The Fair Trade System

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Published as: Kate Macdonald, “The Fair Trade System”, Handbook of Transnational Governance Innovation, edited by David Held and Thomas Hale, Polity Press, Cambridge (2011): pp.252-258

The Fair Trade System The contemporary fair trade system has a distinctive, hybrid character as a production and trading network, a social governance arrangement, and a transnational social movement. From the perspective of global governance innovation, it can perhaps be best conceptualised as an ‘alternative’ normative and institutional system to both organise and govern production and trade. Its central purpose is to operate an alternative market through which commodities can be produced and traded on terms that promote sustainable social development among marginalized workers and producers, particularly those in the global South. The institutional core of the fair trade system is built around its trading activities, which create alternative supply chain systems linking producers to participating fair trade buyers in countries where the products are consumed. This core institutional structure has loose links with a broad collection of organizations and networks with wider ‘social movement’ characteristics. An increasingly formalised governance system has been built to facilitate and regulate these core activities. Although the core activities of the system are market oriented, the principles orienting the governance system are overtly political, based on principles of economic justice and democratic governance. The following discussion reviews the history of fair trade’s emergence and evolution, outlines the system’s key activities and organisational structures, and presents a brief evaluation of the system’s strengths and weaknesses in terms of the democratic quality of its decision making processes, the effectiveness of its efforts to promote goals of social development and trade justice, and the system’s overall legitimacy. 1

History The fair trade system in its current form evolved from a range of secular and faith-based initiatives dating to the post-WWII period. It is linked historically to an even longer tradition of alternative approaches to social relations of production and consumption, in both the global North and South (Low and Davenport, 2005; Raynolds et al., 2007). While the concept known as ‘fair trade’ is essentially a Northern development, indigenous attempts to empower producers and create alternatives to international trade have deep roots in the South. Southern fair trade organisations developed out of indigenous income generation initiatives in some cases, and with Northern NGO development assistance in others (Murray et al. 2003). There is a great deal of diversity within the contemporary fair trade movement, in terms of both goals and organisational structures. Formal certification systems have operated since 1997, when alternative trading organizations operating within consuming countries in North America and Europe formed an overarching international body to coordinate their activities: the Fairtrade Labelling Organization (FLO). Increasing volumes of fair trade coffee are now traded within the framework of this formal certification system, though more informal networks of fair trading continue. The contemporary fair trade movement encompasses a set of groups formally linked through participation in the FINE network, comprising the Fairtrade Labelling Organisations International (FLO), the World Fair Trade Organisation (formerly the International Federation of Alternative Trade), the Network of European Worldshops (NEWS), and the European Fair Trade Association (EFTA).


Discussion draws on a review of a range of existing studies of the fair trade system by scholars and practitioners; on field research carried out by the author in Nicaragua in 2003-04 and in India in 2010; and on ongoing research and writing in this field by the author.


Much of the below discussion focuses on the section of the fair trade system with the most visible and widely debated governance system: the Fairtrade product certification system organised by the Fairtrade Labelling Organization (FLO).

Activities Regulatory modes of governance play a central role within the FLO system, taking the form of standard-setting, auditing, and certification functions. Fairtrade standards regulate social, labour, environmental, and democratic standards at the producer level, and also require buyers of fair trade products to comply with standards regulating issues such as payment of a ‘fair’ minimum price and social premium, pre-financing arrangements, and the stability of trading arrangements. Certification and auditing processes aim to promote a developmental process through which designated standards (beyond specified minimums) can be progressively realized. Accordingly, FLO’s producer standards are conceptualised as starting from ‘minimum’ requirements and developing through various ‘progress’ requirements. The former are required before certification is granted and the latter are requirements on which the producer groups must show ongoing improvement over time (Courville 2008). The fair trade system also performs redistributive and capacity building functions intended to support the socio-economic development and ‘empowerment’ of marginalised producers and workers. The required payment of a ‘fair price’—calculated for specific products and regions or countries on the basis of the estimated cost of sustainable production—is the system’s main instrument for mobilising financial resources for social development. Producer participation in the fair trade system is also designed to generate more intangible resources in the form of enhanced knowledge and experience concerning production, trading, managerial, and community organizing activities. Many alternative trade organizations operating as fair trade buyers also provide direct training and capacity building opportunities for worker and producer organizations. Some organisations in the fair trade system are also engaged in broader forms of social mobilisation and campaigning around issues of trade justice. Such political activities have so far targeted mainly governments in the global North. Fair trade organisations have also attended international forums such as ministerial meetings of the WTO, the Summit of the Americas, UNCTAD meetings, and the World Social Forum, and have prepared shared policy positions within these forums.

