Memorandum submitted by the Department
for International Development (DFID)
Memorandum (including responses to the specific
questions raised by the Committee)
1. DFID'S approach to Trade and Development
2. The Role of Fair and Ethical Trade in
3. The Impacts of Fair and Ethical Trade:
3.1 Fair and ethical trade and poverty
3.2 Challenges for fair and ethical trade in
4. Mainstreaming Fairness in Trading Relations
with Developing Countries:
4.1 A greater role for the private sector
4.2 Role of donor support in mainstreaming fairness
in trading relations
1. If the Millennium Development goal of
halving the proportion of people living in extreme poverty by
2015 is to be achieved, trade has a crucial role to play. DFID
believes that creating a fairer international trading system that
improves markets access and makes markets work better for the
poor is the best way for trade to contribute to poverty reduction.
2. DFID also believes that trade is not
intrinsically fair or unfair but that we should be influencing
the way that trade rules and markets operate to promote economic
growth and poverty reduction.
3. Fair and ethical trade is a small but
significant part of the international trading system that seeks
explicitly to build more equitable trading partnerships between
north and south. It ranges from certification and labelling schemes
to codes of conduct.
4. DFID sees the main contributions of fair
and ethical trade to development as raising awareness among consumers
and business about patterns of international trade and the situation
of poor producers, encouraging market participation and capacity-building
of producers, securing a larger percentage of the retail price
for producers and promoting decent labour standards. DFID has
supported fair and ethical trade initiatives for a number of years,
committing over £8 million since 1997, through direct support
to Fair trade organisations, development education in the UK,
and its regional programmes.
5. There has been very little impact assessment
of fair and ethical trade schemes in terms of their direct impacts
on sustainably reducing poverty. They have been more successful
in raising awareness of fair and ethical trade issues, witnessed
by the increasing number of fair and ethical trade schemes, increased
engagement of the private sector and increases in sales of certified
goods. Despite impressive increases in sales, fair and ethical
trade is still only a very small, niche market in the context
of north-south trade. Even given sustained growth, the volume
of fair-trade trade is dwarfed by overall trade flows.
6. DFID therefore sees the key challenges
to the industry as being to maintain high product quality and
ethical standards, and to work with the private sector and donors
to catalyse reforms to the pattern of trade in mainstream markets.
This will encourage more businesses to adopt similar practices,
benefiting many more small-scale producers.
7. We are already involved in discussions
with industry and fair and ethical trade agencies on how to learn
from their trade experience and better incorporate these principles
in mainstream supply chains.
1. DFID'S APPROACH
1. Trade is crucial to development and reaching
the Millennium Development Goals (MDGs). Trade reform leading
to increased trade has been one of the key ingredients of rapid
growth and poverty reduction.
1 DFID believes that creating a fairer international trading system
that improves market access and helps make globalised markets
work better for the poor is the best way for trade to contribute
to poverty reduction. The 2000 White Paper2
committed the UK government to supporting an open rules based
system and to promoting equitable trade rules and an effective
voice for developing countries. It also committed the UK to supporting
reductions in barriers to trade and to building the capacity of
developing countries to take advantage of new trade opportunities.
The 2004 White Paper renewed this commitment to making trade work
for the MDGs.
2. DFID is working towards the long-term
outcome that all developing countries and poor producers within
them are able to seize the opportunities and manage the threats
from increasingly globalised markets, using the gains from economic
growth to reduce poverty. Increased trade between countries also
has the potential to improve regional stability and security.
With the world interconnected in mutually beneficial exchange
the rights of all people to security could be realised.
3. Fair and ethical trade has also made
an important contribution to raising awareness of global trade
relations and the situation of poor producers in poor countries
among consumers and business in the developed world. As such DFID
supports fair and ethical trade initiatives as part of an overall
approach to helping poor people benefit more from trade.
4. The International Trade Department in
DFID focuses on influencing, mainly by developing and deploying
an evidence base with its networks in UK government departments,
the European Commission and multilateral institutions and the
WTO to ensure fairer trading arrangements. The strongest focus
is on the international trading system, especially the WTO Doha
Development Agenda, the EU-ACP Economic Partnership Agreements
and ongoing reform of the EU Common Agricultural Policy. We are
continuing to work hard in conjunction with other departments
across Whitehall towards achieving pro-development outcomes from
all these negotiations.
5. DFID's trade-related capacity-building
work is geared to help build poor countries, and producer communities
within them, capacity to trade. It includes a wide range of activities
in agriculture and natural resources, standards compliance, investment,
competition and business development services, intellectual property,
labour standards, corporate social responsibility as well as funding
for fair and ethical trade initiatives. It is in these areas the
bulk of DFID expenditure on trade takes place. In 2004 we spent
a total of £24 million on trade-related work.
5 DFID also played a major role in the recently developed concept
of "Aid for Trade" that encompasses these areas.
6. A key theme in many of these areas of
work is helping producers compete in new markets and working in
partnership with the private sector, bringing commercial benefits
that help to reduce poverty in their communities. Through the
Business Linkages Challenge Fund,
6 DFID supports 57 programmes and projects that help producers
improve their position in the global economy.
7. Three examples of support under the BLCF
below illustrate the substantial development benefits that can
arise from working in partnership with the private sector to support
new business development with poor producers. Analysis of the
experience of the fund across a number of projects and from another
challenge fund, the Financial Deepening Fund, highlighted the
catalytic nature of this type of funding from donors in leveraging
greater private sector resources.
|EXAMPLES OF DFID SUPPORT TO SMALL SCALE PRODUCERS
East Africa Tea Standards is a Cafe« Direct project
helping farmers to meet food safety standards. DFID provided a
grant of £86,218, alongside the private sector contribution
of £157,218. This project aims to ensure that the new British
Retail Consortium Global StandardFoods and Hazard Analysis
Critical Control Point (HACCP)does not become a market
barrier for smaller tea suppliers in East Africa.
