Introduction
A major characteristic of the 21st has been the expansion in global trade. This trade has been catalyzed by the advances in communication and transportation technologies that have led to an exponential increase in the interactions between countries and people in a process known as globalization.
International trade has had positive results on participating nations and efforts have been made to liberalize trade for the benefit of all. Free trade has been promoted as a means of stimulating economic growth and increasing the wealth of a nation. Because of conventional trade practices that are structured under a free trade system, a lot of wealth has been created. However, in spite of the advances made in global trade, extreme poverty remains rampant in the developing world.
The World Bank (2012) reports that 22% of the world population (1.3 billion people) is still living in extreme poverty. The failure of the conventional trade system has forced people to reconsider the assumption that free trade is the best way to create wealth and benefit all of humanity.
Other systems have been proposed to try to remedy the failures of free trade. Fair trade is an alternative model that purports to overcome the failure of conventional trade and foster economic development the Third World. Fair trade is a new way of doing business that emphasizes on empowering small-scale producers in the international market.
Differences in opinion exist between free trade and fair trade advocates. Free trade proponents argue that free trade is the key to universal economic development and an end of poverty (Sidwell, 2008). They envision a world that is united into one hemisphere-wide free trade area with everyone enjoying the benefits of free trade.
Opponents of free trade view such a reality as damaging to the interests of people and groups who cannot compete with the major corporations that will stand to gain the most from free trade. Fair trade advocates argue that while globalization and international trade are not harmful in themselves, the manner in which they are implemented makes them harmful.
This paper will set out to argue that fair trade can be a practical alternative to free trade. To reinforce this claim, the paper will demonstrate the ways in which fair trade can help overcome the numerous economic damages attributed to free trade and result in a sustainable and universally beneficial economic system.
International Trade: An overview
The last century has been characterized by an increase in international trade. This increase in international trade has led to more specialization by countries and economies of scale in production as countries aim to produce greater quantity of products for trade. To reduce tensions in international trade, trade treaties have been entered into by many countries.
The first major multilateral trade treaty was the General Agreement on Tariffs and Trade (GATT) which was formed in 1948 (Kowalski, 2007). This agreement had the major objective of reducing or eliminating tariffs all together in order to promote international trade. The GATT was replaced with the World Trade Organization (WTO), which was formed in 1995.
This new international trade regulator has the primary objective of promoting international trade by administering the agreements made by member states (Kowalski, 2007). Like its predecessor the GATT, the WTO also seeks to promote free trade and prevent protectionist measures by individual countries.
Countries have held talks aimed at producing agreements that will advance free trade and its inherent benefits even further. Stencel (2008) observes that the WTO is the world leader in most of the talks held on free trade initiatives. In spite of the general move towards promoting free trade, trade organizations have still acknowledged the benefits of some form of intervention.
Jackson (2001) notes that while efforts have been aimed at expanding free trade; there has been a trend towards higher degree of intervention and regulations especially by developed economies. These regulations have been necessitated by the realization that in addition to the economic implications of International trade, there are also environmental and social implications.
While trade can be a powerful tool in elevating people out of poverty, international trade has not achieved this noble quest. Oxfam (2002) observes that while international trade has been a source of unprecedented wealth, “millions of the world’s poorest people are being left behind with increased prosperity going hand in hand with mass poverty and the widening of already obscene inequalities between rich and poor” (p.7).
Even the WTO, an organization created to promote free trade, acknowledges that a universal implementation of free trade might not be the best option in the present time. Jackson (2008) accentuates the fact that the WTO specifically refers to “fairness” and has demonstrated a paramount concern with rules and regulations in coming up with international trade arrangements.
The inclination towards fairness even by a body that seeks to break down trade barriers and foster free trade suggests that fair trade might be the sustainable and preferred form of trade.
Fair Trade and Free Trade: A definition
- Fair Trade
Fair trade emerged as a movement that offered an alternative to the conventional way of conducting international trade. Moore (2004) traces the origins of the Fair Trade movement to the post World War II years when US churches began projects to sell handicrafts made by European refugees.
These projects were a form of charity since they hoped to help the producers by purchasing their products at a higher price. There is no universally accepted definition of Fair Trade. However, the most widely used definition developed by FINE defines Fair Trade as:
A trading partnership based on dialogue, transparency and respect, and that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South. Fair trade organizations (backed by consumers) are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade. (Moore, 2004, p.74).
