Four Reasons Fair Trade Can’t Become a Universal Model
Tue, Nov 3, 2009
Author: Joshua Levin (33 Articles)
Joshua Levin is a consultant to non-profits and their corporate partners in sustainable agriculture business development and sustainable food markets. Joshua holds an MBA from the NYU Stern School of Business, where he was a Catherine B. Reynolds Fellow in Social Entrepreneurship, and a BA from Harvard University. He lives with his wife in Brooklyn, NY.
“There has probably never been a stronger force for change in history than the American consumer,” says Paul Rice, founder of the American Fair Trade movement.
Last week, while in line at Di Fara’s Pizza with Kenji, I participated in a conference call with the controversial Paul Rice. Rice once worked (and, rumor has it, fought) alongside Sandinistas in Nicaragua before he spearheaded a global movement that oversees $11 billion in Fair Trade-certified sales. Rice’s work has effectively raised the living standards of tens of thousands of farmers in the developing world.
Now, Paul Rice wants to spread Fair Trade to every food import in America, as well as expand to other products such as gold and diamonds. But can Fair Trade really become a universal model for all foods and even all imported consumer products? I believe that the answer is no. But before I give my reasons, a little background:
The Coffee Model
In 1990, the agreed-upon living wage price for coffee was $1.10 per pound. However, the actual price paid to farmers by middlemen, the so-called “coyote price”, was only 10 cents per pound. Disenchanted with existing rural aid programs, Paul Rice decided to bypass the middlemen and work directly with a new group of progressive importers – Equal Exchange, in Massachusetts – to promote socially just and better tasting coffee to Americans. American Fair Trade was born, and Rice expanded the “Prodecoop” co-op to 3,000 members. In late 1998, Rice went on to launch TransFair USA, a certification company that ensures that all products bearing its label are produced with strict social justice standards.
Transfair´s system consists of three key elements. The minimum price is a mandatory price floor for each crop, based on what Fair Trade believes is a livable wage. The social premium – 10 cents per pound for coffee – is an additional fee that coffee importers must pay, which flows back to the producer cooperative for use in community development projects, such as schools or health centers. Lastly, the certification fee – another 10 cents per pound – must be paid to TransFair if you want to put their label on your box. Given that coffee traditionally trades at around $1 per pound, these fees can add up to large sums for many businesses (see my visualization below)
Joshua Levin Copyright 2009
Many major coffee companies predicted that Fair Trade would fail in America. Yet with a message of social justice in hand, Rice pursued a guerilla marketing strategy that focused on college campuses and small coffee houses. From 1999-2006, more than 150 million pounds of Fair Trade coffee was sold in America, putting an additional $83 million directly into the pockets of small coffee farmers in the developing world. Shortly after, bananas, tea, and chocolate became Fair Trade mainstays. TransFair is now using its considerable pull among consumers to force many of its original detractors to launch Fair Trade product lines.
Why It Won’t Work
Though Fair Trade thus far has been an important tool for breaking the backs of exploitative middlemen, as well as forcing big American food importers to ratchet up the commodity prices they pay small coffee producers, here are four reasons why Fair Trade can’t become a universal model:
1. Prices for Consumers:
Most companies don’t have a problem with paying the social premium, as this goes right to the farmers. But the confluence of all three fees – the minimum price, social premium, and (very large) certification fee – results in a major set of costs for businesses, which they pass down to consumers. This consumer value, in turn, does not all flow back to farmers, as the certification fee largely pays for TransFair’s own marketing activities. Mainstream consumers, across sectors, are not going to be willing to pay these high premiums for all their foods and other products.
2. Market Pricing:
Photo: Gary L Howe
A common critique of Fair Trade is that it “distorts markets”. OK, but so what? The obligopolistic buying power of major food companies, and the asymmetric information between middlemen and producers, distort markets even more. Where interference has an effect, however, is that Fair Trade is not as good at pricing as a real market. The living wage for food production is not the same across countries and continents, and yet the Fair Trade price floors are universal. It is not clear what algorithms these minimums are really based on. For example, world cocoa prices have been above the minimums for years, rendering the importance of TransFair certification questionable, while coffee commodity prices have dipped below the minimum in some years, sometimes causing farmers to simply ditch the Fair Trade label and eat the cost of the certification fee in order to actually move their product.
