We’ve spent the last few weeks talking about the impact of globalization on developing countries, but this final blog is going to examine an alternative to free trade. Many people have argued that free trade has allowed producers in developing countries, especially in the market for agriculture, to suffer from insufficient wages and safety hazards. The theory of Fair Trade attempts to solve these labor issues by encouraging local production of goods through government assistance.
The main mechanisms for Fair Trade, as explained in the Journal of Economic Perspectives:
- A price floor is set so that there is a minimum price that a Fair Trade buyer can buy from a Fair Trade producer. Prices can be negotiated higher when considering the quality and other aspects of the goods. This price floor also acts a cushion for when economic recession occurs and there may be cause for worry about being able to sell goods. Only in very recent years has the market price actually exceeded the fair trade price for coffee.
- There is a Fair Trade premium that is paid from the buyer to the cooperative in addition to the price of the good being sold. The premium is supposed to be used by cooperatives in a democratic style to determine how to enhance production or community infrastructure.
- Fair Trade buyers gain stable access to credit by agreeing to a long-term contract of at least one year and must “provide some advance crop financing to producer groups (up to 60 percent if requested”.
- “Free Trade workers must have the freedom of association, safe working conditions, and wages at least equal to the legal minimum. Some forms of child labor are prohibited.”
- Farmers are encouraged to organize democratic associations or cooperatives that can facilitate sales and manage the premium received from sold products.
- Fair Trade production prohibits harmful chemicals from being used in food production to maintain a healthier environment. Producers are required to provide basic environmental reports that describe their impacts on the environment. Genetically modified crops are not allowed.
- For a product to be sold under the mark of Fair Trade, both the buyer and seller must be Fair Trade certified. Standards vary on the particular crop being produced and are analyzed by different Fair Trade leaders such as Fairtrade International and FLO-CERT. Organizations obtain a Fair Trade certification by successfully applying to FLO-CERT and passing an initial inspection. Certifications can only be maintained by renewing with FLO-CERT and allowing for another inspection of the Fair Trade organization. (Dragusanu et al., 219-221)
The Institute for the Study of Labor, a non-profit project that allows scholars to engage in research about labor economics, conducted a study on the economic impact of Fair Trade. The findings, although still in its earliest stages, suggest that there is a positive impact on the prices and income of producers. In contract, the Fair Trade premiums were only earned on a fraction of the producers’ output due to the limited world demand of Fair Trade buyers, and thus the average amount of premium per producer is fairly small. Unfortunately, many other attempted empirical findings from the study were said to come inconclusive, which has become standard due to the inconsistency of studies trying to quantify the negative and positive effects internally and externally of Fair Trade policies and the growth of cooperatives (Dammert and Mohan, 24-25).
Fair Trade has been on the rise over the past couple of decades. In 2006, consumers spent $2.2 billion on Fair Trade certified products, which was a 42% increase over the previous year, ultimately benefitting over seven million producers in developing countries. 3.3% of all coffee sold was Fair Trade certified in 2006 which was eight times the amount sold in 2001 (Downie). Mexico examined its own use of Fair Trade policies and determined the main obstacles to the economic reform are its lack of power in the current world market, its lack of participation from small farmers, unawareness by consumers, and a necessity for more government aid. Regardless, Mexican farmers have expressed optimism in regards to the implementation of Fair Trade throughout the country, which has already developed largely in its market for coffee (Godoy).
Fair Trade is definitely an innovative way to challenge some of the labor issues that plague the current neoliberal practices in agricultural markets. The word of certified Fair Trade companies and foods has spread all over the world, and it has become part of a growing discussion in development and labor economics. If there were enough room in this blog post, I would’ve described a real life example of how Fair Trade has been implemented in the coffee industry for decades and how it compared to similar markets that participated in Free Trade. Thank you for taking a look at the impact of globalization on developing economics with me over the last few weeks.
Dammert, Ana C., and Sarah Mohan. “A Survey Of The Economics Of Fair Trade.” Journal of Economic Surveys 29.5 (2014): 855-68. Web.
Downie, Andrew. “Fair Trade in Bloom.” NY Times. 2 Oct. 2007. Web.
Dragusanu, Raluca, Daniele Giovannucci, and Nathan Nunn. “The Economics of Fair Trade.” Journal of Economic Perspectives 28.3 (2014): 217-36. Web.
Godoy, Emilio. “Fair Trade Will Become Major Trend, Say Mexico Growers.” Banderas News. Inter Press Service, 12 Oct. 2009. Web.