House of Commons - International Development

Select Committee on International Development Seventh Report

2 FAIR TRADE: A THRIVING AND GROWING ENTERPRISE

10. Fair trade is one of many initiatives designed to engender responsible or ethical business practices between developed and developing countries. Marks & Spencer sees its commitment to fair trade as part of a wider commitment by the company to ethical trading.[17] The approach most commonly compared with fair trade is ethical trade, although there are important differences between the two. Fair trade focuses on the trading terms for producers, while the emphasis of ethical trade is on the conditions of production. In terms of objectives, fair trade seeks to change unequal relationships into partnerships which benefit producers; ethical trade seeks to improve the welfare of producers in the work-place. Ethical trade is more likely to be used for multinational brands and retailers and for complex production processes, often in factories. In contrast fair trade has become known for its work with small farmers in the agricultural commodity sector, although it has become more diverse in recent years.[18]

Fair trade and conventional trade

11. It would be incorrect to assume that goods which do not bear a fair trade mark are produced or traded in an unfair way. Fair trade is commonly understood to be a means of giving farmers and producers in developing countries a better deal than conventional trading arrangements.[19] The assumption behind fair trade is that international markets are unfairly distorted and cannot be relied upon to produce fair outcomes.[20] However, fair trade does not seek to avoid the market, rather to harness it in such as way as to promote improved outcomes for producers on the basis of ethical principles. It is thus a particular way of engaging with the market. However, as discussed in Chapter 5, fair trade only has standards for a limited range of products and it would be impossible to create fair trade standards for some products because of the complex manner in which they are produced. In addition some of the smallest producers cannot afford to become fair trade certified. Thus we do not expect all producers or all products to become fair trade.

12. The four main international fair trade organisations have together developed the following definition of fair trade:[21]

13. Fair trade labelling organisations issue fair trade marks or labels to products which meet certain criteria or standards set by the labelling organisation. There are two sets of generic producer standards, one for small farmers and another for workers on plantations and in factories. In addition there are product-specific criteria for certain food and non-food products. For traders wishing to use fair trade certified products the following trading standards apply:

A price is paid to producers which covers the cost of sustainable production
A social premium is paid which producers can invest in community development projects
Partial payment in advance is available if requested
Contracts allow for long term planning.[23]

A fair trade label thus tells consumers that a particular set of criteria has been met in the production and trading of a particular product. Consumers can purchase these products with confidence that they have been produced and traded in a certain way and that this has been independently verified.

14. The situation, however, is complex. There are increasing numbers of ethical initiatives, some independently verified and others which are not, which may seek to meet different sets of criteria. In coffee production, for example, there are a range of different schemes. The Rainforest Alliance's main concern is environmental sustainability and biodiversity.[24] Another scheme is Utz certified coffee which has a 25-30% share of the Dutch coffee market.[25] Utz is not fair trade and does not pay farmers premium prices although it has similar social and environmental objectives. Starbucks coffee also has its own in-house ethical sourcing scheme, CAFÉ (coffee and farmer equity), with social and environmental objectives. Again there is no guaranteed price or social premium but Starbucks told us that they currently pay more than the world market price for coffee.[26] In response to the multiple schemes in the coffee industry the German Coffee Association took the initiative to create a Common Code for the Coffee Community. Nestlé, Sara Lee, Kraft and Tchibo, representing 40% of the world coffee-roasting market, have all signed the Common Code which seeks to improve working and environmental conditions on coffee farms. The Code requires producers to pay minimum wages to workers, not to use child labour, to allow union membership, and to protect the environment.[27]

15. While these schemes may not share the same objectives as fair trade they do seek to raise standards in corporate purchasing practices. Moreover many of the same organisations which sell fair trade products will also sell other ethical labels, offering consumers a range of ethical products. The rise in ethical labels demonstrates that both retailers and consumers are interested in ethical sourcing. It is important that fair trade organisations do not assume they have a monopoly on this although fair trade can be said to represent a gold standard in terms of trading relations with producers. With many different schemes pursuing different objectives it is vital that consumers are given the correct information in order to make informed choices. Awareness-raising is one way of doing this and will be discussed in Chapter 6.

FAIR TRADE ORGANISATIONS

16. The fair trade movement emerged in the 1950s and 1960s with Alternative Trading Organisations selling mainly handicrafts from developing countries.[28] Subsequently fair trade labelling organisations emerged and oversaw the growth of fair trade across European markets.

17. Fair trade products are still marketed by two different routes. Under the first, goods—traditionally crafts—are imported by Alternative Trading Organisations (ATOs) and distributed mainly in small 'world' or fair trade shops, churches, or other community organisations. Most of the ATOs and producer organisations are members of the International Fair Trade Association (IFAT). The clothing company People Tree is a member of IFAT and its fair trade clothing range is licensed by the Association.

18. The second route is the labelling route where goods are labelled by national fair trade certification organisations. In 1997 the international Fairtrade Labelling Organisation (FLO) was formed as a coordinating body for various national fair trade initiatives. FLO is now responsible for setting international fair trade standards in each product category, certifying the production of the goods, auditing trade and labelling these products.