The project is implementing HACCP in seven Teadirect supplier
organisations and training three local inspectors/auditors. By
doing this it is helping to secure and stabilise the tea market
for approximately 40,000 smallholder tea producers. This project
progressed well in its first year with all factory representatives
receiving HACCP training. All but one of the factories has implemented
the HACCP plan and four Ugandan factories are currently negotiating
contracts with buyers in three new factories. All factories are
operating to maximum capacity and focusing HACCP at the farmer
level has increased the green leaf quality. Cafe« direct
is pleased with increases in safety traceability, an important
factor in maintaining supermarket buyer confidence.
Malawi Cotton Seed Treatment Programme (MCSTP) was
implemented in 2003 and by the end of the first season had increased
Malawi's national cotton crop by 265%. More than 180,000 smallholders
are currently registered with the programme and this figure is
expected to rise. The MCSTP was implemented by the Great Lake
Cotton Company and ended in August 2006. DFID provided £232,500
and the private sector contribution was £1,966,571. The MCSTP
helped farmers access improved cotton varieties and better quality
seeds. Members of the consortium successfully formed and registered
the "Cotton Development Association" to provide a national
focal point for the cotton sector in Malawi. Training was also
provided for supervisors and extension workers throughout the
project. Productivity more than doubled in the first two years
with increases in average income, and increased planting areas
creating widespread job opportunities. Large numbers of small
traders have either set up new businesses or expanded existing
enterprises in cotton-growing areas due to larger disposable incomes.
There has been a three-fold increase of cotton being bought and
transported, providing a massive boost to local transport companies.
In 2002, Mondi, an integrated forestry and paper manufacturer,
received a grant for £114,000 from DFID. Alongside £115,880
of its own funds, it implemented a three year project to establish
the charcoal producing company, Black Gold.
Black Gold transforms Mondi's waste timber into charcoal
which can be sold on as a value-added product to larger charcoal
distributors for a profit. Not only has this been a successful
business venture, achieving commercial sustainability in 2004,
but the company's activities have had positive social and environmental
impacts. Black Gold's charcoal production units give rise to entrepreneurial
and employment possibilities for the local community by creating
new business opportunities and providing access to domestic and
international markets. In addition, by removing waste timber for
charcoal production, the business has contributed to a reduction
in the risk of forest fires in the area, which have previously
been a serious and common problem affecting both the environment
and the community.
Now that Black Gold is a self-sufficient business, Mondi
has reduced its stake to 10%, transferring the remaining 20% over
to the community trust. All of the entrepreneurs are entitled
to join Firing Trading, the consortium with the largest equity
stake in the business. The model is in line with the Black Economic
Empowerment (BEE) initiative in South Africa as the local entrepreneurs
represent people from a previously disadvantaged background.
Q. How can aid be more effectively mobilised to help producers
improve the quality of their produce in order to access fair trade
8. The quality of produce is vital for market penetration.
DFID has supported work (see East Africa Tea Standards case study
above) to help fair-trade producers meet health and safety standards.
Regardless of the quality of the fair-trade product, unless health
and safety standards are met it will be virtually impossible to
sell in a developed country market.
9. Standards are a double-edged sword. Whilst they are
mainly used to harmonise and promote improved production processes,
safety and quality, standards have been and still are used to
protect domestic markets from competition. Developing countries
do accuse developed countries of raising standards to levels that
are de facto barriers to their products. DFID works across Whitehall,
the European Commission and with relevant WTO committees to ensure
standards and standard-setting processes are fair and transparent
for developing-country producers. DFID uses its resources to fund
the Standards and Trade Development Facility in Geneva. This organisation
co-ordinates and funds international capacity-building activities
related to agricultural product standards in developing countries.
10. The past decade has also seen trans-national food
retailers and large supermarkets introducing their own quality
standards. The driving forces are largely the same as for governments
and international agencies but private standards tend to be higher
than those set by governments and international standard-setting
bodies. Private standards often include the process of production,
the use of labour and impact upon the environment. DFID believes
that whilst challenging, such standards are largely positive because
they enable market access and are linked to support services that
promote good agricultural practices. Farmers who have managed
to attain such high standards are normally more innovative and
resilient. We keep a close watch on the impact of private standards
on poverty and the ability of small farmers to meet them. DFID
is working closely with organisations such as EurepGAP (a standard
setting organisation for retailers and producers in 71 countries)
to ensure the special production circumstances of developing countries
are considered by its technical committees. We are keen to see
other private standard setting organisations abiding by common
codes of good practice in standard setting.
Q. Is there a role for donors in helping to develop the
interests of producer communities in developing countries (for
example, the Ethiopian coffee trademark dispute)?
11. DFID actively supports establishing ways for producers
of developing countries to secure higher prices in export markets
that reflect the distinctive characteristics of their local products.
In the case of Ethiopia, the "birth place of coffee",
according to many, varieties originating in the Harar (Harrar),
Sidamo and Yirgacheffe regions, are widely regarded as possessing
unparalleled flavour and high quality.
12. However, in a global market for coffee grains, where
prices are dictated by international auctions, Ethiopian producers
receive very low prices: typically around $1 (50p) per lb, a small
fraction of the retail price. A half-pound tin of roasted, ground
coffee costs about $5. Most often these are prices close to
that of bulk coffees of much lower quality, and negotiated at
commodity auctions. A portion of the sales attract a premium.
For instance, Starbucks offered on average a 23% premium in 2005,
and 37% in 2006 ($1.42 per lb), over the New York commodity market
price for the coffees it buys worldwide.
