In the U.S., any law allowing manufacturers of brand-name or trademarked goods to fix the actual or minimum resale prices of these goods. (Elsewhere the practice is called price maintenance.) Fair trade laws were passed by many states during the Great Depression in an effort to protect independent retailers from price-cutting by large chain stores and consequent loss of employment in distributive trades, but most were later repealed at the state level. Critics argued that such laws restricted competition; the complexity of post-World War II marketing channels also made enforcement impracticable. In 1975 the few that remained in existence were repealed by an act of Congress.

Learn more about fair trade law with a free trial on Britannica.com.

Fair trade is an organized social movement and market-based approach to empowering developing country producers and promoting sustainability. The movement advocates the payment of a fair price as well as social and environmental standards in areas related to the production of a wide variety of goods. It focuses in particular on exports from developing countries to developed countries, most notably handicrafts, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit and flowers.

Fair trade's strategic intent is to deliberately work with marginalized producers and workers in order to help them move from a position of vulnerability to one of security and economic self-sufficiency. It also aims at empowering them to become stakeholders in their own organizations and actively play a wider role in the global arena to achieve greater equity in international trade. Fair trade proponents include a wide array of international religious, development aid, social and environmental organizations such as Oxfam, Amnesty International, Catholic Relief Services, and Caritas International.

In 2007, Fair trade certified sales amounted to approximately €2.3 billion (US $3.62 billion) worldwide, a 47% year-to-year increase. While this represents a tiny fraction of world trade in physical merchandise, fair trade products generally account for 1-20% of all sales in their product categories in Europe and North America. In June 2008, it was estimated that over 7.5 million disadvantaged producers and their families were benefiting from fair trade funded infrastructure, technical assistance and community development projects.

Definition of fair trade

The currently accepted definition of Fair Trade has been agreed by FINE, an informal association of four international fair trade networks (Fairtrade Labelling Organizations International, International Fair Trade Association, Network of European Worldshops and European Fair Trade Association):

Key fair trade principles

The principles of Fair Trade are based on the practical and shared experience of Fair Trade organisations over many years and reflect the diversity of Fair Trade relationships. The most important of these are unique to Fair Trade and are integral to its developmental objectives. These include:

• Market Access for Marginalised Producers-

Many producers are excluded from mainstream and added-value markets, or only access them via lengthy and inefficient trading chains. Fair trade helps producers realise the social benefits to their communities of traditional forms of production. By promoting these values (that are not generally recognised in conventional markets) it enables buyers to trade with producers who would otherwise be excluded from these markets. It also helps shorten trade chains so that producers receive more from the final selling price of their goods than is the norm in conventional trade via multiple intermediaries.

• Sustainable and Equitable Trading Relationships-

The economic basis of transactions within Fair Trade relationships takes account of all costs of production, both direct and indirect, including the safeguarding of natural resources and meeting future investment needs. Trading terms offered by Fair Trade buyers enable producers and workers to maintain a sustainable livelihood; that is one that not only meets day-to-day needs for economic, social and environmental wellbeing but that also enables improved conditions in the future. Prices and payment terms (including prepayment where required) are determined by assessment of these factors rather than just reference to current market conditions. There is a commitment to a long-term trading partnership that enables both sides to co-operate through information sharing and planning, and the importance of these factors in ensuring decent working conditions is recognised.

• Capacity Building & Empowerment-

Fair Trade relationships assist producer organisations to understand more about market conditions and trends and to develop knowledge, skills and resources to exert more control and influence over their lives.

• Consumer Awareness Raising & Advocacy-

Fair Trade relationships provide the basis for connecting producers with consumers and for informing consumers of the need for social justice and the opportunities for change. Consumer support enables Fair Trade Organisations to be advocates and campaigners for wider reform of international trading rules, to achieve the ultimate goal of a just and equitable global trading system.

