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Fair trade: Market-driven ethical consumption

Book cover

by Alex Nicholls and Charlotte Opal, Sage Publications, 2005.

Abstract

This book sets out the principles on which the Fair Trade movement is founded and organised. It provides detailed descriptions of the certification methods by which it assures consumers that the scheme is working to the benefit of the third world producers and to all the participants in the supply chain and that good is being done while profits are still being made. Hints are offered in the book on how the Fair Trade approach may be extended without departing from the market economy, but perhaps humanising it.

(Reviewed by Edgar Wille in July 2007)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

A different approach to the market

This book is about Fair Trade, which is an approach within the global market economy, still concerned with profit, but aiming at the same time to ensure fairness throughout the value chain, especially to the producers in the developing countries of products such as bananas, coffee, cocoa, dried fruit etc. These producers include the poorest of the poor, who have no capital and no security and are often near starvation level. Fair Trade is the name of a group of organisations whose trademark offers confidence to consumers in the rich countries that by paying a little more for certain high quality goods they can make a considerable difference to the lives of many producers in the third world. The phrase Fair Trade has also tended, with or without upper case, to become a generic term to describe the movement.

At the moment Fair Trade reaches only a small proportion of the poverty stricken producers, but each year sees its reach being extended. The organisations involved maintain a system of linking with producers, who are organised into cooperatives and gain access to the world market that was not possible before. Fair Trade reduces the number of steps in the value chain and ensures prices which never go below the market price and are often above it, advancing credit to producers and a guaranteed market. Fair Trade also pays a bonus which producer cooperatives can spend by democratic decisions on improving conditions in their locations eg by educational or logistic provision. Fair trade, as a generic process, aims to empower producers to develop livelihoods that avoid dependency.

Sometimes the Fair Trade system is criticised because what the producer gets is a small proportion of what the final consumer pays for the product. This is because even a strict pruning of the number of players in the supply chain does not do away with the need for a number of intermediaries, such as importers, wholesalers, processors and retailers. Each of them must have their margin. However, if the producer in the third world receives 4% of the final price, this can be twice as much as would normally go back through the supply chain. This can make a considerable difference to the life of the producers and their families. Individual units may seem to offer a small return, but when aggregated they are significant. For example, the amount per pound weight finding its way back to coffee growers is typically double the conventional amount, and they will sell many pounds.

There are also many accompanying benefits in the partnerships with the producer. Information, consultancy, technology, marketing guidance and many other facets of doing business are shared, giving the opportunity to many producers to transform their small businesses. They are also helped to manage the process of switching products where the market indicates this as desirable.

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The wider impact of Fair Trade

The book is worth reading if you are a citizen who is concerned about world poverty and wishes something could be done beyond emergency aid. You will then understand one approach and will be able to consider whether it has a wider future.

But this book is also stimulating in making the reader think about a more humane way of following the capitalist system which, without forsaking the principles of the market, would modify some of the processes to seek a fairer deal for all stakeholders, especially for basic producers and many parts of the supply chain. Large retailers, including some of the big supermarket chains, are already giving shelf space to Fair Trade.

Another encouraging feature is that a growing number of mainstream companies have even introduced their own labels into the segment, broadly following the principles of Fair Trade. They have become convinced that there is a market demand from which they can profit, directly and indirectly, through a growing desire among many customers to do something to alleviate world poverty. This has been stimulated by the recent campaign to make poverty history.

The book gets us asking whether there are ways to give greater opportunity to less favoured countries to make a living, and to be less dependent on handouts from richer countries. The authors are concerned mainly with the opportunities and problems of Fair Trade itself, but reading the book stimulates ideas on how the methods could evolve to new and more equal ways of doing business.

Fair Trade follows a stakeholder model of business, in which activity is broadened to focus beyond immediate interest groups such as customers and shareholders, to encompass employees, the suppliers in the value chain, the local community and even some aspects of relationships with competitors.

