Fair Trade Legislation: Well Designed

Myth or Definition of the Guidelines for

Future Commerce?
Jurgita Sarkovaite
ABSTRACT
Fair trade has been one of the top topics in the world of economics for
the last few years. Yet, the discussion of how really fair trade works and
who benefits from it most is still on-going. There are 4 major
international organizations working on defining fair trade standards and
implementing fair trade policies, but it looks like the rules are still
dictated by the multinational importers and exporters and none of
countries or economic blocks authorities has found the way to enforce
the implementation of fair trade principles. From my personal point of
view, as well as from the macroeconomic perspective, fair trade should
not be seen as a privilege, but as the natural and the only way of trading
goods and services. Therefore, the main objective of my seminar paper
will be to analyse the current regulations on fair trade in the
international market and answer the question what is missing to make
the fair trade a commercial principle, not the exception.


Definitions and Abbreviations
1

Fair Trade
2
: Is a trading partnership, based on dialogue, transparency and respect,
that seek 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.
Fair trade
Labelling
Organisations
International
(FLO)
An umbrella organisation set up in April 1997 created to co-ordinate
the work of the various national Fair trade initiatives and to run the
monitoring programmes more efficiently. A central responsibility for
FLO is to collect data and ensure the audit of all Fair trade-labelled
products from the producer to the supermarket shelf.
FINE Abbreviation for the informal network of the four Fair Trade
organizations (FLO, International Federation for Alternative Trade
(IFAT), Network of European World Shops (NEWS), European Fair
Trade Association (EFTA)
ATO Alternative Trade Organisation
CSR Corporate Social Responsibilit
EU European Union
NGO Non-Governmental Organisation



1
Definitions retrieved and adapted from http://www.maketradefair.com
2
Definition agreed by the four Fair Trade organisations: Fair trade Labelling Organisations
International, International Federation for Alternative Trade, Network of European World Shops,
European Fair Trade Association
Table of Contents
DEFINITIONS AND ABBREVIATIONS 3
INTRODUCTION 5
WHO IS REALLY BENEFITING FROM THE FAIR TRADE? 7
PRODUCERS 7
CONSUMERS 7
INTERMEDIARIES 8
NATIONAL ECONOMIES 8
FAIR TRADE STANDARDS HARMONIZATION AND THE ROLE OF NGOS IN SOLVING THE PROBLEM 9
FAIR TRADE CERTIFIED 10
FLO CERTIFICATION 10
REAL LIFE EXAMPLE AND THE NEED OF ESTABLISHING LEGAL REGULATION SYSTEM 11
WALES THE FIRST FAIR TRADE NATION 12
EU INITIATIVES 12
WTO POSITION 13
CONCLUSIONS 14
REFERENCES 16


Introduction
From the very early arousal of the issues of the Fair Trade that backs up to the
Interwar period and the first legislation acts such as emerging competition laws and
California Unfair Practices Act the same principal of the Fair Trade has been severely
discussed. A lot of discussions are still ongoing up to these days and there is no
general agreement on a single definition that results in different perceptions about
who should the Fair Trade really benefit and how its practices should be applied.
There is a wide range of local and international organizations around the world
continuously fighting for the implementation of Fair trade policies on national and
supranational basis, but until now it seems that everything stays on recommendations
level and is being left to decide for the companies, whether to introduce Fair Trade
into their CSR policies. Although there is an exception of Wales, being nominated as
the first Fair Trade Nation (Townley, 2009), where the Fair Trade principles are
officially regulated by the State law in Catering industry and is being expanded to
other industries and market sectors.
However, here lies the main criticism of the implementation of the Fair Trade. There
are few sources of critics, coming from different economic and social perspectives,
such as:
the real benefits for consumers, producers and intermediaries to get involved
in the Fair Trade process are doubtful;
Legal requirements and generally agreed standards of fairly traded goods are
not approved by any jurisdictional authorities and vary according to regions
and markets which creates confusion for all market players and distorts
expectations;
The position of governments and international organizations, such as WTO,
EU bodies and other decision makers of the global market is unclear towards
the Fair Trade.
There are more influential factors, of course, but these are the main issues discussed
at the international levels among business, government and NGOs representatives
during the last ten years. Therefore, I see it important to take a deeper look at each of
these factors in answering the question whether in the future Fair Trade principles will
become universally accepted commercial norms or it will remain at its formation
stage as a premium consumption indicator at economically wealthy countries and a
marketing tool for the multinational corporations to demonstrate their commitment to
the global society.

