Fair trade s influential past and the challenges of its future.

Fair trade s influential past and the challenges of its future. Graham Young for the King Baudouin Foundation May 2003

This report has been prepared by Graham Young for the Conference Fair trade, an asset for development An international dialogue organised on May 28 th, 2003 by the King Baudouin Foundation Coordination King Baudouin Foundation: Gerrit Rauws, director Pascale Taminiaux, project collaborator Sonja De Koninck, assistant You can download this report from the site www.kbs-frb.be under the heading Publications May 2003 D/2003/2893/11 ISBN-90-5130-427-7 2/12

Fair trade s influential past and the challenges of its future. Graham Young 1 for the King Baudouin Foundation 2 May 2003 With retail sales now close to half a billion Euro, fair trade has grown considerably over recent years. It has an honourable past, having played a major part in raising awareness about corporate responsibility issues and building capacity in large numbers of poor producer organisations in the less developed world. As its past is recognised, its future seems unclear. Once seen as an alternative to traditional business it now seeks to grow by increased professionalism in those traditional skills. Will fair trade s growth be at the cost of its prophetic edge as an innovator in responsible business practice and its campaigning for justice in trade? What is fair trade? Fair trade is a term given to a particular sort of trade with disadvantaged producers in less developed countries, largely in the southern hemisphere ( the south ). The internationally agreed definition and intent is as follows: 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, marginalised producers and workers especially in the South. Fair trade organisations (backed by consumers) are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade. 3 1 gyoungdurham@aol.com 2 www.kbs-frb.be 3 Source: FINE, formed through the informal co-operation between Fairtrade Labelling Organizations International (FLO), the International Federation for Alternative Trade (IFAT), Network of European World Shops (NEWS), and the European Fair Trade Association (EFTA). 3/12

Fair trade's strategic intent is: deliberately to work with marginalised producers and workers in order to help them move from a position of vulnerability to security and economic selfsufficiency to empower producers and workers as stakeholders in their own organisations actively to play a wider role in the global arena to achieve greater equity in international trade. What this means in practice is demonstrated by the membership criteria for the North American Fair Trade Federation. 4 paying a fair wage in the local context; offering employees opportunities for advancement; providing equal employment opportunities for all people, particularly the most disadvantaged; engaging in environmentally sustainable practices; being open to public accountability; building long-term trade relationships; providing healthy and safe working conditions within the local context; providing financial and technical assistance to producers whenever possible; For that part of fair trade which has an independently verified fairtrade label, there is an additional condition which is that the buyer has to pay a social premium, over and above the price of the product, which the producers can invest in development. Fair trade grows from individual units to an organised international movement Fair trade has a history which could be traced back to the late 19 th century co-operative movements in Europe, with their desire to create an integrated co-operative economy from the producer to the retailer. However the more immediate history and direct line is to the development of trading by the international development and solidarity movements in the US (as far back as the 1940s) and in Europe, particularly in the Netherlands, Belgium and the UK in the 1950s and 60s. They traded with politically and economically disadvantaged countries, often (as far as Europe was concerned) ex-colonies, in for instance South and Central America, East and Southern Africa and Asia. The original purposes were associated with the symbolism of standing alongside these countries and the practical assistance of creating jobs or at least providing income. They were for many a political statement and were unrelated to the particular qualities of the products. The ubiquitous Nicaraguan instant coffee was very much an acquired taste. 4 www.fairtradefederation.com 4/12

