Abstract
Fair Trade USA certifies fair trade products that are produced and grown around the world and sold in the United States. It has reached 100,000 retail locations nationwide (n.p.). But despite its positive intentions and its gradual growth in impact, fair trade operates within a very narrow system that limits their potential for success. In the U.S., fair trade items are usually significantly more expensive and are therefore reserved for wealthy consumers, creating a culture of buying and selling that is unnecessarily elite. In addition, fair trade leaves little personal choice to the other side of the equation: the producers, who are mostly farmers in rural, developing areas.
A price-quality scale within fair trade, which would allow for low-price lowquality goods to be included in the fair trade initiative, would give American consumers of all socioeconomic backgrounds the option to support the fair trade mission. This scale would thus improve the overall global impact of fair trade’s community programs and interactions with participating farmers. Ultimately, it is vital for the American consumer to be knowledgeable about fair trade before making a purchasing decision, and Fair Trade USA can achieve this by modifying its policies to increase its consumer base.
My economic analysis will be a profile of four different types of consumers and their preferences for goods under my proposed Fair Trade USA modification. The consumers in my model represent American consumers who, under my definition of public interest, have the right to be educated about, and participate in, Fair Trade USA’s trade system.
Introduction
Fair trade is a social movement and trade system that focuses on improving the working conditions of producers, namely those in non-Western countries, as well as the environmental sustainability of production methods. This is achieved by third-party organizations implementing community development programs and notifying consumers of these fair trade programs by labeling their goods as such. As a result of these labels and extra initiatives that do not occur with regular free trade, prices of fair trade goods are often higher than those of their non-fair-trade counterparts (Pelsmacker, Driesen, et al n.p.). To address this issue, fair trade should have a price and demand spectrum within its procedures that takes into account that most consumers have a desire to purchase altruistically, but that not all can afford the higher prices associated with fair trade. Fair trade should abandon its connotation with high quality and allow for low-quality, low-price fair trade goods to be produced and sold. This will broaden its consumer base by allowing consumers with various levels of disposable income to be included in fair trade. It will also eventually resolve the issue of fair trade perpetuating structural inequality—a problem with which scholars are becoming increasingly aware. I will first present a literature review, covering various opinions on the general effectiveness of fair trade, fair trade prices, and fair trade alternatives. I will then propose both qualitative and formulaic components of a fair trade system that frees itself from the restraint of high quality.
Definitions
For the purpose of this paper, both low price low quality (LPLQ) and high price high quality (HPHQ) goods would be able to be sold under the fair trade label, the definition of low-quality goods will not be those that are produced in environmentally detrimental ways, but those that are not “specialty” goods. In other words, fair trade organizations should not decrease their environmental standards in order to include low-quality goods under their labels.
Review of Existing Literature: Fair Trade and its History, Proponents, and Critics
It is important to understand the history of fair trade labeling and the differences between the motives of fair trade organizations. Before fair trade labeling, international charities operated a system called “direct trade”—which was just that. These charities helped producers to sell their items to global customers. But because an official third party was not involved, the system relied fully on consumers’ trust that the firm would sell inventory. In addition, the firm had to “be involved at every step in the supply chain,” which became inefficient (Elliot n.p.). Fair trade labeling arose as a response to the desire for any retailer to sell fair-trade goods, even if they were not directly involved with their production. Max Havelaar, widely recognized as the first fair trade labeling organization, was founded in the Netherlands in 1988 and paved the way for organizations such as Global Exchange and TransFair, the latter of which ultimately split into Fairtrade International and Fair Trade USA. Fairtrade International believes their label should be reserved for small businesses, while Fair Trade USA does not (Dragusanu 218). For each good, a price is set by the International Fair Trade Labeling Organization. Then, TransFair USA screens and approves retailers. Members of the Fair Trade Federation, on the other hand, sell non-certified products such as crafts and apparel (Green America n.p.).
Fair trade products have experienced a recent boom in the global market, with corporations such as Starbucks, Dunkin Donuts, and Wal-Mart offering fair-trade labeled products to varying degrees. However, in 2011, the total amount spent globally on fair trade items was just $7 billion (Elliot n.p.). The primary debates over fair trade are not over its theoretical implications, but whether it is the most efficient way to help farmers and whether it is fair for the existence of third party labels to hike up prices (Dragusanu et al n.p.). Fair Trade USA itself claims to “teach disadvantaged communities how to use the free market to their advantage” (n.p.).