Approaches to Fair Trade

All Fair Trade products originate from producers and workers committed to Fair Trade principles. However, in the subsequent supply chain, Fair Trade products are traded and marketed through two distinct but complementary channels:

• The "integrated supply chain" route whereby products are also imported and/or distributed by organisations who have Fair Trade at the core of their mission and activities (commonly referred to as alternative trading organizations), using it as a development tool to support disadvantaged producers and to reduce poverty, and combine their marketing with awareness-raising and campaigning.
• The "product certification" route whereby products complying with international standards are certified indicating that they have been produced, traded, processed and packaged in accordance with the specific requirements of the international standards.

General structure of the movement

Most fair trade import organizations are members or certified by one or several national or international federations. These federations coordinate, promote, and facilitate the work of fair trade organizations. The following are the largest and most influential:

• The Fairtrade Labelling Organizations International (FLO), created in 1997, is an association of three producer networks and twenty national labeling initiatives that promote and market the Fair trade Certification Mark in their countries. The FLO labeling system is the largest and most widely recognized standard setting and certification body for labeled Fair trade. It regularly inspects and certifies producer organizations in more than 50 countries in Africa, Asia, and Latin America.
• The International Fair Trade Association (IFTA) is a global association created in 1989 of Fair trade producer cooperatives and associations, export marketing companies, importers, retailers, national, and regional fair trade networks and fair trade support organizations. In 2004 IFAT launched the FTO Mark which identifies registered Fair Trade Organizations (as opposed to the FLO system, which labels products).
• The Network of European Worldshops (NEWS), created in 1994, is the umbrella network of 15 national Worldshop associations in 13 different countries all over Europe.
• The European Fair Trade Association (EFTA), created in 1990, is a network of European alternative trading organizations which import products from some 400 economically disadvantaged producer groups in Africa, Asia, and Latin America. EFTA's goal is to promote fair trade and to make fair trade importing more efficient and effective. The organization also publishes yearly various publications on the evolution of the fair trade market. EFTA currently has eleven members in nine different countries.

In 1998, these four federations created together FINE, an informal association whose goal is to harmonize fair trade standards and guidelines, increase the quality and efficiency of fair trade monitoring systems, and advocate fair trade politically.

• The Fair Trade Federation (FTF), created in 1994, is an association of Canadian and American fair trade wholesalers, importers, and retailers. The organization links its members to fair trade producer groups while acting as a clearinghouse for information on fair trade and providing resources and networking opportunities to its members.
• The Fair Trade Action Network, created in 2007, is an international fair trade volunteer web-based network. The association links volunteers from a dozen of European and North American countries, actively supports Fairtrade Town initiatives and encourages grassroots networking at the international level.

Student groups have also been increasingly active in the past years promoting fair trade products both on their campuses and their communities. Although hundreds of independent student organizations are active worldwide, most groups in North America are either affiliated with United Students for Fair Trade (USA) or the Canadian Student Fair Trade Network (Canada).

History

The first attempts to commercialize fair trade goods in Northern markets were initiated in the 1940s and 1950s by religious groups and various politically oriented non-governmental organizations (NGOs). Ten Thousand Villages, an NGO within the Mennonite Central Committee (MCC) and SERRV International were the first, in 1946 and 1949 respectively, to develop fair trade supply chains in developing countries. The products, almost exclusively handicrafts ranging from jute goods to cross-stitch work, were mostly sold in churches or fairs. The goods themselves had often no other function than to indicate that a donation had been made.

Solidarity trade

The current fair trade movement was shaped in Europe in the 1960s. Fair trade during that period was often seen as a political gesture against neo-imperialism: radical student movements began targeting multinational corporations and concerns that traditional business models were fundamentally flawed started to emerge. The slogan at the time, “Trade not Aid”, gained international recognition in 1968 when it was adopted by the UNCTAD (United Nations Conference on Trade and Development) to put the emphasis on the establishment of fair trade relations with the developing world.

The year 1965 saw the creation of the first Alternative Trading Organization (ATO): that year, British NGO Oxfam launched "Helping-by-Selling", a program which sold imported handicrafts in Oxfam stores in the UK and from mail-order catalogues.