National organisations specialising in what was originally called alternative trade developed through differing processes. Some movements, in Belgium for instance, started as local community solidarity or political groups or World Shops. These units then came together to create national, or at least central, organisations to deal with tasks such as importing or the production of educational materials. They are usually fiercely independent, democratic, membership organisations. Other organisations started as businesses with national coverage, for example in the UK. The development of grass roots support was then driven from the centre with more conventional corporate structures. Shareholdings in such companies became some of the earliest socially responsible investment opportunities. Some of these centrally originated bodies were set up by international development agencies which saw the potential of this trade and established trading arms or supported separate companies that combined development goals with trading opportunities for small businesses in disadvantaged communities. These companies originally tended to specialise in selling craft products which were easier to import in small quantities and which created a higher ratio of jobs to turnover. It was possible to make these products at home or in small co-operatives from locally available, renewable resources and often involved women who were otherwise marginalised in the money economy. They also made use of traditional craft skills and therefore ensured their continuation. There were limited sales of commodity products, largely coffee and tea. These products encouraged the beginnings of co-operation between the northern groups when some specialised in particular commodity importing and sold on to other fair trade companies. This co-operation developed and in 1989 two associations were established to enable the sharing of knowledge, experience and activity. The International Federation for Alternative Trade (IFAT) is a loose group of northern retailers and southern producer organisations presently with some 160 members in 50 countries. The European Fair Trade Association (EFTA) is a group of 11 companies in 9 European countries who actively work together to reduce duplication of activity and engage in strategic co-operation towards common goals. For membership of both organisations see the websites noted below. 5 5 IFAT www.ifat.org EFTA www.eftafairtrade.org 5/12

Fair trade figures Worldwide retail sales of fair trade labelled products for the year 2002 were 260 million. This represents an increase of 22% on the previous year 6. Turnover of the individual members of the International Federation for Alternative Trade (IFAT) in the year 2002 totalled 238 million 7. The sales of IFAT members are largely not labelled products, so these are additional sales but with some double counting. Additionally there are some sales through World Shops which are not included in either of the above figures, but there is no central record of these sales. So a conservative estimate of total fair trade sales would suggest half a billion Euro. Products which are sold by fair trade organisations are split into food and non-food categories. The latter includes handcrafted products of all sorts including household products, soft furnishings and clothing, as yet there is no independently verified fair trade labelling standard for these products, except for sports balls. Such a standard does exist for the following food products, coffee, tea, cocoa, sugar, honey, bananas and other fruit and fruit juices and rice. Some composite products such as chocolate and snack bars are also labelled. Other fair trade food and beverage products are sold, such as wine or nuts, but without fairtrade labelling. There are 416 licenses, authorising companies to use the Fairtrade Label on a specific product for final sale to consumers in 17 countries in Europe, North America and Japan. Fair trade refines itself and takes a strategic approach to its task Fair trade companies recognised that they were playing in a niche with little knowledge of their trading activities outside their liberal and largely politically left leaning constituencies in the churches and humanitarian agencies. Fair trade wanted to move from the margins to the mainstream. In the late 80s discussions were held simultaneously between various companies and with supportive donor agencies about strategies to take fair trade sales to a wider public that it had not traditionally reached. There were at least two results. Firstly, some companies came together to pool their resources and create a product range that could be sold in outlets where the ordinary consumer shopped. Perhaps the most successful of these is Cafedirect 8 in the UK. In order to focus and to strip out overhead (traditionally high in fair trade) and so meet the margin requirements of mainstream retailers, a separate, jointly owned company was established to market this one product which quickly became a range of high quality coffees and teas. Growth was exponential and the product concept much copied. Such commercial fair trade coffees now have something like 14% of the UK roast and ground coffee 6 Source: Fairtrade Labelling Organizations International (FLO) www.fairtrade.net 7 Source: International Federation for Alternative Trade (IFAT) www.ifat.org 8 www.cafedirect.co.uk 6/12

