International Fair Trade Essay

UNDER THE GUIDENCE OF

Prof. Hanan Elzainy

University of Alexandria - Faculty of Commerce

Prepared By

WAEL BARAKAT
Executive MBA Program Cohort (9)

I. Introduction
Fair Trade represents an important new approach to alleviating poverty in the global
South based on a strategy of trade not aid. The growing Fair Trade movement
seeks to challenge historically unequal international market relations, transforming
North - South trade into an avenue of producer empowerment and poverty
alleviation. Markets for Fair Trade labelled coffee and other items link ethically
minded Northern consumers with democratically organized groups of poor Southern
producers, offering the disadvantaged producers a chance to increase their control
over their own future, have a fair and just return for their work, continuity of income
and decent working and living conditions through sustainable development
(Fairtrade Foundation 2000a).
Though the international market for Fair Trade products represents only a minor
share of global trade, it is growing rapidly. The world market for Fair Trade products
is currently valued at US$ 400 million, with sales growing at close to 30 percent per
year (Fair Trade Federation
2000). Coffee, the first labelled commodity, remains the backbone of the Fair Trade
system. Recently established initiatives in North America are making Fair Trade
commodities available outside the movements European home, fueling the
markets rapid growth. The United States has in just a few years become one of the
largest importers of Fair Trade labelled coffee and may over time double the world
market. The Fair Trade market is poised to expand dramatically over the next
decade as labelled commodities become more widely available and better known.
As Fair Trade markets in the North grow, it is critical to develop a more systematic
understanding of the Southern experience of this rapid expansion. The growth in
Fair Trade will pose both new opportunities and new problems for Southern coffee
producers. Identifying the lessons producers have learned could help ensure that
the benefits of Fair Trade in the South are maximized and extended as effectively as
possible. This overview of existing research suggests that the potential capacity of
Fair Trade in helping to alleviate poverty is shaped by the following:
(1) Prevailing political and economic conditions at global, national and sub-national
levels.
(2) The internal organization of producer groups and their external links to state,
corporate, and NGO groups,
(3) The individual characteristics of producers such as ideological commitment,
educational levels, market sophistication, capital and labor resources, and
environmental assets.

The Fair Trade movement is an effort to improve the income of farmers in the
developing world by linking socially conscious consumers in the Global North with
producers, distributors, wholesalers, and others who engage in socially progressive
farming in the Global South. Fair Trade aims to provide producers in the Global
South with a stable and fair price for their commodities, create more positive
agricultural labor practices, develop democratic and empowering producer
cooperatives, and promote environmental sustainability (Hanson and Terstappen,
2009, p. 4). Fair Trade is an attempt to build more direct links between consumers
and producers that provide the latter with greater benefits from the marketing of
their products than conventional production and trade have allowed, while breaking
down the traditional alienation of consumers from the products they purchase
(Murray, Raynolds, and Taylor, 2006, p. 7). Coffee is a commodity on which Fair
Trade organizations have focused considerable effort to improve farmer incomes.
According to Laura Raynolds, Research suggests that in alternative food arenas
such as Fair Trade, organic, local, regional appellation, and slow foodsproducts,
trade relations, and enterprises are differentiated and legitimated according to
conventions rooted in personal trust, attachment to place, and social and ecological
welfare concerns (Raynolds, 2009, p. 2). In other words, consumers often purchase
Fair Trade foods because they trust that the higher price they pay directly supports
their social justice principles, including equitable incomes for farmers

What is Fair Trade?

To better understand Fair Trade coffee, it is necessary to have background on how
coffee is moved from the farm to the consumer. Coffee is a plant cultivated only in
tropical regions. Significantly, most coffee-growing countries are developing
economically; many people in these countries experience profound poverty, which
can contribute to environmentally unsustainable farming practices.

