EEP 131: Fair TradeTopics in this series of lecturesBasic issuesWhat is Fair Trade?Common justifications for fair tradeMarket Failures (the Fair trade version)Be alert when people advance “market failure” as a rationale for policy interventionEffect of fall in commodity pricesFairness and EfficiencySome backgroundPrevious Efforts to mitigate effects of worsening terms of trade for commodity exportersInternational commodity agreements of 60s – 80sComparison of previous efforts and Fair tradeFair trade Objectives:Fair trade objectives, continuedThe Fair Trade movement has many objectives. Summary of these objectives:Fair trade price = max(price floor, market price + Fair trade premium) Here is a comparison of market and Fair trade price for cocoaObtaining fair trade certificationA criticism of Fair trade’s use of producer price increases as a means of helping producersA response to this criticism of fair trade (FT)What is the effect of FT on price of non-FT coffee?Market power: another response to the price-depressing criticism of FTWhat does a monopsonist do?Do coffee producers face monopsonistic middle-men?How does fair trade attempt to reduce monopsony power?FT’s preference for a cooperatives over other forms of labor organization – and the monopsony argument againEffect of fair trade on consumersRetailers might add large markups for FT productsAnother possibility for retailer behaviorIs FT an efficient way to support poor producers?FT response to criticism that higher prices delay adjustment out of sectorFT requires that coffee importers establish long term relations with producersFT requires that importers provide credit for producersFT creates “insiders” and “outsidersFT might benefit outsidersCriticisms of FT “from the left”SummarySummary, continued1EEP 131: Fair TradeNovember 23, 20072Topics in this series of lectures•Basic issues and definition of “Fair trade”•Discussion of market failure and fair trade.•Falling prices for agricultural commodities and past attempts to provide price support.•Objectives of Fair Trade (FT) movement.•Mechanics of obtaining FT certification.•Criticisms of FT and response to criticism.•FT as a remedy to market power.•FT’s effect on consumers.•FT “bundles” reforms, e.g. those involving credit and length of contract.3Basic issues•The fair trade movement attempts to increase the prices that producers in developing countries receive for the goods they sell (principally handicrafts and some commodities). Other goals include better credit, increased stability of earning, and promotion of institutional “capacity building”. The movement also wants to increase awareness, amongst consumers in richer countries, of development issues.•Skeptics of the movement think that it will have little practical result. It might even be counterproductive if it leads to increased supply and lower prices for producers who do not have fair trade certification, or if it encourages producers to remain in “dying sectors” rather than looking for jobs in sectors with more growth potential.4What is Fair Trade?According to FINE, the umbrella organization that comprises the four largest Fair Trade organizations (FLO, International Federation for Alternative Trade, Network of European World Shops, and the European Fair Trade Association): •“Fair Trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers—especially in the South [FINE 2001]”.•Fair Trade is an approach to treat the relationship between international trade and poverty alleviation in the global South based on a strategy of “trade not aid.”•Markets for Fair Trade coffee and other items link ethically minded Northern consumers with democratically organized groups of poor Southern producers. The goal of this alliance is to provide disadvantaged producers a chance to “increase their control over their own future, have a fair and just return for their work, continuity of income and decent working and living conditions through sustainable development” (Fair trade Foundation, 2002).5Common justifications for fair trade(http://en.wikipedia.org/wiki/Fair_trade)•Implicit and often explicit in fair trade is a criticism of the current organization of international trade as being "unfair". Fair trade advocates argue in favor of the need for fair trade by mentioning the purported microeconomic market failures of the current system and an alleged commodity crisis and its impact on developing country producers.6Market Failures (the Fair trade version)The Fair trade movement claims to support free trade, but states that the assumptions underlying trade theory do not hold in rural agricultural societies, including lack of perfect market information, perfect access to markets and credit, and the ability to switch production techniques and outputs in response to market information).Therefore, the absence of these microeconomic conditions can nullify or even reverse the potential gains to producers from trade. Fair trade is seen as an attempt to address these purported market failures by providing producers a stable price for their crop, business support, access to premium Northern markets and better general trading conditions.7Be alert when people advance “market failure” as a rationale for policy intervention•Some of the “market failures” listed in the previous slide (e.g. lack of perfect market information, perfect access to markets and credit, and the ability to switch production techniques and outputs in response to market information) may not actually be “failures”. For example if “perfect market information” is expensive to obtain, it is rational (efficient) for information to be “imperfect”. (We would not regard the fact that, when facing a positive price of widgets we do not consume as many as we would under a 0 price, as a “market failure”.)•Even where there are genuine market failures, some forms of intervention make things worse.8Effect of fall in commodity prices•Prices of sugar, cotton, cocoa and coffee fell by 30 to 60 percent during 1970 – 2000. FAO estimated that these lower prices caused a loss of $250 billion for developing countries during 1980 – 2002. •Lower prices do not always lead
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