market. Another example is the Day Chocolate Company 9 which makes chocolate bars for the popular market and is stocked in 4,500 outlets. It emphasises its ownership structure, which includes raw material producer representatives on the Board and as part owners of the company. Secondly, a means was sought to verify the claims which companies made that a product was fairly traded. How was the consumer to know on what basis the claim of fair was being made? How were companies to know what terms of trade constituted fair trade? In 1988 Max Havelaar 10 was established in the Netherlands. This was a labelling scheme which set standards for fair trade and a system by which products could have their claims to be fair verified against the standard. It began in the coffee business which was (and still is) ravaged by the vagaries of the international commodities market, leaving growers with a return less than the cost of production. Over the following years a number of variations on this model were developed in different countries in Europe, North America and Japan. In order to gain the benefits of scale, to standardise the terms and to facilitate cross boarder trading an international organisation was established by these different national bodies. This became Fairtrade Labelling Organizations International (FLO) 11. FLO assesses producer organisations for inclusion in the register from which fairtrade labelled products must be sourced. It also owns the international trademark which is now being adopted by all the national labelling initiatives. They award the label to products marketed in their countries. Products sold under the fairtrade label now turnover 260 million annually. Fairtrade labelled products are largely sold in commercial outlets. The traditional fair trade outlets of World Shops specialising in fair trade, other community outlets and some specialist mail-order companies continue to sell their own fair trade products, many of which are not marked with an independent verification label. As the originators of the concept they believe that their own brands are the sign of fair trade. The labelling system has not yet developed standards for many of these products. The World Shops, which are often communally or privately owned businesses, play a significant role in raising awareness locally and in encouraging activism in the wider movement. They have their own national and international associations. In Europe this is known as NEWS, the Network of European World Shops. 12 NEWS works with 15 national organisations and 2,500 shops to raise awareness amongst consumers and to support the World Shops and fair trade. The various fair trade umbrella organisations now work together as FINE (an acronym of the initial letters of the organisations FLO, IFAT, NEWS and EFTA). They share information and when appropriate, they co-ordinate lobbying and awareness raising efforts. 9 www.divinechocolate.com 10 www.maxhavelaar.nl 11 www.fairtrade.net 12 NEWS www.worldshops.org 7/12

Small business development and market access activities have also become a major part of some fair trade companies. This has aimed at developing better suppliers, but also at enabling producers to move into mainstream trading partnerships. In some cases separate not-for profit organisations have been set up to take advantage of government and private Foundation funds for this work. Fair trade has significant impact on producers in less developed countries, but there are lessons to be learnt FLO has certified 274 producer organisations, representing almost 400 first level producer structures and around 800,000 families of farmers and workers, coming from over 40 countries in Africa, Asia and Latin America. FLO also has 236 registered traders, being exporters, importers, processors and manufacturers, coming from 56 countries all over the world. FLO calculates that in 2001 the additional benefit of fairtrade sales to coffee growers over and above the normal return on their product was 27.7 million. These are the bald facts of the contact between fair trade in the North and disadvantaged producers in the South. However, one of the key features of fair trade is that it is not simply an un-interested financial transaction. Fair trade is about an ongoing relationship, designed to have a long term developmental impact which goes beyond the individual financial exchange. This is often characterised by the understanding and support given to producers working in very difficult circumstances. It can mean very specific assistance in terms of design inputs and general business support. This is often given in a way which means that the producer can not only fulfil the assisting companies needs better but can also use the skills taught to find and satisfy other buyers. It s not simply about giving a design, it is about teaching producers how to read the market and design for themselves. This sort of assistance is not centrally documented and its outcomes are often difficult to calculate. OXFAM GB has done a detailed study of 18 producer groups which it has worked with, across 7 countries in Asia Africa and Latin America 13. An extract from the summary states: Overall the findings of the study indicate that Oxfam Fair Trade made a difference in the livelihoods of producers. In terms of income, capacity building and in some dimensions of gender relations the programme achieved significant outcomes. Moreover, the contrasting findings across groups open the possibility for a rich and interactive learning process. 13 Impact Assessment Study of Oxfam Fair Trading, co-ordinated by Raul Hopkins, November 2000 available from pwilliams@oxfam.org.uk 8/12

