A paper presented to the School of Economic Science Justice and Equity Conference, 2011

 John Deval, London, UK

cocoaCampaigns by non-governmental organisations for trade justice and the Fair Trade movement are current initiatives aimed at removing perceived injustices in the realm of international trade. Leon MacLaren’s lecture ‘Justice’ points out that in seeking to remedy one injustice it is easy to add another one to it. This paper considers the question whether the solutions advocated by these initiatives avoid this pitfall.

In his 1951 lecture, ‘Justice’[1], Leon MacLaren poses the question, ‘In what does justice consist?’ He answers by saying that ‘it consists in rendering to every man his due: so that he who pays, pays willingly, and he who receives, receives no more then is owed to him’. He also observes that the ‘difficulty for us comes when, having seen and observed that some condition is unjust, we come to take a further step and study how to remove injustice’. The remedy is often not obvious and in seeking to remedy one injustice, we not only add another to it but create a perplexity worse than that which preceded it.

The aim of this paper is to consider whether two responses to alleviating the injustice of poverty in the world through improvements in the conduct of international trade, the Trade Justice Movement and the Fairtrade initiative avoid giving rise to further injustices.

Both initiatives are responses to the situation that at a time of unparalleled world prosperity, at least in financial terms, 800 million people in the world suffer malnutrition or starvation largely because they do not have enough money to buy food. The Trade Justice Movement is a group of organizations which campaigns for fundamental change to what it considers to be unjust rules and institutions governing international trade so that trade is made to work for all. Fairtrade is different in that, although its goals are similar, its method of operation is to provide small producers in developing countries who meet certain conditions with a market for their products in the developed world.

The Trade Justice Movement

The Movement is a fast-growing group of organizations which includes trade unions, aid agencies, environment and human rights campaigns, fair-trade organizations, faith and consumer groups. The Movement claims more than 80 member organizations that have over 9 million members. They state that they are campaigning for trade justice – not free trade – with the rules weighted to benefit poor people and the environment. The following demands illustrate the general thrust of their concerns:[2]

  • The EU should unilaterally end agricultural subsidies now
  • The EU should support changes to trade rules to enshrine the right of developing countries to protect their domestic agricultural sectors on the grounds of food security, livelihood security and sustainable rural development
  • The UK Government should demand that the IMF and World Bank stop imposing trade conditions on poor countries
  • The UK government and EU should oppose any restrictions on the ability of governments to regulate foreign investment in accordance with their development and environmental needs.
  • The EU should seek to ensure that global trade policies and practices do not undercut internationally agreed social and environmental standards

Supporters argue that even if the playing field in international trade were level instead of tilted against developing countries, the poorest developing countries, in particular, would still struggle to gain from trade if forced to trade under free trade terms. This is because of their current overwhelming lack of competitiveness – poor countries do not have huge stocks of exports waiting to be shipped to rich countries. Instead, most small farmers want to be able to sell their goods locally. So those calling for trade justice often also defend the right of developing country governments to follow protectionist trade policies. As the above demands illustrate, they believe that poor country governments should have the right to choose their own trade policies to promote food security and to protect the livelihoods of agricultural producers.

Fairtrade

The concept of ‘fair trade’ has been around for over 40 years. Its aims are better prices, decent working conditions, local sustainability, and fair terms of trade for farmers and workers in the developing world. The first Fair Trade label was launched in 1988 under the initiative of the Dutch development agency Solidaridad. In the late 1980s/early 1990s the initiative was replicated in several other markets across Europe and North America, including the establishment of the Fairtrade Foundation in UK in 1992. In 1997 the Fairtrade Labelling Organizations (FLO) International was established in Bonn, Germany to unite the labelling initiatives under one umbrella and establish worldwide standards and certification.

The Fairtrade Foundation was established in the UK by CAFOD, Christian Aid, Oxfam, Traidcraft and the World Development Movement. These founding members were later joined by the Women’s Institute. It describes its vision thus:

Our vision is of a world in which justice and sustainable development are at the heart of trade structures and practices so that everyone, through their work, can maintain a decent and dignified livelihood and develop their full potential.[3]

 To achieve this vision, it seeks to:

Transform trading structures and practices in favour of the poor and disadvantaged by facilitating trading partnerships based on equity and transparency., Fairtrade contributes to sustainable development for marginalized producers, workers and their communities. Through demonstration of alternatives to conventional trade and other forms of advocacy, the Fairtrade Movement empowers citizens to campaign for an international trade system based on justice and fairness.