Nunn lists that there are two fair trade mechanisms: one being a price floor and the other being a fair trade premium. A price floor means that the higher minimum price assigned to fair trade goods is meant to cover the costs of producing fairly and sustainably. In Fair Trade USA’s mission statement, this includes higher wages and the right to organize for associated workers. A price floor makes it less risky for farmers who are members of fair trade organizations because their wages will not be entirely dependent on macroeconomic and spending patterns in the purchasing countries of the global North. This mechanism can be effective if it does not act as a barrier to consumer sales. The second mechanism of fair trade is the premium; this is the specific amount of extra money that the consumer pays to the fair trade organization in order to purchase their good. Like the price floor, the premium helps foster fair trade’s mission, but rather than going directly to farmers, it supports the organization and its community-building work (such as recruiting more farmers, trainings, capacity building, and supplies for farmers) and allows it to expand.
Proponents of fair trade point to its rising popularity, consumers’ innate preference for buying altruistically, and fair trade organizations’ involvement in communities to improve the lives of producers. These organizations act as both a guide for the consumer to guarantee that the item was made under fair working conditions, as well as an enabler for producers to charge more for fairly traded goods (Dragusanu 222). Dragusanu cites the significantly higher prices that farmers are able to receive under fair trade—a study on Nicaraguan coffee found the farmers working under fair trade labels earned over twice the amount earned by conventional farmers (Dragusanu 223). After adjusting for some confounding variables by undertaking a panel rather than a cross-sectional study of farmers, Dragusanu and Nunn discovered that the amount of wage increase from 1999 to 2010 because a number of specific mills was 5 cents per pound after switching to fair trade (Dragusanu 225)—less than in the previous study, but still positive. He also notes that, perhaps due to the higher quality of treatment, farmers working under the fair trade label produce a larger output. Another important goal of fair trade is not just to help farmers “survive in the existing order,” but to provide them with long-term tools to address the larger, systematic reasons for their oppression (Fridell 11).
Critics of fair trade point to the higher prices and the general ineffectiveness of fair trade by some measures. Most economists’ research agrees, to some extent, that consumers care about the conditions under which their commodities were produced. While it is not so clear how much more money people are willing to pay for this peace of mind (some say it is quite a small amount), there is evidence to show that most are willing to pay some premium (Elliot n.p., Carlson). This mechanism can be seen in everyday purchases of the average American, such as bananas or coffee. However, even if we assume that prices remain stable and that most people would prefer a fair-trade good over a non-fair-trade good of identical price, there is still the problem of transparency. The consumer is not paying directly for the improved labor standards of producers, but for the label that supposedly ensures those standards. The whole system, then, relies on consumers’ trust of fair trade organizations to label accurately and remain congruent with their mission. This also leaves retailers with the “dilemma […] of how to respond to consumer demand for fair trade goods without implying that the conventional goods they offer are unfair” (Elliot n.p.). Dammert and Mohan argue that many studies of fair trade do not take into account other factors that may determine fair trade certification (Elliot 3). They note that the studies that take selection bias into consideration when analyzing farmers’ incomes find a less significant difference between fair trade and non-fair-trade practices (Elliot 4). In addition, many fair trade advocates do not recognize that, on average, farmers who participate in fair trade only sell 30 percent of their goods to fair trade organizations, leaving the rest to conventional trade. This implies that the uniformity and regularity exhibited by fair trade organizations may not be the case for individual farmers. Colleen Haight notes that fair trade results in a “quality problem” in which fair trade goods are deemed as high quality, even though some are not, but are still sold with a premium (n.p.). Others are critical of fair trade because they believe that it perpetuates structural inequality. An article from a fair trade co-op in support of fair trade being reserved for small farmers cites that 98 percent of fair trade tea sold from the U.S. actually comes not from small farmers but but from plantations, which have “networks within the banking, government and export sectors of their countries” and whose labor systems perpetuate inequality and disconnect from the product (Robinson n.p.). This implies the belief that the ability to be classified as fair trade is too lenient. Collier states that fair trade, despite its mission, actually backfires in its attempt to include farmers in the Global South in the fruits of neoliberalism, allowing them to “get charity as long as they stay producing the crops that have locked them into poverty” (pg 163). It does this by discouraging farmers from diversifying their crops or taking the risky step of expanding to other types of work (Collier).