Who is really benefiting from the Fair Trade?
According to the definition proposed by FINE and widely adopted worldwide, the
main interest group supposed to benefit from the fair trade are small and medium
scale producers in the economically weak and developing countries. Although some
authors (Arnould, 2009, etc.) use Fair Trade terminology in a wider extent, involving
the rights of consumers access to the information about the product origins. But I
would also like to consider the positive effects on other important market participants
involved in the Fair Trade. Lets take a look at each of them individually.
Producers
Small and medium scale producers play the most important role in the Fair Trade
chain. Providing high quality usually agricultural products and other raw material as
cotton, that are produced in environmentally friendly way, without violating human
and/or animal rights and ensuring safe working conditions and fair waging system for
the campus workers, these producers are enabled to charge premium price for their
products in order to satisfy the requirements implied by the intermediaries that usually
work according to FINE or ATO defined standards for fairly traded goods. Moreover,
these intermediaries have the obligation to partially subsidize various license fees for
the producers and sign long-term contracts to ensure sustainable economic growth and
price stability for the primary material providers (Arnould, Plastina, and Ball, 2009).
Taken this into consideration, producers within the Fair Trade networks, such as
TransFair International and similar organisations gain direct benefits from
participating in the channel activities and receive various facilities and consultations
about fostering the companys economic growth as well social integration of the
community to take advantage of the programme, that includes professional education,
scientific investigations in the field of region specialization, creation of new working
places, etc. Such opportunities and successful examples are encouraging non-member
producers to achieve the required quality standards and contribute to the creation of
sustainable economic welfare of their region as well.
Consumers
On the other side of the chain there is a final consumer. Noticing the latest trends of
increased consumer preferences for natural products and organic goods (Mintel
International Group, 2009) we can conclude that cutting offs on casual spending
during the financial crisis made the consumers to become more value conscious and
start taking care about the products they use and what possible impacts of their health
and wellbeing they can have. That leads us to the favourable situation for fairly traded
goods that allow consumer to be aware from where their products come and how they
were produced. In other words Fair Trade fulfils consumers right to perfect
information. Another major benefit is that it facilitates the development of the direct
linkages of Southern producers with businesses and consumers in the economically
wealthy countries (Townley, 2009). It not only increases awareness of business and
investment possibilities in the African or Latin American countries, but also alters the
standards of goods provided for the final consumer.
Intermediaries
The middle part of the chain large exporters, importers and reproducers of the
fairly traded goods supply chain is probably the most criticized of all. Without
discussing the reasoning of those critics here, neither legal nor moral, those usually
arise, consider the mutual benefits the intermediaries receive from the Fair Trade.
Firstly the Fair Trade principle is based on a perfectly competitive market with
many operating firms, which allows the intermediaries get the fair price. On the other
side of the coin, intermediaries are able to provide consumers with all the information
about the product origins and gain customers trust and loyalty which ensures
sustainable long term relations, mutually beneficial for all the supply chain parties.
National Economies
Finally, the least direct participant in the Fair Trade market, although one of the most
influential can be the national economies of both, supplying and consuming countries.
The national economies benefit directly from collecting taxes on fairly traded goods,
exports and imports, VAT tax (depending on national laws, whether the tax is charged
only on final consumption good or at all stages during the transferring process).
Indirectly from creation of official work places and social guaranties for the campus
workers in the producing countries, as well as from the creation of integrated
infrastructure in the industry logistic chains, educational and investigation centres
(Arnould, Plastina, and Ball, 2009).
So it looks like all the parties should be motivated to implement Fair Trade standards
in as many fields as possible as everybody benefits from it. However, we know that in
reality models use not to work properly as they ought to for several reasons abuse of
power, wrong priorities and different goals of the parties, cheating, etc. It is one of the
most obvious examples of the tragedy of commons economic model (Hardin, 1968)
where everybody is seeking to maximize its own profit although overall welfare is
steadily decreasing. The difference is that in this case, the only player having the
power to manipulate others is the middle part the intermediaries. As it normally
happens, these are huge multinational corporations, in monopolistic or oligopolistic
market operating exporters and importers, having control over the main distribution
channels and therefore able to influence producer and consumer price expectations
and information flows. ATO and FINE are actively working in the field of setting
price floors for the producers, but there is no way to regulate the outbound chain and
other complementary factors as their marketing campaign and information disclosure.
This results that the concept of Fair Trade is distorted by various misleading messages
and moral scandals in different companies and in the mass society is often seen as a
trend of ethical consumerism. The customers and local producers feel being cheated
on prices and hidden information; local economies suffer from inability to enforce the
implementation of Fair Trade practices in multinational corporations. And this leads
us to the main issue of this paper: who should responsible for regulating the Fair
Trade implementation process at microeconomic level among individual firms as well
as at macroeconomic level considering national regulations and international trade
standards.
Fair Trade standards harmonization and the role of NGOs in solving the
problem
As mentioned in the introduction, there are actually four major organisations defining
the standards of Fair Trade based relations and implementation of its principles on a
worldwide basis. These four organisations, also known as FINE have defined specific
standards for the production, packaging and distribution process on fairly traded
goods and established easily recognizable certification system on each category of
goods, such as tea, coffee, and cocoa products, fruits and vegetables, and cotton, as
well as some non-traditional cultures. Let us take a closer look on some examples of
such certifications.
Fair Trade Certified
TransFair International was one of the first organizations to
implement certification system for the fairly traded goods, and at
the beginning was the most widely used certification system with
the logo indicated in the picture 1. In order to get this certification,
producers have to fill in the online application form with an
extended explanation of their business model and production
process, when there is an in-depth investigation run by the
TransFair International experts on quality, processes and legal
issues, and if everything is fine, the producer is obliged to pay the
licence fee and gets the right to mark his products with TransFair