19. In 2003 a new international fair trade certification mark was launched. The FAIRTRADE mark is jointly owned by 21 National Labelling Initiatives and three regional producer networks in Asia, Africa and Latin America. In the UK the Fairtrade Foundation is the organisation which licenses the FAIRTRADE mark.

20. The transition to fair trade labelling has been crucial for expanding fair trade out of a niche market and into the mainstream retail market. Buyers must ensure that only products purchased from registered fair trade producers are labelled as fair trade. The Fairtrade Labelling Organisation also monitors the producers regularly to ensure they are meeting fair trade criteria. This independent certification is key to the credibility of the FAIRTRADE mark. As Marks & Spencer told us, "We believe that the ground-breaking work of the Fairtrade Foundation particularly with commodities—cocoa, cotton, sugar, coffee and tea—gives huge reassurance to the consumer […]"[29] We believe that fair trade labels have helped consumers to be reassured about the way in which fair trade products are traded. This is an important achievement for which the Fairtrade Foundation in the UK and the Fairtrade Labelling Organisation internationally are to be commended.

Fair trade in the UK

GROWTH IN CONSUMER AWARENESS

21. There has been a significant increase in consumer recognition of the FAIRTRADE mark in the UK, from 12% in 2000 to 57% in 2007. The type of customer who purchases fair trade products is also changing. Sainsbury's told us that:

"if you look at our customers, historically this was the older customer, who bought tea and coffee […] That customer has changed over the last 10 to 13 years and it is very much more a universal customer and younger customers who are buying into a whole breadth of products, for a number of reasons."[

Harriet Lamb of the Fairtrade Foundation told the Committee,

The Fairtrade Foundation has worked hard to achieve this level of awareness, firstly through increasing the demand for fair trade certified products by raising public awareness and understanding of fair trade, and secondly by ensuring companies and retailers are offering a range of products so that consumption of fair trade products is easy and public demand can be met.[32] Fair trade organisations have also raised awareness by improving the quality of fair trade products.[33]

22. However the Foundation has not achieved this alone. The Foundation is made up of a number of non-governmental organisations such as Christian Aid and CAFOD who also engage in awareness-raising activities. In addition there are NGOs directly involved in fair trade such as Traidcraft. The Fairtrade Foundation has worked with these NGOs as well as with trade unions, schools, churches and community organisations to expand awareness of the fair trade movement.

GROWTH IN UK SALES

23. Growth in awareness of fair trade has translated into growth in sales. Fair trade sales in the UK have been growing on average at 40% per year. The total value of fair trade products sold in the UK in 2006 was £284 million, up from £196 million in 2005, and signifying a growth of over 1,000% since 1998.[34] The Fairtrade Foundation reports that Mintel,[35] in its report Attitudes to Ethical Foods in the UK, estimated that at current trends, the sales value of fair trade products in the UK would exceed £547 million by 2011.[36] This growth is not restricted to the UK: the market for fair trade labelled products has been growing worldwide at 30-40% a year.[37]

24. Some fair trade companies have become mainstream. Café Direct, for example, is the fourth largest roast and ground coffee brand in the UK.[38] Similarly, Divine Chocolate has become a well-known brand in a highly competitive market and has influenced the strategies and policies of other companies in the UK confectionery industry.[39] Evidence suggests that the market for fair trade chocolate is growing in a static market.[40]

25. DFID reports that fair trade remains a very small proportion of overall retail sales in developed countries. In the UK in 2003 sales of fair trade certified goods made up only 0.17% of a total £67 billion expenditure on food and drink. Currently fair trade labelling only affects one million farmers and their dependants.[41]

Fair trade pricing

26. DFID predicts that the market is likely to hit a ceiling shortly because it is non-price competitive.[42] Contesting this the Fairtrade Foundation told us that, when Sainsbury's switched all its "Kids" bananas to fair trade, sales increased by 30%. This gave Sainsbury's the confidence to decide to stock only fair trade bananas.[43] Similarly Marks & Spencer told us that when they switched all their coffee and tea to fair trade they saw a 6% growth in sales.[44] However the Fairtrade Foundation did acknowledge that they had to ensure that they struck the right balance between paying a fair price to the farmers and marketing the product at an acceptable price.[45] Fair trade guarantees farmers a floor price, even if the market price drops below this, and promises to pay the market price when it rises above this floor price. There will therefore always be limits to the profit margins unless fair trade products are sold at a significantly higher price than other brands. Retailers such as Marks & Spencer have not passed on any price increases to their customers as a result of switching to fair trade products, but there are obvious limits to this. For example, if the price of coffee was to fall significantly for an extended period of time it is unclear how buyers or fair trade organisations would respond. Critics of fair trade argue that this is one of the problems with fair trade: it does not respond well to market signals. If the price of coffee drops too low for farmers to make a living, they believe this should be taken as a signal for farmers to move out of coffee production.[46]