The Fair Trade model differs significantly from the normal supply-chain model of business in that there is monitoring and certification inbuilt in the system to guarantee that fairness and accountability is achieved. Free trade advocates assert that the openness to the international economy prompted by fair trade will catalyze economic development for all countries.
On the international level, the main certification body is the Fair Trade Labeling Organization International (FLO) and it is an association of producer organizations, traders, and labeling initiatives (FLO International, 2010).
Fair trade is a concept grounded in the belief that paying producers in the developing world a fair price will promote sustainable development and therefore accelerate economic growth in the third world (Stencel, 2008). Fair trade has therefore emerged as both a movement and a set of business initiatives that aim to improve the socioeconomic conditions of producers in the developing world while encouraging environmental sustainability.
- Free Trade
The free trade theory advances that the ideal market environment is one where goods and services can flow among nations without any government-imposed restrictions such as taxes, tariffs, or quotas. The free trade movement has therefore sought to lower trade barriers between countries and promote the movement of goods and services between countries (Sidwell, 2008).
While the free trade ideal has not been achieved, liberalization measures, which aim at reducing trade barriers, have been in action for many decades and they aim to eventually remove all trade restrictions thereby achieving free trade. Economic arguments have been the most important contributors of free trade since historical times.
The liberal concept was formulated by Adam Smith in 1776 and in it, he argued that free trade leads to international division of labor and the subsequent interdependence between countries (Sidwell, 2008). This interdependence is good since it fosters stability, prosperity, and peace for all participating nations. The liberal concept therefore calls on nations to abandon any kind of trade restriction because they will only mitigate the positive impacts that trade has on the individual country and its trading partners.
Free trade is supported since it promises to bring about economic benefits to a country by encouraging the participation of the private sector and increasing competition. Free trade activists are opposed to fair trade, which they regard as a form of protectionism because it tries to limit the free market (Glockner, 2010). Free trade advocates feel it is best to let the market work on its own since freer trade promotes economic well-being not just for a marginal group of producers but the entire global community.
- Positive Impacts of Free Trade
Free trade benefits both the customers and the producers. The customers gain since they have a bigger variety of products to choose from since products are obtained from all over the world. The prices are also lower due to the economies of scale and competition among suppliers.
The suppliers also gain from an increase in turnover and therefore make significant profits. Kowalski (2007) claims that trade barriers are responsible for the high price and limited choice that consumers have to deal with since tariffs and other barriers to trade distort the market.
Free trade results in increased efficiency and the production of higher quality goods. The theory of comparative advantage holds that a country is able to maximize its wealth by concentrating on things it does better relative to other nations and buying other products through trade (Kowalski, 2007). The free trade model therefore avoids wastages and enables consumers to enjoy the best goods and services.
Free trade leads to greater openness and greater integration with the global economy. This integration is beneficial for all countries with the WTO observing that “trade liberalization helps poor countries to catch up with rich ones and that this faster economic growth helps to alleviate poverty” (Jackson, 2001, p.25). The rate of economic development for developing countries that have opened up their markets has been phenomenally high. On the other hand, countries that have resisted opening up to trade have developed at significantly lower rates. This suggests that open trade has a positive impact on the economic well being of a country.
- Negative Impacts of Free Trade
Free trade leads to loss of jobs as some industries are rendered unprofitable due to competition from foreign players. Free trade opens up the local market to foreign competition (Kowalski, 2007). If the local industry is still in its developing stage, it might not be able to compete favorably with the mature foreign competitors.
Without some form of protection through tariffs or trade barriers, the infant industries cannot survive in the competitive international trade arena. The foreign industry will be able to provide higher quality goods at a lower price and this will drive the local industry out of business. This will increase unemployment levels in the country as industries are forced to close due to the intense competition from the international market.
Free trade exposes producers to frequent price fluctuations and small-scale producers especially in developing nations might not be able to cope with these price uncertainties. Sidwell (2008) observes that free trade is based on “free individuals voluntarily seizing market opportunities, rather than attempting to manage production and restrict the market place” (p.5).
