Does Fairtrade have more impact than conventional trade?


Housing and Planning
Fairtrade is part of the rich tapestry of institutions that develops in market economies to bring together consumers and producers. Fairtrade opens up an additional trading channel within the market in a way that matches consumer preferences to the needs of many producers.

However, it does not alter the market fundamentals. The demand and supply conditions for Fairtrade products follow conventional trade practices. Upstream actors in the supply chain exert economic and quality control taking account of consumers’ preferences. Fairtrade growth, like conventional trade, is fuelled by the increasing involvement of mainstream corporate and retail circuits.

It is therefore simplistic to assert that Fairtrade corrects inequitable trade because Fairtrade is not changing the market basics. Furthermore, Fairtrade is not for the poor and marginal producer as it is difficult for them to meet the Fairtrade requirements. The beneficiaries of Fairtrade activity, by and large, are not the world’s poorest people.

Of course, like other speciality market producers, Fairtrade producers benefit from the additional trade channel that is opened up. But so do a very large number of conventional market producers – and other labelling schemes such as Rainforest Alliance. Most conventional trade buyers want stable supply chains and good relationships with suppliers and Fairtrade is not unique in achieving such relationships. For example, the growth of speciality coffee, encouraged by buyers, provides a huge premium for growers and has led to much greater prosperity in Africa’s poorest countries.

Despite the growing visibility of Fairtrade in some Western markets and some products, one cannot ignore the fact that Fairtrade sales represent only around 0.01 per cent of the total food and beverage industry sales worldwide. So, when it comes to the relief of poverty, Fairtrade will always be a bit-part player.

The main drivers of poverty reduction are peace and stability, the rule of law, the protection of property rights, good systems of justice and the right conditions for enterprise and markets to work. This includes a commitment to free trade.

Fairtrade is a small player in a general environment of institutional and policy improvements in many poor countries. It is these other policy improvements that lead to the greater competition for labour, more efficient supply chains and the movement into higher-value-added production that are the sustainable solution to poverty.

It is not Fairtrade that has led to the highest level of economic growth in sub-Saharan Africa in its history in recent years; it is not Fairtrade that has led to significant reductions in inequality in Africa. And it is the extension of free trade that has lifted hundreds of millions out of absolute poverty in countries such as Vietnam, China and India. Indeed, those poor economies that opened to trade grew three times faster in the 1990s than those that did not.

Thankfully the Fairtrade Foundation has become relatively silent on the issue, but it was certainly not helpful in the 1990s and early 2000s when it was making the case for more trade regulation – a policy destined to promote bad governance and increase poverty. There is enormous potential for much greater poverty reduction in India, Pakistan and Bangladesh but, again, Fairtrade is largely irrelevant. Of course, significant responsibility lies with developed economies too. They should reduce their trade barriers (for example in cotton, sugar and rice). This would also help the poor, but not because of Fairtrade.

To repeat, we welcome Fairtrade! We believe in a market economy. We approve of private certification schemes (though the cost of such schemes should be borne in mind and those promoting such schemes should not use soft or hard coercion to promote membership).

Fairtrade deserves credit for opening up a trade channel that provides an additional marketing opportunity for some producers and possibly allowing them to capture a price premium. That participation brings greater diversification, empowerment and capacity building.

However, Fairtrade is to the primary product market what the fan-owned clubs such as Exeter City and Wycombe Wanderers are to the football league – welcome institutional diversity, but not of huge significance.

This article is excerpted from a debate in the journal Food Chain.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

3 thoughts on “Does Fairtrade have more impact than conventional trade?”

  1. Posted 03/03/2014 at 17:28 | Permalink

    Really, Fairtrade is no more than a fig leaf covering the principle problem.

    IEA produced a paper some time ago on escalating tariffs and here lies the real problem to the development of the emerging markets.

    How can we expect to see any real development when we restrict the emerging markets to an agricultural economy? Wher for example wouold the UK be if it’s economy had been restricted to agriculture?

    Of course, anybody with any imagination would be able to see the EU protecting its own chocolate cocoa and sugar refiners but who are they protecting?

    Were escalating tariffs to be abolished the european manufacturers would move their factories to where the raw materials were and the consumer would benefit through lower prices; the European producers would benefit in the short term through lower labour costs and lower shipping costs and the EU would be forced to get off its butt and find something else for it’s workers to do.

    Just maybe if all these things happened then the governments would have less to do and would require less taxes and thus stimulate the economy.

    In he meantime, so long as Europe and others insist on holding back development they deserve to suffer the problems of terrorists using Africa as a base.

  2. Posted 03/03/2014 at 18:23 | Permalink

    “Wher for example wouold the UK be if it’s economy had been restricted to agriculture?” (though more in relation to S. Korea

    we make that point in the second article but it is behind the paywall I am afraid!

  3. Posted 03/03/2014 at 21:22 | Permalink

    Fair Trade is, at its heart, a market intervention. Intervention in the de-sensitization that global production chains create for the consumer. Thus I agree the consumer is a natural economic actor and Fair Trade is best understood as a luxury disposable spend, in a mass market sense, rather than the norm.

    Thus the natural market for FT is a luxury one; meaning the market is small as pointed out in the article (0.01%). Furthermore, as also pointed out, you cannot exceed the overwhelming impact of good governance and economic stability.

    Nevertheless, the majority of the global food chain is out of reach for the poorest. And this is true whether the environment is stable or unstable; the most economically vulnerable remain so which ever way you cut it. It is for such reasons FT performs best outside of tight policy and government regulation and the domination of powerful global supply chain actors, for a short period at least, and provides a step-up to sustainable economic participation.

    FT does not drive the kind of economic development that lifts entire economies out stagnated growth. Further it becomes anti economic in the long term, making farmers too reliable on the FT stream stifling innovation and progression. FT works best as an economic kick starter over a 3-10 year period for small farmers who can then develop the skills and knowledge and base to participate in the wider economy. It reduces the market risk of the most vulnerable.

    Further, such fluidity allows the small amounts of FT market opportunity to move on to others who need the economic kick start. Thus FT is a practical free market tool, that needs to be correctly understood in the globalized context to be maximized as the useful economic tool it is. As we all know, very few markets are free of political and/ or social interference. FT is a demonstration that all supply chain actors are capable of exhibiting ethical values in the global value chain; but free market principles dictate a limit to this. It is about understanding the limits, and maximizing the potential; to in the end bring a little more equality to the competition in the global value chain by providing farmers with that little extra power during the critical market entry point.

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