The Institute of Economic Affairs took a hard look at Fair Trade Practice and found it wanting in its Fair Trade without Froth Report. Its critique looked at whether it is different than Free Trade. It is not. It is a philosophy of Free Trade. It creates an alternative distribution channel for a particular niche of goods. I also wondered why they did not say that if this were not the case, then it would mean that Free Trade is not Fair and is it fine for it to undermine countries and businesses. Surely that is not fine. Here is the a summary of the findings and my recommendations about what it will take to achieve real changes in supplier’s lives.

The study also examined whether it provided any real benefit toward the three main intentions: a guaranteed minimum ‘fair’ price and social premium, organizational capacity building, and equitable trading partnerships.

Report Findings

  1. Fair price paid: “Notwithstanding whether the costs of organizing and managing the Fair Trade process are justified or not, there is no denying the fact that a major proportion of the gain from the Fair Trade price premium is eaten up in the supply chain and, to that extent, the premium available for redistribution to producers is reduced. In addition, producers are likely to incur additional expenditure in meeting the Fair Trade certification standards. Therefore, despite the Fair Trade scheme making an explicit provision for a price premium, the net premium actually received by producers can be far lower than is commonly perceived.2 It may be worth noting that it is wrong to assume that producers join Fair Trade only for the premium; as noted earlier, there can be other reasons, such as lack of access to other marketing institutions or a wish to diversify their marketing options.”
  2. Market Organizational Capacity Building: Fair Trade is responsible for the creation of an additional trade channel. Studies show, and a priori reasoning tells us, that participation in any form of alternative trade network serves the purpose of diversification, which reduces exposure and vulnerability to low and variable prices. However, there was no indication that there was ability to handle volatility of markets any better than other channels

Equal Trading Partnerships: “The Fair Trade model proposes trade that is as direct as possible, eliminating unnecessary ‘middlemen’ between importers and producers. But the capacity of Fair Trade to reduce the number of intermediaries is questionable. Local intermediaries have been the traditional means of access for most small producers, and for many Fair Trade producers these have been replaced by producer organizations. At times, Fair Trade production on the ground is much more complex than conventional production in that firms are often required to ensure supply of a particular desired quality and quantity.  When it comes to large commercially oriented producers, they enjoy direct market access with or without Fair Trade. Therefore it is difficult to conclusively say that Fair Trade is more direct than conventional trade. We noted earlier that the market competitiveness conditions for Fair Trade products follow conventional trade practices Fair Trade cannot change the underlying demand and supply conditions in the product supply chain.”

By the reports guidelines, the producers are not fairing much better in most cases and yet there is a premium price on the products paid by consumers who are being fooled by the organizations that certify fair trade.

The challenge as I see it is that it has been made a program and not a way of businesses doing business with a philosophy of responsibility to all the business effects.  When something it fragmented out of the business practice as a whole, which much corporate responsibility is, including Fair Trade, it releases the rest of the business leadership from needing to pay attention. It needs to be embedded in the way of doing business for all companies who proclaim they are responsible.

What would happen instead of Fair Trade in The Responsible Business. Merida Meridian provides an image of how a business works with its co-creators (all those who are responsible for the creation of the product/service from sourcing to shipping). They work with the supplier businesses to develop a variety of skills in business, marketing, manufacturing, finance and organizational capacity. They help the businesses find additional customers so their volatility is reduced. This also ensures that Merida has a stable supplier who values the relationship. But they go further. They work on building a resilient economy in the places where they do businesses by involving related businesses in the development. They know that a business needs a stable context and families are part of who well the business does.

This report was seeking to measure the effects of Fair Trade where most businesses and consumers only measure the efforts exerted. To move to more effectiveness when seeking to be responsible, the business will need to measure different things than a Fair Trade certification can offer. It has to ask, ‘how prosperous” can it be in the business as a result of our engagement? How able it is to meet market and economic challenges as a result of our engagement? How able is the community of businesses to engage in creating developmental economies as a result of our engagement? Only when businesses ask these questions, as a part of doing business with their suppliers, will the intentions of Fair Trade be achieved.