Organisation FLO’s organisational structure mirrors the key activities the organisation performs. Standards are developed by FLO’s Standards and Policy Committee, in which representatives of national labelling initiatives, producer organisations, traders, and other designated ‘experts’ participate (the Board then approve these standards). Auditing and certification of producers, traders, and retailers is managed by FLO-Cert; this is a specialised certification agency that is owned by FLO International, but which has operated as a separate legal and managerial entity since 2004. Final certification decisions are made by a multi-stakeholder Certification Committee, and decisions can be appealed via a separate Appeals Committee. The Producer Business Unit plays a role in supporting producer capacity building, mainly by helping strengthen producers’ access to fair trade markets and their understanding of certification requirements and processes. Its work is carried out by regional managers and coordinators, and in some locations also local liaison officers. Decision making authority within FLO is centred to a significant extent in the FLO Board of Directors, which is composed of: five representatives from the Labelling Initiatives; four representatives from Fairtrade Certified Producer Organizations (at least one from Latin America, Africa and Asia); two representatives from Fairtrade Certified Traders; and two external Board Members. National labelling organisations elect their representatives to the Board every three years during their meeting of members. 2

Producer and trader representatives are selected at the FLO Fairtrade Forum, held every three years. FLO’s Director is answerable to the Board for the day to day running of the organisation.

Evaluation Democratic decision-making Principles of democratic decision-making occupy a central role within normative accounts of ‘fair trade.’ In practice, the democratic credentials of the fair trade system have been widely questioned by critics who point to significant structural power imbalances between Northern and Southern participants. These power asymmetries influence day to day dynamics of operational decision-making, and the broader strategic governance of the system. FLO has instituted several reforms designed to strengthen the formal representation of Southern participants, though structural imbalances persist. Critics have characterised the FLO-based system as having a “pyramid decision making structure, where the top often does not communicate with the base” (Franz VanderHoff Boersma, cited in Leigh Taylor et al. 2005, p.140). The majority of positions on the FLO Board are held by fair trade stakeholders from consuming countries rather than producers, and many key negotiations and meetings still take place in the North. Power asymmetries are also reflected in the dynamics of wider North-South interactions – both in the conduct of routine trading activities and within the deliberative processes through which agendas and priorities for the movement as a whole are debated and defined (Bacon, 2010). These power imbalances partly result from asymmetries in financial and institutional resources between North and South. Other contributing factors include the conduct of much debate in consumer countries and in English, and associated information asymmetries stemming from the proximity of Northern participants to consumer markets and their consequent ability both to access market information and to engage directly with potential consumers and corporate buyers. Although consumers and major corporate buyers do not have any formal role within the FLO governance structure, their structural influence over managerial decision making processes is significant. While problematic asymmetries of power persist, FLO has undertaken a range of reforms and initiatives to strengthen the institutional position of producing country stakeholders within the fair trade system. Initial reforms to FLO governance included the opening up of membership on the FLO Board and key committees to FLO certified producers (Nicholls and Opal 2005), creation of the Coordinadora Latinoamericana de Productores de Café FLO, the introduction of a FLO Fairtrade Forum (held every two years) to enable diverse stakeholders to meet and discuss strategic key issues within the system, and the creation of Regional Producer Assemblies held regularly between Forums to strengthen producer involvement. Beyond the FLO system, both WFTO and the fair trade alliance NEWS have worked to create new global deliberative and communicative spaces involving fair trade groups, making use of transnational networks, newsletters, electronic updates and commercial contacts. Effectiveness The effectiveness of fair trade as a means of promoting the social development of marginalised workers and producers has been widely debated. Among advocates of the fair trade system, much emphasis has been placed on the redistributive functions of the minimum fair price and additional ‘social premium’ which must be paid to producers under Fair trade rules. Fair trade co-operatives typically draw on these premiums—often supplemented by other sources—to contribute to provision of social services and infrastructure such as purchase of school utensils for children of participating farmers, improvements to housing, repair of community infrastructure such as roads, and in some cases the construction of community health and education facilities. The increased income stability associated with payment of a fair trade price floor has also been identified by various impact studies as being associated with strengthened security of land tenure, reduced pressure at the household level for individuals to migrate in search of wage income, and greater incentives for producers to invest in both increased farm 3