Steve Sellers, the Chief Operating Officer of Transfair, the principal American Fair Trade certification and marketing organisation, blended capitalism and conscience with the words:

We’re about money, and about the capitalist system and about freedom of choice, and we are saying, by God, make your choice, just make an informed choice. Understand what’s going on and then make a choice. Understand what’s going on, open yourself to the notion of conscience, and then make a choice.

This review aims to help this choice process by summarising some of the key details of the Fair Trade approach as presented by Alex Nicholls and Charlotte Opal, both deeply involved in the business of Fair Trade. They give details to an extent rarely available to would be users of the Fair Trade label. Their’s is a commercially oriented book, as well as being concerned about the social issues connected with poverty. It gives details of how connectivity is established between all the participants in the value chain, reaching ultimately to a sense of partnership between them all. It becomes clear that the Fair Trade system has an impact on the lives of poor producers beyond that normal in commercial relationships. There is a social return on investment as well as a financial one. This book ends with a look at the future challenges to Fair Trade and the wider benefits that can yet accrue, from a new way of doing business.

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Agreed minimum price

The fundamental principle of Fair Trade is to ensure that the producers get a fair price which covers the cost of production and takes into account the cost of providing for their families and investing in the improvement of their products and related processes, so that they can plan for the future. The world market price for a commodity is the basis of the calculation, plus meeting local needs to avoid environmental damage. This provides a “floor price”. If the market price falls, the agreed floor price is still paid. If the market price rises, then income rises in line with this.

Small farmers are paid through banding together in local co-operatives, which also pool resources in the interests of efficiency. Individual workers employed on large plantations also form associations and are paid in accordance with the legal minimum wage and in line with International Labour Office (ILO) standards. The price is agreed as fair by such local or regional negotiation; and in the case of the formal Fair Trade (run by the Fairtrade Labelling Organisations International – FLO) there is a certification process which assures the consumers that the principles of Fair Trade are being adhered to.

There are detailed chapters on the certification process which, at its most rigorous, makes heavy demands on calculation and inspection time, which could limit its ability to become a mainstream business factor, although ways in which this danger may be overcome are discussed in detail.

The full Fair Trade certification system is set out in one chapter with illustrative figures, which are convincing in the sense that they give consumers confidence that they are buying a product which reaches the consumer by processes or from an organisation which make the world, to a small degree, a better place, while still enabling commerce to make a profit.

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The Fair Trade premium

In addition to the agreed price, the formal Fair Trade system pays a social premium or bonus to the cooperatives or associations of individual workers.
This is often 10% or more of the cost price of the goods. What to do with this is decided upon collectively and democratically by the cooperatives or worker associations. It may be used for educational purposes, or for meeting social needs like sinking wells, milling equipment, scales for ensuring that prices are based on a fair weight, or new product development. Technical assistance may also be offered as part of the cooperation between the consumers, through the Free Trade association, and local producers.

This premium is important in helping people emerge from dependence and stand on their own feet. Also, it is infusing the capitalistic development to which they are being introduced with a sense of communal cooperation as well as efficiency creating competition. The producers are not at war with each other, yet have the opportunity to make improvements which will increase the prices they will realise.

This premium helps third world producers to move out of aid into trade, in a sustainable way and one that enhances their own sense of dignity.

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Direct purchasing

Fair Trade lessens the power of local brokers who have often been the only source of credit for seed buying and pre-harvest activity. Their exploitative rates have mired many third world producers in poverty, leaving them saddled with debts that are ever growing and which can never be paid off. Fair Trade seeks to reduce the number of middle men or agents and the number of margins thus required. The aim is also to reduce the amount of screwing down to minimum prices, irrespective of production costs, by the most powerful members of the supply or value chain. The intention is that more of the ultimate sales price will return to the producer.

The inspection system, which maintains producer standards and is used in connection with certification, provides for a real connection with local producers, and the resulting reports funnelled up to the central bodies keep them informed about what is going on in the field.

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Open trading partnerships and long term relationships

Producers do not only require earnings upon which they can live, but also longer term stability, where they are assured that the better conditions will not suddenly disappear and where markets are given a stable basis. Buyers universally have a short term bias. Long term contracts avoid the harmful effects of these. Producers know where they stand and can make plans for the future development of their businesses.