Its four key areas of activity are:

  • Providing an independent certification of the trade chain, licensing use of the FAIRTRADE Mark as a consumer guarantee on products
  • Facilitating the market to increase the demand for Fairtrade and enable producers to sell to traders and retailers
  • Working with partners to support producer organizations and their networks
  • Raising public awareness of the need for Fairtrade and the importance of the FAIRTRADE mark.

How does Fairtrade work?

The way Fairtrade works will differ according to different products. But there are certain basic similarities which apply across the board. In this paper the example of Fairtrade coffee sold in the USA will be used to illustrate how Fairtrade works and the problems that it is trying to address. (The following material is largely taken from a website sympathetic to Fairtrade’s work so may not be completely unbiased).[4]

Coffee is the world’s second most valuable traded commodity, behind only petroleum. There are approximately 25 million farmers and coffee workers in over 50 countries involved in producing coffee around the world. It was traditionally developed as a colonial cash crop, planted by serfs or wage labourers on tropical climates on large plantations of landowners for sale in colonial countries. The largest producer and exporter is Brazil, followed by Colombia, Vietnam, Indonesia and Mexico.

Coffee prices are set according to the New York “C” Contract market. The price of coffee fluctuates, often wildly – most coffee is traded by speculators in New York who trade approximately 8-10 times the amount of actual coffee produced each year. The single most influential factor in world coffee prices is the weather in Brazil. Droughts and frosts portend shortages of coffee and price increases.

So-called specialty coffee is often imported at a negotiated price over the C market which is considered a quality premium. Most of these premiums never reach the coffee farmer, but rather stay in the hands of the exporter. This dilutes the incentive for farmers to increase their quality, as they do not receive the direct benefits of increased investment in producing better coffee.

The global commodity chain for coffee involves a string of producers, middlemen, exporters, importers, roasters, and retailers before reaching the consumer. Most small farmers sell directly to middlemen exporters who are commonly referred to as coyotes. It is asserted that coyotes take advantage of small farmers paying them below market price for their harvests and keeping a high percentage for themselves. In contrast, the larger coffee estate owners usually process and export their own harvests that are sold at the prices set by the New York Coffee Exchange. However extremely low wages ($2-3 per day) and poor working conditions for farmworkers characterize coffee plantation jobs.

Importers purchase green coffee from established exporters and large plantation owners in producing countries. Only those importers in the specialty coffee segment buy directly from the small farmer co-operatives. Importers provide a crucial service to roasters who do not have the capital resources to obtain quality green coffee from around the world. Importers bring in large container loads and hold inventory, selling gradually through small orders. Since many roasters rely on this service, importers wield a great deal of influence over the types of green coffee that are sold in the US.

There are approximately 1200 roasters in the US today. Large roasters usually have one blend of recipes and sell to large retailers – the Big Three (Kraft, which owns Maxwell House; Proctor and Gamble which owns Folgers and Millstone; and Nestle) account for over 60% of total green bean volume. Most roasters buy coffee from importers in small, frequent purchases. Roasters have the highest profit margin in the value chain.

Retailers usually purchase packaged coffee from roasters, although an increasing number of retailers are also roasting their own beans for sale. Supermarkets and traditional retail chains are still the primary channel for both specialty coffee and non-specialty coffee and they hold about 60% of market share of total coffee sales.

Coffee farming originally developed in Africa as an ‘understory’ crop beneath diverse shade trees that provided habitat for wildlife such as birds, butterflies, insects and animals. Traditional farmers tend to use sustainable agricultural techniques including composting coffee pulp, rotating crops, and do not apply expensive chemicals and fertilizers. In addition, they usually cultivate food alongside cash crops, and intercrop other plants such as bananas and nut trees which help provide food security as well as additional sources of income.

 

How does Fairtrade engage with the supply chain for coffee

Criteria have been developed by the Fairtrade Labelling Organisation (FLO) for producers and for roasters and importers.

