ABSTRACT

Fair trade has been one of the top topics in the world of economics for the last few

years. Yet, the discussion of how really fair trade works and who benefits from it

most is still on-going. There are 4 major international organizations working on

defining fair trade standards and implementing fair trade policies, but it looks like the

rules are still dictated by the multinational importers and exporters and none of

countries‘ or economic blocks‘ authorities has found the way to enforce the

implementation of fair trade principles. From my personal point of view, as well as

from the macroeconomic perspective, fair trade should not be seen as a privilege, but

as the natural and the only way of trading goods and services. Therefore, the main

objective of my seminar paper will be to analyse the current regulations on fair trade

in the international market and answer the question what is missing to make the fair

trade a commercial principle, not the exception.

Definitions and Abbreviations1

Fair Trade2: Is a trading partnership, based on dialogue, transparency and respect,

that seek greater equity in international trade. It contributes to

sustainable development by offering better trading conditions to, and

securing the rights of, marginalized producers and workers -

especially in the South.

Fair trade

Labelling

Organisations

International

(FLO)

An umbrella organisation set up in April 1997 created to co-ordinate

the work of the various national Fair trade initiatives and to run the

monitoring programmes more efficiently. A central responsibility for

FLO is to collect data and ensure the audit of all Fair trade-labelled

products from the producer to the supermarket shelf.

FINE Abbreviation for the informal network of the four Fair Trade

organizations (FLO, International Federation for Alternative Trade

(IFAT), Network of European World Shops (NEWS), European Fair

Trade Association (EFTA)

ATO Alternative Trade Organisation

CSR Corporate Social Responsibilit

EU European Union

NGO Non-Governmental Organisation

1 Definitions retrieved and adapted from http://www.maketradefair.com2 Definition agreed by the four Fair Trade organisations: Fair trade Labelling Organisations International, International Federation for Alternative Trade, Network of European World Shops, European Fair Trade Association

Table of ContentsDEFINITIONS AND ABBREVIATIONS 2

INTRODUCTION 4

WHO IS REALLY BENEFITING FROM THE FAIR TRADE? 6

PRODUCERS 6

CONSUMERS 6

INTERMEDIARIES 7

NATIONAL ECONOMIES 7

FAIR TRADE STANDARDS HARMONIZATION AND THE ROLE OF NGOS IN SOLVING THE PROBLEM 8

FAIR TRADE CERTIFIED™ 9

FLO CERTIFICATION 9

REAL LIFE EXAMPLE AND THE NEED OF ESTABLISHING LEGAL REGULATION SYSTEM 10

WALES – THE FIRST FAIR TRADE NATION 11

EU INITIATIVES 11

WTO POSITION 12

CONCLUSIONS 13

REFERENCES 15

Introduction

From the very early arousal of the issues of the Fair Trade that backs up to the

Interwar period and the first legislation acts such as emerging competition laws and

California Unfair Practices Act the same principal of the Fair Trade has been severely

discussed. A lot of discussions are still ongoing up to these days and there is no

general agreement on a single definition that results in different perceptions about

who should the Fair Trade really benefit and how its practices should be applied.

There is a wide range of local and international organizations around the world

continuously fighting for the implementation of Fair trade policies on national and

supranational basis, but until now it seems that everything stays on recommendations

level and is being left to decide for the companies, whether to introduce Fair Trade

into their CSR policies. Although there is an exception of Wales, being nominated as

the first Fair Trade Nation (Townley, 2009), where the Fair Trade principles are

officially regulated by the State law in Catering industry and is being expanded to

other industries and market sectors.

However, here lies the main criticism of the implementation of the Fair Trade. There

are few sources of critics, coming from different economic and social perspectives,

such as:

the real benefits for consumers, producers and intermediaries to get involved

in the Fair Trade process are doubtful;

Legal requirements and generally agreed standards of fairly traded goods are

not approved by any jurisdictional authorities and vary according to regions

and markets which creates confusion for all market players and distorts

expectations;

The position of governments and international organizations, such as WTO,

EU bodies and other decision makers of the global market is unclear towards

the Fair Trade.

There are more influential factors, of course, but these are the main issues discussed at

the international levels among business, government and NGOs representatives during

the last ten years. Therefore, I see it important to take a deeper look at each of these

factors in answering the question whether in the future Fair Trade principles will

become universally accepted commercial norms or it will remain at its formation

stage as a premium consumption indicator at economically wealthy countries and a

marketing tool for the multinational corporations to demonstrate their commitment to

the global society.

Who is really benefiting from the Fair Trade?