The system is characterized by an absence of any price-fixing mechanism and the trading partners rely on the forces of supply and demand to dictate the market prices. In this system, producers are exposed to market fluctuations and they are at risk of suffering from loses if the market prices are poor.
Free trade takes place in an uneven playing field, which places the developed nations at an advantage. The primary good produced by most developing nations is agricultural products. These countries are unable to gain a good price for their exports due to government action by developed nations.
Many industrialized countries, particularly the US, offer subsidies to their domestic farmers. Swain (2009) observes that these subsidies are an effective mechanism of protecting the farmers from prevalent market realities that would make it impossible for them to make a profit.
However, the subsidies come at a high cost for developing world producers who cannot compete with the underpriced and overproduced goods from the First World. In effect, these subsidies keep food prices artificially low and make it impossible for producers from developing countries to compete with the subsidized products from farmers in the rich countries.
Khor (2000) reveals that the developed countries demand that the developing countries reduce their own trade barriers on agricultural products, which allows the cheap subsidized products from the developed world to flood the market.
For a country to experience notable gains under free trade, it has to fulfill a number of key conditions. The country has to have perfect access to markets, an ability to adjust production techniques to suit the market needs and increase or decrease production in response to market realities, and a good infrastructure.
The country should also have a well-developed human capital base and enterprise capability for new exports. Most developing countries have not yet achieved these conditions and they are therefore unable to cope effectively with the rapid trade liberalization imposed on them.
Khor (2000) affirms that in the context of agricultural production, conditions such as adjusting outputs in response to market information are simply unachievable. In addition to his, most developing countries are unable to determine how fast their exports grow since they lack the necessary infrastructure to facilitate increase in trade.
Free trade promotes the exploitative practices that huge corporations engage in as they try to reduce the cost of production. Multinational companies such as Nike have engaged in the outsourcing of production to developing nations (Wladimir, 2009). This helps the companies to benefit from the wage differences and therefore cut production costs and gain greater profits.
Free trade is not concerned with the conditions under which production takes place. While most developed countries have stringent safety standards, majority of the developing countries have low safety standards and there is little concern for the welfare of the workers. Free trade encourages the exploitation of the poor who provide the labor, sometimes in unsafe environments, for international businesses in return for minimum wages.
Multinational Companies (MNCs) such as Nike have been accused of ignoring the poor human conditions under which their subcontractors produce their goods. The subcontractors who are in countries that have poor human rights records pay their workers pitiful wages and offer harsh working conditions. MNCs are not take advantage of the fact that they are not legally accountable for the actions of their foreign subsidiaries since the subcontractor is an independent legal entity (Wladimir, 2009).
The preoccupation with increased production and reduced production cost has led to the environmental impacts of business being ignored (Jackson, 2001).
Economic growth normally takes precedence over economic considerations as can be construed from the failure by some countries to take part in the 1997 Kyoto Protocol out of economic considerations. The USA, China, and India refused to participate in the agreement that promised to have a positive impact on the environment since the binding measures proposed would come at an economic cost.
Fair Trade as an alternative to Free Trade
Clearly, conventional international trade practices, which are aimed at promoting free trade, are not adequate in promoting sustainable economic development especially for the developing nations. The neoliberal concept of free trade has proved to be incomplete in addressing the unique conditions faced mostly by producers in developing nations (Glockner, 2010).
Free trade is devoid of social and cultural considerations and the focus on liberalization and deregulation fails to address development issues in the third world countries. The fair trade movement seeks to counter the harmful impacts that free trade has on the poor nations.
For the numerous benefits offered by free trade to be enjoyed universally, all participating countries need to be equipped properly to participate and enjoy the same benefits.
At the present, developing countries are disadvantaged since most of them depend on the export of raw materials whose prices have been systematically decreasing while the prices of imported capital increase. Practicing free trade is therefore not beneficial for all and only fair trade can ensure equality among all participating nations. Fair trade proponents propose that developing countries should be treated differently in the international trade setting.
- Merits of Fair Trade
The Fair Trade Movement guarantees that producers are able to earn a decent living by dictating that produce purchases must pay laborers a price “sufficient to make a living” in order to quality as Fair Trade certified.