In 1969, the first Worldshop opened its doors in the Netherlands. The initiative aimed at bringing the principles of fair trade to the retail sector by selling almost exclusively goods produced under fair trade terms in “underdeveloped regions”. The first shop was run by volunteers and was so successful that dozens of similar shops soon went into business in the Benelux countries, Germany, and in other Western European countries.

Throughout the 1960s and 1970s, important segments of the fair trade movement worked to find markets for products from countries that were excluded from the mainstream trading channels for political reasons. Thousands of volunteers sold coffee from Angola and Nicaragua in Worldshops, in the back of churches, from their homes, and from stands in public places, using the products as a vehicle to deliver their message: give disadvantaged producers in developing countries a fair chance on the world’s market, and support their self-determined sustainable development. The alternative trade movement blossomed, if not in sales, then at least in terms of dozens of ATOs being established on both sides of the Atlantic, of scores of Worldshops being set up, and of well-organized actions and campaigns attacking exploitation and foreign domination, and promoting the ideals of Nelson Mandela, Julius Nyerere, and the Nicaraguan Sandinistas: the right to independence and self-determination, to equitable access to the world’s markets and consumers.

Handicrafts vs. agricultural goods

In the early 1980s, Alternative Trading Organizations faced a major challenge: the novelty of some fair trade products started wearing off, demand reached a plateau, and some handicrafts began to look “tired and old fashioned” in the marketplace. The decline of segments of the handicrafts market forced fair trade supporters to rethink their business model and their goals. Moreover, fair trade supporters during this period became increasingly worried by the impact of the fall of agricultural commodity prices on poor producers. Many then believed it was the movement's responsibility to address the issue and to find innovative remedies to react to the ongoing crisis in the industry.

In the subsequent years, fair trade agricultural commodities played an important role in the growth of many ATOs: successful on the market, they offered a much-needed, renewable source of income for producers and provided Alternative Trading Organizations a perfect complement to the handicrafts market. The first fair trade agricultural products were tea and coffee, quickly followed by dried fruits, cocoa, sugar, fruit juices, rice, spices, and nuts. While in 1992, a sales value ratio of 80% handcrafts to 20% agricultural goods was the norm, in 2002 handcrafts amounted to 25.4% of fair trade sales while commodity food lines were up at 69.4%.

Rise of labelling initiatives

Sales of fair trade products only really took off with the arrival of the first Fairtrade certification initiatives. Although buoyed by ever growing sales, fair trade had been generally contained to relatively small Worldshops scattered across Europe and to a lesser extent, North America. Some felt that these shops were too disconnected from the rhythm and the lifestyle of contemporary developed societies. The inconvenience of going to them to buy only a product or two was too high even for the most dedicated customers. The only way to increase sale opportunities was to start offering fair trade products where consumers normally shop, in large distribution channels. The problem was to find a way to expand distribution without compromising consumer trust in fair trade products and in their origins.

A solution was found in 1988, when the first Fairtrade certification initiative, Max Havelaar, was created in the Netherlands under the initiative of Nico Roozen, Frans Van Der Hoff, and Dutch development NGO Solidaridad. The independent certification allowed the goods to be sold outside the Worldshops and into the mainstream, reaching a larger consumer segment and boosting fair trade sales significantly. The labeling initiative also allowed customers and distributors alike to track the origin of the goods to confirm that the products were really benefiting the producers at the end of the supply chain.

The concept caught on: in the ensuing years, similar non-profit Fairtrade labelling organizations were set up in other European countries and North America. In 1997, a process of convergence among labelling organizations – or “LIs” (for “Labelling Initiatives”) – led to the creation of Fairtrade Labelling Organizations International (FLO). FLO is an umbrella organization whose mission is to set the Fairtrade standards, support, inspect and certify disadvantaged producers, and harmonize the Fairtrade message across the movement.

In 2002, FLO launched for the first time an International Fairtrade Certification Mark. The goals of the launch were to improve the visibility of the Mark on supermarket shelves, facilitate cross border trade, and simplify procedures for both producers and importers. At present, the certification mark is used in over 50 countries and on dozens of different products, based on FLO’s certification for coffee, tea, rice, bananas, mangoes, cocoa, cotton, sugar, honey, fruit juices, nuts, fresh fruit, quinoa, herbs and spices, wine, footballs, etc.