13. Ethiopia believes in the potential of its fine coffees
to attract higher producer prices and be recognized by consumers
for their distinctive quality. High retail prices and branding
strategies in the speciality coffee market suggest that this is
a viable option. Ethiopia is thus seeking to have better control
on the distribution of its high quality coffees, negotiate increased
brand awareness, and in the medium term, obtain a higher share
of the retail prices. Securing trademark rights for three of the
most famous coffee regional names and licensing their use to speciality
coffee roasters and retailers, is central to this strategy. By
doing so Ethiopia is using intellectual property rights to capture
part of the intangible value of Ethiopian coffee.
14. This initiative, which DFID has helped fund along
with advice from non- profit organizations, and free legal advice,
could set an example for other developing countries on how to
promote local unique products on rich countries' markets. It also
demonstrates how knowledge of intellectual property rights legislation
in developed countries can be used to further the market interests
of the poorest countries. DFID funds a number of activities on
IPR, drawing on the recommendations of the Commission for Intellectual
Property Rights. 7
Q. How does the international trade system impact on ethical
and fair trade production (for example, the impact of changes
in the EU tariff regime for bananas on small developing country
15. WTO rules prohibit differentiation between products
on the basis of their means of production or process. This is
the so-called "PPM clause" (process or production methods).
The intent is to encourage fair competition, by making it illegal
to exclude a company's or a country's products from a market based
on how they are produced. Developing countries themselves lobbied
for these rules as they feared developed countries would use them
for protectionist purposes.
16. Tariff escalation, with higher tariffs on processed
products such as chocolate, coffee, clothing and many handicrafts
can limit access into developed country markets for these products
not just for fair and ethical versions. So reductions in tariffs,
in particular through the WTO, will have a positive impact on
all trade. However, trade reform has losers as well as winners.
In some cases, fair and ethical trade can provide an alternative
livelihood for producers who, as a result of trade reform, are
no longer able to compete in mainstream markets. This is the case
with Windward Island bananas. DFID funded work to help identify
ways to increase the competitiveness of banana production and
other livelihood opportunities. However, the potential of fair
and ethical trade to provide a solution to preference erosion
is likely to be limited to a few specific cases.
|THE IMPORTANCE OF FAIRTRADE TO THE WINDWARD ISLANDS BANANA INDUSTRY|
Bananas are of Great importance to the Windward Islands.
The banana trade provides a living for thousands of small-scale
producers and in the past accounted for up to 50% of the Islands'
total export revenue. However, production is relatively high cost,
because of a number of inherent characteristics of the industry.
Successive changes to the EU banana regime have steadily
eroded the protection traditionally given to the islands' producers.
Compounded by global oversupply and low retail prices, the islands'
market share has been eroded by lower-cost producers resulting
in reduced revenues, decreased production and increases in unemployment
and related social problems. By 2003, exports had fallen to about
25% of 1992 levels and there were corresponding falls in the numbers
of farmers and workers sustained by the industry.
In searching for new market opportunities for the islands'
banana producers, the Windward Islands National Farmers' Association
(WINFA) began working with the Fairtrade Labelling Organisation
International (FLO) in the late 1990s. WINFA became a registered
Fairtrade banana producer and started to export Fairtrade bananas
in June 2000. Fairtrade has since emerged as the main lifeline
of the industry: 80% of the bananas from the islands are sold
under Fairtrade terms and they receive a premium of around 6p
a kilo, in addition to a minimum guaranteed price (which varies
across different producers).
The market for Fairtrade bananas is growing, particularly
in view of the recent switch by some supermarkets to 100% Fairtrade
bananas. However, challenges remain: in particular the Fairtrade
market for bananas is becoming increasingly competitive with Latin
American and other Caribbean producers moving into Fairtrade production.
2. THE ROLE
17. Fair and ethical trade is a small but important part
of the international trading system. It includes a wide range
of initiatives from fair-trade certification schemes to codes
of conduct. DFID fully supports the objectives of fair and ethical
trade schemes. These include: helping poor producers improve their
terms of engagement with markets and build their capacity, improve
the distribution of profits along supply chains, raising awareness
among consumers in developed counties about trade and development
to create pressure for change in favour of poor countries and
producers, and promote improved labour standards. DFID has committed
nearly £8.5 million to fair and ethical trade initiatives
Q. How best can donors help to develop fair trade consumer
markets in both developed and developing countries?
18. Raising awareness amongst consumers, businesses and
policy-makers about how mainstream international trade excludes
the poor has long been a fundamental objective of fair and ethical
trade organisations. Some have been highly successful at lobbying
on these issues. Partly as a result of these activities, the growth
of the sector has been mirrored by a significant shift in mainstream
business practice towards an understanding of the importance of
corporate social responsibility (CSR).
19. A significant proportion of DFID funding for fair
and ethical trade has been for public awareness raising activities.
Some examples include:
Fairtrade Education Project (Comic Relief with
Trading Visions, The Day Chocolate Company and Kuapa Kokoo): This
provides engaging and effective teaching materials to UK schools
and colleges focusing on people's experiences of Fairtrade.
Fairtrade Out of Home (Fairtrade Foundation):
This focuses on the introduction and promotion of Fairtrade in
hotels, restaurants and catering establishments.
Buying into Development (Traidcraft Exchange):
increases opportunities for UK businesses to positively impact
on poverty in developing countries through changes in their purchasing
Fashioning and Ethical Industry (Labour Behind
the Label): supports tutors of fashion-related further and higher
education courses in engaging with today's corporate social responsibility
Young Co-operatives (Young Co-operatives):
helps young people (aged 13-18) learn about the difference that
fairtrade makes and how they can help by setting up businesses
that sell Fairtrade products.
Fairtrade Schools (Fairtrade Foundation): a
nationally co-ordinated Fairtrade schools award scheme, implemented
locally, regionally and UK wide from primary to sixth form.
20. DFID ministers have participated in events promoting
fair trade, including the establishment of fair trade boroughs
and cities, and spoken at the launch of fair-trade products, such
as cotton. DFID was also a founding member of The Ethical Trade
Initiative and sits on its board.