27. We agree that moving out of coffee production would be a rational response to continued low prices but also recognise the complexity of such decisions. On our visit to Ethiopia we met with representatives of coffee farmers who complained about the low price they were getting for their coffee. They also pointed out that many farmers were responding to this by growing the narcotic khat for which the returns were much better. Similarly Prime Minister Skerrit of Dominica explained to us that banana production had fallen significantly in the Windward Islands after the WTO ruling against the EU Banana Regime which had offered Caribbean bananas preferential access to the EU market. Caribbean bananas had not been price competitive without this preferential access, but the conversion to fair trade in 2000-01 had now made banana production profitable for the region.[47] The annual value of sales for Dominica had increased from US$8 million to US$15 million by 2006 as a result, although revenues were still below the level they were prior to the WTO ruling.[48]

28. There are many possible responses to low commodity prices. Diversification, especially into higher value products or services, is an obvious one but one which depends on the viability of alternative livelihoods. It may be that, in some cases fair trade provides farmers with valuable breathing space to make such transitions.[49] It may also be the case that, given low prices for some commodities, fair trade is mistakenly encouraging production. However given the low volume of fair trade production in global production it is unlikely to have been the chief cause of low commodity prices. Nevertheless in the context of fluctuating commodity prices fair trade organisations, along with retailers, need to consider how they would respond if the price of a commodity dropped well below the fair trade floor price for an extended period of time.

GROWTH IN COMPANIES INVOLVED IN FAIR TRADE

29. The growth in sales has led to an increase in the number of retailers selling fair trade products, as well as an increased number of manufacturers making their own brand fair trade products. Sainsbury's say they are the largest single retailer of fair trade products in the UK selling £55 million worth in 2006. Sainsbury's estimate that this is set to increase to £130 million in 2007 and £200 million by 2008.[50] However it should be noted that fair trade products comprise less than 1% of total sales; for Tesco the percentage is similar.[51]

30. The Co-operative Group was the first UK supermarket to convert all its own label coffee and block chocolate to fair trade in 2003.[52] Since then other retailers have followed. From the summer of 2007 Sainsbury's will stock only fair trade bananas. Marks & Spencer has already converted all its coffee and tea to fair trade. Both companies have done this not by switching suppliers but by helping their existing suppliers to meet fair trade standards.[53] In addition Marks & Spencer has sought increasingly to engage directly with its suppliers and, where this is not possible, to rely on the Fairtrade Foundation to provide a level of traceability which Marks & Spencer cannot.[54] Most other UK supermarkets stock a range of fair trade products.

31. In addition companies like Nestlé and Starbucks have increased their purchasing of fair trade coffee quite significantly in recent years.[55] One of the more controversial fair trade products to be launched in recent years has been Nestlé's Partners Blend instant coffee. According to Nestlé their research showed that there were many consumers who were interested in purchasing a fair trade coffee product but were not actually doing so. Nestlé considers that the strength of its brand name has brought these consumers into the fair trade market.[56]

32. It is right that questions should be asked about the engagement of big companies in fair trade. It is relatively easy for them to tick the "fair trade box" for specific products without necessarily changing the way in which they do business with most of their other developing country suppliers. Fair pricing should not be restricted to a few beneficial but limited niches for either supermarkets or multinationals.[57] We were particularly impressed with the efforts of Marks & Spencer to engage directly with its producers and to use the FAIRTRADE mark for those products where direct engagement is not possible.

33. While the fair trade brand ensures that producers receive a minimum price for their products, many UK retailers are also competing to offer cheaper products in order to capture a larger section of the market. This should not be at the expense of developing country producers. The drive for cheaper produce is neither desirable nor sustainable if such low prices involve the exploitation of labour abroad. We accept that developing countries have a competitive advantage in cheaper labour and they should be able to take advantage of this, but we do not accept that workers should be paid less than the national minimum wage where one exists. Nor should fundamental labour rights be dependent on levels of economic development.

17 Ev 106 [Marks and Spencers] Back

18 The implications of this for fair and ethical trade are discussed in Sally Smith and Stephanie Barrientos, "Fair Trade and Ethical Trade: Are there moves towards convergence?", Sustainable Development 13, 190-198, 2005. Back

19 Fairtrade Foundation, TNS Omnimas, Topline Results, April 2007. Back

20 Mayoux, L. Impact assessment of fair trade and ethical enterprise development, 2001. Back

21 The organisations are the International Fair Trade Association (IFAT), the Fairtrade Labelling Organisation (FLO), the European Fair Trade Association (EFTA) and the Network of European World Shops (NEWS). Back

22 European Parliament, Fair trade and development. Back

23 www.fairtrade.org.uk Back

24 www.rainforest-alliance.org Back

25 Utz Certified, Key points of value and difference, March 2007. Back

26 Q 66 [Mr Burrows] Back

27 Ev 81 [DFID] Back

28 Anne Tallontire, "Challenges facing fair trade and ethical sourcing: which way now?", Social Enterprise Development, pp12-24, September 2002. Back