3. Big Kids and Small Kids Can’t Play Together:
To actually attain Fair Trade certification, farms must meet a set of labor and human development criteria. Fair Trade used to be designed only for smallholder co-ops. Yet in order to integrate more products, they’ve started working with large plantations, and consequently have had to loosen their labor standards. Furthermore, when they let in a big player, it can damage the smaller producers who have built their brand largely around the Fair Trade label. For example, TransFair recently inked a deal to certify Dole bananas, to the great dismay of many small Fair Trade banana businesses who can hardly compete with the giant. I saw a similar thing happen with rooibos tea last year in South Africa.
4. Attitude:
Courtesy Sustainability.com
Courtesy Sustainability.com
Paul Rice is known for having a cult-like following among some members of his organization, and a “You’re either with us or against us” attitude. On our phone call, he referred to other certification organizations as “competitors”, and stated that TransFair is essentially a business which was forced to establish itself as a non-profit for brand reasons. Whereas this blending of for-profit and non-profit models is often applauded, there’s only so long you can use humanistic ideas of social justice to bludgeon “competitors” and try to gain market share. There’s a lot of karma in the non-profit and social enterprise space.
Paul Rice is definitely a hero, and TransFair’s work in America has been a critical element of the progress that’s being made in the food sector. I hope they prosper. But I’m also glad there’s “competition”, as this is not a universal model.
Tags: Joshua Levin
Very well written, and right on the mark….although your issues do not mean that fairtrade won’t continue to expand. It is going gangbusters in the UK.
Thanks fairtrader. And yeah, it amazes me the difference between the American and U.S. mentality on this. Do you work in the industry, and if so, what do you “trade”?
This post brings up some really interesting issues about the Fair Trade model. The apposite points brought up are clearly well thought out. Whether one believes Fair Trade to be a universal model or one better suited to certain products, it is important to discuss and understand all of the pertinent topics affecting the implementation of a fair, just model for international trade. I have studied Fair Trade for a long time—as an undergraduate and a graduate student—and have been an intern for TransFair USA, where I was able to learn a little more about how the organization operates, and what their goals, and reasons for those goals, are. So, in an effort to continue this important conversation on Fair Trade, I’d like to bring up some items to think about that relate to your four main reasons.
1) In actuality, the certification fee differs depending on the product being certified. For example, while coffee, as you accurately point out, is currently $.10 per pound, the fee for fruit is only $.01 per pound, and for sugar, the price is around $.03. In addition, this licensee, or certification, fee can be lowered for licensees if, for example, they increase their annual purchase of Fair Trade Certified products, or they increase the percentage of Fair Trade Certified products that make up their overall sales.
The licensee fee is one of the ways that the Fair Trade model can be sustainable over the long term, and not be solely dependent on donations or other financial contributions. Approximately 70 percent of TransFair USA’s income is from license fees, while the rest comes from donations and grants.
TransFair USA devotes the majority of its total revenues to consumer education and grassroots outreach, certification and auditing services (they audit more than 40,000 transactions per year!), client services (connecting licensees to suppliers and providing market information, and support for producer organizations.
The effect that this licensee fee has on the final retail price on the product is not astounding. The price of Fair Trade Certified coffee, for example, is very close to the retail price of conventional coffee. Recent studies have also begun to show with more certainty that many consumers are willing to pay a higher price to know that the product was produced fairly (see for example TIME Magazine’s article, “The Responsibility Revolution,” and the Political Science Quarterly’s current issue’s article, “Human Rights and Public Opinion: From Attitudes to Action”).
2) The second main reason was a very interesting one. There are both positive and negative arguments instituting a country-specific living wage. You astutely point out the positive side—the cost of living does differ from country to country. However, the cost of living and production costs also can differ among local regions within a country, which would entail a very difficult and resource-heavy investment in order to accurately portray those differences in the prices. Also on the negative side, having different prices from country to country could increase competition among producers which is not something that the Fair Trade model aims to encourage. Similar to the last point, raising the price in one country to reflect a lower standard of living could make it harder for those producers to sell their products on the international market. It would, in essence, replicate the mentality of the race to the bottom argument that is well known among anti-globalization activists and those that debate the free trade model. At the same time, however, the one-price-for-all method is not set in stone, and if it is deemed by FLO, in consultation with its members and producer groups, that this should be changed, it can be. That brings up another point that you raise for your second reason: the living wage price is determined based on a consultative process with Fair trade producers and traders. Therefore, it isn’t actually an algorithm, but more of a democratic and ongoing process that determines the price.