21. In addition to financial and moral support DFID also
lends its support by example. Following DFID's lead, a number
of other government departments, including DTI and Defra, as well
as both Houses of Parliament, make available a range of fair trade
products, including tea, coffee, drinking chocolate, orange juice,
bananas (where available), chocolate and cookies. The European
Parliament has also recently undertaken to provide only fair-trade
tea and coffee in its catering outlets.
22. Although embryonic, South-South trade in fair-trade
products is growing and fairly traded handicrafts and food are
now sold in countries like Kenya, Ecuador and Nepal. Although
the incomes of consumers in developing countries are generally
too low for fair-trade certified goods charging a price premium
to gain market shares on the scale achieved in Europe, there is
likely to be the potential for growth in these markets. Key to
the success of this would be the development of appropriate standards
and certification processes in these countries and this could
be an area for donor support in the same way donors, including
DFID, have supported the development of the Fairtrade Labeling
Organisation International (FLO).
3. IMPACTS OF
23. While fair-trade certified products provide a small
price advantage to producers, and the fair-trade premium is used
to invest in community projects the impact of these in sustainably
reducing poverty among producers has not been widely investigated.
There is certainly plenty of anecdotal information from fairtrade
certified producers saying how fairtrade has improved their lives
but there has been limited systematic analysis of sustainable
poverty reduction impacts. Similarly, there is little analysis
of the wider range of fair and ethical schemes. Some certification
schemes do not guarantee prices or provide a premium, so it is
difficult to quantify what aspect of the schemes benefits producers.
24. Most observers agree that fair and ethical trade
cannot solve all the problems of poverty in the South. For example,
in 2005 Fairtrade labelling reached only one million workers and
farmers with four million dependents.
9 Achieving the MDGs will require a much larger number of producers
to benefit from trade. It also remains a very small proportion
of overall retail sales in developed countries. In the UK in 2003
sales of fairtrade certified goods made up only 0.17% of a total
£67 billion expenditure on food and drink. Despite impressive
increases in fair-trade sales to around £185 million in 2005,
the market for certified goods is likely to hit a ceiling, as
has been demonstrated in other non-price-competitive markets such
as organic. 10
3.1 Fair and ethical trade and poverty
Q. How effective is fairtrade in reducing poverty?
25. Assessing the poverty impact of fair and ethical
trade is complex. In 2000, DFID commissioned a report to guide
its work on fair and ethical trade.
11 This report identified four ways initiatives can have a positive
impact on development:
By supporting participation in markets on a more equitable
basis they aim to bring about changes to trading systems, whilst
creating sustainable businesses.
By securing a premium that consumers are prepared
to pay for fairly traded retail products. By pressing importers
and processors to guarantee producers a minimum price, fair trade
transfers pass risk from the most vulnerable producers to intermediaries
higher up the supply chain that are better resourced to bear it.
By empowering producers through assisting them to
access training, trade credit, organisational development, and
By raising awareness amongst northern consumers and
the private sector about problems faced by southern producers,
and the effect of consumption patterns and international trade
policy on the south. Many northern organisations are also engaged
in development education.
26. There has not been a great deal of analysis of the
impacts of fair and ethical trade schemes, and most impact assessments
are primarily interview-based. However, there are a number of
lessons emerging around the above issues, including from DFID-funded
27. On supporting participation in markets. For small
and marginalised producers it is very difficult to access international
markets. They lack access to information, infrastructure and influence
on market prices or tariff rates. There is evidence that participation
in certification schemes (not just from fair-trade schemes but
on food safety standards such as EurepGAP) can help producers
to gain a better understanding of international markets. They
provide producers with contacts and mobilise resources to help
with getting market information and develop business and technical
skills. For example, for coffee growers who sell the majority
of their coffee through conventional channels, access to market
information can be very important in negotiating better prices
from coffee brokers. Many coffee-producer groups appear to use
the information and resources they gain in working with fair and
ethical trade networks to enter other high-return markets like
that for organic produce. Although it is difficult to quantify
the extent to which this occurs, producer groups argue that these
benefits far outweigh the value of any fair-trade premium they
|FAIR TRADE COFFEE PRODUCTION IN TANZANIA: KILIMANJARO NATIVE CO -OPERATIVe UNIOn
The Kilimanjaro Native Cooperative Union (KNCU) comprises
96 coffee-grower societies around Mount Kilimanjaro in Tanzania.
Although only 10-15% of the coffee KNCU purchases from members
is sold to fair-trade organisations, this has played a big part
in developing KNCU's exports. TWIN helped set up KNCU's export
office, trained their Export Manager, and linked KNCU with commercial
coffee companies. Fair Trade Organisatie, a Dutch alternative
trade organisation, is assisting KNCU farmers to convert to organic
farming, and obtain organic certification.
28. On securing a premium price for producers. Evaluations
indicate13 that for
many small-scale farmers, the income benefits of fair and ethical
trade may only be small when commodity prices are buoyant, but
that they become significant when commodity prices slump. Where
the volumes sold through fair-trade channels are small, many cooperative
unions opt not to pass their premium direct to members but pool
it to support the operation of the cooperative or devote it to
29. In the handicrafts sector, the positive impact of
fair-trade schemes on poverty appears more clear-cut. Here employment
is often timed to coincide with the agricultural off-season, providing
important alternative income opportunities for the rural poor.
In areas of high unemployment and for certain types of worker
(eg women and the disabled), such employment may be the only source
of income, thus helping marginalised groups escape extreme poverty.
