Select Committee on Administration Written Evidence


Memorandum submitted by the Department for International Development (DFID)

SUMMARY OF CONTENTS

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 Development

  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 the marketplace

  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

SUMMARY

  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 TO TRADE AND DEVELOPMENT

  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.[3] 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 Paper[4]2 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.[5] 3

  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.[6] 4

  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.[7] 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,[8] 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 Standard—Foods 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 markets?

  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.[9] 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 producers)?

  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.[10] 8

  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 OF FAIR AND ETHICAL TRADE IN DEVELOPMENT

  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 since 1997.

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 practices.

—  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 agenda.

—  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 FAIR AND ETHICAL TRADE

  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.[11] 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.[12] 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.[13] 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 marketing advice.

—  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 projects.

  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 receive.[14] 12
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 indicate[15]13 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 community programmes.

  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.[16] 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 premium—may 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 trade?

  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 certification.



  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.[17] 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 NGOs.

  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.[18] 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 evidence[19]17 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".[20]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 IN TRADING RELATIONS

  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 operations.

  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),[21] 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 sourced brand.

—    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.[22] 20

  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.[23] 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 pressure—from trade unions, NGOs and consumers—to 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 chain.

  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 issues.

4.2  Role of donor support in mainstreaming fairness in trading relations

  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[24] 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, DFID

February 2007





3   Chen, S and Ravallion, M. "How have the worlds poorest fared since the early 1980s?" 2004. Back

4   Eliminating World Poverty: Making Globalisation Work for the Poor, White paper on International Development, 2000. Back

5   Making Globalisation a Force for Good, Trade and Investment White Paper, 2004. Back

6   The links between trade and security are discussed in Benn, H "Trade and Security in an Interconnected World" in Dodds and Pippard, Human and Environmental Security: An agenda for Change. Earthscan, 2005. Back

7   According to WTO definitions and using the WTO/OECD database. Back

8   The Business Linkages Challenge Fund (BLCF) supports private sector partnerships that bring commercial benefits to the businesses that participate and help to reduce poverty in target developing countries. Companies have access to grants between £50,000 and £1,000,000 to increase access to markets, transfer technology, improve competitiveness, or address the policy and regulatory environment for business. The BLCF is financed by the UK Government's Department for International Development and managed by Emerging Markets Group (EMG) Ltd. More information on the BLCF can be found at www.businesslinkageschallengefund.org Back

9   CIPR, 2002. UK Commission on Intellectual Property Rights: integrating intellectual property rights and development policy. Back

10   Oxford Policy Management and NERA (2004), "Addressing the impact of preference erosion in bananas on Caribbean countries". Back

11   FLO International News Bulletin, October 2006. Back

12   Tallontire, Anne & Bill Vorley (2005), "Achieving fairness in trading between supermarkets and their agrifood supply chains", UK Food Group Briefing. http://www.ukfg.org.uk/docs/UKFG_Briefing_Fairness_in_Trade_Sept_2005.pdf Back

13   Oxford Policy Management and IIED, "Fairtrade: Overview, Impact, Challenges-Study to inform DFID's policy support to fair-trade". htpp//opml.co.uk/docs/acf3c3c.pdf Back

14   Raynolds, L T "Poverty alleviation through participation in fair trade coffee Networks: existing research and critical issues", 2002. http://www.colostate.edu/Depts/Sociology/FairTradeResearchGroup/doc/rayback.pdf Back

15   OPM/IIED op.cit. Back

16   Ronchi, L (2002), "The Impact of Fair Trade on Producers and their Organisations: A Case Study with Coocafe« in Costa Rica", PRUS Working Paper No 11, University of Sussex. http://www.fairtrade.net/uploads/media/ronchi_ft_impact_cococafe_costa_rica.pdf Back

17   For example, The Economist, 9 December 2006. Voting with your trolley: can you really change the world just by buying certain foods? Back

18   Milford, A. (2004), "Coffee, Co-operatives and Competition: The Impact of Fair Trade, Chr. Michelsen Institute: Development Studies and Human Rights. http://www.fairtrade.net/uploads/media/Milford_Coffee.pdf Back

19   Young, G (2003), "Fair Trade's Influential Past and Challenges for its Future", Report Prepared for the King Baudouin Foundation. http://fairtraderesource.org/resources/ft-youngbackgrounder.pdf Back

20   Economist, op cit. Back

21   Food Industry Sustainability Strategy, Defra, 2006 www.defra.gov.uk/fiss Back

22   www.rainforest-alliance.org/ Back

23   See http://www.cadburyschweppes.com/EN/EnvironmentSociety/EthicalTrading/fair_trade.htm Back

24   http://www.ogc.gov.uk/procurement_policy_and_the_eu.asp Back


 
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