productivity and more environmentally sustainable production methods (Douglas et al. 2003; Macdonald 2007). Another important mechanism through which the fair trade system has contributed positively to social development has been the strengthening of producers’ and workers’ organizations. In some cases, existing co-operatives or fair trade buyers play a direct role in facilitating and supporting the formation of new producer co-operatives or other organisational structures. In some cases buyers provide direct financial, technical, or administrative assistance to fair trade co-operatives they work with. The fair trade system also promotes organisational strengthening more indirectly as a result of its provision of stable market access at sustainable prices. Over time, many producer organisations connected to fair trade markets have strengthened and expanded – incorporating new members, investing in productive and institutional capacity, and strengthening organisational skills in the performance of an increasing range of functions (Bacon 2005). Fair trade’s redistributive credentials have, however, been questioned from a number of perspectives. Some have highlighted the limited redistributive impact of the price floor and social premium in view of the very small percentage of total goods traded under the Fairtrade label in most product groups, and the small differences in income differentials between Fairtrade and conventional products during periods of high market prices. Others have criticised perceived inefficiencies in Fairtrade’s redistributive mechanism resulting from both limited economies of scale and costly certification processes. Neoclassical economists have attacked what they perceive as price distortions inherent in the price floor mechanism, suggesting that these may contribute to persistent overinvestment in surplus capacity, compounding the structural causes of low commodity prices. Critics from within the fair trade system have questioned the potential for worker ‘joint bodies’ in certified plantations to facilitate the kinds of social mobilisation and empowerment achieved by many smallholder associations participating in the fair trade system. The impact of fair trade’s social movement activities is difficult to evaluate, given the highly interactive and indirect channels through which such influence is exercised. There have been many claims in some countries of rising consumer awareness of ethical issues concerning traded commodities, and rising engagement with the agenda by some European governments, though the causal contribution of fair trade activities is difficult to document. Legitimacy From the perspective of both developmental impact and democratic governance, many still consider Fairtrade to be the ‘gold standard’ among social certification schemes. This widely perceived legitimacy is coming under increasing strain as the system expands. Pressures on the system’s legitimacy result importantly from strategic tensions between the pursuit of different dimensions of effectiveness and between goals of effectiveness and democratic governance. The desire to widen the system’s impact by securing expanded fair trade markets for certified products has led to an increasing preoccupation with engaging large corporate buyers, a trend that some see as linked to a dilution of fair trade standards, particularly in relation to long-term trading relationships or pre-financing. Increasing influence of corporate buyers is also viewed by many as threatening both the integrity of the system’s democratic processes and the critical edge of the system’s political agenda. Moreover, the desire to supply large volumes of Fairtrade certified products in sectors such as tea and bananas has led to increasing participation by private or corporate-owned estates employing hired labour. Some see the widespread participation of estate producers as being in significant conflict with principles of worker and producer empowerment, in part because of concerns about smallholders being ‘crowded out’ of fair trade sectors dominated by estate production, but also because of the deeply entrenched inequalities of social power that typically characterise relationships between wage-labourers and landowners on estates. Negotiation between these competing conceptions of legitimate outcomes, 4

democratic processes, and the trade-offs between them is likely to play a central role in the ongoing development of the fair trade system as it continues to work towards consolidation and expansion. References Bacon, Christopher. 2005. "Confronting the coffee crisis: Can Fair Trade, organic and speciality coffees reduce small-scale farmer vulnerability in northern Nicaragua?" World Development 33(3). Bacon, Christopher, 2010, “Who decides what is fair in fair trade? The agri-environmental governance of standards, access and price”, Journal of Peasant Studies, 37:1, 111-147 Courville, Sasha. 2008. "Organic and Social Certifications: Recent Developments from the Global Regulators." In Confronting the Coffee Crisis: Fair Trade, Sustainable Livelihoods and Ecosystems in Mexico and Central America, eds. CM Bacon, Christopher M Mendez, V. Ernesto Gliessman, Stephen R. Gliessman, David Goodman and Jonathan A. Fox: MIT Press. Jaffee, D., 2007, Brewing Justice: Fair trade coffee, sustainability and survival, University of California Press, Berkeley Leigh Taylor, P. (2005). "In the Market But Not of It: Fair Trade Coffee and Forest Stewardship Council Certification as Market-Based Social Change." World Development 33(1). Lindsey, Brink. 2004. "Grounds for Complaint? 'Fair Trade' and the Coffee Crisis." London: Adam Smith Institute Low, William and Eileen Davenport. 2005. "Postcards from the Edge: Maintaining the 'Alternative' Character of Fair Trade." Sustainable Development 13. Macdonald, Kate 2007. "Globalising justice within coffee supply chains? Fair Trade, Starbucks and the transformation of supply chain governance." Third World Quarterly: Special Issue on ‘Beyond CSR? Business, Poverty and Social Justice’ 25(7). Macdonald, K. and Marshall, 2010, S., Fair Trade, Corporate Accountability and Beyond: Experiments in Globalizing Justice, Ashgate Murray, Douglas, Laura Raynolds and Peter Leigh Taylor. 2003. "One Cup at a Time: Poverty Alleviation and Fair Trade Coffee in Latin America." Colorado State University. Nicholls, A. and Opal, C., 2004, Fair Trade: Market-driven ethical consumption, Sage Publications, London Raynolds, L., Murray, D. and Wilkinson, J., 2007, Fair Trade: The challenges of transforming globalization, Routledge Wilson, Tim, in Macdonald, K. and Marshall, S., 2010, Fair Trade, Corporate Accountability and Beyond: Experiments in Globalizing Justice, Ashgate Useful websites 5


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