Some alternatives to fair trade have been proposed. Some organizations have similar missions to those of fair trade organizations and also sell to retailers, but without the fair trade label, such as Terra Nostra Organic Chocolate. Others propose selling “specialty” coffee rather than fair trade, which would simply require farmers to increase the quality of their crop, which would supposedly solve the problem of unfair trade by paying the farmers more for higher-quality coffee, eliminating the need for third party intervention (Vocativ). This would work by having a more direct trade system in which farmers are paid directly for higher-quality goods. A very advanced quality-check system would be necessary in place of fair trade organizations, to ensure that farmers are not taken advantage of. A loud critic of fair trade, Peter Griffiths, argues that the most ethical action to take is to outwardly tell consumers how much more they are paying for a fair trade product than a regular one (Vocativ n.p.). Nasser Abufarha of The Fair World Project reports that “major fair trade certifiers have proven all too willing to compromise on fair trade standards in their efforts to welcome these multinational companies” by including large plantations, using monoculture, and lowering fair trade content thresholds for products (Vocativ n.p.). He states that multinational corporations are less interested in fair trade itself and are instead interested in using consumers’ growing trends toward fair trade goods to their monetary advantage. According to Abufarha, Alternative Trade Organizations (ATOs), being the “backbone” of the fair trade system, can take the first step to bringing the fair trade focus back to the farmer by encouraging corporations and consumers to educate themselves about the true goals of fair trade. Abufarha calls upon fair trade labeling organizations to responsibly label products. Other ATOs include Oxfam Trading, Cooperative Coffees, and Artisans du Monde. These organizations may use slightly different techniques than the groups technically labeled as fair trade, but may do an even better job at working toward the fair trade mission. Educating consumers about other types of ethical trading can assist them in making more informed decisions and will give them more options for purchasing their goods if they decide not to participate in the fair trade label, but still wish to buy ethical goods. Sushil Mohan states that there are several techniques that could co-exist or replace fair trade, such as private social labeling initiatives, increased corporate social responsibility (CSR), and government-regulated social standards (83).
Proposal: A Price-Quality Scale Within Fair Trade
To address the problem of elite pricing, but continue the support to underrepresented farmers, I propose a modification to the fair trade system. This scale allows for both high-price high-quality (HPHQ) and low-price low-quality (LPLQ) goods to all be sold under the fair trade label. This means that almost all goods categorized as LPLQ would exist in the fair trade market as new entrants. This model is theoretical and can serve as a building block for more advanced, real-world models. For that reason, the goods are categorized as either low-quality or high-quality (0 or 1, respectively). I believe that, once fair trade has been expanded, eventually most people will prefer fair trade goods to ones that are not, given people’s willingness to pay a premium of varying amounts for fair trade (Carlson). However, for the sake of the model, I will simplify this and demonstrate that there are four types of consumers—ones who do and don’t prefer fair trade goods, and those who do and don’t prefer high quality goods.
U (Fair trade status, Quality, Price) = U (Fi, θi, Pi) = CFi + Dθi + Pi,
where consumers, C Î {no, yes} = {0,1,} D Î {low quality, high quality} = {0, 1}, Pi = Price
Like the case with any discussion of utility, consumers in this scenario maximize their individual utility functions to locate the ideal choice. To find the marginal utility, the first derivative of the utility function, with respect to each variable, is calculated. Each “type” of consumer has an individual preference with regards to quality and fair trade status, and those preferences can be maximized by the theory above using the following model below.