Although the positive impact of fair trade is not disputed, its success must be qualified. Two related weaknesses stand out: (i) Dependency and vulnerability. In several of the producer groups studied Oxfam GB buys a high proportion of the crafts produced and much has yet to be done in order to access the mainstream market; and (ii) there is a need to implement an overall strategy regarding how the relationship between Oxfam GB and the producer groups should evolve. This would seem to echo the views of other commentators 14, that whilst impact is good for those involved, it can create dependency. More should also be done in a strategic manner to introduce producers into mainstream trading, breaking the dependency and moving them on so that more producers and consumers can benefit from the fair trade advantage. However, it should be noted that the OXFAM report was largely based on non-food producers. Food producers are more likely to be part of traditional trading relationships as well as having some fair trade outlets. Fair trade and systemic change The impact of fair trade is sometimes thought to be mainly in the less developed countries of the South. However, it is clear that the education and public policy work of the fair trade organisations has had a marked impact on the traditional business community in the North. As described above, the origins of the various fair trade organisations differ. Those who were motivated by the solidarity movement have maintained their commitment to and focus on southern producers. However, there were others who saw fair trade as a way of changing the way the world understands the role of business and therefore the way in which it should be conducted. They took a strategic approach to fair trade which used it as a means to trial new tools and approaches which balanced the interests of all stakeholders in a business. Their awareness raising and public advocacy work also bore much fruit and their focus was as much (if not more) in the north as on the south. Their perspective was that systemic change had more impact in the long term. These were early players in the social responsibility movement which came on the tails of the understanding of environmental responsibility in business and which has become known as Corporate Social Responsibility or CSR. Current stakeholder consultation and social reporting techniques were developed by the fair trade movement, as was the work on labour codes of practice in supply chains exemplified by the Ethical Trading Initiative 15 (ETI) in the UK. Some have been influential at a governmental and European Union level in relation to regulation and legislation on corporate responsibility and corporate governance. 14 See Development Impact of Fair Trade. Contributions for Discussion. Misereor, Bread for the World, Friedrich-Ebert-Foundation (Editors) www.misereor.de/aktiv/fairtrade.pdf 15 www.ethicaltrade.org 9/12

The fair trade movement has its own investment vehicle, Shared Interest 16, which supplies loans to producers secured against orders from fair trade companies. The capital comes from a cooperative of individual investors committed to the movement s principles. It and the investment opportunities in publicly owned fair trade businesses came out of the early work carried out on socially responsible investment by fair trade organisations in the 1980s. Twenty years ago most international development agencies were extremely critical of business and many saw it as an agent of underdevelopment. Fair trade has been instrumental in bringing these two groups together and demonstrating the potential for business being an active and positive contributor to social development and facilitating the creative engagement that is now commonplace and effective. Fair trade has also played its role in empowering consumers in the north. Success in the customer action that encouraged retailers to stock fair trade products has been part of the general awareness-raising amongst consumers that they can influence the activities and policies of the big supermarket chains. Fair trade needs to define success in the new context The sales growth in fair trade is presently strong, not in the traditional area of craft products but in the commodity and processed food sectors. Much effort has been put into the professionalisation of fair trade businesses, an important and necessary process if fair trade was to move from the margins to the mainstream. Attention is still required to quality issues, diversity of the product range (particularly that covered by FLO standards) and generally more business minded, profit producing, management. However, many fair trade players are well aware of this and resources are being applied in that direction. Corporate Social Responsibility (CSR) is also more firmly established as a valid dimension of business practice and a legitimate focus for international development agencies and big accountancy firms alike. The pioneering role of fair trade in CSR has been successful. However, this means that at least for some, a raison d etre no longer exists. It also means that many CSR agencies have moved on to a professionalism and sophistication of which fair trade, whose main activity (if not influence) is not in CSR, is no longer able to match. The fields of social reporting, stakeholder consultation and socially responsible investment would be good examples. Fair trade has also now been adopted by the commercial sector, not as a principle for business, but as a useful marketing tool which differentiates them in the market and has some benefit to the producer too. Fair trade has become one of the tools in the CSR armament rather than a basis for doing business. 16 www.shared-interest.com 10/12

