House of Commons - International Development

Select Committee on International Development Seventh Report

4 THE IMPACT OF FAIR TRADE

52. In this chapter we examine the impact of fair trade on producers, consumers and companies. We acknowledge that determining the impact of particular trade policies is difficult because causality is often indirect and, in the case of producers, no single policy will be the sole determinant of livelihoods.

53. Although a number of country-and commodity-specific impact assessments have been carried out, DFID points out that there has been limited systematic analysis of the sustainable poverty reduction impacts of fair trade.[83] In response, the Fairtrade Labelling Organisation (FLO) is currently considering a model for a results-based monitoring and evaluation system which will enable trends in the impact of fair trade to be analysed over time.[84] We believe there should be increased systematic analysis of the impact of fair trade and would urge DFID to contribute to this process.

Benefits to producers

STABLE INCOMES

54. Fair trade organisations determine a price for each product which is based on national average costs of production. Buyers must pay this price even when the market price is below this. The fair trade price thus reduces the effect on producers of large fluctuations in commodity prices. The benefit of this is that producers are assured of a stable income, which covers the cost of production, and which should enable them to plan for the future. In Costa Rica for example fair trade coffee producers have benefited significantly because the world market price for coffee has been so low. One producer commented: "The fair trade price allows us to survive as coffee farmers—it covers our costs of production, lets us send our kids to school, buy clothes and keep a roof over our heads."[85]

55. While the Prime Minister of Dominica emphasised that the minimum fair trade price for bananas was important to farmers,[86] evidence from trade unions on Central American banana plantations suggests that banana companies claim they cannot pay basic wages because the supermarkets have lowered their prices. Similar evidence from South African farms suggests that supermarkets are pressuring farmers to lower their prices or lose their market.[87] In the context where some supermarkets are putting pressure on suppliers to reduce prices below the cost of basic wages, or when commodity prices are low, the guaranteed fair trade price is extremely valuable for farmers.

56. In practice the fair trade price may not be significantly above the world market price, so fair trade farmers primarily benefit when there is a slump in the market price.[88] Moreover they may not benefit exclusively since other ethical schemes may also offer above market prices. Starbucks for example paid on average a 23% premium in 2005, and 37% in 2006, over the New York commodity market price for the coffees it buys worldwide.[89]

SOCIAL PREMIUMS

57. More significant than the guaranteed fair trade price is the social premium which buyers pay to the fair trade producer organisation or cooperative. This will usually be between 5-30% of the farm gate price and is intended for investment in the business or for community projects.[90] Decisions about how to spend the premium must be taken collectively by the producer organisation or, in the case of hired labour, an elected body.

58. We were told that premiums have provided significant development benefits to communities where farmers are selling a large part of their produce as fair trade. For example Monjural Haque of Artisan Hut in Bangladesh told us about the benefits derived from the social premium including medical and education facilities, housing construction and other community development projects.[91] Erica Kyere from the Kuapa Kokoo Cooperative in Ghana told us that they received a premium of US$150 per tonne of cocoa which is invested back into the communities. This has helped to fund the drilling of about 300 boreholes, and the establishment of seven schools as well as funding links with the medical school in Ghana.[92] In Dominica the Prime Minister described how they had used the premium for the construction of farm access roads and the purchase of school buses.[93] In addition he noted that fair trade had helped create more democratic community leadership and management.[94] Thus, the benefits derived from the social premiums are not restricted to members of the producer group but can extend to the whole community.[95]

DEVELOPMENT OF CAPACITY

59. One of the main benefits to producers from fair trade appears to be the development of capacity. This can include knowledge about how international markets work and increasing organisational, business and technical skills. The representative from Kuapa Kokoo told us how Twin Trading Company had helped set up the cooperative in Ghana.[96] The cooperative has grown from 1,000 members in 1993 to 45,000 in 2007.[97] Harriet Lamb of the Fairtrade Foundation emphasised the role which fair trade plays in encouraging producers to become organised:

Monjural Haque from Artisan Hut described how the retail company People Tree had taught them new skills which enabled them to switch from making local style garments for the domestic market to producing western style garments for international markets.[99] Such outcomes are consistent with the objectives of DFID's trade-related capacity-building work, including those of aid-for-trade.[100]

60. However the numbers of producers and workers who produce for fair trade markets remains small—approximately one million.[101] In addition there are fair trade standards for only a limited range of products. Whilst fair trade does help some disadvantaged producers to access the market, there are many more who could be helped. Thus the overall impact of fair trade on producers is limited by the scale of fair trade in terms of the number of producers involved as well as the range of products for which fair trade standards apply.

61. The benefits of fair trade to producer groups, and often their wider communities, through the social premiums, are clear. Fair trade targets disadvantaged producers who have either been excluded from the export market or who may not be benefiting from it. Fair trade helps to build up their capacity to trade effectively in the market-place and offers a stable income. In this respect it has a positive development impact which reflects some of the objectives of the Government in relation to trade-related capacity-building.

Adding value through branding

62. Fair trade can provide a premium market for products which otherwise would not have one. The Prime Minister of Dominica explained to us how converting banana exports from the Windward Islands to fair trade has been a lifeline to their economies—it has raised standards of living and this in turn has helped maintain social stability.[102] Similarly the loss of a major market for Darjeeling tea exports led many farmers to convert to organic fair trade tea which has sustained the industry.[103] Both products had previously struggled to compete against cheaper larger scale production. What fair trade has provided to Caribbean bananas and Darjeeling tea is a third party mark or brand—the FAIRTRADE mark—which adds something of value to the product.[104]

63. We also assessed another form of branding—premium branding—in relation to the Ethiopian Intellectual Property Office's quest to trademark three speciality coffees—Harrar, Sidamo and Yigarcheffe—produced only in Ethiopia. The application had met with opposition from the US National Coffee Association (NCA). Starbucks, a member of the NCA, also expressed its opposition to the proposal and suggested that geographical certification was a better option.[105] After much bad publicity Starbucks rescinded its opposition to Ethiopia's trade-marking proposal.[106] Subsequently in May 2007 Starbucks signed a new licensing, distribution and marketing agreement with the Ethiopian government which "recognised the importance and integrity of Ethiopian speciality coffees.[107] The details of the agreement are not yet available.

64. Starbucks insisted that in suggesting geographical certification for Ethiopian coffees they had the interests of Ethiopian coffee farmers at heart. Starbucks is a company which prides itself on its social consciousness and its collaborative relationships with farmers.[108] Yet when we asked Douglas Holt, Professor of Marketing at the Oxford Said Business School, if he thought Starbucks was interested in helping Ethiopian coffee farmers he commented:

109

65. This type of premium branding can be extremely beneficial to producers because it allows them to capture a greater percentage of the profits from their products. If Ethiopia is allowed to trademark its speciality coffees in the US, it would then have the potential to add significant value to its product. Such innovative strategies should be encouraged by multinational companies.

Impact on consumers

66. DFID points out that fair trade has made an important contribution to raising awareness among consumers about development and ethical trade issues.[110] Moreover this awareness can create pressure for changes in favour of poor countries.[111] Starbucks supported the view that the Fairtrade Foundation had done an extraordinary job in raising awareness, especially in the UK, and that consumers were increasingly inquisitive about the products they consumed.[112] While increased awareness of ethical issues does not always translate into changes in consumption patterns, there has been a steady increase in fair trade sales in the UK.[113]

67. According to the Fairtrade Foundation this demonstrates that price is not the only concern on people's minds when they go to the supermarket.[114] Mike Barry of Marks & Spencer commented that the FAIRTRADE mark gave customers certainty about the origins of the product in the context of many different brands. He considered that there was a high level of trust in the FAIRTRADE brand.[115]

