A B C D F G I L M N O P Q R S T W

Accountability   Recent scandals involving big business have raised the issue of accountability in contemporary business practices to unprecedented levels.  Trust in the integrity of decision-makers is no longer taken for granted.  The Fair Trade movement, along with many non-governmental organizations, has for decades been criticizing international trading organizations for their methods and for the lack of transparency in their business practices.  The very same underlying problems that have led to the current crisis in confidence are abundantly evident in bi-lateral and multilateral international trade: an overemphasis on sales and inflated profits while simultaneously masking future liabilities.  Fair Trade provides good models for accountable business practice.  

Business Ethics The terminology surrounding business ethics can be confusing:  Corporate Social Responsibility, Social Accountability Index, Social Impact Management and Socially Responsible Entrepreneurship being some of the current terms.  The key issue is broadening the evaluation of success from profitability to include rights and values of stakeholders as well as criteria that measure security, safety and quality of life.  These need to be demand-driven through much greater participation by stakeholders with business management.   Such approaches are an integral part of the decision-making process within Fair Trade.  

Certification   Fair Trade certification requires that production adhere to a set of strict social conditions, where registration is permitted only to democratically-organized producer associations or plantations with independent democratic unions who must uphold basic ILO (International Labor Organization) conventions. In addition to paying a set premium above world market price and have a guaranteed minimum price should the market price collapse, Fair Trade importers must provide up to 60% of the expected harvest value. To date, these NGO-based standards have no parallel or protection in national legislation. The certifying agent for Fair Trade in the United States is TransFair USA.

Codes of Conduct   Increasingly over the last few years in the US, customers have begun asking more questions about the types of products they are buying.  Price and quality remain the primary reasons explaining consumer choice; however other more pertinent doubts have arisen: Where was it made? Under what conditions?  Was child labor involved? Is it environmentally friendly?  Growing public demand for corporate codes of conduct to answer these questions can be seen as one of the significant social movements of the 1990s.    As the media has revealed stories of well-know, reputable companies selling everyday goods made by exploited workers, there has been a rash of codes of conduct drawn up.  Many are merely public relations exercises to minimize the risk of negative consumer reactions.  In the US, 80% of the largest companies have a code of conduct, but each is of its own making.  Although the codes are most often supposed to be about worker’s rights, the workers themselves are often not part of the negotiation and decisions are introduced in a top-down fashion in a country far removed from the actual workplace.

Recent research by WWW (Women Working Worldwide) ^[i] with its partner organizations in low-income countries demonstrated clearly that workers knew nothing about such codes of conduct, even when they were working in factories supplying well-known companies like the Gap and Nike. For many, the struggle for genuine trade unionism was seen as more important than the promotion of company codes. Indeed many workers interpret the codes of conduct as a series of rules they have to comply with, rather than protecting them. For example, in China, workers were told that they had to do in 8 hours what they did before in 12 hours. ^[ii]

Fair Trade companies have attempted to address this systematic problem by ensuring there is a participatory democratic mechanism between workers and management in the actual factories before establishing long-term contracts; and, that the codes of conduct are strictly adhered to by making frequent visits. Furthermore, the share of the profits are returned to the producer groups to decide themselves what their immediate priorities are, instead of assuming their best interests without consent.

Development Aid  In the last ten years, official development assistance (ODA) has dropped to less than one-third of the agreed UN target. In real terms, this shortfall amounts to $125 billion each year at a time. The United States, the world’s largest economy, is the least generous major donor, dedicating only 0.10 of its GNP to aid, instead of the 0.7% target pledge made to the UN some thirty years ago, and contrary to the perceived figure of 15% by the American public. ^[iii]

President Bush’s pledge to increase US development assistance by $100 million over the next five years could be seen as a sign of progress, but only if the criteria for ‘qualification’ is not based on political grounds nor funneled through the same mechanisms and development strategies that have consistently left out those who most need it.  Fair Trade practices can offer a workable alternative. According to the European Parliament, “Fair Trade is not a marginal niche market nor a passing fad …but one of the few successful approaches to development aid.” ^[iv]

FLO (See "Labeling")

Fair Trade Fair Trade’s rules guarantee: a living wage in the local context, offering employees opportunities for advancement, providing equal 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.

