Fair Trade News

5/2004 | The World and I
By Rory Van Loo


How Rich Consumers are Aiding Poor Nations

A new "people to people" form of international aid, which encourages grassroots free enterprise, hard work, middle-class expansion, and community building, is beginning to take hold in the world arena.

Rather than worrying about whether the World Trade Organization and government grants have been making trade more lucrative for poor countries, an international consortium of nongovernmental organizations has been taking the issue straight to consumers since the late 1980s. The result is a "fair trade" certification system, the sales of which reached $325 million and 21 percent growth in 2002, thanks partly to buy-ins from megacorporations such as Procter & Gamble, Starbucks, and some of the world's largest grocery chains.

When a consumer in any of 17 countries--in Europe, North America, and Japan--buys a product with the fair-trade label, it means that the item was purchased from farmers in the developing world at an above-average price and in accordance with specific criteria set forth by Fairtrade Labeling Organizations International (FLO), a nongovernmental organization in Bonn, Germany. The consumer thus sometimes pays more for his product in the knowledge that the premium is improving living conditions in the Third World.

The fair in fair trade, according to its advocates, means that Third World farmers and factory workers, simply by the fact that they are human beings, deserve to make a minimal living by which they can take care of the basic health, food, and shelter needs of their families and stay free from debt. Over 800,000 developing-world families have benefited from this system.

Other observers outside the fair-trade system note that wealthy countries often raise tariff barriers to protect their own farmers and other workers, increasing domestic production and lowering world commodity prices. By providing higher prices to developing-world growers, the fair-trade system offsets this distortion in the global economy, making trade fairer.

In addition, experts say that building prosperity through fair trade creates goodwill toward the West and cultivates markets for Western manufactured products.

The details of what the fair-trade label signifies vary from product to product. With coffee, the most widely available of these commodities, the label assures consumers that the farmer was paid at least $1.26 per pound for his crop, compared to its recent world commodity price of 70 cents, and that the coffee was bought only from small farmers taking part in democratically operated cooperatives.

Fair-trade soccer balls, which first hit Italian stores last year, have criteria that focus more on the working conditions, ages, and wages of factory workers in what many Europeans have come to view as a sweatshop-dominated industry. Although in the United States only fresh fruit, chocolate, coffee, and tea are available under fair-trade labels, in other countries rice, dried fruit, juices, sugar, honey, wine, and nuts can be found.

While continually increasing fair-trade sales have attained market shares of over 20 percent for bananas in Switzerland and 7 percent for ground coffee in England, the fair-trade label still governs well under 1 percent of the total worldwide trade for the categories within which the goods are sold. Part of this can be explained by the reality that the fair-trade label arrived in the United States and Japan only a few years ago, as opposed to over a decade ago in European countries such as Switzerland. Given its small overall market share, how big a role can fair-trade certification play in international development? What remains to be done for the system to reach its potential?

Community Development
There is little doubt that in those communities where fair-trade producers exist, the system has contributed to development. With many products, this community development follows because the system works through groups of small farmers who are both the owners and the workers. In Poco Fundo, Brazil, for example, a coffee cooperative started selling under the fair-trade system only two years ago but is already turning around the economic situation of much of the local community. For many farmers in this small town of 18,000, the switch to fair trade has meant getting out of debt.

"The prices were so low that last year we stopped planting coffee and were falling deep in debt," says Rosanna Paiva, 35, who owns and operates a small coffee farm with only her husband to help her. "We received $57 per sack before fair trade, which did not cover costs, and now we are receiving $150 and are almost out of debt."

This freedom from debt in turn makes it easier to spend money on clothing, food, and medicine. Others in Poco Fundo can now buy things that before were only a dream. For example:

- José Maria Ribeiro, 44, had worked in the fields since the age of 12 and eventually started sharecropping. But it was only after a year of selling at fair-trade prices to Dunkin' Donuts that this lifetime renter was able to start buying the materials he needed to build a small house for himself; he expects to complete the work with sales of this year's crop.