FAIR TRADE TOWNS

68. Shared Interest told us that there are many ways to raise awareness and commented in particular that:

"The fair trade towns campaign has proved highly successful at spreading the word among members of the UK population and the Fairtrade Foundation's counterparts in Europe have also expressed an interest in this type of campaign and are looking to roll this out themselves. The Fair Trade Scotland and Fair Trade Wales campaigns are now mobilising large numbers of fair trade consumers and support for initiatives such as these will facilitate achievement of the Fair Trade Nation criteria and hence increased awareness and sales."[

116

The Fair Trade Towns campaign has been particularly effective in raising awareness among local communities. There are currently 222 towns that have been awarded fair trade status, with a further 250 towns working towards that goal.[117] In addition both Wales and Scotland have plans to become fair trade countries. The fair trade towns campaign has been extremely successful and we commend Wales and Scotland on their initiatives to become fair trade nations. That communities and nations are willing to engage with fair trade to this extent demonstrates the success of fair trade awareness-raising campaigns as well as growing interest in development issues.

Changing company practice

69. As discussed in Chapter 2, increasing numbers of mainstream supermarkets and shops, led by the Co-operative, are now selling fair trade products. Some have transferred whole product ranges to fair trade. In making these changes retailers have invested in helping their existing suppliers become fair trade certified. These additional investment costs have not been passed on to the consumer. Sainsbury's told us that they "aim to be genuine partners with these suppliers, encouraging them to follow our best practice and supporting them in their efforts to maintain high ethical standards."[118] Moreover its move in the banana sector shows a "recognition that sustainable social and environmental conditions in producer countries do not necessarily equate to decreases in profits and market share."[119]

70. Douglas Holt, of the Said Business School, considered that UK retailers appeared to be competing to advertise their ethical credentials and out-perform their rivals.[120] However some supermarkets have gone further than many multinationals which only produce one or a limited number of fair trade products. Nestlé for example has only one fair trade coffee product. When asked if the company was prepared to offer more fair trade products Hilary Parsons, Head of Corporate Social Responsibility, explained that fair trade was one part of a larger commitment to ethical sourcing and that they also supported other schemes such as the Rainforest Alliance and Utz.[121]

71. Fair trade, and the success of fair trade labelling, has led companies to think about the supply chains of the wider range of products they sell. Despite the limited volume of fair trade products as a percentage of total sales, the concepts of a fair price and a fair exchange have begun to enter the mainstream. Thus an important impact of fair trade may in fact be in catalysing other traders to improve their social performance.[122]

72. This does not mean that all is well in the UK corporate sector or that there is not more that could be done. For example supermarkets all support Fair Trade Fortnight, but the Fairtrade Foundation reports that promotional space and material is paid for by fair trade suppliers rather than the supermarkets.[123] Additionally, because UK supermarkets purchase a large percentage of some developing countries' exports, their purchasing practices have the potential to impact significantly on livelihoods in these countries.[124] As discussed in the following section, we are concerned that some supermarkets may be exploiting their dominant position in developing country markets.

73. Whether or not companies are involved in fair trade, we believe that they should all be engaged in a process of ensuring their supply chains are socially sustainable. Companies need to be particularly aware of the impact of their purchasing policies on small producers. Fair trade offers an excellent means of ensuring purchasing has a positive impact in the categories where fair trade standards and products are available.