As many decisions are made cooperatively, the terms negotiated are not secret and thus the facts are known and a sense of security is established. Small producers are less likely to feel that they are pawns on the chessboard of the large and powerful companies.

Equality of exchange is of the essence in these partnership arrangements, with development as the objective and confrontation as something to be avoided.

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Cooperation in balance with competition

Fair Trade operates on the basis of mutual trust in relationships between buyers and producers. A spirit of partnership is fostered. As well as creating a better spirit in the trading process, this actually leads to greater efficiency in the delivery of value to the ultimate consumer. Every effort is made to ensure high quality, for which many Western consumers will be happy to pay higher prices. The cooperative approach also contributes to achieving a consistency of supply.

Where consumers are motivated by ethical considerations in the light of world poverty, the partnership approach also assures them that the ethos of trade is one which they can approve of. Competition exists as every producer seeks to keep costs to a minimum and margins therefore higher, but because of the banding together of small farmers and individual workers, there is little scope for ”dog eat dog” forms of capitalism.

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Credit provision

Third world producers, in general, lack capital and find credit hard to come by because they have little or nothing to offer as collateral, either due to poverty or due to confused property laws in their country which leave it unclear who owns what. Many people are in fact technically long term squatters. Organisations like the Grameen Bank have addressed this issue, especially helping small scale entrepreneurs in rural areas, but the problem is still widespread. (A review of de Soto’s work on The mystery of capital discusses the property issue.)

Fair Trade provides help in the issue of credit by requiring the actual importers, where requested, to pre-finance up to 60% of the total purchase price of seasonal crops. Importers have much better access to credit than the developing country exporters. Thus farmers can receive an advance for their crop before it is ready to be exported. Their income streams are therefore smoothed.

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Information provision

The documentation provided by Fair Trade in respect of transactions indicates the prevailing market price for the goods and also keeps producers informed about changes in the market price. This is not only so that the producers can be assured that they are getting a fair deal from Fair Trade, but gives them information about the market which they can use in negotiating with their non Fair Trade customers, who, after all, still make up the majority of the buyers of their commodities.

Before such help as this, and before access to mobile phones and village internet booths were provided by organisations like Grameen Phone, producers were negotiating with their hands tied behind their backs and were easy victims of exploitation. In the West we take business information for granted and little realise what a boon it can be for third world producers.

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Democratic organisation of producers

The small farmers are dealt with by Fair Trade in groups organised as cooperatives. Similarly, workers on estates and large plantations have to be allowed the right of association so that they can be assured that their rights to minimum wages and other benefits are acknowledged by their employers. The equivalent of the small farmer premium also has to be collectively available to them.

The cooperatives and worker associations have to reach agreement democratically on the use to which the premium is to be put. In neither category is the premium for individual use, though all individuals should benefit. The bonus is to be applied to some community need in areas like water, education or product development. To reach such consensus must have its moments of difficulty, but self interest is ultimately providing a learning opportunity in grass roots democracy and responsible self management in coordination with others.

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Quality and sustainability

All small farms and cooperatives must have plans in place for managing resources in order to be certified. This includes the avoidance of certain pesticides and the adoption of methods which will not harm the environment or impede the needs of future production. Quality must be at approved levels in accordance with precise guidelines. Also, organic husbandry is granted a higher Fair Trade floor price reflecting the higher price which ultimate customers are prepared to pay for organic produce. Organic farms may use the Fair Trade premium to gain organic certification, if this is agreed by the cooperative.

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Employment conditions

It is a condition of trade that no labour abuses occur during the production process, whether by small farm members of cooperatives sometimes employing a few workers or by the estates employing many workers.

This means that slave labour or child employment is not permitted on any farm involved in the certification process, though on family farms this must be difficult to police, as it is hardly seen as employment when children help with odd jobs around the farm, even though much of their time may be used in such activity.

Workers must also be allowed to belong to Unions.