Fair trade today

Global fair trade sales have soared over the past decade. The increase has been particularly spectacular among Fairtrade labelled goods: in 2007, these sales amounted to approximately €2.3 billion (US $3.62 billion) worldwide, a 47% year-to-year increase. As per December 2007, 632 producer organizations in 58 developing countries were FLO-CERT Fairtrade certified.

Fair trade product certification

Note: Customary spelling of Fairtrade is one word when referring to the FLO product labeling system

Fairtrade labelling (usually simply Fairtrade or Fair Trade Certified in the US) is a certification system designed to allow consumers to identify goods which meet agreed standards. Overseen by a standard-setting body (FLO International) and a certification body (FLO-CERT), the system involves independent auditing of producers and traders to ensure the agreed standards are met.

For a product to carry either the International Fairtrade Certification Mark or the Fair Trade Certified Mark, it must come from FLO-CERT inspected and certified producer organizations. The crops must be grown and harvested in accordance with the international Fairtrade standards set by FLO International. The supply chain must also have been monitored by FLO-CERT, to ensure the integrity of labelled products.

Fairtrade certification guarantees not only fair prices, but also the principles of ethical purchasing. These principles include adherence to ILO agreements such as those banning child and slave labour, guaranteeing a safe workplace and the right to unionise, adherence to the United Nations charter of human rights, a fair price that covers the cost of production and facilitates social development, and protection and conservation of the environment. The Fairtrade certification system also promotes long-term business relationships between buyers and sellers, crop prefinancing, and greater transparency throughout the supply chain and more.

The Fairtrade certification system covers a growing range of products, including bananas, honey, coffee, oranges, cocoa, cotton, dried and fresh fruits and vegetables, juices, nuts and oil seeds, quinoa, rice, spices, sugar, tea, and wine. Companies offering products that meet the Fairtrade standards may apply for licences to use one of the Fairtrade Certification Marks for those products.

The International Fairtrade Certification Mark was launched in 2002 by FLO, and replaced twelve Marks used by various Fairtrade labelling initiatives. The new Certification Mark is currently used worldwide (with the exception of Canada and the United States). The Fair Trade Certified Mark, used in Canada and in the United States, also still identifies Fairtrade goods in both countries. Full transition to the new Mark should become reality in the future as it gradually replaces the old Certification Marks in both countries.

IFAT Fair Trade Organization membership

In an effort to complement the Fairtrade product certification system and allow most notably handcraft producers to also sell their products outside worldshops, the International Fair Trade Association (IFAT) launched in 2004 a new Mark to identify fair trade organizations (as opposed to products in the case of FLO International and Fairtrade). Called the FTO Mark, it allows consumers to recognize registered Fair Trade Organizations worldwide and guarantees that standards are being implemented regarding working conditions, wages, child labour, and the environment. The FTO Mark gave for the first time all Fair Trade Organizations (including handcrafts producers) definable recognition amongst consumers, existing and new business partners, governments, and donors.

Fair trade impact studies

Several independent studies have recently measured the impact of fair trade on disadvantaged farmers and workers. The following studies are described and discussed on the Fair trade impact studies page.

• Brewing Justice: Fair Trade Coffee, Sustainability and Survival
• The Impact of Fair Trade on Producers and their Organizations: A Case Study with Coocafe in Costa Rica
• One Cup at a time: Poverty Alleviation and Fair Trade coffee in Latin America
• Étude d'impact du commerce équitable sur les organisations et familles paysannes et leurs territoires dans la filière café des Yungas de Bolivie
• Confronting the Coffee Crisis: Can Fair Trade, Organic, and Specialty Coffees Reduce Small-Scale Farmer Vulnerability in Northern Nicaragua?
• Fair Trade on marginalised producers: an impact analysis on Kenyan farmers
• Assessing the Potential of Fair Trade for Poverty Reduction and Conflict Prevention: A Case Study of Bolivian Coffee Producers

Fair trade and politics

European Union

As early as 1994, the European Commission prepared the “Memo on alternative trade” in which it declared its support for strengthening Fair Trade in the South and North and its intention to establish an EC Working Group on Fair Trade. Furthermore, the same year, the European Parliament adopted the “Resolution on promoting fairness and solidarity in North South trade” (OJ C 44, 14.2.1994), a resolution voicing its support for fair trade.