30. Reports on the impact of the fair trade premium on
the producers involved have generally concluded that the money
reaches the poor and marginalised, and that the system has a positive
influence on the life situation of those benefiting from it. Despite
the growth in schemes and sales there has still not been any impact
study that uses extensive comparative data from before and after
the introduction of fair-trade certification to evaluate its long
term effects. 14
31. On empowering producers. A number of case studies
suggest that the most important contribution of fair and ethical
trade initiatives has been to strengthen capacity of producer
groups and to increase their bargaining power. Successful organisational
development and marketing support, provided as part of a fair-trade
package, can generate gains beyond the commercial value of the
products traded through fair-trade channels (it is worth noting
that the quantities of product designated "FAIRTRADE"ie
attracting the price premiummay represent only a small
proportion of the total volume sold by a producer group). The
extent to which producers benefit from schemes will therefore
to a large extent be determined by the effectiveness of producer
control and the transparency of the management of the cooperatives.
FAIR TRADE COFFEE PRODUCTION IN CHIAPAS, MEXICO
A case study of Fair Trade coffee exporting cooperatives
in Chiapas, Mexico found that they rely to a large extent on extra
income from both the Fair Trade and organic market. Without these
alternative outlets, it would have been difficult for them to
export, and to have a positive effect on the market situation.
The strongest proof of this is the fact that there do not seem
to be any cooperatives in the region exporting only conventional
coffee to ordinary purchasers. However this is a conclusion that
should not be generalised to all other coffee producing areas
on the world. In other places (both Africa and Latin America),
there are cooperatives exporting coffee without support from alternative
trading systems. 14
32. On raising awareness among consumers and business.
It is in this area that perhaps the most reliable data exists
about the impacts of fair and ethical trade. Public awareness
of the Fairtrade mark in the UK now stands at 39%, a 14 percentage
point increase on 2003. This is matched by increasing sales, with
global sales in 2005 reaching 1.1 billion, 276 million
of that in the UK. A growing number of retailers are also stocking
fairly traded products. It is estimated that Fairtrade-labeled
products can be purchased in over 55,000 supermarkets in Europe,
and the Ethical Trading Initiative (ETI)'s corporate members combined
annual turnover is over £100 billion.
Q. What has been the impact of donor funding for fair
33. DFID grants to fair and ethical trade initiatives
have focused on raising consumer awareness of ethically traded
products and labour standards, engaging with the private sector
on issues of fair and ethical trade, support for capacity building
of southern producer groups and helping to develop new products.
Recent grants to the Fairtrade Foundation have also covered improving
its financial sustainability, in recognition of the fact that
donors, including governments and NGOs, continue to provide financial
support for many fair-trade organisations' core activities.
34. As highlighted in paragraph 18 above, a considerable
amount of DFID support has been directed at public awareness-raising
with some notable success. However a number of other initiatives
DFID has supported have also had positive outcomes. These include
the underwriting of the start-up costs of the Day Chocolate Company,
which manufactures and markets fairly traded chocolate in the
UK. This company is part-owned by northern ethical investors including
TWIN, and part by Kuapa Kokoo, the Ghanaian farmer co-operative
from which Day sources its cocoa. This is an example of not only
supporting Fairtrade certification for Ghanaian cocoa but also
enhancing Kuapa Kokoo's other marketing channels.
FAIR TRADE COCOA PRODUCTION IN GHANA: KUAPA KOKOO LIMITED
Kuapa Kokoo is the only source of FAIRTRADE cocoa in Ghana.
Kuapa Kokoo Limited was formed in 1993 and became a cooperative
in 1996 as Kuapa Kokoo Union (KKU). It now has more than 35,000
farmers and owns a third of the Day Chocolate Company who manufacture
Fairtrade Divine and Dubble chocolate bars in the UK.
TWIN Trading and other FAIRTRADE organisations, with DFID
support, helped build KKU's capacity. Initially FAIRTRADE sales
amounted to around 15% of KKU's total sales. However, these sales
have been stagnant (between 300 and 600 tonnes per year) while
KKU's total sales have grown to around 18,000 tonnes. FAIRTRADE
sales currently account for around 2% of KKU sales. Only a small
proportion of the price premium on fairly traded cocoa sourced
from Kuapa Kokoo has been paid out to farmers. The majority is
paid into the Kuapa Kokoo Farmers' Trust which is used to fund
community development projects.
Although Kuapa Kokoo's emergence did not depend on TWIN Trading,
the technical assistance was valuable. However, in principle,
this assistance could have been delivered independently of fairtrade
35. An impact assessment of DFID funding to the Fairtrade
Foundation in 2005 demonstrated successes against objectives of
expanding the range of fair-trade certified products, increasing
consumer awareness of fair-trade and reducing reliance of the
Foundation on external grant funding for its operational and promotional
activities. Among the project outputs were agreement of fairtrade
certification standards for seven new product categories, including
wine, seed cotton and herbs and spices; the certification of 105
new producers groups and an increase in the number of certified
inspectors. The project helped the Foundation increase its income
from licensing to 69% of total operational and promotional costs.
36. The assessment also included a stakeholder review
where the Foundation, FLO, and producer groups reviewed their
experience of working together. Issues emerging included a desire
on the part of producers to be more engaged in the development
of standards, a need to simplify and streamline the certification
system and make it more user-friendly. Some of these issues are
being taken up under the current DFID grant to the Foundation
that is scheduled to run to end 2007.
37. The recent independent impact assessment of the ethical
trade initiative also highlighted the difficulties in measuring
impacts on poverty but highlighted a number of positive social
benefits (see paragraph 55).
38. A number of other European donors are also active
supporters of fair and ethical trade, most placing it in the context
of helping poor producers access markets and promoting corporate
social responsibility. Several countries have supported public
awareness raising campaigns and these could clearly have contributed
to the growing public awareness of fair and ethical trade in Europe.
Outside Europe, USAID has supported the Rainforest Alliance's
work on developing standards for sustainability that conserve
wildlife and promote the well-being of workers and their communities.
In January this year McDonald's announced that they would be sourcing
all their UK coffee from Rainforest Alliance-certified producers.
3.2 Challenges for fair and ethical trade in the market place
39. The debate about the efficacy of fair and ethical
trade is growing.