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Fair Trade organisations

The Fairtrade Labelling Organisations International, known as FLO, is a global umbrella body which coordinates the work of 19 certification initiatives, working on similar bases. The FLO provides the guarantee of the integrity of the Fair Trade mark and the certification process on which is it is based. It also matches supply and demand and helps producers to develop better business strategies. It provides for initial and subsequent regular inspection to ensure that all the rules of Fair Trade have been followed, including democratic cooperative arrangements, financial transparency and community development goals. The trademark means that the product for which you pay, say in the UK, has met all the standards of minimum pricing, credit provision and long-term trading relationships.

The International Fair Trade Association (IFAT) is the main global trade association for both producers involved in certified products and those which follow Fair Trade principles, but which for a variety of reasons cannot be fitted into the detail of the strict Fair Trade system, such as craft products which are less easy to pin down than food products. Traidcraft products are an example of goods which are produced by organisations which are committed to all the fundamentals of Fair Trade, so that consumers can be satisfied that they are contributing to the alleviation of poverty and buying quality products when they buy goods with this mark.

IFAT does not aim to compete with FLO certification, but it has its own system of assessment against the Fair Trade standards, mutual review between trading partners and external verification. Those organisations who survive a rigorous monitoring process are given the mark FTO, which stands for Fair Trade Organisation. The main difference between IFAT and the FLO, with its Fair Trade mark, is that IFAT relates to the integrity of an organisation rather than of specific products. There are so many products under its wing, many of them non-food, that it would not be possible to certify each one separately. It assures the ultimate consumer, as well as organisations in the value chain, that the processes leading up to a particular product being on the shelf were run by a reliable organisation, committed to the principles of Fair Trade.

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Mainstream commercial growth

These organisational arrangements may sound a little complex, but it is a matter of recognising that some products, whose natures prevent them from being individually subjected to the particular rules of the FLO, may nevertheless be bought with equal confidence.

The FTO category may sometimes be adopted or imitated by large companies; some supermarket chains want to brand their own label products as Fair Trade without going through the FLO processes, since these would involve such detailed and lengthy producer inspection that market opportunities would be lost. If the highly detailed and individualised producer inspection were undertaken for all potential Fair Trade products the costs would be prohibitive. If Fair Trade is to grow to cover a large proportion of third world production, then something like the FTO system might become the basis of a system that large companies with high turnovers could join and a new form of capitalism, still harnessing market forces would have developed.

The authors comment: “If Fair Trade is to represent a sustainable and scaleable commercial model there must clearly be some integration with mainstream big business. Indeed, balancing the demands of being both “in” and “against” the market is a notable feature of Fair Trade. The challenge is often how to maintain mission integrity whilst also achieving mainstream commercial growth.”

Needless to say, this is quite controversial, with purists feeling that FTO lacks the rigour and reliability of FLO, dealing as it does with organisations rather than products for the award of the mark. FTO has, however, proved itself reliable with the Traidcraft products, a substantial majority of whose products are not certified under FLO; others are certified by FTO or by other reliable means. If FTO monitors organisations effectively to make sure that they are monitoring their producers rigorously, then this may be the way ahead for the extension of the Fair Trade movement, from its current relatively limited contribution to one where it is a major part of the world trading system, introducing a level of justice and equality that has long been uncertain in the business of the third world.

If this is the way ahead it will also have the effect of providing large numbers of consumers with confidence that their contribution in higher prices is really making a difference in the alleviation of world poverty.

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Fair Trade and the “free market”

Many economists see Fair Trade as an aberration. They see it as having a price structure which disobeys the rules of the “free market”. It sets price controls on humanitarian grounds and thus departs from the principle of free interplay of supply and demand. It is therefore held to be an encouragement to uncompetitive production.

Furthermore, it is considered to have strayed from the path of rationality, in that is not seeking to maximise the financial utility of the purchaser. It does not fit conventional market mechanisms.

