Is Fair Trade flawed and unethical? Part 1

Is Fair Trade flawed and unethical? Part 1

“Our mission is to connect disadvantaged producers and consumers, promote fairer trading conditions and empower producers to combat poverty, strengthen their position and take more control over their lives.” [1]

This is the mission statement of Fairtrade, flagship of the Fair Trade movement which inspires millions of consumers, with almost religious zeal, to buy Fair Trade products. Yet, the essential element of the debate at the heart of the Fair Trade movement is missing: empirical academic evidence to prove that the Fair Trade movement enacts its mission statement.

Is Fair Trade ethical? Is it fair? This article seeks to uncover the nuances within the Fair Trade movement to allow us to answer this question.

 

How Fair Trade operates:

Fair Trade (FT) provides two guarantees to the farmer: firstly, that there is a minimum price (a price floor) that buyers have to pay for a product, even if the market price dips below that price; secondly, that a premium is charged to the consumer above the product’s market value which is transferred to the farmer. That’s the theory. The question is, does it succeed?

 

Has income increased? What benefits can be proven for Fair Trade farmers?

Several studies have tried to quantify the benefits of FT, focusing almost exclusively on coffee production in Latin America. One of the largest and most influential studies (Ruben and Fort (2012)) analyzed three mainly organic FT cooperatives and three conventional cooperatives in Peru growing coffee, at different stage of maturity and organic agriculture. They report that “even though FT farmers could receive better average prices, these differences are not strong enough to represent a clear welfare effect.” Overall, FT farmers did not have a higher income compared to farmers in conventional cooperatives, but they had large changes in the organization and assets of the cooperative.  [2]

They discovered that any benefits were correlated with the length of time that the farmers had been involved with FT: the issues with outward FT cost, particularly concerning the extra costs associated with organic farming (see Part 2), were higher in the two younger FT cooperatives. [2]

The study also found better access to credit amongst FT-certified farmers, such that they have more animals on their farms, and were more likely to invest long-term; arguably, the biggest change they found was a more risk-taking, entrepreneurial spirit amongst FT farmers. [2] Nonetheless, a 2009 Finnish study noted that this extra access to credit achieved through FT is not necessarily positive: one harvest may not pay back the cost of the credit, leading farmers tied to the same coffee buyer/cooperative, even if it becomes bankrupt, or if a rival buyer offers a lower price, a situation known in economics as monopsony. [3]

Does this image represent the reality of the premium?

Arguably, the biggest reason why few improvements are seen is that cooperatives control the FT premium, rather than the individual farmers. According to FLO International, Fairtrade does not control or monitor what cooperatives do with the premium. To researchers and consumers, it is as if the money vanishes into a great grey hole. In the Peruvian study, 10% of farmers were unaware that the premium existed, and only 25% could identify a tangible benefit from the premium. [2]  Corruption and nepotism at this point in the supply chain are likely to be rife, but the lack of transparency particularly in audit-reports means that researchers cannot investigate this. This comes despite the fact that the investment of the premium is meant to be through democratic election. [1]

What’s more, even when used properly, the premium is a poor way for communities to improve: due to economies of scale, the same amount of money will have much more impact with a specialized charity. [4] For example, the 2014 FLO report demonstrates why the process of allocating the small premium that is received is potentially bad practice, despite the fact that money is received:  23% of the premium was reinvested in the cooperative itself, rather than individual farmers; 41% was given to individuals as tools, training, and direct payments; 37% went on increasing the productivity of the plot. [5] This is not necessarily flawed, but investments into water supply, education, healthcare, and infrastructure are more likely to lead to development; these are more likely to be realized with the larger budgets of targeted aid agencies which have the right tools for the job, so to speak. 

Most critical is the size of this premium in the first place. A 2012 analysis (Griffiths) argues that FT products in supermarkets are unethically marketed to consumers. In the review, it is shown that, based on 2011 FLO data, only 1.53% of the retail price, at most, went to cooperatives. The study cites that a large British coffee chain offered FT coffee for only 10p more than a cup of conventional coffee, as a rare example of these products stocked side-by-side; at most, Griffiths argues that about 0.1p of this would go towards the premium. [4]

FT acknowledge that they cannot have an influence over the supermarket price schemes, because the premium is invested at the certified importer from the producing country. Due to the numerous processes involved here with small add-ons of money, many critics of FT have pointed out the likelihood of corruption reaching much further upstream of the farmer. Theoretically, the certified importer will sell the product like a conventional product to the supermarket. [1] But because supermarkets almost never stock the same products – one FT and the other conventional – alongside each other, the consumer is never able to identify how much money is going to the farmer; this lack of transparency can be seen as unethical. [4]

To quote Fairtrade’s FAQ page: [1]:

“The Fairtrade Foundation has no control or influence over commercial costs or margins. And because the major costs of the finished product are incurred after the producer has sold the commodity, the return to the producer will inevitably make up a relatively small percentage of the retail price.”

There is, of course, the other side of the coin, that much success has been achieved. The following infographic in purple summarizes Fairtrade’s 2016 report about its achievements in bananas. [6]

However, the landmark Peruvian study suggests that many such impact studies lack rigour at the start of its literature review:

The European Fair Trade Association (EFTA) provides an overview of more than 100 so-called FT impact studies that have been realized since 2000, but only few studies rely on representative field samples or use a rigorous comparison with otherwise similar nonFT producers. Most of these studies present case-study material based on interviews with farmers and results from focus group meetings at village level. Conclusions of such studies generally emphasize the positive effects on production, sales and the participation in farmers’ organizations focusing on the process of capitalization from FT premium payments—while little attention is given to changes in individual livelihoods and household-level welfare implications (Raynolds, Murray, & Taylor, 2004; Taylor, 2005).” [2]

Taken in this light, much of the qualitative questionnaire-based data concerning perceptions acquires doubt.