- The first thing Donizete Talvárez, 48, bought after getting out of debt was a phone so that he and his neighbors would no longer have to spend two hours going into town to deliver messages or get medical help in an emergency.

Another way that fair-trade certification contributes to community development is through a social premium that buyers must pay, usually in addition to the established fair-trade price. With tea, for example, this premium is all the more important because most of the workers on the fair-trade plantations are hired and thus do not own the tea. Consequently, a higher price alone would not guarantee that a wide variety of people in the community would benefit.

"The [plantation] workers are all very poor. It is a hard life in the best of times," says Anupa Mueller, owner of the Makaibari plantation in Darjeeling, India. "The fair-trade premium allows them to have that something extra."

Those fair-trade-funded extras at Makaibari have included college scholarships, health care, small-business loans, and the installation of sanitation facilities. Jamuni Mangarni, a 45-year-old unemployed woman living near the Makaibari plantation, used a fair-trade microloan to buy a cow and then turned the resulting dairy and manure products into a successful small business. She eventually paid back the loan and now supports her family from earnings on the cow.

Good Business
One of the main reasons that fair-trade certification has been able to help so many people is that the label sells. Chief Executive Officer Seth Goldman of Honest Tea, for example, hit a brick wall when a moratorium on new products prevented his new bottled teas from getting into stores owned by Kroger, the largest U.S. grocery chain. He found a solution when he launched the first-ever U.S. fair-trade bottled beverages.

"When they [Kroger] heard we had a fair-trade bottled tea, that changed all the rules," says Goldman. "They already had fair-trade coffee that did really well, so they said they definitely wanted to have the fair-trade tea."

Goldman believes that the fair-trade label helped Peach Oo-la-long tea, made with leaves from the Makaibari plantation, become his most successful product introduction to date out of his 12 bottled teas. The beverage was also 2003's most successful new product introduction for ready-to-drink beverages in natural foods, according to the Nielsen rating agency.

"We asked each of our divisions to make sure and develop a fair-trade program, because we had identified that fair-trade was an area that our target consumer found important," says Robert Norris, the corporate category manager for natural and organic foods at Albertsons, the second-largest U.S. grocery chain, which now has fair-trade goods in an estimated 1,700 stores. "As far as results are concerned, I think that financially it probably has picked up some incremental business for us, but also as an image-enhancer it has helped us target the consumers we're really looking for at our stores."

Marketing Savvy
The marketing impetus behind this demand is supplied by TransFair USA, an Oakland, California, nonprofit that issues the fair-trade label in the United States. Each of the 17 countries that sells fair-trade products has a single national organization that monitors the label in partnership with the umbrella fair-trade organization FLO. While FLO offers certification packages for many goods and takes care of monitoring the producers, it is up to the national organizations to decide which products to certify in their territory and how to promote them.

"We follow the basics of marketing, which are to inform and inspire," says Haven Bourque, director of marketing for TransFair USA. "To do that, we send out print materials and emails, and we have volunteers, particularly in universities and faith-based organizations, who go out into the community to raise awareness."

TransFair USA also gets the word out through relationships with other nonprofits, such as the Washington-based Co-op America. When TransFair USA told Co-op America about Honest Tea's fair-trade bottled beverage, for example, the organization promptly spread the word via two newsletters to 120,000 people nationwide.

Companies wanting to capitalize on the fair-trade marketing mechanism do have to pay for it. In addition to the premium paid to producers, licensees also pay a certification fee to TransFair USA in order to use the fair-trade label. For example, fair-trade importers must pay tea growers from $0.58 to $1.16 per pound above the market price for community development, and an additional $0.18 to TransFair USA. "The fair-trade fees wind up being 10 to 20 percent of the cost of the tea," says Mueller of the Makaibari plantation. "It can get pretty expensive."