Fair Trade advocates, alongside other civil society bodies, are often branded as protectionists or isolationists who oppose trade per se. This is a distortion. Trade can be utilized as an engine of growth for all and can help to lift marginalized, small-scale producers from their poverty. It is the specific rules of trade that are overwhelmingly unfair and exploitative.  (See Fair Trade above.)

Globalization The type of business that dominates today’s global economic system operates on the basis of finding the cheapest labor source and charging the highest price to the consumer. This represents the key component of ‘free market’ or ‘free trade’ ideology. In the eyes of the ‘globaphiles’ (represented in the World Bank, the International Monetary Fund (IMF), the WTO and Northern-government circles), all trade is good trade and every trade barrier is a bad barrier. Increased trade though is not an automatic guarantee of poverty reduction, as the dominant view contends. ‘Globaphobes’ by contrast are acutely pessimistic about trade, believing it leads to more poverty and exploitation by TNCs of poor countries. The evidence of the last twenty years bears this out – the huge increase in wealth generated by trade under globalization has not been matched by a parallel progress in poverty reduction, or in broader progress towards human development.

Fair Trade organizations are not alone in stressing that trade, under more equitable and less hypocritical rules, can work as a real engine for genuine broad-based economic growth. Complete withdrawal from the international trading system, on the other hand, would leave the world’s poor even further adrift and isolated. Increasingly nowadays global business operates in a “triangular manufacturing” ^[v] system under which companies take orders from Europe and the US, contract them out to lower wage economies and then ship the finished goods back to the buyers. This method of ‘outsourcing’ eliminates any contact between the low-paid producers and management operations, and absolves employers from any responsibility for workers.

Fair Trade, conversely, has deliberately tried to reverse this emergence of “manufacturing without factories” by encouraging direct contact with producers, ensuring greater participation and guaranteeing long-term relationships. By establishing ‘good practice’ models, Fair Trade provides a clear alternative to the flawed premise that a business can’t be successful unless it maximizes its profit. In the USA, there are nearly twice as many Fair Trade companies operating as for profit ventures. ^[vi]

International Commodity Agreements Rich countries’ willingness to favor the interests of powerful food companies in getting cheap raw materials has been a major factor in shaping commodity markets. Arguments that the failure of such intervention proves the case for free trade or supply management is anti-market and bad for business are hypocritical; the current ‘free market’ US government is responding to a crisis in over-production in its steel industry by seeking an international supply-management agreement.

More recent attempts at supply management by poorer countries in order to push up prices, for example the ‘retention’ plan by the Association of Coffee Producing Countries (ACPC) in 2000, have failed to produce any meaningful action. Part of the problem was the failure to separate the objective of raising prices from stabilizing prices. In addition to lacking the storage facility to withhold stocks from the market, the bottom line still remains that exporting countries have desperate needs for foreign exchange however low export prices fall.

The proposals made by NGOs to reform this systematic commodity crisis mirror many of the steps that Fair Traders have already taken or plan as future strategies: market intervention and long-term supply management by means of quality criteria, increased diversification and value-added, and the use of insurance (in the form of premium/credit for farmers to manage the risk of price collapse). The predecessor of the WTO, the General Agreement on Tariffs and Trade (GATT), explicitly accepted the case for commodity-market intervention.

Labeling Consumers have a right to know the conditions in which goods are produced, and companies who purchase these goods should make this information available. Promoted by a wide cross-section of consumer groups, corporations, governments and even the World Bank, labeling is widely accepted as a vehicle for broadening consumer choice and giving products a market incentive to improve their social and environmental performance. ^[viii]

Labeling a product produced in a socially responsible way requires the elaboration of well-defined criteria which are clear to everybody. Important common ground is shared among Fair Trade labels, such as TransFair (USA), Max Havelaar (Europe), and Fairtrade Mark (UK), eco-labeling efforts in forest and marine products (by the Forest/ Marine Stewardship Council) and social labeling in textiles and apparel (by Clean Clothes Campaign or Rugmark). Since these labeling efforts are strictly voluntary, they are not considered by the World Trade Organization to be barriers to trade.

Since 1997, the fairly traded labels have been united under the umbrella NGO, Fairtrade Labeling Organization International (FLO), in order to harmonize differing standards and create a single Fair Trade market. FLO has established common Fair Trade principles, procedures and specific certification requirements for coffee and tea, fruit and other commodities.