THE ETHICAL TRADING INITIATIVE

74. In the UK, the Ethical Trading Initiative (ETI), set up in 1998, seeks to identify and promote good practice in the implementation of International Labour Organisation (ILO) core labour standards including the monitoring and independent verification of these standards. DFID told us that the ETI provides a good example of how trade unions and NGOs have successfully placed pressure on UK companies to ensure decent working conditions for the people who produce the goods they sell. According to DFID the ETI is an example of "the private sector, civil society and the Government working together to improve labour standards through responsible sourcing."[125]

75. DFID provides a significant part of the running costs of the Ethical Trading Initiative and this has raised some concerns among NGOs. Traidcraft, for example, argues that, while the work of the ETI is valuable, it is the companies themselves who are benefiting from it and that the Government should not be funding the private sector to practise corporate social responsibility. Traidcraft also contends that the results of the 10 year assessment of the ETI were not outstanding and questions were raised about its impact on poverty reduction. Given the ambiguous results of the assessment, Traidcraft considers that DFID should be more demanding of the Ethical Trading Initiative.[126]

76. The Trades Union Congress (TUC) comments that the ETI has become the leader in the ethical trading field, and that one of its major contributions, along with fair trade, has been the collaborative development of credible systems of workplace social auditing.[127] However the TUC also cautions that "few social auditors yet have the skill to detect indirect discrimination, many do not understand what does and does not constitute child labour."[128] Moreover they add that only where free trade unions are present is it possible to guarantee that workers' rights have been respected. Thus products made in China, where freedom of association is impossible, cannot be described as ethically or fairly traded.[129] Similarly it is clear to us that as yet there are insufficient guarantees in place in the cocoa industry to ensure that child and child-slave labour are not being used in the Ivory Coast.[130]

77. A report from the NGO War on Want revealed poor working conditions in garment factories in Bangladesh supplying high street shops such as Primark, Asda and Tesco.[131] When we questioned Tesco about War on Want's findings they assured us these had been fully investigated with unannounced visits to the workplaces and that they "were not able to find any evidence to support the claims that were made and neither were the third party assessors."[132] We subsequently received a letter from War on Want stating that in fact Tesco had made no such investigations because War on Want had not revealed to Tesco, for confidentiality reasons, which factories they were referring to:

133

78. Tesco has also refuted claims made by ActionAid in its report, Rotten Fruit, about the working conditions for South African fruit pickers.[134] Tesco told us they have not seen any evidence which corroborates the allegations which were made.[135] Nevertheless, as a result of the Report, Tesco has set up a forum comprising representatives of the South African Government, workers, suppliers and a partner organisation to ActionAid, to work out how best to respond to the concerns.[136] We believe that the largest supermarkets in the UK should be leading the way in corporate social responsibility and setting an example for smaller competitors. The performance of some large retailers in this regard falls below standards we consider acceptable.

79. If different companies understand compliance with ILO core standards differently, and social auditing guarantees are inadequate, the Ethical Trading Initiative is in danger of being seen as a weak approach to corporate social responsibility. This would be a shame since the Initiative is a good one. It is very easy for companies to advertise to the public that they are members of the Ethical Trading Initiative without the public having any knowledge of what this means in practice for workers abroad. Such disparities should be monitored. We question whether the Government is doing all it can to make the Ethical Trading Initiative (ETI) a credible one which genuinely promotes corporate social responsibility. It should not be the responsibility only of NGOs to investigate and monitor the behaviour of UK companies abroad. As we suggested in our report on Private Sector Development, the ETI could be expanded into a monitoring mechanism that ensures more independent scrutiny of companies. The Government should encourage the Ethical Trading Initiative board to investigate the potential for the Initiative to be enhanced in this way.

83 Ev 71 [DFID] Back

84 Fairtrade Foundation, Fair trade impact: summary of studies undertaken since 2003. Back

85 Ev 91 [Fairtrade Foundation] Back

86 Q 25 [Mr Skerrit] Back

87 Ev 139, 140 [ActionAid] Back

88 Ev 77 [DFID] Back

89 Ev 74 [DFID] Back

90 Ev105 [Fairtrade Foundation]. The farm gate price is the price available on the farm excluding any transport or delivery costs. Back

91 Q 90 [Mr Haque] Back

92 Q 23 [Ms Kyere] Back

93 Q 26 [Mr Skerrit] Back

94 Q 22[Mr Skerrit] Back