There are two primary coffee varietiesArabica and Robusta. Farmers in Latin
America, Ethiopia, and Kenya have historically cultivated most of the Arabica beans
that are generally considered of higher quality and sold to specialty markets at
slightly higher prices than robustas. Brazil, Vietnam, and Uganda produce most of
the worlds Robusta coffees (Bacon, 2005, p. 10). According to the International
Coffee organization, the top four coffee-producing countries are Brazil, Vietnam,
Uganda, and Colombia. These countries are the top exporters of the Robusta variety
of coffee bean, which is used primarily to supply large producers of low-cost roasted
coffee, including brands such as Maxwell House (produced by Kraft), Nescaf
(produced by Nestl), and ButterNut (produced by Sara Lee). In contrast, Arabica
beans are used to produce the higher-cost coffees sold by most retail cafs.

Arabica beans are the focus of Fair Trade initiatives, because consumers have
shown they are willing to pay a premium price for Arabica coffee. Since Arabica
coffee is already a high-value commodity, many coffee retailers and roasters have
focused on developing value-added Arabica markets. The success of Fair Trade
initiatives depends upon the willingness of consumers to pay more for products that
are explicitly labeled as providing social benefits, such as poverty eradication. As
with other forms of social marketing, the higher price of Fair Trade goods does not
necessarily denote higher quality, but adds value by enabling the consumer to
purchase social benefits. Capitalizing on the increased concern of consumers in the
developed world for the working conditions in developing countries, as well as the
potential of free trade to marginalize poor producers worldwide, social marketing
allows consumers to choose products based on how these are produced (Basu and
Hicks, 2008, p. 3). In fact, the largest and fastest-growing share of Fair Trade
certified coffee is now being sold by market-driven firms which are primarily
motivated by increasing market share rather than by promoting the Fair Trade
mission, which has proven an effective social marketing strategy. With its
mainstreaming, Fair Trade coffee has become an increasingly important product for
giant coffee retailers, like Starbucks, Procter and Gamble, and Nestl, and
supermarkets, like Tesco and Costco. These market-driven companies source their
coffee from commercial importers and may roast their own beans (Raynolds, 2009,
p. 7).

Despite the global importance and value of coffee, coffee farmers often remain
impoverished while coffee retailers profit. Fair Trade attempts to increase the share
of profits gained by farmers, and Fair Trade initiatives mostly focus on agricultural
commodities produced in the Global South and consumed in the Global North. Fair
Trade is defined broadly as a trading partnership based on dialogue, transparency
and respect that seeks greater equity in international trade (World Fair Trade
Organization, n.d.). Using a set of international standards for both producers and
traders, Fair Trade attempts to counteract the inequities associated with neoliberal
economic and agricultural policies, and to minimize the impact of fluctuations of the
market in commodities such as coffee, tea, and cocoa. Fair Trade initiatives often
begin with small producers who establish cooperative associations to gain an edge
in dealing with middlemen in the selling of coffee from farmers to consumers.
Between farmers and consumers, there are several intermediaries in the global
coffee economy, including exporters, wholesalers, importers, roasters, and retailers,
each of which gain increasing profit relative to the farmers. Sometimes, farmer
cooperatives are able to eliminate some of these middle stages by taking on
additional roles. Indeed, a key part of the Fair Trade mission is to promote closer
relationships between suppliers and buyers. Third-party organizations certify the
income-sharing practices of participating farmer cooperatives, thus providing some
guarantee to consumers that the higher price of Fair Trade coffee does contribute to
more equitable business relationships. For farmers, participation in Fair Trade
production often means a fixed and relatively high price premium, particularly
noticeable and important during periods of price depression (Muradian and
Pelupessy, 2005, p. 10).

