Colin James: Making fair trade profitable

7/8/2004
COMMENT
New Zealand Herlad
Fair trade is free trade, right? Yes and no. Profits can be made out of fair trade that is not free.

This is not to be confused with the profits to be made out of unfair trade that is not free because of Government policy or structural failure. The United States' mollycoddled cotton farmers, Japan's geriatric rice farmers, Europe's timorous farmers of all sorts live fat on state subsidies and protection. Huge companies control trade in some commodities on which tariffs are low or zero.

It is those holes in the trade fabric that drove the group of 20 poor countries at Cancun to revolt against the rich countries' conduct of the World Trade Organisation's Doha talks.

And the rich countries' disease is catching. Many poor countries protect their own producers and constrain or tilt the playing field against foreign investment. The losers are their own poor.

Oxfam calculated in a report* in 2002 that if rich nations' protectionism was reduced enough to lift developing countries' share of world trade by 5 per cent, 128 million would be lifted out of poverty.

Oxfam's concern is the poor - huge numbers of them trapped, exploited or maltreated. This has fuelled widespread and growing opposition in both poor and rich countries to globalisation and free trade and spilled over into protest which now dogs trade negotiations.

Oxfam takes a different route from opposition. It has concluded that well and ethically administered economic globalisation would reduce inequalities. Hence its support for Fairtrade, a voluntary system of higher-priced trade in some products made in poor countries. What Governments cannot or will not do private individuals can - by making fair trade profitable.

"As well as talking about the rules of trade, there are actions we can take," says Oxfam New Zealand executive director Barry Coates.

This is not the "fair trade" that is disguised protection - Governments and lobby groups in rich countries insisting on labour and environmental standards which rich countries can readily afford but poor countries cannot (until trade makes them rich in turn). This sort of "fair trade" would have New Zealand exports banned by the United States, Europe, Japan and Australia because of our lower wages.

Fairtrade is a system of certification and a trade channel that pays poor producers in least-developed and developing countries more than the going - often very low - international rate, and brands their products so consumers in rich countries can identify and buy them.

It has just been launched in Australasia.

Coffee is the staple item and was the main topic at a seminar in Wellington on Friday run by Coates and Australia New Zealand Fair Trade Association chairwoman Sasha Courville. Other agricultural items are prominent in the scheme, including, for example, bananas.

This is because much of the world trade in commodity food is dominated by a few huge companies which have vastly more bargaining power than the producers they buy from and can keep prices very low, sometimes below subsistence level.

It doesn't help that there is an oversupply of many of the products - in coffee's case because the World Bank has encouraged countries to plant it as a means of economic development.

The simple solution is to produce less coffee and the price will go back up. The problem is that the very poor cannot afford the loss of income while switching out of coffee.

Fairtrade intervenes in the market instead. Its certified traders buy from accredited producer organisations at a price calculated to provide a subsistence living plus a small premium to the producer organisation.

At the other end, middle-class people with a conscience look out for the Fairtrade mark and buy the product. And pay a premium to make them feel better? Not necessarily. Fairtrade coffee sells for the same price as other coffee. The difference, Coates insists, is a shorter supply chain which adds less to the price.

The principle is familiar to some New Zealanders through Trade Aid, a chain of shops which sell goods made in poor countries. Green co-leader Rod Donald was associated with it in the 1980s and early 1990s. Trade Aid general manager Geoff White says its sales are growing around 15 per cent a year. With Fairtrade labelling he expects this to accelerate. Trade Aid is a distributor in New Zealand of Fairtrade products.

Sounds cute and woolly cardigan. It is about to get a suit and tie. It already has abroad.

Some 250 products are now traded under the scheme worldwide in 17 countries, though only a fraction are available initially in New Zealand (and, out of sensitivity for Australian producers, bananas will not be early on the list). Coffee is available in about 60 outlets here.

Fairtrade is very small - "a drop in the ocean," says Donald - but it is growing fast.

In Britain the Fairtrade market was worth £90 million in 2003, up from £60 million in 2002. Fairtrade coffee accounts for 14 per cent of the British coffee market and Cafedirect (the Fairtrade coffee brand) is the sixth largest coffee brand there. The Sainsbury supermarket chain now has special fair trade sections in its stores similar to its organic sections. Two in five of the British adult population now recognise the Fairtrade mark, up from one in four in 2003, according to a Mori poll in March 2004. None of this has needed Government action. The nearest the British Government has come is to introduce Fairtrade products into some of its departmental staff restaurants. Parliament serves only Fairtrade coffee.

What drives it now is profit. Distributors and retailers can see a market, selling to better-off consumers. As Associate Minister of Foreign Affairs and Trade Marian Hobbs said when approvingly opening the Wellington seminar, Thorndon people buy it but not yet Miramar people (which roughly translates to Parnell and Papatoetoe).

The parallel is organic and non-GM foods (around half of organics worldwide are Fairtrade-certified). There are people who will pay for their fears, fads and ideological fancies.

And you can expect to hear a lot more about Fairtrade here, through a variety of sympathetic groups. Oxfam is also working on district councils to emulate some in Britain which have declared themselves fair trade towns by meeting five criteria, including that Fairtrade products must be readily available in the shops and served in local cafes and must be used by a number of local workplaces.

Okay, it's catching and it makes people feel good. But does it work?

Robbert Maseland and Albert de Vaal at the University of Nijmegen in Holland compared fair trade with free trade and protectionism and concluded it was "obvious that fair trade is the only way to guarantee the fulfilment of minimum requirements" such as stopping child labour or environmentally harmful effects, since those outcomes happen "only by chance" under free trade or protectionism.

But when it came to reducing inequality, they said, "It is by no means clear that fair trade initiatives are always fairer than other options".

For example, "where transportation costs are low, free trade most of the time fares better than fair trade". So fair trade organisations "should study the characteristics of the markets they enter and assess whether fair trade would mean an improvement".

Maseland and de Vaal qualify their conclusion in two ways. There are possible long-run benefits which did not show up in their essentially short-run study. They might include reducing transport costs simply by increasing trade or reducing cultural barriers and improving networks which lower transaction costs.

Fair trade might also redress "structural market failures". Dominance by a few large trading organisations, as in coffee, would come under this heading.

So does it work? Mostly. And it might fatten profits here, too, for retailers with an eye for a trend.

* Oxfam International, Rigged Rules and Double Standards: trade, globalisation and the fight against poverty, 2002