How will fair trade define success in this new context? What now is its role? Increase sales and so benefit more workers? But if the benefits brought by fair trade are limited to those gained by southern producers, is fair trade an efficient way of producing those benefits? Where is the potential for systemic impact? And, perhaps more importantly, is fair trade liable to mask rather than expose the next perceived key threat to a more equitable trading system? When the impact of fair trade was both directly on producers in the south and indirectly by leveraging long term change through reducing the negative social impact of business, then both these elements worked together to reinforce each other. The products and profile of fair trade raised issues in consumer s minds about why the rest of the products in their supermarket were not fairly traded. Emotive issues such as child labour were brought to the breakfast table and consumers forced change in supply chain workplace practices. However, if the next big challenge to equitable trade goes beyond the internal regime and policies by which companies are run, to the external macro-system of trade rules that is being developed to govern global trading activity, will fair trade lead consumers to a false assurance that all is well in the world of trade? PPM s (process or production methods) or TBT (Technical Barriers to Trade) and the other acronyms of the World Trade Organization are not evoked by a smiling grower on the side of a coffee pack. The increased professionalism mentioned above has brought vastly increased sales, however it also means sophistication in packaging and sales in non-specialised outlets both of which are less likely to raise awareness about highly technical and apparently esoteric trade rules. The challenge of World Trade Organization rules Fairtrade labelling needs to explore the implications of the rules of the World Trade Organization 17 (WTO) for its own activity. Presently 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 by describing them by the way in which they were (or were not) made or processed. Technically this ruling applies to governments which require PPM labelling of products which are the result of specific production or process methods. Individual companies should be able to decide to differentiate a product using a label if they wish. However, this has not yet been tested. ISEAL 18 (The International Social and Environmental Accreditation and Labelling Alliance) has at least 7 members such as the Forest Stewardship Council and the Marine Stewardship Council as well as FLO who could be caught under this clause. 17 www.wto.org 18 www.isealalliance.org 11/12

One of the big areas of growth potential for fair trade is in public procurement. What local and national governments and public institutions buy is big business. If political pressure can be brought to bear on such bodies to buy fair trade products, that could rapidly increase sales as well as having an iconic effect. However, this is again an issue under WTO rules. Fair trade will be gearing itself up to press for its continuing legality under WTO rules. It would be ironic if it concentrated its advocacy in globalisation on a campaign to defend its future existence, rather than on the bigger picture issues highlighted by the wider trade justice movement. Fair trade is not the answer to the problems less developed countries have with trade, it needs to actively and effectively work for and encourage consumers to push for changes in trade rules that deal with the macro issues. Otherwise, it risks becoming part of the problem. Collaborators for the future or the grand distraction? Fair trade traditionally focuses on disadvantaged producers in less developed countries. However, many food producers in Europe feel considerably disadvantaged by the unequal struggle between them and the increasingly centralised and therefore powerful food retailers. These retailers consistently drive down the prices they will pay for food products and transfer as much cost as possible to the producer. Their rationale is that their customers demand cheap food. It is important to raising awareness amongst consumers about the implications of this issue. Lower prices in shops, can mean a higher price paid by poor or otherwise vulnerable producers in terms of bad working conditions or low wages. There is of-course a view that this downward pressure on prices is inevitable until there are fewer farmers in the market and less subsidies from central government. There needs to be a debate about whether there are other social and environmental factors locally, nationally and internationally that need to be brought to bear on the logic of the market. Many consumers in Europe are also concerned about the health, ecological and environmental issues around food and its diversity. These include additives, organics, local production and sale, ecological sustainability, animal welfare, bio-engineering, life form patenting etc. There are like minded people and organisations whose focus is on these issues rather than solidarity with the producers of the south, but who see the synergistic potential of collaboration. Maybe the big challenge for fair trade is to expand its horizons? 12/12