It is important to bear in mind that not all Fair Trade products--especially non-food craftscarry certification labels. Consumers can be confident that businesses who are members of the Fair Trade Federation operate according to Fair Trade criteria.

Markets Refreshingly frank criticisms of ‘markets’ are uncommon outside the NGO world, but Leon Panetta, co-chairman of the New York Stock Exchange panel on corporate reforms, reinforced what Fair Trade advocates have been saying for decades - we need to address “the whole get-rich-quick, boost-the-stock-price environment” that encourages speculation in the markets. ^[ix] Unfortunately the reality for the last ten years has been to focus on short-term swings in stock prices, rather than long-run profitability, which were hailed by investors and the business press as ‘creative, cutting-edge management’.

The financier and philanthropist George Soros has observed that global markets operate on fewer and fewer shared values, and that markets dictate politics, rather than vice versa. The general failure to deal with this problem has created our greatest threat to stability. ^[x]

Although the world market for Fair Trade products is expanding at 10 to 25% per year, with about 60% sales coming from a small number of food products, most proponents agree that their market share will always be relatively small. Thus the true significance lies in the critique of the subordination of agriculture and food to market principles that devalue and thus encourage the degradation of human and environmental resources, particularly in poor countries.

Thanks to the work of Fair Trade companies, more small-scale farmers are increasing their knowledge of and access to distant commodity markets. Strong linkages between producers, importers and labeling organizations as well as more reciprocal financial and commodity exchanges have proven essential in re-embedding value in human resources in the market place.

NGO Nongovernmental organization

Organic Organic labeling, unlike Fair Trade, has been solidified by national regulations that define minimum ‘organic’ standards. The International Federation of Organic Agriculture Movements (IFOAM), with over 600 member organizations in 100 countries, has only recently added standards that stipulate that producers must uphold basic human rights and labor conditions, after considerable controversy. ^[xi] Organic production has grown considerably in recent years to over 100 countries, with imports from countries of the South valued at about $500 million per year, but representing only five per cent of the world organic market, worth over $10 billion.

Contrary to most assumptions of organic production, much of the trade is controlled by medium and large enterprises, and does not directly benefit small family farms. ^[xii] Important barriers to entry for poor rural families are numerous. They include extremely high certification costs (up to five per cent of their sales value) borne by the producer, a conversion period of up to three years, during which time farmers experience diminished income, and a general lack of information available on organic processes and markets.

The vast majority of small farmers involved in Fair Trade worldwide grow primary commodities like coffee and cocoa without chemical fertilizers or pesticides and are considered ‘passive organic’. Traditional family farms grow a variety of crops in one area (‘intercropping’) together with livestock making more efficient use of the land than large monoculture estates. Though there are minimum agro-ecological requirements for Fair Trade producers, they do not meet organic standards.

In order to help small-scale farmers profit from the growing market for certified organic produce, Fair Trade groups have provided the financial and institutional support necessary for conversion from ‘passive organic’ to certified organic. This is usually done by means of an extra premium added to the minimum Fair Trade floor price to provide an incentive to change. Many cooperatives invest their revenues in technical assistance to train their members in soil improvement and other long-term sustainable techniques that will reduce their dependence on costly imported agrochemicals. This has proved to be very successful with small-scale organic coffee producers in Mexico. Since 1999, for example, 80% of the Fair Trade certified coffee by TransFair (USA) has been certified organic.

Prices Guaranteed minimum prices is one of the cornerstones of the Fair Trade movement and they have enabled many small holder producers to survive the slump in commodity prices. For example, coffee prices have fallen by 70% since 1997, costing developing-country exporters some $8bn in lost foreign exchange earnings. Thanks to the efforts of Fair Trade companies and consumers who paid the extra premium through a fair-trade price, farmers in Latin America at the end of 1999 were receiving double the prevailing market prices.

The effect of unstable, or low prices, on the producer are numerous. Research has shown that farmers’ families take their children out of school, suffer from increased malnutrition and have extreme difficulty meeting health costs; or at worst, abandon their land. Arguably more important than the actual price is that the absolute risk of indebtedness, which increases the more unstable the market is. Short-term contracts and delayed payments mean that small-scale producers cannot plan ahead, find it difficult to obtain credit and can be pressured into selling their goods/crops at bad prices. Even when market prices have increased beyond Fair Trade prices in the past, the fact that most small-scale producers continue to sell to their cooperative instead of the middlemen exemplifies their priorities of stability and guarantee over quick profit.