15 This has covered issues around the allocation of the premium,
the potential size of the fair-trade market, the ability to reach
the very poorest producers and the potential of the approach to
mainstream benefits to a wider range of producers, notwithstanding
the lack of evidence on poverty reduction impacts cited above.
These are all issues that potentially affect the sustainability
of fair and ethical trade in providing the types of benefits listed
above to Southern producers.
40. There are a number of issues around the premiums
charged to consumers for fair-trade-certified products (eg FLO,
Rainforest Alliance). The popular understanding of fair trade,
most notably conveyed by the media, focuses almost exclusively
on the issue of "fair price". This is most likely due
to the intuitive appeal to the consumer of the idea that "we
pay more/they get more". This understanding of fairtrade
has tended to over-simplify the impact and neglect its role in
the organisational development of producer groups. Related to
this is the amount of the price differential that actually reaches
producers. Diseconomies of scale mean that businesses face higher
unit processing, distribution and retail costs vis-a"-vis
their larger commercial competitors. In addition, they must pay
the licence fee. As a result, the premium is never passed on entirely
to the producer group.
41. The use of the premium also appears to be evolving.
In some cases, the premium has financed the cooperatives' technical
and other organisational support of coffee producers' activities.
In the past, the premium was often distributed among members after
administrative costs were discounted as part of individual income.
More recently, FLO has encouraged organisations participating
in fairtrade to direct the premium toward social projects. While
this can deliver fairly immediate, concrete benefits such as health
posts and schools, there are questions about the sustainability
of this use of a premium, for example when repairs are needed.
In addition, while it can remove the need for governments to provide
services in the short term, in the longer term it can provide
an excuse for lack of government action.
42. When the premium is used in this way it also raises
questions about the efficiency of transferring funds to farmers,
because little of the mark-up is passed on to the farmer. Critics
argue that it would be preferable and more efficient to provide
direct transfers. It also raises the question of whether concerned
consumers would be better off donating directly to development
43. In order to scale up impact and make a significant
contribution to attaining the MDGs, fairtrade labelling organisations
will need to reach relatively "marginal" producers.
Although this does not appear to have been tested empirically,
researchers argue that labelling organisations do not take the
initiative to support the creation of new cooperatives for particularly
poor people and do not intervene actively to help cooperatives
that are weak and unable to satisfy labeling requirements.
16 It is argued that instead they only accept cooperatives that
are already strong and functioning successfully, that are ideally
already managing processing and export procedures, and where democracy
is strong and member participation is high. Many of the cooperatives
that are now linked to fair-trade were initially formed on the
initiative of governments or NGOs, and these organisations today
show a high level of independence and member participation.
44. Although the market is expanding there still appear
to be problems with supply and demand. Certified producer groups
are not guaranteed a purchaser for their coffee. FLO estimated
that in 2003, fair-trade coffee export capacity in Latin America,
Africa, and Asia was roughly seven times greater than what was
exported via fair trade. And case studies show that most cooperatives
are able to sell only part of their output via fair trade channels.
Whilst some of the advantages gained via participation in fair-trade
supply chains, such as market contacts and greater understanding
of international markets, are not purely related to the volume
of fair-trade sales, other benefits are accrued in direct proportion
to sales, including guaranteed prices, social premiums, long-term
contracts, and low-interest credit.
45. There is some evidence17
that fair-trade production can create dependency. There is growing
recognition within the fair-trade movement of the need to become
more market-oriented, helping producer groups develop new products
and expand into new areas. This is particularly true for handicrafts,
where changing fashions demand that suppliers adapt quickly to
new customer tastes.
46. Fairtrade certification has been criticised for propping
up the prices of agricultural commodities, which are low because
of overproduction. By doing this, it is argued that the system
encourages farmers to produce more of these commodities rather
than diversifying into other crops and so depresses prices"thus
achieving, for most farmers, exactly the opposite of what the
initiative is intended to do".18
Such arguments have been countered by FLO, who say that Fairtrade
farmers' groups frequently invest in developing their market knowledge,
in building up their export or processing capability, or in diversification
programmes, all of which require investment. However, the extent
to which such diversification has been successful is not clear.
4. MAINSTREAMING FAIRNESS
47. Fair and ethical trade initiatives have played an
important role to date in raising awareness of international trading
relations, and they have demonstrated impacts in improving the
lives of poor producers in developing countries. But the above
evidence suggests their scale of impact is limited, and to lift
the millions of small producers out of poverty necessary to meet
the MDGs a wider approach with greater involvement by the private
sector is needed.
4.1 A greater role for the private sector
48. A notable success of fair and ethical trade schemes
has been in increasing private sector engagement in the issues
as a result of enhanced consumer awareness. DFID sees the key
challenge facing fair and ethical trade organisations today as
how to use the experience and knowledge gained to promote fundamental
change in mainstream markets. This involves going beyond thinking
solely about certification schemes and encouraging companies to
think about fair and ethical principles in their mainstream procurement
49. As mainstream manufacturers and service providers
see "ethical trade" as a significant market trend, they
play an important role in translating the idealistic expectations
of consumers into practical, operational schemes. There is a danger
of cooption, however, and many of the ethical trade organisations
are seeking to work with the private sector to avoid this. The
ETI is a step in this direction, with NGO, trade union and private
sector stakeholders coming together to develop and implement a
"best practice" approach to implementing labour standards.
50. The Ethical Trade Working Group of Defra's Food Industry
Sustainability Strategy (FISS),
19 which DFID participates in, is also discussing this issue.
The group brings together food retailers, processors and civil
society groups to make recommendations on how the objectives in
the FISS relating to ethical trade can be achieved. The group
have agreed that promoting ethical trade goes beyond increasing
the sales of fair and ethically labeled goods to influencing the
sourcing and procurement practices of the industry. The Group
is due to report to DEFRA ministers in the spring.
Q. What is the role of supermarkets, retailers and businesses
in supporting ethical and fair trade production?