| Fair trade | Non fair trade | |
| High quality |
Consumer 1 C = a > 0; D = b > 0 U(1,1) (utility) = a + b > U(1,0) = a > U(0,1) = b > U(0,0) = 0 |
Consumer 2 C = a < 0, D = b > 0 U(0,1) (utility) = b > U(1,1) = e + b > U(0,0) = 0 > U(1,0) = e < 0 |
| Low quality |
Consumer 3 (New entrant) C = a < 0; D = b < 0 U(1,0) (utility) = c > U(1,1) = c + d > U(0,0) = 0 > U (0,1) = d < 0. |
Consumer 4 C = a > 0; D = b < 0 U(0,0) (utility) = 0 > U(1,0) = e > U(0,1) = d > U(1,1) = e + d < 0 |
a and b will only appear where the variable is 1, meaning that the contribution to the utility function from these terms is either a, b, a+b, or 0 depending on which of the four types of consumers is being represented. For each consumer, we will want to rank a, b, a+b, or 0. Consumer 1, for example, will rank a+b as the highest outcome and will maximize his utility by using both the high quality and the fair trade labels (both variable a and variable b). He would be happiest when drinking high-quality fair-trade coffee, and would prefer fair trade only to high-quality only. He is worst-off when drinking low-price, low-quality non-fair-trade coffee, and if he had another option (which we’ll call Option Z) for buying his coffee, he would begin to avoid our brands altogether and purchase Option Z instead. Consumer 3, for example, will rank a as the highest outcome, because she has a preference for the fair trade good when confronted with two identical goods of the same price. She also prefers to buy low-quality goods because she cannot afford those of higher quality—she would prefer high-quality goods if price were not an issue, but understands that that is rarely the case and that wealth and quality patterns cannot be separated from one another. The relative importance that she places upon a good being fair trade versus being low-quality will determine how much more she is willing to pay for a fair trade good than a regular one. In reality, one individual who fits the “Consumer 3” label may purchase the fair trade coffee for $4.75 instead of $4.50, while another may draw his line at $4.57. For this reason, the above model is purely theoretical. A complex model with the ability for these preferences to be expressed continuously, rather than discretely, is necessary in order to determine those personal differences. In the real world, retailers would have to analyze a societal average of these individual preferences and find the “sweet spot” price for each combination of goods that would make the consumers willing to purchase them.
Qualitative Discussion on a Price-Quality Scale Within Fair Trade
Not only would this scale greatly increase the consumer base for fair trade goods, but it would also give farmers the option to invest in capital that will improve the quality of their crop, or produce low-quality crops for a lower payoff, or any combination of the two. Farmers’ decisions for production quality would be shaped by the market demand. This would remove fair trade organizations’ role in requiring high quality production, leaving them to focus on training and community building initiatives; transparency of production information for consumers; environmental protection; and guaranteeing that their mission to treat producers fairly is fulfilled. The task of checking for quality minimums would be shifted to ensuring that the quality and price relationships remain proportional.
Another new task for fair trade organizations must be to conduct actual, not superficial, experiments and trainings to improve the environmental implications of growing both specialty (high-quality) and “low-quality” crops. Many small-scale farmers and non-Western cultures already have farming systems that are ecologically sustainable, such as rice-duck and rice-fish farming, intercropping, and integrated pest management (IPM) (Greenpeace n.p.). So the role of fair trade organizations in terms of sustainability should be primarily to listen to the systems that have already worked for generations and then to add new technologies for sustainability if they become necessary. This has not yet been attempted on a significant scale yet, possibly because fair trade organizations work in many countries, all with different cultural and historical farming techniques.
Adopting this modification would also gradually improve the retailers’ dilemma described in the previous section (of not wanting to imply that conventional goods are unfair and decrease their sales). With a wider scope of fair trade products available, it’s assumed that that most people will buy the fair trade item compared to the non-fair-trade item of identical or similar price. This means that retailers will not have to decide whether to offer fair trade or non-fair-trade goods because only fair trade goods will be preferred when placed next to non-fair-trade ones. The market for non-fair-trade goods would remain separate, and, with a large enough market, “demand for mainstream non-fair trade products could be reduced as consumers begin buying fair trade products, thus generating a negative demand externality” (Dammert and Mohan 5). With modifications to the current fair trade system, whether through price-quality scales or other alterations, fair trade could become the new default for goods. Many of fair trade’s problems, such as high prices, being reserved for the elite, and inaccessibility and inconsistency for farmers, would be eliminated with simply an increase in its scale. However, this will not happen unless fair trade abandons its association with high quality. This is because the market will fail if it only sells high-price, high-quality goods. In other words, if fair trade is to succeed, it must conceptualize itself as eventually becoming a default good, and if it is to become a default good, it must expand its range of quality. This case is a cultural, not just an economic, change. Not only do fair trade organizations have to expand their work, but consumers must be open to this rather than continue to assume they cannot afford to participate in fair trade, even once prices have become affordable for them.