International certification logo, under the agreement that the
certifying NGO will monitor and evaluate regularly the compliance of Fair Trade
standard requirements. These requirements are regularly revised and updated in order
to meet the latest environmental, labour and developmental standards within the
countries and/or companies using this certification system.
FLO certification
In 2002 FLO launched International FAIRTRADE Certification
Mark with the main objective to increase the visibility of the
fairly traded goods on the supermarket shelves and draw
societys attention to the issue, as well as facilitate export
procedures for producers and exporters. FLO-CERT
certification now is the most widely adopted certification that
replaced other certification systems all other the world (except
USA where TransFair International is still being used). It is
agreed that this certification system has been the greatest
achievement and proof of FINE efforts in the field of
standardizing requirements applied for the fairly traded good
producers and exporters. As for the quality assurance, FLO has established the
separate inspection FLO-CERT responsible for the assurance that FAIRTRADE
certified producers and traders comply with the standards set and defined by the FLO
Picture 1 TransFair International
certification logo
Picture 2 FLO-CERT established
International Fairtrade Certification logo
which defines the pricing, economical and developmental criteria as well as legal
issues and quality assessment.
Fortunately, it seems that these and some other smaller certification systems have
gained the trust of national authorities and consumers in developed countries and are
positively accepted in the market. Although numbers are impressively increasing year
by year (International Fair Trade Report, 2011), it is clear that fairly traded goods still
corresponds only to a small percentage in the commodities market. And the reason for
this is very obvious all these international organisations have developed strong
certification, monitoring and audit systems to help the businesses implementing the
Fair Trade principles. They did a huge work in Fair Trade standard harmonization and
acceptance at the international, which facilitates a lot the expansion of the Fair Trade
producers and traders network. But the final decision whether to join those trading
networks, or not, belong to private companies and neither FINE nor any other NGO
working in the field has a legitimate power to force it. And however it is, we have to
face the reality, that price premium faced in the Fair Trade scares the majority of self-
profit maximizing companies that are more concerned about the possibility to provide
their customers more affordable prices rather than focused on philanthropic activities
and universal economic development. And with this point we arrive to the last and the
most important question of this paper should the Fair Trade practices, considering
the benefits received by all participating parties, be enforced by any kind of legitimate
authorities, or left for the individual decision of individual business companies?
Real Life example and the Need of Establishing Legal Regulation System
To be able to address this issue with strong arguments, we must look whether there
have been any intentions by the national governments or other legitimate bodies to
implement the Fair Trade system and adapt it to certain economic circumstances and
market needs. And as we normally now USA going foot by foot with innovation in
every field, this time its liberal policies on market regulations left it behind the
European intentions. Although in the World Summit for the Sustainable Development
that took place in 2002 in Johannesburg the Fair Trade was actively discussed as one
of the possible means to achieve the sustainable economic growth and increase living
standards in the developing countries, the world leaders did not agreed on any
particular solutions considering the regulations of the fairly traded goods movement.
Although, there are separate attention worth cases of the individual nations within the
EU, whose achievements in the field could be set as an example for the further
development of national and international legislations.
Wales the First Fair Trade Nation
Waless government is probably the one with the most serious attitudes towards the
international community and commitment to the United Nations Millennium Goals.
One of them is to halve global poverty by the 2015. According to these references, in
2005 Welsh government announced their strategy for international development and
integrated the Fair Trade implementation as a key component to the strategy success.
They established the Fair Trade Nation campaign for the 3 years with political
leadership, special facilities on taxation and the financing for the companies that
decide to implement the Fair Trade principles into their businesses. Over 3 years of
joint efforts of legal authorities, local and international organizations, producers,
importers, exporters and local distributors finally achieved the goals initially set by
the campaign that included not only policy changes, but perception changes of the
nature of business. In 2008 an independent panel of experts from fair trade
organisations (European and UK-based) agreed that Wales had met its targets for
becoming a Fair Trade Nation (Townley, 2009). There were no statutory penalties or
enforcement measures for those, who did not like to apply the Fair Trade principles,
but the massive campaigns and created facilities benefited businesses to take action in
changing their scope of operations, which finally led to the overall acceptance, that
the Fair Trade is the right way into both, economic growth and sustainable
development.
EU initiatives
Although until today EU has not agreed on any permanent directives concerning the
implementation of the Fair Trade, there have been various initiatives by the EU
bodies and coherent organisations realized on the project basis. Between 1997 and
2004 EU had fully or partially funded 66 projects in the field of sustainable
development, from which some of them like Shopping for a Better World or
Sustainable Banana Economy had the direct connection with Fair Trade (Lamy,
2004). So actually, what we can see is that EU is continuously promoting Fair Trade
through the CSR implementation in private sector, but there are no enforcement tools
for the companies who reject or even not consider this alternative.
WTO Position
WTO has a strong favourable position towards the Fair Trade. It established a
separate organisation promoting it, which is closely interrelated with FLO foundation
FAIRTRADE. The WTO foundation represents its public opinion related to the
questions on the Fair Trade, plays the advisory role in FLO-CERT certification
decisions, but does not work in implementation of any obligatory regulations or
directives for the WTO members addressing Fair Trade issues at the international
levels.
As a result, there are some good examples, every year there are some campaigns and
promotional projects, world leaders discuss the issue at almost every Summit and
general meeting. But 8 years have passed from this inspiring speech of Pascal Lamy
in the Conference of Fair Trade organized by the European Parliament in Brussels at
2004, and there are still no real measures taken. Although Fair Trade benefits seems
obvious in the long run, implementation of the Fair Trade networks today, especially
having in mind current economic situation in Europe and United States, creates the
necessity for additional encouragement. And national governments, as well as such
bodies as the EU at the regional or WTO on the global level, have a legitimate power
and resources to establish such requirements and take necessary steps for
implementation of Fair Trade that would go beyond the voluntary participation of
individual companies and creation of worldwide accepted standards of the sustainable
economic relations among the countries.