In 1996, the Economic and Social Committee adopted an “Opinion on the European “Fair Trade” marking movement”. A year later, in 1997, the document was followed by a resolution adopted by the European Parliament, calling on the Commission to support Fair Trade banana operators. The same year, the European Commission published a survey on “Attitudes of EU consumers to Fair Trade bananas”, concluding that Fair Trade bananas would be commercially viable in several EU Member States.

In 1998, the European Parliament adopted the “Resolution on Fair Trade” (OJ C 226/73, 20.07.1998), which was followed by the Commission in 1999 that adopted the “Communication from the Commission to the Council on “Fair Trade” COM(1999) 619 final, 29.11.1999.

In 2000, public institutions in Europe started purchasing Fairtrade Certified coffee and tea. Furthermore, that year, the Cotonou Agreement made specific reference to the promotion of Fair Trade in article 23 g) and in the Compendium. The European Parliament and Council Directive 2000/36/EC also suggested promoting Fair Trade.

In 2001 and 2002, several other EU papers explicitly mentioned fair trade, most notably the 2001 Green Paper on Corporate Social Responsibility and the 2002 Communication on Trade and Development.

In 2004, the European Union adopted the “Agricultural Commodity Chains, Dependence and Poverty – A proposal for an EU Action Plan”, with a specific reference to the Fair Trade movement which has “been setting the trend for a more socio-economically responsible trade.” (COM(2004)0089).

In 2005, in the European Commission communication “Policy Coherence for Development – Accelerating progress towards attaining the Millennium Development Goals”, (COM(2005) 134 final, 12.04.2005), Fair Trade is mentioned as “a tool for poverty reduction and sustainable development”.

And finally, on July 6, 2006, the European Parliament unanimously adopted a resolution on Fair Trade, recognizing the benefits achieved by the Fair Trade movement, suggesting the development of an EU-wide policy on Fair Trade, defining criteria that need to be fulfilled under Fair Trade to protect it from abuse and calling for greater support to Fair Trade (EP resolution “Fair Trade and development”, 6 July 2006). "This resolution responds to the impressive growth of Fair Trade, showing the increasing interest of European consumers in responsible purchasing," said Green MEP Frithjof Schmidt during the plenary debate. Peter Mandelson, EU Commissioner for External Trade, responded that the resolution will be well-received at the Commission. "Fair Trade makes the consumers think and therefore it is even more valuable. We need to develop a coherent policy framework and this resolution will help us.

Belgium

Belgian lawmakers discussed as early as 2006 a possible legislation on fair trade. In January 2008, lawmakers proposed possible definitions and three proposals were debated. A consensus on a common definition, however, has not yet been reached.

France

In 2005, French parliament member Antoine Herth issued the report “40 proposals to sustain the development of Fair Trade”. The report was followed the same year by a law, proposing to establish a Commission to recognize Fair Trade Organisations (article 60 of law no. 2005-882, Small and Medium Enterprises, 2 August 2005).

In parallel to the legislative developments, also in 2006, the French chapter of ISO (AFNOR) adopted a reference document on Fair Trade after five years of discussion.

Italy

In 2006, Italian lawmakers started debating how to introduce a law on fair trade in Parliament. A consultation process involving a wide range of stakeholders was launched in early October. A common definition of fair trade was most notably developed. However, its adoption is still pending as the efforts were stalled by the 2008 Italian political crisis.