51. Retailers, in particular supermarkets, play a critical
role in supporting fair and other forms of ethical trading relationships
by making the products readily available to consumers. The dominance
of supermarkets and the dependence of millions of people in developing
countries on these buyers places considerable responsibility on
retailers in developed countries. Their purchasing practices can
have considerable influence over the livelihoods of producers
in the South. Many companies recognise the responsibility this
gives them, and the importance that some consumers place on how
they respond to this responsibility, and have taken steps to address
exploitative practices in their supply chains and develop codes
of practice for their suppliers.
52. As profit-making entities, supermarkets and other
retailers will usually only change their buying policies where
they see that there is demand for this from consumers. Retailers
increasingly are competing to advertise their ethical credentials
as shoppers' demand for organic and fairly traded goods increases.
Mainstream companies and retailers have responded in several ways.
Some retailers in the UK and Switzerland, for instance, have embraced
Fairtrade as an integral part of their own brands:
Marks & Spencer has recorded a double-digit increase
in sales of its tea and coffee since switching to 100% Fairtrade
certified in March 2005.
The Co-op has switched all its chocolate to the ethically
Multinational giants such as Nestle« and
Procter & Gamble have launched Fairtrade coffees.
53. Not all companies have embraced Fairtrade. Because
it requires above-market payments to producers, Fairtrade certification
is an inherently more expensive way to introduce social responsibility
into mainstream companies' supply chains. As a result, some large
companies have chosen to use other third-party labels on their
products to assure consumers that they trade in a more responsible
way than other companies.
54. In the coffee industry, the most important schemes
are Utz Kapeh and Rainforest Alliance. Both have less consumer
recognition than Fairtrade, yet their close alliance with multinational
corporations may supplement their consumer-marketing efforts.
Rainforest Alliance certifies coffee, bananas, citrus, cocoa,
ferns, cut flowers, and tropical woods, which positions them to
compete with Fairtrade. Though no minimum or guaranteed price
is given to the farmer, Rainforest Alliance found that, on average,
farmers meeting the Alliance's standard can obtain up to 10% more
for their produce in the market.
55. As an alternative, rather than adopt another third
party verification, large coffee and tea companies have publicised
their existing industry-wide codes of conduct (or launched new
schemes) in response to increased consumer concern about fair
and ethical trade issues. In September 2004, Nestle, Sara Lee,
Kraft and Tchibo, representing 40% of the world coffee-roasting
market, signed a "Common Code for the Coffee Community"
to improve working and environmental conditions on coffee farms.
The code requires that producers pay minimum wages to workers,
cease from using child labour, allow union membership, and follow
international environmental standards. DFID, along with other
donors, supported the development of the Common Code.
56. Similarly, tea industry giants such as Unilever,
the Tetley Group and Sara Lee recently re-named their "Tea
Sourcing Partnership", a programme which aims to guarantee
that tea estates in Asia and Africa comply with local labour laws
and union agreements, the "Ethical Tea Partnership".
This initiative, which does not include union, NGO or smallholder
participation in its governance structure, has increased promotion
of its activities, most likely in response to success of other
companies with Fairtrade teas. Neither of these industry codes
requires minimum pricing or farmer and worker empowerment, but
they show that the consumer interest in fair and ethical trade
is forcing food companies to address labour and environmental
conditions if they do not want to lose significant market share.
57. Cadbury Schweppes is a company that has not gone
down the Fairtrade labeling route.
21 It argues that Fairtrade works with farms that have access
to good communications and warehousing facilities and can form
co-operatives, but that the majority of cocoa farmers do not have
access to this level of infrastructure as many are small family-owned
operations in remote areas. Cadbury's emphasises that Fairtrade
is not the only way to ensure farmers receive a fair return for
their crops and that it aims to help all cocoa farmers improve
their standard of living by developing sustainable crops of quality
beans that command a higher price. It also highlights various
developmental programmes to assist farmers that it funds.
58. To summarise, innovative companies have experimented
with the concept of "socially responsible trade" within
their CSR and sustainability agendas. These initiatives may incorporate
elements found within certified Fairtrade production, such as
direct and/or long-term contracts with producers. But they do
not necessarily share the objectives of Fairtrade with regard
to either a floor price or enabling market access for disadvantaged
producers. There have been criticisms of some of these initiatives
as confusing the consumer, diluting the Fairtrade standard, or
"greenwashing" to provide a fig leaf over injustices
in mainstream business operations. However, it is apparent that
certification schemes are unlikely to realistically provide the
only means through which the terms under which farmers in the
South supply the North can be improved. As a result DFID welcomes
the wider engagement of buyers and retailers.
Q. How can trade unions help to ensure that the drive
for cheaper produce does not undermine social and environmental
standards in developing countries?
59. The Ethical Trading Initiative (ETI) provides a good
example of how trade unions can have an impact on supporting social
and environmental standards in developing countries. In the late
1990s, companies selling food and clothing to UK consumers were
coming under increasing pressurefrom trade unions, NGOs
and consumersto ensure decent working conditions for the
people who produce the goods they sell. Such companies typically
responded by adopting a code of practice setting out minimum labour
standards that they expect their suppliers to comply with.
60. Many companies who adopted such codes soon found
that they had neither the public credibility, nor the necessary
experience and skills, to answer these questions alone. They realised
they needed the backing of relevant civil society organisations,
in particular of trade unions and NGOs with expertise in labour
issues and overseas development. The ETI was set up in 1998 with
support from DFID to bring the combined knowledge and influence
of relevant NGOs and the international trade union movement, to
help develop good practice on labour standards in the global supply
61. The work of the ETI has shown that code implementation
is most successful when it is backed up by local organisations
such as trade unions and NGOs. Such organisations have unique
local knowledge, influence and staying power to ensure that improvements
in labour conditions are appropriate and sustained over time.