According to the definition proposed by FINE and widely adopted worldwide, the

main interest group supposed to benefit from the fair trade are small and medium

scale producers in the economically weak and developing countries. Although some

authors (Arnould, 2009, etc.) use Fair Trade terminology in a wider extent, involving

the rights of consumers’ access to the information about the product origins. But I

would also like to consider the positive effects on other important market participants

involved in the Fair Trade. Let’s take a look at each of them individually.

Producers

Small and medium scale producers play the most important role in the Fair Trade

chain. Providing high quality usually agricultural products and other raw material as

cotton, that are produced in environmentally friendly way, without violating human

and/or animal rights and ensuring safe working conditions and fair waging system for

the campus workers, these producers are enabled to charge premium price for their

products in order to satisfy the requirements implied by the intermediaries that usually

work according to FINE or ATO defined standards for fairly traded goods. Moreover,

these intermediaries have the obligation to partially subsidize various license fees for

the producers and sign long-term contracts to ensure sustainable economic growth and

price stability for the primary material providers (Arnould, Plastina, and Ball, 2009).

Taken this into consideration, producers within the Fair Trade networks, such as

TransFair International and similar organisations gain direct benefits from

participating in the channel activities and receive various facilities and consultations

about fostering the company’s economic growth as well social integration of the

community to take advantage of the programme, that includes professional education,

scientific investigations in the field of region specialization, creation of new working

places, etc. Such opportunities and successful examples are encouraging non-member

producers to achieve the required quality standards and contribute to the creation of

sustainable economic welfare of their region as well.

Consumers

On the other side of the chain there is a final consumer. Noticing the latest trends of

increased consumer preferences for natural products and organic goods (Mintel

International Group, 2009) we can conclude that cutting offs on casual spending

during the financial crisis made the consumers to become more value conscious and

start taking care about the products they use and what possible impacts of their health

and wellbeing they can have. That leads us to the favourable situation for fairly traded

goods that allow consumer to be aware from where their products come and how they

were produced. In other words Fair Trade fulfils consumers’ right to perfect

information. Another major benefit is that it facilitates the development of the direct

linkages of Southern producers with businesses and consumers in the economically

wealthy countries (Townley, 2009). It not only increases awareness of business and

investment possibilities in the African or Latin American countries, but also alters the

standards of goods provided for the final consumer.

Intermediaries

The middle part of the chain – large exporters, importers and reproducers – of the

fairly traded goods’ supply chain is probably the most criticized of all. Without

discussing the reasoning of those critics here, neither legal nor moral, those usually

arise, consider the mutual benefits the intermediaries receive from the Fair Trade.

Firstly – the Fair Trade principle is based on a perfectly competitive market with

many operating firms, which allows the intermediaries get the fair price. On the other

side of the coin, intermediaries are able to provide consumers with all the information

about the product origins and gain customers’ trust and loyalty which ensures

sustainable long term relations, mutually beneficial for all the supply chain parties.

National Economies

Finally, the least direct participant in the Fair Trade market, although one of the most

influential can be the national economies of both, supplying and consuming countries.

The national economies benefit directly from collecting taxes on fairly traded goods,

exports and imports, VAT tax (depending on national laws, whether the tax is charged

only on final consumption good or at all stages during the transferring process).

Indirectly – from creation of official work places and social guaranties for the campus

workers in the producing countries, as well as from the creation of integrated

infrastructure in the industry – logistic chains, educational and investigation centres

(Arnould, Plastina, and Ball, 2009).

So it looks like all the parties should be motivated to implement Fair Trade standards

in as many fields as possible as everybody benefits from it. However, we know that in

reality models use not to work properly as they ought to for several reasons – abuse of

power, wrong priorities and different goals of the parties, cheating, etc. It is one of the

most obvious examples of the tragedy of commons economic model (Hardin, 1968)

where everybody is seeking to maximize its own profit although overall welfare is

steadily decreasing. The difference is that in this case, the only player having the

power to manipulate others is the middle part – the intermediaries. As it normally

happens, these are huge multinational corporations, in monopolistic or oligopolistic

market operating exporters and importers, having control over the main distribution

channels and therefore able to influence producer and consumer price expectations

and information flows. ATO and FINE are actively working in the field of setting

price floors for the producers, but there is no way to regulate the outbound chain and

other complementary factors as their marketing campaign and information disclosure.

This results that the concept of Fair Trade is distorted by various misleading messages

and moral scandals in different companies and in the mass society is often seen as a

trend of ethical consumerism. The customers and local producers feel being cheated

on prices and hidden information; local economies suffer from inability to enforce the

implementation of Fair Trade practices in multinational corporations. And this leads

us to the main issue of this paper: who should responsible for regulating the Fair

Trade implementation process at microeconomic level among individual firms as well

as at macroeconomic level – considering national regulations and international trade

standards.