3) As you note, the issue of bringing in larger retailers is controversial, but it is important to remember that TransFair USA certifies products, not companies. The idea is simply to increase the access that farmers have to the international market, while continuing to ensure that these farmers are paid a decent wage. TransFair USA believes that Fair Trade should be an inclusive model, not exclusive; the more farmers that are helped, the better. Although Fair Trade began with small farmer cooperatives, the Fair Trade system now includes certification of hired-labor situations because of the significant benefits to be had for workers. Why should those workers that are employed by tea, banana or flower plantations be excluded? And it is not entirely accurate to say that the labor standards are lowered; they just are different. Plantations operate very differently than small producer groups organized into cooperatives. Therefore, certain considerations for the inclusion of labor standards, workers’ rights and the involvement of local and international NGOs, unions, and other players that are not involved with small producer groups in the same capacity.
4) This point was a little funny to read. Paul Rice does not have a cult-like following among his employees, but his extensive experience with coffee cooperatives and never-ending list of stories from the farms is truly an inspiration to the entire TransFair USA staff. And the conversation you refer to definitely sounds like something Paul would say. He believes that in order to make the Fair Trade model sustainable in the long run, it has to have business elements. It cannot just be a charity that people donate to out of the kindness of their hearts. For it to expand, it should be trying to gain more market share because that is the only way that the farmers it represents will continue to prosper. And, like you said, competition certainly is not a bad thing, even when everyone is after the same essential goals: elimination of poverty and the empowerment of those working in the developing world. Different models are doing different things, and that’s great. But that doesn’t mean that each shouldn’t try to expand their efforts and make more people aware of those efforts. That is essentially what TransFair USA is doing. And doing it rather well.
Christy, thanks for these great points, and for taking the time to share your extensive experience and insights with our readers. I’ve already had my chance on the stage here, but I wanted to respect your comment with a quick response on each point:
1. You’re right that there are different fee levels for different crops. I focused on coffee for the purpose of simplification. Fees for fruit, etc., are lower, yet they still constitute a similarly high % of the global commodity price. Overall, I would like to hear more on the “process” for determining this fee. As you say, it is a multi-stakeholder conversation. But what are the parameters?
Most of the expenditure areas you listed could be considered marketing, particularly as the TransFair logo is the organization’s primary strategic tool. My thinking comes in part from complaints I’ve heard in interviews with fair traders, including “100 Percenters”, that they rarely experience a true audit, besides an occasional desk audit, and thus they’re not sure where their money’s going.
2. Good point. It makes sense that this floor should help avoid the race to the bottom. Assuming, however, that the result isn’t persistent over-production or simply selling one’s product without the FT premium in order for farmers to clear their inventory.
3. The idea that FT certifies product, not companies, makes sense from a farmer perspective. But from a company perspective, FT definitely certifies companies, because the main reason they’re using the FT system is in order to augment their company’s brand promise (and out-compete or differentiate from other companies). In some cases, as with the Heiveld rooibos cooperative in South Africa, the farmers also own the brand. So when FT starts certifying big plantations, who incidentally have worse labor practices than the smallholder cooperative, the smallholders get pushed out of business, because they’re no longer differentiated. I suppose it doesn’t really matter whether the farmers own the brand or not, because they are tied to the success of their channel. The problem essentially exists when there are BOTH plantations/estates and smallholder co-ops in the same market, and when the price floor is based on the bulk product produced by the estates, because the estates have much lower costs p/unit than the smallholders and will push them out. I’d be interested to hear your response on this. Perhaps the situation is not as prevalent as I fear.
4. I’ll retract this. My statement of “cult-like following” was based on hearsay, so although your remarks are also hearsay for me, it’s best I take it back now. I also meant this phrase in the weak sense – e.g. “Pearl Jam has a cult-like following”. Not an actual cult.
Competition between certifiers is good, IN TERMS OF SERVICES OFFERED TO PRODUCERS AND COMPANIES. But it’s not productive for TransFair to keep issuing their press releases every time a “competitor” inks a new partnership putting down the other organization and saying that this partnership shows a “lack of commitment to fair labor standards”. I feel that’s just petty, and it undermines consumer trust in certification systems. Furthermore, I believe there are probably economies of scale and shared learning that could be achieved through further cooperation between the certifiers.