In recent years, international coffee prices have declined to a hundred-year low

when adjusted for inflation (Lyon, 2007, p. 3). During the 1990s and 2000s, coffee
farmers were devastated by this price decline. Many Latin American producers who
are not involved in Fair Trade production have abandoned their crops and land since
the price they receive for coffee does not even cover the costs of production
(Raynolds, 2002, p. 5). In contrast, Fair Trade agreements have helped reduce the
income loss participating farmers experienced. For instance, at the height of this
crisis, during the 20012002 coffee harvest, the cooperative Guatemalan Fair Trade
farm group was paid US$1.41 per pound for Fair Trade coffee (Lyon, 2007, p. 4). At
the time, this price was double that paid to non-members by local buyers. This
higher price would have been impossible without Global Northern consumers who
are willing to purchase Fair Trade coffee, even when the sale price is higher than
that of conventional varieties. The higher income enabled members to continue
repaying their debts, maintain their standard of living, retain their landholdings, and
pay for their childrens education during a period in which many non-members were
forced to sell their land and withdraw their children from school. Nonetheless, many
cooperative members feel that the Fair Trade price, while higher than that for
conventional coffee, remains inadequate (Lyon, 2007).
Coffee importers using Fair Trade labels must uphold the following standards:
(1) Purchases must be made directly from grower organizations using purchasing
agreements that extend beyond one harvest cycle.
(2) Importers must guarantee the FLO minimum price (US$ 1.21 per pound for
Arabic coffee) and pay a social premium (US$ .05 per pound) above that minimum
or above the world market price (whichever is higher).
(3) Certified organic coffee must get a further premium (US$ .15 per pound).
(4) Importers must offer pre-financing equal to 60 percent of the contract value
upon request.
To be included on FLOs approved registry of growers permitted to supply Fair Trade
coffee,
Producers must also uphold a set of standards:
(1) Producers must be small family based growers.
(2) Producers must be organized into politically independent democratic
associations.
(3) Producers must pursue ecological goals conserving natural resources and
limiting chemical input use. FLO monitors both traders and producer associations to
insure that these conditions are upheld. Setting it apart from other certification
initiatives (e.g. organics, eco-labelling, etc.), the costs of Fair Trade annual
monitoring and certification are paid by Northern importers, not by producers
(Raynolds,

2000).

Fair Trade & Price

How does the price paid in the United States for a quality cup of coffee compare
with the wage earned by a small coffee farmer? According to TransFair USA, a Fair
Trade certifying organization in the US, the Fair Trade average price per pound was
$1.69 in 2009, which was well above the minimum price paid to coffee producers
globally (TransFair USA, 2009). This is the market rate, which is paid to farmers
cooperatives. While this price is up to twice what farmers earn for non-Fair Trade
coffee, it is important to remember that the small farmers who often participate in
Fair-Trade cooperatives individually produce relatively little coffee. These farmers
remain in poverty despite being connected to Fair Trade organic markets (Valkila,
2009, p. 7). Fair Trade coffee does improve the income of farmers across the world,
though only marginally. Many farmers understand their experience with Fair Trade
as providing improvement, even though they see their share of the global coffee
economy as remaining unfair (Francis, 2006).

Additionally, even though many farmers groups want to be involved with Fair Trade
production, it is often hard for producers to gain the attention of the largest coffee
roasters who pay the highest prices for coffee. Market-driven companies like
Starbucks are often criticized for their secrecy in product assessments, since it
undermines cooperative efforts to create transparent price and quality
specifications for their members. Transparency is central to trade relations with
mission-driven and quality-driven buyers (Raynolds, 2009, p. 9). The proliferation of
sustainable certification programs, including Utz Kapeh (now known as UTZ Certified
which is a program that focuses on social and environmental aspects for coffee
growers around the globe), Rainforest Alliance (which focuses on helping growers
produce coffee plants with sustainability in mind), Fair Trade, organic, and
Starbucks CAFE Practices (which guarantees that Starbucks will pay above market
price for its coffee and directly improve the infrastructure of the producers
plantations), has resulted in new opportunities, benefits, costs, and complications
for small farmers and their organizations (Bacon, Mendez, Flores Gomez, Stuart, and
Diaz Flores, 2008, p. 15). Many coffee buyers want to establish their own
certification systems rather than relying on independent certification organizations,
a strategy that can reduce the ability of farmers to pursue the types of production
and marketing they envision. In such cases, however, coffee roasters or retailers
can challenge certification norms directly by setting up captive certification
programs that may mimic public-standards-based certification yet dispense with key
aspects that are considered undesirable. In these instances, firms challenge the
public character of production space and use economic power to shape nominally
independent production practices (Mutersbaugh, 2005, p. 3).