Netherlands

The Dutch province of Groningen was sued in 2007 by coffee supplier Douwe Egberts for explicitly requiring its coffee suppliers to meet fair trade criteria, most notably the payment of a minimum price and a development premium to producer cooperatives. Douwe Egberts, which sells a number of coffee brands under self-developed ethical criteria, believed the requirements were discriminatory. After several months of discussions and legal challenges, the province of Groningen prevailed in a well-publicized judgement. Coen de Ruiter, director of the Max Havelaar Foundation, called the victory a landmark event: "it provides governmental institutions the freedom in their purchasing policy to require suppliers to provide coffee that bears the fair trade criteria, so that a substantial and meaningful contribution is made in the fight against poverty through the daily cup of coffee".

United Kingdom

In 2007, both Scottish and Welsh governments were actively attempting to become the "world's first fair trade country". In Wales, the campaign to make Wales the world’s first Fair Trade country was launched in 2004 by the National Assembly for Wales. In Scotland, First Minister Jack McConnell pledged that Scotland will aim to become a "Fair Trade Nation".

In June 2007, a parliamentary committee published the report Fair Trade and Development, criticising the government for "failing to adequately support fair trade despite having said it wanted to help poor countries trade their way out of poverty". The MPs, led by Malcolm Bruce, said the Department for International Development "had not kept pace with growing support for fair trade among the public and retailers".

The committee report examined several ethical trading schemes and concluded that fair trade was "gold standard in terms of trading relations with producers". It called for greater support both domestically and internationally of fair trade organisations and recommended making a senior official responsible for fair trade within the government. The report also suggested to commission research on the feasibility of a labelling scheme which will force all retailers to show how much they paid farmers and workers in the developing world for each particular product.

Common justifications for fair trade

Implicit and often explicit in fair trade is a criticism of the current organization of international trade as being "unfair". Fair trade advocates argue in favor of the need for fair trade by mentioning the microeconomic market failures of the current system and the commodity crisis and its impact on developing country producers. According to Fair Trade umbrella organisations FLO International and IFAT: "Fair Trade is, fundamentally, a response to the failure of conventional trade to deliver sustainable livelihoods and development opportunities to people in the poorest countries of the world. Poverty and hardship limit people’s choices while market forces tend to further marginalise and exclude them. This makes them vulnerable to exploitation, whether as farmers and artisans in family-based production units or as hired workers within larger businesses.”

Free trade and market failures

All FINE members and fair trade federations support in theory the principles of unhindered free trade. However, as Alex Nicholls, social entrepreneurship professor at Oxford University, states, the "key conditions on which classical and neo-liberal trade theories are based are notably absent in rural agricultural societies in many developing countries." Perfect market information, perfect access to markets and credit, and the ability to switch production techniques and outputs in response to market information are fundamental assumptions which "are fallacious in the context of agricultural producers and workers in developing countries".

The example of coffee is particularly telling: "since it takes from three to four years for a coffee plant to produce significant quantities of coffee, and up to seven years before the plant reaches peak productivity, it is difficult for coffee farmers to react quickly to price fluctuations. As a result, coffee supply often increases even as market prices plummet. Further, this leads to a collective action problem, where each farmer has an incentive to increase production as price falls in order to reduce per unit cost and increase his or her margins. In aggregate, this activity creates a negative feedback loop and further depresses the world price."

According to Fair trade proponents, this example clearly shows how the absence of perfect microeconomic conditions can nullify or even reverse the potential gains to producers from trade. While Nicholls agrees that the win-win situation for all actors involved may be broadly correct in some markets, nevertheless, "within developing countries market conditions are not such that producers can unambiguously be declared to be better off through trade." The existence of these market failures lessens the capacity trade has to lift developing countries out of poverty.

Fair trade is seen as an attempt to address these purported market failures by providing producers a stable price for their crop, business support, access to premium Northern markets, and better general trading conditions.