Extra Price?
It is this higher cost that ultimately causes much friction in the fair-trade debate. Surprisingly, not all fair-trade items cost consumers significantly more simply because of the trade criteria under which they were purchased. Because many of these goods fall into the already high-priced specialty foods category, quite often the opposite is the case. The Massachusetts company Equal Exchange, the leading U.S. importer of fair-trade products, puts out an array of organic cocoa, coffee, and tea items that sell at or below the price of similar non-fair-trade organic products. And Honest Tea's fair-trade beverage sells at the same price as the company's other beverages.

Yet a general comparison of the prices in a broad food category, say, all chocolate bars, shows that the fair-trade items generally cost 7 to 12 percent more, according to Tradecraft, a pioneering British fair-trade importer. This extra cost involves a somewhat unfair comparison between a gourmet fair-trade food item and a nongourmet conventional food item, but it suggests that fair-trade items have yet to match in price what the majority of consumers are paying.

That's not to say that advocates of fair trade are not trying to move the label into more mainstream products. Global Exchange, an activist organization in San Francisco, has a large-scale campaign aimed at getting Mars to purchase fair-trade chocolate for use in its popular candy lines, such as M&Ms and Snickers. But industry experts question whether such a move will happen in anything other than a limited line of side products.

"The average consumer still really doesn't know what fair trade means within the chocolate industry, and I don't see the large chocolate companies adopting fair-trade chocolate any time soon," says Joan Steurer, president of Chocolate Marketing, a Los Angeles--based consulting firm. "But there are ground stirrings."

Even with greater awareness about the fair-trade label, inspiring informed people to buy the product has met with obstacles. In European countries with fair-trade consumer-awareness rates of 50 to 80 percent and high sympathy rates, only about 5 percent of consumers say they regularly purchase fair-trade goods, according to Luuk Zonneveld, director of FLO.

"Resolving this problem is a question of putting time and hard effort into building public support. In general, the launching of a product is not hard--you get initial exposure and interest from the media," says Zonneveld. "But then that interest tapers off, and that's where it gets crucial to continue telling the fair-trade story. The price difference is, of course, playing a role in keeping people away."

Potential Reach
While the fair-trade labeling system has produced more concrete results than other efforts to make trade fairer, detractors see it as only a part of the solution. David Zehner, an associate manager at Citigroup, who authored a report on fair-trade coffee, says that the number of eligible farmers will continue to exceed the demand for fair-trade products.

"People around the world are lining up to sell fair trade, but people aren't lining up for capacity-building programs," he observes. "I believe fair trade will stabilize at somewhere around 10 percent of the market, which means that a lot of farmers will get left out."

Given that the benefits of fair trade extend to more than just the direct recipients, even a market share of 10 percent would contribute considerably to development. The direct benefits would also be substantial. Fair-trade coffee, the most successful U.S. fair-trade product, captured around 1 percent of the U.S. market in 2003, a year of 92 percent growth, but even at these low levels of market share, TransFair USA estimates that it has generated over $34 million in additional revenue for developing-world farmers since 1999.

While the potential may be high for fair-trade sales to have a significant direct monetary impact on the developing world, some hope the model will have an even larger influence.

"The biggest challenge to fair trade today is getting people to understand that fair trade isn't a kind of coffee, it's an ethical stance that companies take with farmers," says Dean Cycon, owner of Dean's Beans in Massachusetts. "Companies say they don't want to stock fair-trade coffee until customers demand it, but it's not a product--it's an approach."

To the extent that the fair-trade label influences companies not using the label to approach trade differently or perhaps puts pressure on companies by making consumers increasingly aware of aiding the developing world, its impact transcends the issue of market share. Regardless of whether it ever attains such difficult-to-measure objectives, the fair-trade labeling system brings additional dollars into tangible community development.

For participating farmers, that is what matters. "The fair-trade system is the only guarantee we currently have, as small producers in the developing world, that we will receive a stable, livable price for our products," reflects Abel Fernández, member of a Dominican Republic fair-trade cocoa cooperative. "When we get this price, we don't need charity because we are earning what we need to build our communities."