Conclusions
All in all, taken everything into consideration, I suppose it is only a matter of time and
investment, both of financial and non-material resources such as informational and
educational campaigns, consultations on legal issues and disposition of quality
standards. The question is if the world is ready to accept this need. Of course, the
contribution to the worlds sustainable development would seem like a sufficient
reason for the countries to switch to the Fair Trade, but the reality is that business is
based on the satisfaction of the economic needs firstly, and the welfare of the general
society only later. Although, another trend of the recent years is noticed that
companies start using the strategy of CSR and tends to contribute more to the creation
of common wellbeing in the society they are part of. However, in some cases the CSR
and Fair Trade are used just as catchy slogans of the marketing campaigns, and such
abuse creates bad reputation of the whole issue. But it is clearly seen that the trend of
Fair Trade practices is getting more and more weight every year as well as higher and
higher profits (economical and non-economical), both for the producers in developing
countries and traders in the wealthier countries where those goods are sold. Knowing
economic principles of supply and demand, it is not difficult to predict that increasing
profits will shift the supply as well, leading to the urgent need for market regulation
on state or international level.
Therefore, I would like to highlight the point, that such regulations are needed as soon
as possible in order to ensure proactive attitude on the issue of the legislative bodies
and prevent the possibilities of future abuse of the Fair Trade defined certification,
operations and misleading information spreading among the costumers. Also, based
on the Welsh example, such regulations, when they are adopted, should not only
clearly define the requirements for the businesses to be called a part of Fair Trade
network, but suggest how all the infrastructure should be created in order to facilitate
the transition from the traditional competition based trade to the Fair Trade, which
involves three major steps: 1) informing all supply chain parties (producers,
intermediaries and consumers) about the benefits received from the Fair Trade, 2)
educating producers to fulfil quality and process requirements in order their goods
would be recognized as Fair Trade products, and finally, 3) facilitate the transition
with taxation exemptions or other means acceptable for the regulating institution.
And the final point is that I strongly believe it would be the most beneficial to agree
on Fair Trade legislation on international globalized level, assuring the same
conditions, quality and price levels among the nations and preventing the future
misunderstanding upon non-harmonized standards. Taking the justified and to long
term sustainability oriented decisions will surely define the guidelines for the
standards of future commerce, based on economic stability and mutual benefits for the
global society.

References
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