The commodity crisis

Fair trade advocates also often point out that unregulated competition in global commodity markets ever since the 1970s and 1980s has encouraged a price "race to the bottom". During the 1970-2000 period, prices for many of the main agricultural exports of developing countries, such as sugar, cotton, cocoa, and coffee, fell by 30 to 60 percent. According to the European Commission, “the abandonment of international intervention policies at the end of the 1980s and the commodity market reforms of the 1990s in the developing countries left the commodity sectors, and in particular small producers, largely to themselves in their struggle with the demands of the markets”. Today, “producers… live an unpredictable existence because the prices for a wide range of commodities are very volatile and in addition follow a declining long-term trend”. The total loss for developing countries due to falling commodity prices has been estimated by the Food and Agricultural Organisation (FAO) to total almost $250 billion during the 1980-2002 period.

Millions of poor farmers are dependent on commodities and on the price they receive for their harvest. In about 50 developing countries, three or fewer primary commodity exports constitute the bulk of export revenue.

Many farmers, often without other means of subsistence, are obliged to produce more and more, no matter how low the prices are. Research has shown that those who suffer most from declines in commodity prices are the rural poor — i.e. the majority of people living in developing countries. Basic agriculture employs over 50% of the people in developing countries, and accounts for 33% of their GDP.

Fair trade supporters believe current market prices do not properly reflect the true costs associated with production; they believe only a well-managed stable minimum price system can cover environmental and social production costs.

Criticism

Fair trade's increasing popularity has drawn criticism from both ends of the political spectrum. Some economists and think tanks see "fair trade" as a type of subsidy that impedes growth. Segments of the left criticize fair trade for not adequately challenging the current trading system.

Price distortion argument

Criticism: Fair trade opponents such as the Adam Smith Institute claim that similar to other farm subsidies, fair trade attempts to set a price floor for a good that is in many cases above the market price and therefore encourages, as fair trade opponents claim, existing producers to produce more and new producers to enter the market, leading to excess supply. Through the laws of supply and demand, excess supply can lead to lower prices in the non-Fair Trade market.

In 2003, Cato Institute's vice president for research Brink Lindsey referred to fair trade as a “well intentioned, interventionist scheme...doomed to end in failure." Fair trade, according to Lindsey, is a misguided attempt to make up for market failures in which one flawed pricing structure is replaced with another. Lindsey's comments echo the main criticisms of Fair Trade, claiming that it "leads fair trade producers to increase production." While benefiting a number of Fair Trade producers over the short run, fair trade critics worry about the impact on long run development and economic growth. Economic theory suggests that when prices are low due to surplus production, adding a subsidy or otherwise artificially raising prices will only exacerbate the problem by encouraging more supply and also encouraging workers into unproductive activities.

Response: The Fairtrade Foundation counters the price distortion argument by claiming that fair trade does not ‘fix prices’. "It rather has a minimum floor price that ensures farmers can meet the costs of sustainable production should market prices fall below this level. The minimum price is not a fixed price but the starting point for a market-based price negotiation. Many fair trade growers routinely earn more than this for the quality, type of coffee bean (or other product) or the particular origin they offer. The minimum price mechanism provides the most vulnerable people in the supply chain the security to meet their basic costs in time of crisis. Effectively, it provides a safety net should markets fall below a level considered necessary for farmers to earn back the costs of sustainable production".

Moreoever, the fair trade minimum price only applies if the market price is lower than this. When market prices exceed the minimum price, traders must negotiate on the basis of market prices, not fair trade minimums.

Several academics, including Hayes, Becchetti, and Rosati also identify two other counterarguments to this criticism.

1. First, in many cases the exchange between producers and intermediaries does not occur in a competitive framework. In such case the market price is a distortion because it does not reflect the productivity of producers but their lower market power.
2. Second, the price distortion argument does not take into account the principles of product differentiation. Coffee, for example, cannot be compared to other commodities such as oil: there is not one single type of coffee but instead many different brands that are differentiated from one another in terms of quality, blends, packaging, and now also "social responsibility" features. Consumer demand and taste define what different market prices are acceptable for each of these products. In this sense, fair trade can be considered as a market-driven innovation in the food industry that creates a new range of products for which a growing segment of consumers are willing to pay more based on environmental and social responsibility claims.

References

See also