The authors of the book comment:

However, Fair Trade is a unique solution to market failure in the global trading system. As a consumer choice movement, it is outside the scope of government regulation and thus cannot be criticised as an interventionist trade policy. And in addition, by correcting market failures to make the system work for everyone, Fair Trade is, in fact, a neo-liberal solution to problems with trade. Fair Trade works within an effective capitalist system, rather than abandoning the liberal trade model entirely.

It certainly seeks to achieve cooperation rather than competition amongst the parties in the supply chain, while not exempting itself from the market-driven imperatives of neo-liberal capitalism.

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The philosophy of Fair Trade

One chapter of the book is devoted to the philosophic and ethical undergirding to Fair Trade. There are two main philosophic stances that stand opposed in business activity. One says that you do the right thing because it is right to do it. This is the deontological approach (meaning it is informed by duty – action is informed by whether that action is right or wrong). Kant’s doctrine of the categorical imperative follows this perspective. Some categories of action make it imperative to do one thing rather than to do another.

The alternative perspective is “utilitarianism”, which was outlined by Jeremy Bentham as a matter of seeking the greatest good or happiness of the greatest number. This leaves scope for doing things that Kant would see as wrong even if the consequence is good, eg there is, according to this view, an occasion for lying, for deception, for killing, if it minsters to overall happiness. This view is also called “consequentialism” – a good consequence or outcome defines ethical behaviour, even if the action is dubious in itself.

The thinking behind Fair Trade is closer to Kant than to Bentham, although it could be argued that it minsters to the greatest good of the greatest number by doing the inherently right thing. Social justice may not bring the greatest happiness to those whose main aim in life is to maximise personal wealth, though it is interesting to note that having been successful in the market place and become rich beyond imagination, Bill Gates and Warren Buffet have used the outcome of their pursuit of wealth to create what is possibly the biggest charitable foundation ever, whose aim is to alleviate the scourge of world poverty, especially its health implications. Their highly competitive route to such riches did not necessarily seek the greatest good of the greatest number, but in the end they have become examples of both philosophies.

Most of the people who support Fair Trade on principle will be guided by deontology rather than by utilitarianism, but the utilitarian outcome might still be achieved as Fair Trade becomes mainstream.

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The future of Fair Trade

It is clear that for Fair Trade to become a major factor in enabling the developing world to participate in World Trade, it will be necessary for more flexible methods of certification to be developed than those of the FLO, excellent though these are. In fact, it is because of their excellence that they are so demanding of administrative resources. The IFAT/FTO certification approach which certifies organisations rather than products may be an alternative. The mainstream own label Fair Trade guarantees will need rigorous examination by the companies themselves and by external sources, to be sure that they are benefiting the people at the bottom of the world economic pyramid in the ways they claim, and in which they will surely wish to succeed.

A way has to be found to build trust in large company claims to be following the principles of Fair Trade. There must be confidence that there is something more than talk and that it is not a matter of camouflaging “business as usual”, a cover up for exploitation. The threats need to be overcome of everything claiming to be Fair Trade, to the point where nothing is.

The richer world has been introduced to the idea of doing good without becoming financially unprofitable, of sustaining business by maintaining an openly ethically stance. Such trust can be established as triple bottom line accounting takes hold, where economic prosperity as the bottom line of business activity is joined by environmental quality and social justice, where all the stakeholders in society are taken into account.

With such a perception, the danger of the standards for Fair Trade being diluted would be diminished and it could become the trail blazer for a new way of running our economic and social life throughout the world. This book provides the beginning of a new chapter in which we change many of our ways of doing business, so that we can meet the challenges of resource depletion, environmental damage, climate change, sustainable production, world poverty and corporate governance. We are going to need innovation in every aspect of life, not only technologically, but also in business administration and methodology.

And if we can’t respond to the new approach because it is right, at least we might consider whether we can maintain economic viability without working at it. Where conscience may not suffice to urge us forward, perhaps self interest may. This is the underlying, and often only implicit, message I drew from reflecting on this important book. The world will perhaps never become 100% mainstream Fair Trade; the cost might be too high; but once a new paradigm begins to make its presence felt, who knows how far it may take us?

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