A study by Ronchi (2002) on the impacts of fair trade on Costa Rican coffee farmers showed that the farmers who were involved in fair trade had incomes that were on average 39% higher than their peers in the free trade system. This group of fair trade participants exhibited a higher improvement in their lives with 33% being able to keep their children in school longer and repay all their long-standing debts.
Fair trade practices respect the cultural diversity of the various participants in trade and producers and buyers consider themselves as equal commercial partners and treat each other with mutual respect.
This is significantly different from the free trade principles where the producers and the buyers are unequal commercial partners with the buyers having a higher bargaining power that enables them to dictate the prices that are mostly unfavorable to the producers (Glockner, 2010). Big businesses are able to impose unfair trade terms on small farmers who have to agree since they lack alternatives or any real bargaining power on the issues.
The principles of the free market involve the buyer seeking the lowest price with little regard for the long-term human relationships with the producer. Ehrlich (2010) observes that in the free market, the buyers do not consider the harmful effect that low prices may have on the developing nation producers.
Fair trade principles contradict this free market approach by taking into consideration the long-term human relationship between the buyer and the producer. The buyer seeks to buy at a price that will ensure that producers are able to make a decent living.
Fair trade overcomes the limitations of fluctuating prices by using a price-fixing arrangement. Jackson (2001) asserts that the stable income guaranteed by the fixed price paid to producers through fair trade is the most important benefit accrued by producers through the system. This arrangement greatly benefits the producers in a number of significant ways. To begin with, the set price is always fair since it takes into consideration the needs of the producers thereby ensuring that they are able to make a profit and enjoy a decent standard of living from their products. Small farmers greatly benefit from the insurance against price fluctuation and they are able to better plan their operations due to the assurance of consistent sales.
While free trade proponents frown upon protectionist measures, such measures are a necessary to shield developing nations from unfair competition from developed nations. Developed nations already have an economic head start and they enjoy the best production facilities and technology.
Pitting such economies against the poor developing countries in a free trade market is unfair since the two parties are unevenly matched. Some mechanism for giving the developing world an advantage in international trade is therefore necessary. Fair trade proponents “seek special protectionist measures for the poor” (Sidwell, 2008, p.5). Fair trade fosters development by providing a safe environment in which disadvantaged producers can join the global market.
This development is promoted by providing an avenue though which producers in developing nations can get higher payments for their products. Fair Trade recognizes that there is a great disparity between the capability of producers in developed nations and developing nations. The movement therefore seeks to enable the developing country producers to become sustainable businesses both in the local and international marketplaces.
Fair trade encourages sustainable development in developing countries therefore making reducing or doing away with the need for aid by these countries from the developed world. It does this by acknowledging that existing world trade practices that are rooted in free trade principles are harmful to the developing world.
Fair trade therefore seeks to promote a just distribution of wealth among nations. Sidwell (2008) notes that most consumers in the developed world view fair trade as “the purest form of aid” and deem it more effective than giving to charity. Fair trade is a potent development tool through its underlying “trade-not-aid” philosophy. It acts as a poverty reduction initiative by providing the means through which developing nations can participate in the global market under conditions that are favorable to them.
Fair trade initiatives remove the middlemen who end up taking majority of the profits gained by farmers. In a free market environment, famers in the developing world are mostly made up of individuals who are uneducated and unaware of the market conditions.
The farmers have to rely on the middlemen who know their way around the market and can therefore get the produce to the international market (Moore, 2004). The middlemen buy the goods from the farmers at very low prices and end up keeping most of the profits. Fair trade removes the middlemen from the business cycle and the farmers are therefore able to keep most of their profits.
Fair trade results in safer working conditions for workers in the producing nations. Since producers are the primary stakeholders in the Fair Trade business relationship, they are expected to fulfill some conditions by the buyers. Moore (2004) states that producers are expected to make positive steps towards providing safe and healthy work conditions and other social benefits to their workers.
Producers have to demonstrate a commitment to worker safety and social benefits in order to be included in the Fair Trade program. Gross violation of worker safety may be grounds for being omitted from Fair Trade market.
Since producers want to benefit from the financial gains and security that are inherent in fair trade, they provide the most favorable working conditions for their workers. Fair trade also ensures that exploitative practices such as child labor are not utilized during production. The constant monitoring of producers ensures that they adhere to the set labor standards and avoid any exploitative practices.