The two primary mechanisms of fair trade that were mentioned previously are price floors and premiums. Under the new proposed system, these mechanisms would still operate and allow for fair trade organizations to continue their missions, but with modifications. A price floor would still exist, but would only be called upon when fair trade spending in the consuming countries faces a severe shortage that threatens the wages of the farmers. This would expectantly come into action early enough to not threaten the jobs of retail employees themselves. The extra cost to the fair trade organization to cover price floors during economic troughs would be covered by a fund supported with donations and any extra revenue from high-price, high-quality sales not being used for wages or development programs. A premium would also still exist, but only at the beginning of the onset of this proposed system. An explanation for this is as follows: Assume that the number of people buying HPHQ fair trade goods remains the same after the onset of the new system,and the consumers of LPLQ increase. Because the number of people buying HPHQ fair trade items would not decrease under this model, FT organizations could decrease their premiums significantly by using a progressive premium system that spreads out their costs of operating among all levels of products. In other words, it must conceptualize itself as eventually becoming a default good, and if it is to become a default good, it must expand its range of quality.
The highest premiums would remain attached to the HPHQ items, but because small premiums would be attached to all items, even the HPHQ premium would be able to decrease. This system requires that consumers be willing to pay very slightly more for fair trade goods at the onset of the new system. Once the new system is under way, if the supply of fair trade goods increases significantly, premiums would be able to further decrease or even disappear as consumers’ preferences for fair trade goods increase, and fair trade organizations’ operation costs and cost of offering a living wage would become further subsidized by an increased consumer base. Although an increased consumer base would in fact result in an increased demand for farmers, and therefore a proportionally higher need for extra funds for their wages, the operation costs to the organization would likely not increase to the same degree. Organizations would have to reach more farmers, but could remain in many of the same areas as their programs are already operating.
Maynard Sway, a Co-Op Board Chairman in Kenya, states that “[their] voices are not heard in fair trade” (Griffiths n.p.). This scale would beneficial for farmers because it would allow them to actively participate in the choices directing their local economies rather than be pressured to choose between partnering with fair trade initiatives, with all their current downfalls, or risk producing less-desirable materials and eventually become obsolete compared to their neighbors. This scale would allow fair trade organizations to grow reach more farmers, who may not have access to, or knowledge of, the opportunities offered. In addition, if the 30 percent statistic mentioned earlier is correct, that means that the average farmer only using 30 percent of her land to grow fair trade crops does not even have to reallocate her land if she doesn’t wish to—she can simply continue using the other 70 percent as she has been, but simply sell 100 percent, rather than 30 percent, of her product through fair trade organizations.
Such a scale would also benefit consumers. Not only would it give the opportunity to purchase fair trade goods to people who cannot afford high-quality items, but it also separates the ideas of high-quality and fair trade from one another, which allows consumers to become more educated about what they are purchasing. Currently, the notion of a “fair trade” item is almost synonymous with attributes like “specialty,” “organic,” and “fashionable.” This leads consumers to make decisions based upon assumptions that, at their core, are not true.
Conclusion
It is challenging for a remote farmer to actively locate a fair trade organization, agree to partner with it only to allocate a small percentage of his land to this new source of income, and be required to produce only specialty items. It is also challenging for a consumer, held to a high moral standard, to purchase fair trade goods if he does not have a full understanding of what that means. He may even skip over that aisle in the store if he has never been able to afford the fair trade premium in the past, so assumes that these items are not for his ‘kind.’ If fair trade is truly going to be a bridge between rich and poor, then the middle cannot be left out of the consumption equation. They must be allowed to purchase according to their own moralities, not according to a semi-arbitrary price tag that is so high partially because of a quality premium that a consumer did not even want in the first place. On the other end of the system, the farmer must be able to have a say in how he uses his land and still be given the opportunity to sell his products worldwide, even if he is located in a remote area. This should not just apply to the rare farmer who happens to be in a village where a small fair trade organization has its presence and who has to rely on fate to make a profit. Fair trade should not be reserved for the few—the elite consumer or the lucky farmer.
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