Fair Trade standards harmonization and the role of NGOs in solving the

problem

As mentioned in the introduction, there are actually four major organisations defining

the standards of Fair Trade based relations and implementation of its principles on a

worldwide basis. These four organisations, also known as FINE have defined specific

standards for the production, packaging and distribution process on fairly traded

goods and established easily recognizable certification system on each category of

goods, such as tea, coffee, and cocoa products, fruits and vegetables, and cotton, as

well as some non-traditional cultures. Let us take a closer look on some examples of

such certifications.

Fair Trade Certified™

TransFair International was one of the first organizations to

implement certification system for the fairly traded goods, and at

the beginning was the most widely used certification system with

the logo indicated in the picture 1. In order to get this certification,

producers have to fill in the online application form with an

extended explanation of their business model and production

process, when there is an in-depth investigation run by the

TransFair International experts on quality, processes and legal

issues, and if everything is fine, the producer is obliged to pay the

licence fee and gets the right to mark his products with TransFair

International certification logo, under the agreement that the

certifying NGO will monitor and evaluate regularly the compliance of Fair Trade

standard requirements. These requirements are regularly revised and updated in order

to meet the latest environmental, labour and developmental standards within the

countries and/or companies using this certification system.

FLO certification

In 2002 FLO launched International FAIRTRADE Certification

Mark with the main objective to increase the visibility of the

fairly traded goods on the supermarket shelves and draw

society’s attention to the issue, as well as facilitate export

procedures for producers and exporters. FLO-CERT

certification now is the most widely adopted certification that

replaced other certification systems all other the world (except

USA where TransFair International is still being used). It is

agreed that this certification system has been the greatest

achievement and proof of FINE efforts in the field of

standardizing requirements applied for the fairly traded good

producers and exporters. As for the quality assurance, FLO has established the

separate inspection FLO-CERT responsible for the assurance that FAIRTRADE

Picture 1 TransFair International certification logo

Picture 2 FLO-CERT established International Fairtrade Certification logo

certified producers and traders comply with the standards set and defined by the FLO

which defines the pricing, economical and developmental criteria as well as legal

issues and quality assessment.

Fortunately, it seems that these and some other smaller certification systems have

gained the trust of national authorities and consumers in developed countries and are

positively accepted in the market. Although numbers are impressively increasing year

by year (International Fair Trade Report, 2011), it is clear that fairly traded goods still

corresponds only to a small percentage in the commodities market. And the reason for

this is very obvious – all these international organisations have developed strong

certification, monitoring and audit systems to help the businesses implementing the

Fair Trade principles. They did a huge work in Fair Trade standard harmonization and

acceptance at the international, which facilitates a lot the expansion of the Fair Trade

producers and traders network. But the final decision whether to join those trading

networks, or not, belong to private companies and neither FINE nor any other NGO

working in the field has a legitimate power to force it. And however it is, we have to

face the reality, that price premium faced in the Fair Trade scares the majority of self-

profit maximizing companies that are more concerned about the possibility to provide

their customers more affordable prices rather than focused on philanthropic activities

and universal economic development. And with this point we arrive to the last and the

most important question of this paper – should the Fair Trade practices, considering

the benefits received by all participating parties, be enforced by any kind of legitimate

authorities, or left for the individual decision of individual business companies?

Real Life example and the Need of Establishing Legal Regulation System

To be able to address this issue with strong arguments, we must look whether there

have been any intentions by the national governments or other legitimate bodies to

implement the Fair Trade system and adapt it to certain economic circumstances and

market needs. And as we normally now USA going foot by foot with innovation in

every field, this time its liberal policies on market regulations left it behind the

European intentions. Although in the World Summit for the Sustainable Development

that took place in 2002 in Johannesburg the Fair Trade was actively discussed as one

of the possible means to achieve the sustainable economic growth and increase living

standards in the developing countries, the world leaders did not agreed on any

particular solutions considering the regulations of the fairly traded goods movement.

Although, there are separate attention worth cases of the individual nations within the

EU, whose achievements in the field could be set as an example for the further

development of national and international legislations.

Wales – the First Fair Trade Nation

Wales’s government is probably the one with the most serious attitudes towards the

international community and commitment to the United Nations Millennium Goals.

One of them is to halve global poverty by the 2015. According to these references, in

2005 Welsh government announced their strategy for international development and

integrated the Fair Trade implementation as a key component to the strategy success.

