Fair trade is necessary
Free trade has its loopholes rooted from displacing the role of local producers with the arrival of multinationals and exporters. Local employment which can adversely affect consumption would follow. As people have no money and their purchasing power is transferred to foreign incomes, the government will confront greater challenges particularly on poverty and its consequences. But the negative impact is more eminent with developing than developed countries.
With fair trade, the disadvantages of free trade are mitigated. In addition, fair trade is applied with an ethically motivated mission. Small producers in developing countries can sell and export their products abroad in non-discriminate rather supporting way. Fair trade is necessary for more developed countries such as United Kingdom (UK) to show the international community that its gains from free trade on one hand are balanced with the practicing of fair trade on the other hand.
Developed countries dominate the world trade. As shown in Figure 1, the early stages of their products have already big potential to export to other countries. Their consumption is less than production. They have technology and purchasing power. In the developing countries, the situation is reversed. Seemingly, their role is to import because their consumption is greater than their production capacities. As exports are merely surpluses, developing countries get them for a bargain price.
As long as fair trade is offered by developed countries to producers in developing nations, the latter economy will benefit. For the former, it can enjoy potentially natural and organic food because developing countries are largely known for using indigenous raw materials. They do not have research capabilities to consider hi-tech products.
With particular reference to traded foods, fair trade is important in widening the product selection of the consumers in developed countries. Especially with negative perception about genetically-modified foods from the United States and other developed countries, health- and environmental-conscious consumers will remain trusting in the ability of the market to offer wide-range of products.
To fully-implement fair trade, intervention of multinationals both from developed and developing countries are helpful. Multinationals can advertise fair trade efficiently with the rest of the world. As globalization continues to be the cornerstone of most economies, this strategy can affect on greater scale. Further, the transactions costs between the advocates of fair trade, willful developed counties and producers in developing counties can be minimized. Multinationals can simply buy the products of small producers from developing countries and retail them into the global marketplace.
The concept of fair trade
Fair trade is characterized by subsidies that accrue to producers in developing countries in which developed countries transact business. These subsidies come up as relatively higher-than-market prices from the products. This strategy is allowed to help small producers in maintaining sustainable production. Due to this, the characteristic of fair trade as socially and internationally supportive strategy is emanated.
As shown in Figure 2, increasing the buying price of coffee in the market, the local industry would be able to incur surpluses which are suitable for export. The inverted triangle is the excesses in the local economy that can be exported to developed countries. This is possible because the additional price motivates local producers to investment to their production in sustainable manner. Producers may likely hire additional labor, treat them with respect, apply care with the land, developed relationship with other local producers, and the like.
Developed countries can gain in fair trade because specific products that cannot be produced by their economy or in little production can be outsourced or imported using this medium. As observed in Figure 3, discriminating products coming from developing countries is not well to the economy of developed ones because it can entail shortage of a specific product such as coffee. However, when this situation is mitigated through increasing the price of coffee away from the price floor, shortage can be prevented and consumers can even have lower-than-before coffee prices.
Standard economic arguments to fair trade
Using Figure 2, it is apparent that fair trade can result to producers exiting the market because they know that the subsidy will serve as motivation to other producers. Hence, this will result to overproduction and therefore reduction in price which is detrimental to their incomes. They may come a time that no one is buying their products because their prices do not follow the law of supply and demand. On the contrary, non-Fairtrade producers are adversely affected and have no choice but to reduce price.
As long as fair trade encourages more producers to export under the contract, the surpluses can undermine the benefits to them in the long-run. However, in the same figure, it can be observed that the proceeds from the increase in the price which is done in the short-run can be used to developed technologies to make the production more efficient. As a result, producers can compete with decreasing price levels due to market reaction.
On the contrary, the non-Fairtrade producers who likely mark price in the market level are immune to the reduction in price levels away from the increases due to fair trade. In effect, they are less affected in the long-run as long as they will not try to subjectively increase their price levels at the time when fair trade producers are enjoying the subsidies. As a result, the long-run situation for the two kinds of producers is on a balance stance. The surpluses that are created are only eminent on the short-run but eventually proceed to market level.
Objections to fair trade
As fair trade promotes non-discrimination of international goods, it is not exempted to discrimination as cooperatives are the major recipients of the subsidy. In effect, private farms are not given the additional funds to expand production and to improve their processes. As there are also small farmers within this segment, the idea of protecting producers and their workers is undermined.
The price guarantee can also inhibit inefficient production process on the part of fair trade producers. The competitive behavior is eradicated and replaced by waiting behavior, which is, waiting for the long-run where the market demands reaction from them to lower the price due to overproduction. Possibly, overproduction in the long run can be the cause of either efficiency or inefficiency. And so, fair trade producers being inefficient can be acceptable in the long-run as the effects are similar with competition.
Retailers milk from consumers by carrying fair trade goods. It is an unacceptable move from an ethically-motivated strategy in the first place. Supermarkets can increase the tag price to maximize their profit which can be justified by saying that those are imported and foods made from indigenous materials. Further, manufacturers that use fair trade goods can also increase their prices for the final product with the same justification. Direct regulation can destabilize such behaviors.
Figure 1: Product Life Cycle per Country
History: I = Introduction, M = Maturity, D = Decline
Blue = consumption, Red = production
Figure 2: Surplus in the Market Figure 3: Shortage in the Market
Credit:ivythesis.typepad.com
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