\”Fair Trade\” is often little more than a slogan. If you\’d like a look at the analysis and reality behind that slogan, as it\’s working out in the real world, a good starting point is \”The Economics of Fair Trade,\” by Raluca Dragusanu, Daniele Giovannucci, and Nathan Nunn, in the Summer 2014 issue of the Journal of Economic Perspectives. (Full disclosure: I\’ve worked as Managing Editor of JEP since the first issue in 1987.)
Fair Trade is the practice whereby a nonprofit organization puts a label on certain products, certifying that certain practices were followed in the production of that product. Common required practices include standards for worker pay, worker voice, and environmental protection. The biggest of these certifying organization is Fairtrade International. There is a parallel label for the U.S. called Fair Trade USA. Other labelling standards, each with their own priorities, include Organic, Rainforest Alliance, and others. A producer who joins Fair Trade receives several benefits. When a Fair Trade producer sells to a Fair Trade buyer, they can receive a minimum price, which includes a premium now set at 20 cents per pound for coffee. Fair Trade buyers are also supposed to be more willing agree to long-term purchasing contracts, and to providing credit to producers.
At some level, Fair Trade and other certification programs are just a case of the free market at work. With the certification, consumers who would are willing to pay something extra to purchase products produced in a certain way become able to find those products. A variety of evidence suggests that at least some consumers value this option. For example, in one study the researchers were able to add Fair Trade labels, or not, and alter prices, or not, for bulk coffee sold in 26 U.S. groceries. they found that at a given price, sales were 10% greater when the coffee was labeled as Fair Trade, and that demand for Fair Trade coffee was less sensitive to increases in price.
So what concerns or issues might be raised about Fair Trade? I\’ll list some of the issues here as I see them, based on evidence from the Dragusanu, Giovannucci, and Nunn paper. As they note, \”the evidence is admittedly both mixed and incomplete\”–so some of the concerns are tentative.
Fair Trade and other certification programs affect a relatively small number of workers.
The most important Fairtrade products, measured by number of producers and workers involved in growing them, are coffee (580,000 producers and workers covered), tea (258,000), and cocoa (141,000). Fair trade standard also cover smaller numbers of producers in seed cotton, flowers and plants, cane sugar, bananas, fresh fruit, and nuts. Obviously, compared to the total number of low-income agricultural producers in developing and emerging economies–measured in billions of workers–the share of production covered by Fair Trade certification is quite small.
Fair Trade does seem to provide higher prices and greater financial stability, at least when farmers can sell at the minimum price.
A variety of small-scale studies in many countries suggest that Fair Trade farmers do earn more. However, there is a difficult problem of cause-and-effect here. If the more sophisticated and motivated farmers who are well-positioned by their crops and land to carry out Fair Trade practices are the ones who sign up, perhaps they would have been able to receive higher priced even without the certification. There are a variety of methods to adjust for differences across farmers: age of farmer, education of farmer; size of crop; before-and-after entering a certification program, and the like. After such adjustments, a few studies no longer find that Fair Trade farmers earn more, but the most common finding remains that a price premium continues to exist.
The research in this area also points out that just because a producer is Fair Trade-certified does not mean that the producer can necessarily sell all of their crop as Fair Trade. The buyer determines what quantity of certified product to purchase at the Fair Trade price. In addition, while some buyers provide credit, there is some evidence that buyers who then sell to big firms like Starbucks and Costco are less likely to offer credit or long-term purchasing contracts. Again, farmers overall do seem to gain financial stability from Fair Trade certification, but what they gain in reality is often less than a simple recitation of the guidelines might suggest.
Fair Trade does seem to promote improved environmental practices.
Again, the evidence is from small-scale studies in various countries, but Fair Trade certified producers do seem more likely to use composting, to use contouring and terraces to reduce erosion, to have systems for purifying runoff from fields, to make use of windbreaks and shade trees, and so on.
While Fair Trade helps producers, the effects on workers and work organizations is more mixed.
Fair Trade organizations sometimes operate through cooperatives, in which farmers pass their output to the cooperative, which then negotiates the sales. A variety of studies find higher levels of tension between farmers and Fair Trade cooperatives, with farmers complaining about lack of communication and poor decision-making.
In addition, many producers of Fair Trade products hire outside workers, at least seasonally. As Dragusanu, Giovannucci, and Nunn write: \”The evidence on the distribution of the benefits of Fair Trade remains limited, but the available studies suggest that, within the coffee industry, Fair Trade certification benefits workers little or not at all.\” A couple of months ago, I blogged on a recent study making this point in \”Does Fair Trade Reduce Wages?\” However, these is also some evidence that in non-coffee crops, often grown in plantation agriculture, the certification standards can improve working conditions and reduce the use of child labor.
How might entry by producers affect Fair Trade and other certification programs in the long run?
If producers who operate in a certain way can earn higher profits, then any economist will predict that more producers will choose to operate in that way. But as more producers enter and the supply of the product produced in that way rises, it will tend to drive down the market price, until the opportunities for higher profits are competed away. At least so far, this doesn\’t seem to have happened for Fair Trade. But as Dragusanu, Giovannucci, and Nunn write: \”This link between free entry and rents provides an interesting dilemma for certification agencies. On the one hand, they wish to induce the spread of socially and environmentally responsible production as much as possible. On the other hand, they may also wish to structure certain limits to entry so that they can continue to maintain higher-than-average rents for certified producers.\”
How might entry by additional certification organization affect Fair Trade in the long run?
There is considerable overlap between the various certification organizations: for example, 80% of the Fair Trade-certified producers are also certified as Organic producers. But multiple certifications mean multiple reports and audits, which can be a real burden for farmers in low-income countries. Some for-profit companies are starting their own certification programs, rather than deal with an outside certification organization. At some point, there is a risk that farmers become unwilling to deal with a plethora of organizations, and that consumers become cynical about whether many of these organizations represent something meaningful.