Producers

The FLO maintains a Coffee Producers Registry that is open to associations of small farmers who meet several criteria that can be summarized as follows. They have to be poor; only small farmers who are not dependent on hired labour, not plantations, are represented. They have to be democratically organized as small farmer associations that are independent and transparent. Representatives from FLO annually inspect Fairtrade farms in producing countries.

No criteria are made for farm practices that the Fairtrade farmers have to follow, even though Fairtrade standards explicitly support the development of organic agriculture and environmental protection. At the Fairtrade Producers’ Assembly in 1997, the producer groups themselves proposed a set of environmental standards. These standards include the use of leguminous trees, cultivation of timber species on the coffee farm and windbreaks. These producer-derived indicators emphasize the awareness of ‘shade’ as a beneficial farm practice, decreasing the likelihood that farmers will transfer to ‘sun’ grown coffee as they increase their profits.

Importers and Roasters

In the US, coffee importers and roasters must sign a licensing agreement with the US equivalent of the Fairtrade Foundation, TransfairUSA in order to sell Fairtrade Certified coffee using Transfair’s trademarked seal on their products. Transfair’s Monitoring Department handles the US side of the coffee trail by monitoring licensee paperwork. Roasters must pay a licensing fee of 10 cents per pound to maintain the system and to ensure that costs for certification are not borne by the farmers.

Any coffee roaster that complies with certain conditions can apply for the right to use one of the Fairtrade Labels of FLO. These conditions include:

  • The purchasing price must have been fixed in accordance with the conditions established by FLO. This fixed price acts as a floor. If the normal market price is above this the Fairtrade price is an additional $0.5 /pound premium above this price. The Fairtrade floor prices were determined after considerable field research into production and living costs in various coffee-growing countries. The principle is that income received from this premium is invested by Fairtrade in ‘social, environmental and economic developmental projects’.
  • The roaster/buyer is obliged to facilitate the coffee producers’ access to credit facilities at the beginning of the harvest season, up to 60% of the value of the contracted coffee at fair-trade conditions, at regular international interest rates. These criteria regarding credit are particularly important for small farmers. Without access to credit during the ‘lean months’ between harvests, small farmers are often forced to sell the future rights to their harvests to local middlemen at extremely low prices in exchange for some cash up front. At harvest time, the farmers are not allowed to pay off the middlemen with cash – they must hand over the coffee. So without access to credit, many farmers would not be able to take advantage of the opportunity to sell at Fairtrade prices.

 

Opponents of ‘Trade Justice’ and ‘Fairtrade’

 There is no shortage of articles questioning the merits of these two movements along the lines of ‘Is Fairtrade really fair?’, and ‘How just is Trade Justice?’. Most of them come from organizations or individuals who are staunch supporters of Free Trade. Their position can be summed up by one such writer:

 ‘The term ‘trade justice’ has been captured by the opponents of real trade justice. Given that free trade is the only just system of trade, this is something that should be reversed.’[5]

Many appear particularly vexed that the movements have also hi-jacked the word ‘ethical’ in describing their position and their products and have thus claimed the moral high ground and, in doing so, have persuaded the churches to promulgate their cause. They have several lines of attack which are worth considering, and include the following arguments;

Managed trade is inferior to free trade and makes transitions painful

They agree with the Trade Justice Movement’s proposition that developed countries should remove their protective policies such as the EU agricultural subsidies. They point out in doing so, that these subsidies are a type of so-called fair trade – in this case, an attempt to be ‘fair’ to European farmers. But they certainly do not agree with the proposition that developing countries should be allowed to use protective policies until they are ready to compete on the world stage. They acknowledge that such managed trade can provide certain producers’ benefits in the short term but at the expense of other producers who are excluded. If the managed trade regime collapses or is liberalized, the incumbent producers suffer much more than if the trade had never been managed. When the Multi-Fibre Agreement ended at the beginning of 2005, Christian Aid argued that this was ‘removing protection from those least able to withstand it – effectively stealing their business’. The same pro-Free Trade author quoted earlier observed in the type of hard-nosed and dismissive language which is not unusual amongst opponents:

‘…in the past three hundred years, in the developing world, we have seen a country ‘stealing’ another’s business all the time. Economists generally consider this to be a good thing. Christian Aid is particularly concerned about Cambodia losing its trade overnight. The blame should not be attributed to free trade, but instead to the fact that it was managed in the first place. Cambodia was only in that market to such a degree because of ‘do-gooders’ interfering in the past and trying to give them ‘justice…rather than assuming that textiles is part of Cambodia’s role, Christian Aid should recognise that as part of the race to the top, countries have to be constantly exiting markets and entering new ones’.[6]

Managed trade is inefficient and leads to poverty

The argument is that the price mechanism is important because it provides a signal to producers about what to produce. In the pursuit of profits, it provides an incentive to enter markets where they can make the most and strive for efficiency and innovation. The argument recognizes that cheap imports from foreign producers may destroy some inefficient local industries, but competitive local industries are supposed to be able to absorb the slack as they expand their exports to foreign markets. In this way, trade liberalization is supposed to allow resources to be redeployed from low-productivity sectors into high-productivity sectors.

But this argument assumes that resources are fully employed in the first place, whereas in most developing countries, unemployment is persistently high. One doesn’t need to put more resources into the export sector; rather one needs to employ hitherto unused resources. In practice, trade liberalization often harms competing local import industries while local exporters may not have the necessary supply capacity to expand. So the effect is often that labour goes from low-productivity productivity sectors to zero-productivity unemployment which is a most inefficient use of resources.

Protectionism makes the poor suffer

With protective tariffs in place, consumers are forced to buy more expensive and lower quality products. This is particularly worrying when it applies to life’s essentials. Businesses that aim to compete internationally are hindered. Machinery and plant that would improve productivity, quality and their profits are made more expensive. Given that it is improvements in productivity that enable wages to rise, the result of protectionism is lower wages in the poorest countries.

Protecting infant industries hurts development

It is argued that infant industry protection works differently in practice than in theory. In theory, an infant industry receives protection for a few years while it establishes itself. In practice, infant industries remain in infancy for decades – if not in perpetuity. Free Traders often quote the experience of Hong Kong which is described as having changed from a poor country to a developed one without trying to protect itself – they claim that it was because it refused to pursue protection that it became rich so quickly.

They ignore the fact that most developed countries currently successfully engaging in international trade went through a period of protectionism during which the capacity of both industries and institutional support were developed. It may have been ‘inefficient’ in the short term but could be considered as ‘efficient’ in the longer term. And as Joseph Stiglitz has pointed out, Hong Kong was not slow in intervening ‘massively’ when it saw New York speculators trying to devastate their economy by simultaneously speculating in the stock and currency markets.[7]

Fixing prices will distort the market and hurt someone, somewhere

Guaranteeing prices is an approach which is not unique to Fairtrade. Many purely commercial organizations, including multinationals, guarantee prices to suppliers in order to bring stability to the supply chain. Such contracts are unquestionably welfare enhancing and bring benefits both to suppliers and customers. However they cannot insulate growers from changes in market conditions. If there is a demand shock, at least in the medium term, as the quantity to be exchanged at the fixed price is not itself fixed, there will be a fall in demand for the fair-trade grower’s product. Indeed the fall in demand may be greater because of the fixed price. If there is a supply shock, the spot price of coffee will fall relative to the fixed fair-trade price and either other growers may suffer a greater fall in price or there will be a relative fall in demand for Fairtrade produce because the price differential between the fair-trade product and the product traded in the spot market will have increased.

Not every small producer can become a Fairtrade producer

Becoming a fair-trade producer requires meeting certain conditions which present challenges.