For participants to benefit in free trade, they have to have credit access and adequate capital investments. Most small-scale producers in third world countries lack access to financial facilities. They are therefore unable to venture into the international market and enjoy the benefits of free trade.
Fair trade tries to remedy this by providing access to pre-financing and credit for the producers (Stencel, 2008). Through their cooperatives, farmers are granted finances that they can use to buy the necessary farm inputs and therefore produce the trade commodities.
Producers are able to enjoy lower interest rates on the credit they obtain through fair trade. According to FLO International (2010), buyers are required to offer producers pre-financing at attractive interest rates. This move by the fair trade movement has led government agencies and conventional banks to start offering cooperatives and producers access to credit at competitive rates.
Fair trade induces local capacity building by strengthening the local producers’ capacities. Ronchi (2002) observes hat fair trade encourages institutional capacity building and farmers are encouraged to sell their products through cooperatives. These institutes encourage the improvement of product quality by individual farmers and the producers are also taught about new marketing strategies that can be employed to increase sales.
The producer organizations set up workshops and seminars to teach farmers about new cultivation methods and effective marketing strategies. Considering the fact that most farmers have little education and do not know much about international trade, the lessons provided on the export process are some of the most valuable benefits of fair trade (Ronchi, 2002).
Free trade results in producers being thrust into an aggressive market for which they are not well prepared. Fair trade tackles this issue by introducing producers to the international market in a sheltered environment.
Producers are able to deal directly with buyers in an environment of trust and mutual respect. Ronchi (2002) states that the direct experience with buyers and mutual trust and respect environment increase the confidence of producers who then feel better empowered to deal professionally in a conventional market system.
Fair trade takes positive action to deal with the harmful environmental impacts that free trade encourages. Producers in the Fair Trade market are encouraged to conduct their production in such a way that they mitigate environmental damage. Before being accepted into the fair trade network, the producers have to comply with a number of requirements that emphasize on sustainable development and environmental development.
The standards for example state that producers must undertake their operations in such a way that they “establish a balance between environmental protection and business results through the use of a combination of measures such as crop rotation, cultivation techniques, crop selection, careful use of inputs such as fertilizers and pesticides and, as relevant, shade production” (FLO, 2010, p.15).
Registered producers are also expected to reduce their use of synthetic fertilizers and pesticides and in as much as possible, try to use non-synthetic fertilizers and biological means of disease control. Periodic FLO inspections occur to ascertain that small producers have complied with the requirements and if not, they are rejected from participating in the fair trade network.
Case Studies
- Oxfam
Fair trade has gained the support of a number of reputable international organizations including Oxfam. Oxfam is “an international confederation of 17 organizations networked together in more than 90 countries, as part of a global movement for change, to build a future free from the injustice of poverty” (Oxfam Australia, 2012).
The organization aims to increase development in the world by ending poverty and injustices. According to Oxfam, the current application of free trade contributes to the poverty experienced by low-income developing countries.
Oxfam (2002) reveals that developing countries seeking to improve their economic situation by exporting to developed nations face disproportionate tariff barriers compared to those encountered by developed countries that export to the developing countries. Practices such as farm subsidize in the Developed nations lead to trade distorting in the international trade arena with farm products being at an artificial low price.
Oxfam sees fair trade as a more beneficial system for small producers in the developing world. The organization therefore promotes Fair Trade products in the developed world and it encourages consumers to buy these products and make a difference in the lives of the producers in developing countries. Through its commitment and campaigning efforts, fair trade products have gained greater visibility and achieved higher sales.
- Corporate Involvement
Fair trade principles have become prevalent and major corporations are today taking part in the fair trade market. The multinational corporation Starbucks is engaged in the marketing fairly traded coffee through its various outlets all over the world.
This development has been prompted by an increase in consumer demand for coffee produced under socially and environmentally friendly conditions and the increased advocacy of established Fair Trade organizations. Involvement of companies such as Starbucks in the fair trade movement has expanded the market for fair trade products and therefore benefited the producers in the developing world.
Criticism to Fair Trade
In spite of the numerous benefits attributed to fair trade, the movement faces some criticism due to its philosophy and market practices. Fair trade does not encourage diversification of products by third world producers. As it currently stands, fair trade focuses on a small spectrum of products such as coffee, bananas, and cotton.
