade goods would also require quality controls and proper labeling. If fair trade wages continue to increase, other producers might claim to have fair trade products too, in order to benefit from higher prices, although those goods may not necessarily abide by the true certification guidelines. Also, if consumer demand for fairly traded goods rises substantially, the demand for conventional products would fall, causing a reduction in those prices, and perhaps reducing the wages of workers in the conventional markets. Thus, expansion of fair trade faces many obstacles to overcome in the future.
Fair trade is making strides towards achieving fairness in the global economic community by directly addressing the existing inequality gap between the developing and developed world, but for the moment it seems to have achieved little more than niche status. The fair trade movement will need to solidify its vision for the future if it can have a chance for further expansion.
Hayes, Mark. “On the efficiency of fair trade.” Review of Social Economy 64.4 (2006): 447-468.
Jaffee, D. (2007). Brewing justice: Fair trade coffee, sustainability, and survival. Univ of California Press.
Nicholls, A., & Opal, C. (2005). Fair trade: Market-driven ethical consumption. Sage.
Overview of fair trade in n. america. (2013, 09). Retrieved from http://www.fairtraderesource.org/wp/wp-content/uploads/2007/09/Overview-of-Fair-Trade-in N-America-vSeptember2013.pdf
Raynolds, L. T. (2009). Mainstreaming fair trade coffee: from partnership to traceability. World Development, 37(6), 1083-1093.
The World Trade Organization. (2014). Retrieved from http://www.wto.org/index.htm