  • Producers must be certified by the FLO. It has a complicated 14 page document explaining the process for, and cost of, certification
  • Producers must first form a group which complies with fair-trade criteria, usually a co-operative, although some employers are allowed in subject to good wages and conditions. This group must obtain a letter of intent, from a wholesaler or retailer, to buy some or all of their produce at the Fairtrade price before applying for certification. Given the gap between the Fairtrade price and the market price, this can be difficult and, allegedly, many fail to do it
  • The minimum charge for certification for the smallest group (under 100 producers or employees) is around £1500 and there is an annual renewal fee of at least £800-900. Contrast this with the average Kenyan income, for example, which is around £200 per annum. For the poorest producers to find this money is a challenge

A significant proportion of the Fairtrade premium is used to promote the brand

Wholesalers are charged a percentage (1-2%) on turnover to use the Fairtrade brand name. This cost is passed on to the customer. Customers may not know that most of this income is spent on educational activities, certification, and product development, rather than directly helping to guarantee prices, and improve working and living conditions for farmers. One author claims that it is unusual for a charitable foundation whose objectives are to help the poor in under-developed countries to use such a large proportion of its revenues on activities simply designed to increase its own size and that it would be surprising if Fairtrade customers were aware of this. Fairtrade can argue that it is by increasing the market for Fairtrade products that it can help the poor i.e. producers will sell more and increase their income and/or more producers can be considered for certification. But, it is pointed out, presumably because any commercial firm could make the same claim – that the pursuit of its business, by creating wealth, helps the poor. Should all businesses therefore be allowed to be charities?

Fairtrade restricts the corporate form of its suppliers

In general the Fairtrade movement only deals with co-operatives made up of farms that are not reliant on hired labour. Child labour is generally not allowed either. Critics argue that this model is damaging in certain respects:

  • It is claimed that co-operatives are a ‘notoriously inefficient’ form of business organisation, particularly when made up of small producers. They are said to suppress incentives and efficiency and can make the effective deployment of technology prohibitively expensive.
  • Child labour is essential to the welfare of many poor families in the under-developed world. Its abolition and restriction in some parts of the world has had well-documented catastrophic effects on the poorest families.
  • There is no evidence that workers in a co-operative are treated any better than workers in organizations with other corporate forms. Large commercial firms that hire workers and treat their workers well are generally disqualified from the fair trade model. This is despite the fact that larger, more productive farms have an incentive to use technology and are therefore likely to pay higher wages.
  • Co-operatives also prevent producers migrating up the quality chain into specialty coffees which are an important and growing business. If beans from different farms within the same co-operative are blended, no individual producer has an incentive to produce better quality beans.

Fairtrade answers some of these arguments about corporate form by pointing out that the Fairtrade coffee market is still too small to support both small farmers and plantations. Bringing plantation coffee into the Fairtrade market would therefore tend to dilute the position of small farmers. In the case of tea and bananas, two largely plantation-grown crops, Fairtrade have developed criteria that address wages, living and working conditions of farm workers, and the right to organize. Fairtrade inspectors report that monitoring and verification of fulfilment of these criteria for large estates are more challenging tasks than with small farmer co-operatives.

Comment on critics’ arguments

 The above criticisms of Fairtrade and Trade Justice are only a sample of objections raised. But they serve to illustrate that these critics appear to be less interested in justice and fairness than with their concept of efficiency. It is implicit in their approach that if there is inefficiency than there cannot be fairness. But their definition of efficiency is very limited – it takes no account of environmental or social considerations. Their stance appears to be that if consumers somewhere are having to pay more than they would in the absence of requirements designed to alleviate social and environmental problems, then that is unfair.

But to write off these objections completely does not therefore mean that these two initiatives automatically pass the ‘justice test’. It is time to return to the definition of justice put forward by Leon MacLaren that every man should be paid his due and the criteria that:

  • those who pay, pay willingly,
  • those who receive, receive no more then is owed to them,
  • the remedy does not create another injustice and create a perplexity greater than that existing before.

 

Taking each of these in turn:

Willingness to pay

With regard to the demands of the Trade Justice Movement, this is a difficult judgement to make, because, for example with the elimination of agricultural subsidies in developed countries, we are moving from a situation where some consumers in developing countries will be paying artificially lower prices. It is unlikely that they will willingly pay the higher prices that will follow, at least in the short to medium term.

With regard to Fairtrade, the judgement appears to be simpler. Consumers of Fairtrade products pay the higher prices of these products willingly although there is the possibility that if they knew how the income from the premium was being used then they might not be so willing. Also the producers who have to pay to join the Fairtrade do so voluntarily even if it is with difficulty.