Although most producers only sell a small part of their total production to the Fair Trade, usually at a higher price than conventional traders, in some countries it has had a ‘snowball effect’ on prices for other producers. Since the availability of the produce to commercial middlemen is reduced, they are forced to offer higher prices to obtain sufficient amounts. Examples include honey in Mexico, brazil nuts in Peru, cocoa in Bolivia, tea in Zimbabwe amongst others. This discovery helps to negate criticism from some circles that Fair Trade leaves other small-scale producers out of the picture, since evidence has shown that other producers benefit too from the ‘snowball effect’ on prices. ^[xiii]

Fundamental to mainstreaming Fair Trade pricing policies is reform of corporate purchasing policy whereby companies pay genuinely fair prices and establish long-term contracts. The real choice facing industry is between short-term (and shortsighted) profit imperatives, and a long-term stake in an industry that combines profitability with sustainability.

Quotas Fixed quotas used to form the basis of international commodity agreements and helped considerably towards establishing some kind of price stability and avoiding extremely low prices. It worked as follows – if the market price fell below a set price, a quota regulation system came into effect and the producer countries could not export more than their respective quota. This operated in the coffee market for almost thirty years until, in 1989, a fourth agreement collapsed when producer countries could not agree on the distribution of coffee exports. The result was market deregulation which produced a free fall in prices as exporting countries dumped their stocks on the market.

Regulations aIn the lingo of free-marketeers, government regulation, or intervention is a dirty word. Most economists refer to the so-called ‘invisible hand’ that regulates market prices according to supply and demand. However, the majority of rich ‘free trading’ countries actively use strong-arm tactics, usually in the form of corporate lobbying, to secure markets for their own products. Similarly, strict regulatory mechanisms are in place to protect their own domestic industries from developing country exports. In fact, according to the IMF ‘openness’ test, many poor developing countries are now far more open to trade than the champions of free trade, the rich industrialized countries. ^[xiv]

History can provide some perspective here. During their own development, today’s rich nations insisted on the right to nurture infant industries behind government-regulated protective tariffs: the USA categorically rejected free trade until they had established themselves economically. Even Adam Smith, for all his belief in the power of the market, was much less radical as current corporate demands on poor countries for liberalization, urging trade only by ‘slow gradation and with a good deal of reserve.’

Fair Trade recognizes the need for a similar level of protection for marginalized producers as the richer countries did for their infant industries. This is not intended as a permanent protectionist policy but as a stepping stone in order to have sufficient time to develop their indigenous talents, build-up their sales and marketing capacities and outlets to mainstream trade. By approaching their southern partners in this manner, Fair Traders help producer groups to gain confidence in a trading system that seems too complicated or distant, gain vital experience and ultimately avoid an overdependence on the Fair Trade system.

Subsidies The US, Europe and Japan spend $350 billion a year on agricultural subsidies ( six times what those countries give in development aid) ^[xv] and this creates massive food surpluses  that are then dumped on world markets, depressing prices and putting the lives of hundreds of thousands of small-scale farmers in poor countries at greater risk. The UNDP estimates that these subsidies cost poor countries about $50 billion a year in lost agricultural exports. The inequity of the system is not lost on the farmers themselves: “You know why I can’t compete with American farmers? It is because the market is not fair. They get subsidies and we get nothing.” (Mexican farmer, Oxfam report)^{. [xvi]} With the 2002 US Farm Security Act, taxpayers will be providing farmers over the next ten years with 70% more ‘price stability’ for a total of $180 billion. ^[xvii]

One of the biggest beneficiaries is America’s influential cotton mills like Milliken & Co., who will receive $2 billion from the government to pay the difference between high US prices and lower foreign prices. The result is cotton production has doubled and the glut has cost African countries $250 million each year. ^[xviii] The rhetoric of supporting American farmers under closer inspection bears out some glaring gaps in truth. The fact that 60% of American farmers get no subsidies at all, and 47% of commodity payments got to large farms with average household incomes of $135,00 clarifies the key issue – that is, large-scale government welfare protects minority interests of the rich, who are “farming the government." ^{[xix] .}  Fair Trade partnerships are most often with small scale operations, such as family farms and democratically led cooperatives.