Glockner (2010) suggests that this focus makes farmers in developing nations specialize more on specific products thereby increasing their dependence on the foreign market. This is not sustainable since the demand for the products that the farmers over-specialize in cannot be guaranteed in a free market economy.
This claim is corroborated by Lindsey (2002) who notes that increased specialization led to an oversupply of coffee on the fair trade market and this decreased the international price of coffee therefore hurting all coffee producers.
Economists argue that the fair trade movement is doomed to fail since it ignores the free market realities through its interventional schemes to lift prices (Lindsey, 2004). This makes it possible for inefficient producers to remain in the market since fair trade guarantees them some profit despite their poor production methods. A free market would force such producers to improve their efficiency and the quality of their products or else risk being forced out of the market.
Future of Fair Trade
Fair trade has gained significant popularity in today’s market and fair trade products are among the fastest growing segment of the food market. Even so, fair trade still accounts for a modest 1% of the global market. This is a very small market share and if the advantages attributed to fair trade are to be felt by more producers, the figure needs to increase dramatically. Due to the limited scope of fair trade, comparably fewer producers have been able to prosper from the movement and majority of the producers have been left out.
Ehrlich (2010) notes that the inefficiency of the fair trade value chain is to blame for the small volumes of products traded through fair trade. These inefficiencies in processing, trading, and marketing lead to higher mark-up prices for the consumer. The growth of the market is therefore limited since there is limited demand for these non-competitive fair trade brands with a high price.
Poncelet et al (2004) advices that fair trade should focus on the creation of high-quality products in order to foster growth of the market and therefore increase the volumes that can be sold. The authors also suggest that fair trade production should implement policies that encourage diversification. This diversification will promote economic growth and sustainability since the producers will not be solely reliant on a few key products for trade.
As fair trade has become more recognized, its products are today distributed and marketed through mainstream channels such as supermarkets and supply chains. Proponents of fair trade express their fear that the fair trade label may be used as an additional marketing tool by corporations that do not ascribe to the fair trade philosophy. Low and Eileen (2005) state that this fear is not unfounded since fair trade products placed alongside their non-fair trade alternatives on supermarket stands have experienced a 30% increase in sales. Corporations might therefore set out to exploit this market appeal of fair trade products. Involvement of corporations in the fair trade movement is a positive development since it increases the volume of sales for fair trade products. The movement should therefore increase its monitoring process to ensure that the big corporations live up to the philosophy behind the movement and foster the development of developing country producers.
Discussion
While fair trade is critical of free trade, they both support globalization and an increase in international trade. The significant difference is that fair trade incorporates a broad range of social justice issues as opposed to free trade, which is primarily concerned with trade liberalization.
Efforts by the fair trade movement over the past two decade have been aimed at including social justice issues. As a movement whose primary goal is to fight the negative effect of Free Trade, Fair Trade has succeeded and remains to be the most “practical and campaigning response to the perceived and observed injustices of the capitalist system” (Moore, 2004, p.79). The movement has improved the livelihood of thousands of producers in the developing world and fostered socio-economic development.
The Fair Trade movement is gaining popularity with consumers in the First World countries becoming increasingly aware of this concept of fair trade. Fair Trade organizations have demonstrated that offering producers in developing countries fair prices for their goods can help offset the inequalities that a free trade system creates. The success of the fair trade system has demonstrated that consumers are willing to pay a premium for products that have a benefit to the environmental and producers in developing countries.
Conclusion
This paper has argued that fair trade can serve as an alternative to free trade. It began by offering a brief overview of international trade and its importance to the world. While trade has led to the creation of wealth for nations, producers in the third world still experience widespread poverty.
This reality has forced people to reconsider the assumption that free trade is the best way to create wealth and benefit all of humanity. The paper has revealed that fair trade is the only way through which developing countries can counter the massive non-tariff barriers that Northern countries impose on them and therefore enjoy gains in international trade.
Fair trade guarantees a fair price for the producers therefore securing the rights of these exporters who are harmed by the free trade model. Fair trade is rapidly gaining popularity and many organizations and consumers are using it as an alternative to free trade. The principles and key philosophies of fair trade are necessary for producers in developing countries to improve their livelihoods and experience sustainable growth.
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