Secondly, percentage change is used in many FT and FLO reports; whilst it is an entirely valid measure, it can obscure the true volume of the premium. A meagre portion of the hundreds of millions generated of Fairtrade sales actually becomes premium, as mentioned above; in its trustee impact report, Fairtrade reports that the total premium generated on its sales in 2016 was only £32.2 million (see picture below for the long-term trends). [7] 

Is the floor price actually useful to farmers?

The price floor is the second benefit touted by FT, but its impact today is questionable. The 2012 Peruvian study evidenced its shortcomings:  “FT prices are increasingly considered as a regional floor price offered by local traders to all coffee farmers and thus non-FT farmers reap similar benefits”. In other words, the price floor no longer has any benefit which can be differentiated between conventional and FT  farmers, but the collective income may have risen, although without proof. [2] This contradicts many previous studies from the early 2000s, which focused on the positive effects of the price floor, such as a 2005 study, which found that in 2000-20001 in Nicaragua, FT offered $0.84 per lb, whereas non-certified coffee only attracted $0.14 per lb, which even overcame the effects of altitude on coffee prices. [8]

However, this discrepancy can be explained by looking at the historical price of coffee: from 2000-2004, over-supply caused coffee prices to slump to 41 cents per lb in September 2001, the lowest in 100 years. The price floor implemented by FT at 126 cents would therefore have been hugely significant for farmers in the midst of such volatility; this correlates with the rise of FT branding. [9] Since 2007, the minimum price guaranteed by FT has been largely irrelevant as coffee prices have risen, visible by studying graphs of coffee prices, as seen in the image below. [3] A time-series survey is therefore important: measuring from 1999-2010 in Costa Rica, a 2011 study found coffee farmers over the period received only 5 cents more per lb than conventional schemes, a slim and meagre benefit for the whole process over the decade. [10]

Nonetheless, according to the 2012 study by Griffiths, even the price floor, in times of low coffee prices, is subject to economic criticism. With FT coffee generating higher incomes, FT farmers will increase their output of FT-certified coffee over conventional coffee; this increased production is a central cause of price slumps, which marginalizes other non-FT farmers both locally and worldwide. Since the number of cooperatives operating as FT has grown, in order to maintain the benefit of FT, only a certain percentage of FT coffee can be sold as FT; this makes redundant a portion of all the expenditure on FT. [4]

as can be seen clearly with the horizontal lines representing the FT price floor, between 2004 and 2015 the price floor has hardly been used

A benefit outside coffee?

It might, of course, be argued that larger benefits exist outside coffee production, and that the academic studies above judge FT harshly, a view taken as Fairtrade has diversified to flowers, vegetables, gold, and handicrafts in recent years. Many anecdotalized soundbites exist to extol these positives; however, it is bad science to make any generalization, good or bad, from the research in coffee when it is extended to other products.

 

Do you think FT is flawed and unethical, or is it salvageable and well-intentional?

Continue reading Part 2 here to find out how FT’s standards are actually detrimental to many of the farmers it claims to be helping…

 

 

References:

[1] http://www.fairtrade.org.uk/What-is-Fairtrade/What-Fairtrade-does

[2] The Impact of Fair Trade Certification for Coffee Farmers in Peru, Ruben and Fort

https://docs.google.com/viewer?url=http%3A%2F%2Fwww.ru.nl%2Fpublish%2Fpages%2F637421%2Fruben_fort_-_world_development.pdf 

[3] Fair Trade Coffee in Nicaragua – Impacts of Certified Production on Cooperatives, Farmers and Laborers, Valkila

https://helda.helsinki.fi/bitstream/handle/10138/42569/valkila_dissertation.pdf;sequence=1

[4] Ethical objections to Fair Trade; Griffiths, 2012

https://docs.google.com/viewer?url=http%3A%2F%2Fwww.griffithsspeaker.com%2FFairtrade%2FEthical%2520Objections%2520to%2520Fairtrade%2520web.pdf

[5] MONITORING THE SCOPE AND BENEFITS OF FAIRTRADE SIXTH EDITION 2014

https://docs.google.com/viewer?url=http%3A%2F%2Fwww.fairtrade.net%2Ffileadmin%2Fuser_upload%2Fcontent%2F2009%2Fresources%2F2014-Fairtrade-Monitoring-Scope-Benefits-final-web.pdf

[6] Fairtrade’s impact in the banana industry, April 2016

https://www.fairtrade.org.uk/~/media/FairtradeUK/What%20is%20Fairtrade/Documents/Policy%20and%20Research%20documents/Impact%20reports/Fairer%20fruit%20%20Fairtrades%20impact%20in%20the%20banana%20industry%20%20April%202016.pdf

[7] Fairtrade annual report and statistics (2016) 

http://www.fairtrade.org.uk/~/media/FairtradeUK/What%20is%20Fairtrade/Documents/Annual%20Impact%20Reports/Trustee_Report_Final_Upload.pdf

[8] Confronting the Coffee Crisis: Can Fair Trade, Organic, and Specialty Coffees Reduce Small-Scale Farmer Vulnerability in Northern Nicaragua? Bacon, 2005 

https://cloudfront.escholarship.org/dist/prd/content/qt0xn3f86t/qt0xn3f86t.pdf

[9] https://www.theguardian.com/business/2004/apr/04/theobserver.observerbusiness11

[10] The Economics of Fair Trade; Raluca Dragusanu, Daniele Giovannucci, and Nathan Nunn

https://scholar.harvard.edu/files/nunn/files/dragusanu_giovannucci_nunn_jep_2014.pdf

 

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