Does it matter to farmers whether Fair Trade certification is determined by an

independent, third party or if Fair Trade is self-certified by large roasters or retailers?
According to Sarah Lyon, Not all fair trade coffee roasters are equally committed to
these tasks nor is the producer-roaster relationship universally positive. However,
there are multiple studies demonstrating that many fair trade groups receive
extensive assistance from their Northern coffee roasters and that this assistance
helps them produce a higher quality product and secure their long-term market
access which in turn bolsters their community development efforts (2007, p. 7).
Often, large roasters or retailers that self-certify Fair Trade production
simultaneously seek other social marketing strategies, by encouraging or requiring
various forms of environmentally sustainable production. In particular, many Fair
Trade coffee initiatives also encourage shade-grown production, in which indigenous
rainforest trees are maintained in coffee orchards to provide habitat for birds and
other wildlife. Farmers incentives for maintaining shade trees are diverse, but in the
end this complement to Fair Trade production can further increase farmer incomes
(Bosselmann, Dons, Oberthur, Smith Olsen, Rbild, and Usma, 2009, p. 3). Of
course, environmentally sustainable production does not guarantee equitable
business relationships in the same way Fair Trade production does, and the added
value of environmentally sustainable production does not always benefit farmers
significantly (Mutersbaugh, 2005, p. 10).

Conclusion
The benefits of Fair Trade coffee for small coffee farmers are not conclusive, but
there is evidence that Fair Trade initiatives have helped improve farmers incomes.
Fair Trade has provided increased economic stability to participants, which has in
turn led to improvements in productivity and the quality of small-producer coffee.
Farmers families have also benefited, for instance through greater access to
education for their children. Many indigenous farmers also saw Fair Trade as an
important vehicle for cultural revival, most notably in the cases of the Tzotzilotic
and La Selva cooperatives in the southern Mexico state of Chiapas, and the La Voz
cooperative in the Guatemalan highlands (Murray, Raynolds, and Taylor, 2006, p. 9).
The future challenge will be to maintain Fair Trades commitment to trade equity
and human rights while also continuing Fair Trade coffees consumer market growth.
Certainly, the entry of retail giants into Fair Trade coffee will help increase its market
share, but it remains to be seen whether the participation of these giants in Fair
Trade will weaken the mission of equity and human rights promotion.
In any case, Fair Trade has helped enable some small-scale producers to survive the
coffee crisis of the 1990s and 2000s. These farmers have stayed on their land,
stayed in their communities, and even experienced a degree of prosperity. Through
access to Fair Trade markets, these farmers have been able to sell their coffee at
prices more than double the street price paid by local buyers, who often have
predatory business practices yet are the primary means of access to the global

coffee market for most small producers (Murray, Raynolds, and Taylor, 2006, p. 9).
Fair Trade price guarantees have meant the difference between survival and
bankruptcy for many small-scale coffee growers. In the words of one Latin American
coffee farmer, We are able to keep producing because of the more favorable Fair
Trade price. We are able to provide food and clothes for our families, even medicine.
The children still attend school. We are not rich, but we are moving forward
(Raynolds, 2002, p. 10).
So, in final words the evidence shows, Fair Trade not only does not improve the
living situation of poor people but it preserves the undeveloped state of third world
economies.
But in fact there is NO new evidence presented for this statement, and indeed very
little evidence at all in this paper - just a lot of the same old ideological arguments
presented as `fact.