FAIR TRADE (Encyclopedia)

Fair trade is a growing economic initiative promoted by importing organizations from Europe and the USA, whose aim is to establish long-term relationships with associations of marginalized producers in LDCs in order to promote market inclusion, poverty reduction, capacity building, and improvement of local wellbeing. It is conceived as an example of the more general phenomenon of consumers’ revealed social preferences and producers’ capacity of extracting surplus from them: ethically concerned consumers pay attention not only to prices and quality, but also the social and environmental values of the purchased goods. In this sense, the consumer's choices embody opportunities to expand sustainable development. The organisms that elaborate common strategies to support and promote FT at the international level are the ones recognized under the acronym FINE (FLO, IFAT, NEWS and EFTA).
The FLO (Fairtrade Labelling Organizations) is an international non-profit organization founded in Germany in 1997, aiming to introduce a unique FT trademark worldwide. It established a certification mechanism to submit under verification producers, importers and other firms that take part in the production process. This mechanism guarantees that FT labelled products are in conformity with the provided criteria and that their production assures specific services (not only economically oriented) to marginalized producers. The FT criteria include: i) Transparency and business accountability; ii) Increase in capacity building; iii) An anticyclical mark-up on producers’ prices incorporating an insurance mechanism which guarantees them a minimum earning; iv) Gender equity and fair working conditions; v) Respect for the environment; vi) A direct investment in local public goods (health, education) through the contribution provided to the local producers’ associations; vii) Anticipated financing schemes; viii) Export services.
The IFAT (International Federation of Alternative Trade) is the international organization that looks after the coordination of importers, producers’ organizations and final retailers of FT products.
Finally, the NEWS (Network of Worldshops) and the EFTA (European Fair Trade Association) guide all FT shops all over the world.
The scientific literature documents different possible forms of externalities induced by FT. It has been shown that the FT channel may help to address specific market failures such as credit rationing, underinvestment in local public goods (health, education, professional training), monopsony of local intermediaries and/or moneylenders (Becchetti and Rosati, 2007). Ronchi (2006) finds that FT helps affiliated coffee producers in Costa Rica to increase their market power. Becchetti and Costantino (2008) show in their study that capacity building, trade and product risk diversification are the main sources of benefit for local FT affiliated producers. Moreover, the mark-up on the intermediate price and the success of FT products have been shown to generate contagion effects on profit maximizing competitors (Becchetti and Solferino, 2008)and to convert fair trade into a source of product innovation which increases product variety. Becchetti and Michetti (2008) reveal a link between the FT channel and relational goods since the long-term trade relationship between importers and producers generates an additional social value to the economic one, in the form of membership and generalized trust. Becchetti, Castriota and Michetti (2008) present FT as a possible measure useful to reduce child labour and raise the child schooling level in Chile, by influencing parents’ decisions to send their children to school. Finally, Becchetti et al., (2007) find that affiliation has significant effects on professional self-esteem and life satisfaction.
Three main critiques have been addressed to Fair Trade. The first suggests that the intermediate good price mark-up is a distortion with respect to the market clearing price, since, by generating excess supply, it sends wrong signals to the producers. Nevertheless, the economic answer to this point is that the anticyclical price premium may be perfectly consistent with market equilibrium in situations where local intermediaries and moneylenders have monopsony power on marginalized producers.
Indeed, fair trade helps to reduce the dependence of affiliated farmers on other intermediaries (Becchetti and Costantino, 2008)and to increase their bargaining power (Becchetti et al., 2008). The second critique relates to the standard purchase plus charity donation scheme: if the amount is equivalent to the price differential between the fair trade and the traditional product, it is welfare enhancing with respect to the fair trade choice (LeClair, 2002).
However, it is argued that it must be taken into account that charity, unlike the "portfolio vote" of FT consumers, has no local antitrust effects and does not create contagion among profit maximizing competitors of fair trade. Thirdly, it has been questioned that fair trade may produce negative effects on non-affiliated local producers (LeClair, 2002). Becchetti et al. (2007) empirically address this problem and show that the externalities on local non-affiliated producers can be both positive and negative.
Becchetti L., Castriota S., Michetti M., (2008); Testing the luxury axiom: the effects of fair trade on child schooling decision on a sample of Chilean honey producers, Mimeo.
Becchetti, L. Giallonardo E. Tessitore, N. (2008); Ethical product differentiation with symmetric costs of ethical distance. Rivista di Politica Economica, forth.
Becchetti L., Costantino M. (2008); Fair Trade on marginalized producers: an impact analysis on Kenyan farmers. World Development 365: 823…842.
Becchetti L., Michetti, M., (2008); When Fair Trade Generates Social Capital: Creating Room for Manoeuvre for Pro-Poor Policies. Ecineq working papers 88.
Becchetti L., Solferino, N. (2008). On ethical product differentiation, Economia e Politica Industriale, (forth).
Becchetti L., Rosati F. (2007); Globalisation and the death of distance in social preferences and inequity aversion: empirical evidence from a pilot study on fair trade consumers, The World Economy, 30 (5): 807-30.
Becchetti L. Costantino M. Portale E., 2007, Human capital, externalities and tourism: three unexplored sides of the impact of FT affiliation on primary producers, CEIS working paper n. 262
Leclair, M. S. (2002); Fighting the tide: Alternative trade organizations in the era of global free trade. World Development 30(7): 1099…1122.
Ronchi, L. (2006); "Fairtrade" and Market Failures in Agricultural Commodity Markets. World Bank Policy Research Working Paper 4011. Washington: IBRD.
Editor: Melania MICHETTI

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