They established the Fair Trade Nation campaign for the 3 years with political

leadership, special facilities on taxation and the financing for the companies that

decide to implement the Fair Trade principles into their businesses. Over 3 years of

joint efforts of legal authorities, local and international organizations, producers,

importers, exporters and local distributors finally achieved the goals initially set by

the campaign that included not only policy changes, but perception changes of the

nature of business. “In 2008 an independent panel of experts from fair trade

organisations (European and UK-based) agreed that Wales had met its targets for

becoming a Fair Trade Nation” (Townley, 2009). There were no statutory penalties or

enforcement measures for those, who did not like to apply the Fair Trade principles,

but the massive campaigns and created facilities benefited businesses to take action in

changing their scope of operations, which finally led to the overall acceptance, that

the Fair Trade is the right way into both, economic growth and sustainable

development.

EU initiatives

Although until today EU has not agreed on any permanent directives concerning the

implementation of the Fair Trade, there have been various initiatives by the EU bodies

and coherent organisations realized on the project basis. Between 1997 and 2004 EU

had fully or partially funded 66 projects in the field of sustainable development, from

which some of them like “Shopping for a Better World” or “Sustainable Banana

Economy” had the direct connection with Fair Trade (Lamy, 2004). So actually, what

we can see is that EU is continuously promoting Fair Trade through the CSR

implementation in private sector, but there are no enforcement tools for the companies

who reject or even not consider this alternative.

WTO Position

WTO has a strong favourable position towards the Fair Trade. It established a

separate organisation promoting it, which is closely interrelated with FLO foundation

FAIRTRADE. The WTO foundation represents its public opinion related to the

questions on the Fair Trade, plays the advisory role in FLO-CERT certification

decisions, but does not work in implementation of any obligatory regulations or

directives for the WTO members addressing Fair Trade issues at the international

levels.

As a result, there are some good examples, every year there are some campaigns and

promotional projects, world leaders discuss the issue at almost every Summit and

general meeting. But 8 years have passed from this inspiring speech of Pascal Lamy

in the Conference of Fair Trade organized by the European Parliament in Brussels at

2004, and there are still no real measures taken. Although Fair Trade benefits seems

obvious in the long run, implementation of the Fair Trade networks today, especially

having in mind current economic situation in Europe and United States, creates the

necessity for additional encouragement. And national governments, as well as such

bodies as the EU at the regional or WTO on the global level, have a legitimate power

and resources to establish such requirements and take necessary steps for

implementation of Fair Trade that would go beyond the voluntary participation of

individual companies and creation of worldwide accepted standards of the sustainable

economic relations among the countries.

Conclusions

All in all, taken everything into consideration, I suppose it is only a matter of time and

investment, both of financial and non-material resources such as informational and

educational campaigns, consultations on legal issues and disposition of quality

standards. The question is if the world is ready to accept this need. Of course, the

contribution to the world’s sustainable development would seem like a sufficient

reason for the countries to switch to the Fair Trade, but the reality is that business is

based on the satisfaction of the economic needs firstly, and the welfare of the general

society only later. Although, another trend of the recent years is noticed that

companies start using the strategy of CSR and tends to contribute more to the creation

of common wellbeing in the society they are part of. However, in some cases the CSR

and Fair Trade are used just as catchy slogans of the marketing campaigns, and such

abuse creates bad reputation of the whole issue. But it is clearly seen that the trend of

Fair Trade practices is getting more and more weight every year as well as higher and

higher profits (economical and non-economical), both for the producers in developing

countries and traders in the wealthier countries where those goods are sold. Knowing

economic principles of supply and demand, it is not difficult to predict that increasing

profits will shift the supply as well, leading to the urgent need for market regulation

on state or international level.

Therefore, I would like to highlight the point, that such regulations are needed as soon

as possible in order to ensure proactive attitude on the issue of the legislative bodies

and prevent the possibilities of future abuse of the Fair Trade defined certification,

operations and misleading information spreading among the costumers. Also, based

on the Welsh example, such regulations, when they are adopted, should not only

clearly define the requirements for the businesses to be called a part of Fair Trade

network, but suggest how all the infrastructure should be created in order to facilitate

the transition from the traditional competition based trade to the Fair Trade, which

involves three major steps: 1) informing all supply chain parties (producers,

intermediaries and consumers) about the benefits received from the Fair Trade, 2)

educating producers to fulfil quality and process requirements in order their goods

would be recognized as Fair Trade products, and finally, 3) facilitate the transition

with taxation exemptions or other means acceptable for the regulating institution.

And the final point is that I strongly believe it would be the most beneficial to agree

on Fair Trade legislation on international globalized level, assuring the same

conditions, quality and price levels among the nations and preventing the future

misunderstanding upon non-harmonized standards. Taking the justified and to long

term sustainability oriented decisions will surely define the guidelines for the

standards of future commerce, based on economic stability and mutual benefits for the

global society.

References

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ml

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