Receivers receive what is due to them and no more

This is almost impossible to judge. Any system of guaranteed prices will be somewhat arbitrary, even though the price agreed has been the subject of much research and consultation. The same is true of any ‘management’ of trade as opposed to letting the market determine prices, although as experience shows the latter does not necessarily result in a just outcome.

Less or greater complexity

The present international trade rules are very complex. Free traders argue that a move towards free trade automatically requires fewer and fewer rules and thus the whole system becomes much simpler – this is one of the great attractions of the free trade argument and instinctively one feels that a just system will be a simple system. Insofar as the Trade Justice Movement is calling for differential treatment for one set of countries i.e. developing countries from the rest of the world, the scope for greater complexity is obvious.

With the Fairtrade initiative there is undoubtedly greater complexity. There are differences in how Fairtrade principles are applied with respect to different Fairtrade products and there are additional rules to follow and a need for continuous inspection and monitoring to maintain the credibility and fairness of the system.

An interim judgement

 The analysis above illustrates the problem that notions of fairness which are fairly well-defined in contexts involving individuals are not easily extended to relationships between groups of individuals e.g. nation states. Intuitively one sympathises with the aims of both movements considered in this paper and one feels that if successful there will be greater fairness and justice for certain groups of people at present suffering injustice but it is impossible to be sure that this will not be at the expense of other groups.

So how to proceed in this consideration? A possible clue is provided by the answer given by the Fairtrade Foundation in the answer to one of the Frequently Asked Questions on its website.[8] The question is :

‘Why doesn’t the Fairtrade mark apply to UK farmers?

Included in the answer is the following extract;

‘…We agree that the principles behind fair trade may provide useful insight into the debate on improving the situation for UK producers. The Foundation is not convinced, however, that a labelling scheme is the right solution to the problems affecting UK farmers… …Rather than yet another label, the Foundation believes a more rigorous investigation by government and the industry itself is needed. This should look into the causes behind the problems being experienced by domestic producers, so that more robust and wide reaching policy tools can be identified – to benefit all affected farmers and to reassure concerned shoppers’.

 Implicit in this answer, is the belief that in those countries where Fairtrade do have labelling schemes, these are addressing the causes of the injustices suffered by small farmers. There is a suspicion that in fact they are dealing with, not the causes, but the effects of injustice and that while the underlying injustices that give rise to all the problems of poverty, poor working and living conditions still remain, the efficacy of any remedy will only be short-liveSo what are the underlying causes of the injustices which fair trade and trade justice are trying to address? They will no doubt vary from country to country but a good place to look first are the conditions in which labour has access to land. One Fairtrade website[9] refers to this in a throw-away comment whilst discussing why coffee plantations were excluded at present from Fairtrade certification:

‘However, there has been contention involving bringing plantation grown coffee into the scene, because of the importance of the issue of land reform’.

 Henry George was a passionate advocate of free trade but he was also adamant that the mere abolition of protection did not constitute true free trade. He argued that while the removal of protective tariffs would greatly increase the production of wealth, that

so long as the land on which all must live is made the property of some, increase of productive power can only increase the tribute which those who own the land can demand for its use’[10]

To conclude, the movements are worthy of our support, but the real work has to take place on a much bigger canvas. Only when economic arrangements in countries are such that the injustice, just noted above, is dissolved and removed, for example, through taxation, will true free trade be possible and its attendant benefits shared by all.

[1] Leon MacLaren; Justice: A lecture delivered in December 1951: School of Economic Science 2001

[2] www.tjmorg.uk/briefings

[3] www.fairtrade.org.uk/what_is_fairtrade/fairtrade_foundation.aspx

[4] www.globalexchange.org/campaigns/fairtrade/coffee/faq

[5] Alex Singleton, Trade justice or free trade?: The Globalisation Institute, 2005

[6] Alex Singleton; op cit

[7] Joseph Stiglitz, in Foreword to The Great Transformation, Karl Polanyi, Beacon Press, 2001.

[8] www.fairtrade.org.uk/what_is_fairtrade/faqs.aspx

[9] www.globalexchange.org/campaigns/fairtrade/coffee/faq

[10] Henry George; Protection or Free Trade, Chap XX: Henry George Foundation