However, in many developing countries such local bodies tend to
have very limited resources. As a result, it has often proved
difficult to find appropriate organisations with the capacity
to engage effectively with companies on code implementation issues.
62. A comprehensive assessment by the Institute of Development
Studies of the impact of the ETI's corporate members' ethical
trade activities on workers in their supply chains found that
in members' supply chains, which collectively account for over
three million people worldwide, many workers are benefiting from
a safer and healthier working environment, increased wages and
reduced working hours. More workers are covered by national health
and pension schemes and, importantly, fewer children are working
in some parts of the supply chain.
63. The study also found that the activities of groups
such as trade unions, NGOs and the media can contribute to the
creation of a critical mass to press for change, whether this
is to draw attention to poor labour practices, to support suppliers
and workers in making improvements, or to strengthen labour law
and/or its enforcement. It further found that worker organisation
and the presence of active trade unions is clearly a critical
determinant of labour practices. However, in many of the case
studies undertaken, trade unions had difficulties organising workers
due to resource constraints, management obstruction and/or worker
disinterest, or had been weakened by job losses and pay cuts.
DFID continues to support the ETI to address these issues and
strengthen compliance. We recently signed a Public Partnership
Agreement (PPA) with ETI for five years up to 2011.
Q. In an increasingly crowded ethical marketplace how
can consumers be supported to distinguish between different fair
trade brands, labels and codes?
64. In 2006 the European Parliament recognised this issue.
They called on the Commission and Member States " . . . to
take appropriate measures to ensure that consumers have access
to all information they need in order to make informed choices;
and believes that consumers must have the right to access quickly
product information, which must be easily comprehensible and presented
in a transparent way." It also called on the Commission
" . . . to liaise with the international fair trade movement
in supporting clear and widely-applicable criteria against which
consumer assurance schemes can be assessed, underpinning consumer
confidence in such schemes and consolidating the Fair Trade product
sectors". While desirable, the difficulties in doing
this are considerable and should not be underestimated, not least
trying to identify a central definition of "ethical trade"
as initiatives are based on such a wide range of outputs. For
example, the Ethical Trading Initiative (ETI) is based on private
sector, civil society and trade union organisations working together
to improve labour standards, whilst the Rainforest Alliance scheme
is predominantly aimed at environmental goals.
65. In terms of the European Parliament's call to member
states to ensure consumers have access to information, as highlighted
above, this is an issue that DFID has provided considerable support
to through its grants to the Fairtrade Foundation, support to
the ETI and engagement of Ministers on fair and ethical trade
4.2 Role of donor support in mainstreaming fairness in trading
66. DFID is already involved in discussions with industry
and fair and ethical trade agencies on how to learn from their
trade experience and better incorporate these principles in mainstream
supply chains. We envisage the following role for donor support:
Help developing country producers meet changing market
demand and bring sustainable improvements to their livelihoods;
Catalyse improved trading relations for poor producers
and employees in mainstream supply chains;
Complement DFID programmes that tackle the wider problems
of trade policy or market access for the poor; and
Promote learning between the fair-trade movement,
mainstream companies and donors.
67. DFID is developing partnerships with supermarkets,
food brands, exporters and others involved in supplying the UK
market to ensure their supply chains benefit poor people. Imports
of fresh fruit and vegetables from the countries north of South
Africa and south of the Sahara were worth £200 million in
2005. For farmers in Africa, this has been a success story:
research estimates that almost a million rural African livelihoods
depend at least partly on the international fruit and vegetable
trade with the UK.
68. Working with the private sector was a recommendation
of the Commission for Africa and DFID's agriculture policy makes
a commitment to work in partnership with the food industry to
ensure small scale farmers can access our markets. The Commission
for Africa considered that supermarket standards can lead to the
exclusion of small-scale farmers and it has been in this area
that DFID initiated work with supermarkets and others in the agrifood
supply chain. In April 2003, the Secretary of State chaired a
meeting with supermarkets and others to consider this. This meeting
concluded that while meeting the standards required by supermarkets
can be expensive for African farmers, standards are essential
to reassure supermarket customers and have had a positive impact
on agricultural practices in Africa. DFID is supporting developing
country producers to negotiate with supermarkets on their standards.
69. DFID is working to encourage the private sector to
make investments in innovative supply chains that deliver more
development benefits to small scale farmers and farm workers (eg
financial services, skills development, organisation); and delivering
more information about those farmers to their customers and educating
them about the development impacts of food procurement from Africa.
Q. Do existing government guidelines on procurement of
ethical and fair trade products provide an enabling environment
for the development of this market and the opportunities for producers?
70. There are no legal reasons why public authorities
should not include fair and ethical trade criteria into their
procurement practices. The WTO Agreement on Government Procurement
or GPA, whose cornerstone relates to non-discrimination between
suppliers, states that governments Parties to the Agreement are
required to give the products, services and suppliers of any other
Party to the Agreement treatment "no less favourable"
than that they give to their domestic products, services and suppliers
and not to discriminate among goods, services and suppliers of
other Parties (Article III:1). However, the agreement is plurilateral
and has only been ratified by 30 WTO members, including the EU.
It allows for the use of environmental criteria and eco-labels
that are not intended to "create unnecessary obstacles to
international trade". And it also clearly refers to "processes
and methods of production" as part of the technical specifications
that a procuring entity may require in a tender.
71. Current European procurement directives allow governments
to decide to include social and environmental criteria in purchasing
procedures. Similarly, the UK Office of Government Commerce
guidelines do not prevent public bodies such as government departments,
schools or local authorities from specifying fair and ethical
goods being supplied as part of a supply contract. However, it
has to be recognised that a budgetary trade-off will exist where
there are significant price differentials between fair and ethical
trade goods and conventional alternatives.
International Trade Department and Growth and Investment Group,
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The links between trade and security are discussed in Benn, H
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improve competitiveness, or address the policy and regulatory
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