Fair Trade - Research Paper Example

?Running Head: IS FAIR TRADE FAIR? Is Fair Trade Fair? “Fair Trade is a trading partnership based on dialogue, transparency, and respect” (Mare, 2008, p. 1923), which is aimed at greater equity in global trade. It “is an alternative approach to conventional” (What is Fairtrade? 2011) pattern of trade. The four pillars of fair trade structure, namely, “institutions, producers, consumers, and government/policy” (Stenn, 2012) are now found to make huge contributions to sustainable development through the provision of better trading conditions in partnerships between the producers and the consumers, and protecting the rights of the “marginalized producers and workers” (Mare, 2008, p. 1923). Fair Trade organizations works in opposition to the capitalist market system, but works within it (Fair trade critique, 2010). They are backed by consumers and are engaged enthusiastically in supporting producers, raising consciousness and in organizing campaigns for bringing changes in the existing policies and practices of international trade. The producers in the South are often found to be marginalized to a great extent. The Fair Trade Organizations are working to make trading a fair practice which would accommodate the interests of all the trading partners. The concept of fair trade is relatively new and is commanding the interest of many researchers in current times. This paper presents a critical analysis of the concept of fair trade and evaluation of the practice by utilizing the theory of economics. The benefits of fair trade One of the most vital market based mechanisms is the practice of fair trade, which helps in the improvement of the livelihoods of the producers based in the developing countries (Nicholls & Opal, 2005, p. 5). The partnership between the producers and the consumers is targeted to provide a fair share of the benefits of trade to the farm workers and the farmers. This addresses “the imbalance of power in trading relationships” (What is Fairtrade? 2011). In many countries, particularly in the countries in the South, the farmers and agricultural producers are deprived of the actual yield of profits. Under fair trade the price for the products they sell is set according to the norms of the Fair trade Standards. Involvement of these workers in fair trade helps them to get better deals and also a superior terms of trade (O’Neill, 2007). This in turn provides them with the opportunity to lead a better standard of life and make better plans for their future. Fair trade prices The fair trade price is the minimum price that has to be paid to the fair trade producers. This price acts “as a safety net” (What is Fairtrade? 2011) for the farmers. It is determined by the regulations mentioned in the Fair trade Standards. This price is associated to all the products that are Fair trade certified. This price is set in such a way that it can cover the “average costs of sustainable production” (What is Fairtrade? 2011). When the markets fall below the level of sustainable production, the farmers obtain a meager price for their produces; the fair trade prices are designed to safeguard the interests of the vulnerable producers. Sometimes the prices are negotiated with the buyers to yield a higher price on the basis of the quality of the products. Classical theory of employment According to the classical school of economics “the wage is equal to the marginal product of labor” (Keynes, n.d.). This implies that the real wage entitled to an employed person is the minimum amount of remuneration provided to the person to induce him to put the amount of effort or labor that is actually exerted. The wage is equal to the value of output that is foregone when one unit of the labor is removed from the process of production. The classical theory of economics is built under the assumption of the competitive market, in which the amount of labor employed and the amount of wages are determined by the forces of the market. In this context, the disutility of employment may be understood as the reasons that might instigate a feeling of dissatisfaction in a single laborer or a group of laborers to that might make them withhold their labor. They would better not work than put their effort and accept a wage that provides a level of utility below the minimum level. Fair trade and Classical free trade theory: A comparison The classical theory postulates that the utility of a given wage rate equals the marginal disutility generated by the amount of unemployment at a given volume of employment. This postulate arrives from the conception that the real wage rate of labor is determined by the bargains regarding the wage rate, which the labor force strikes with the entrepreneurs. Under assumption of free competition in the labor market and infinite number of employers, laborers can bring the real wage rate to conform with the mount of employment offered by them. However, the small producers in reality do not have the market power to bargain with the employers and determine the real wage rate to cover the average cost of the labor. The classical theories of competition and self regulation of the market have been contested by the concept of fair trade. Fair Trade is a comparatively new concept that has developed as an alternative option to the phenomenon of free trade. It focuses on the well being of the producers (Schmelzer, 2007). In theory, the free trade is a desirable situation and is ideal in the sense that every economic agent involved in this arrangement benefits. But in the real situation, international trade proves biased towards the consumers of the developed countries. The original classical trade theory proposed by Adam Smith and David Ricardo claims that the countries engaged in trade specialize in the production of those goods in which they enjoy comparative advantage. They export these commodities and imports those in the production of which they incur higher costs compared to their trading partner. This arrangement is followed naturally by the trading countries and is guided by an ‘invisible hand’ of the free market. The free market is termed as the ‘universal economic franchisement’ (Political Ideas of the Classical Economists, 2013). Traders of both countries are benefited in this process. However, in real trade situations, such free trade have been found to lead to the transfer of wealth from the developing countries to the developed. The developing countries mostly engage in production of agricultural goods and export them, while they import the manufactured goods from the exporters of developed countries. This implies they export low priced agricultural products and import high priced manufactured goods. This is a cause of “perverse transfer of wealth” (Schmelzer, 2007). Liberalization of world trade The international institutions, namely, “the World Bank and the International Monetary Fund” have liberalized international trade. It has lead to a sharp rise of the total volume of trade globally. This on the other side of the coin has caused incidents of inequality, which has grown alongside the growth of the global free trade. The income of the forty percent of the population of the world is only five percent of the total global income. Gains from Fair Trade The existence of the market for fair trade can be traced back to the years after the World War II. Since then Fair Trade has undergone a variety of changes and has been incorporated into the market systems for innumerable products. With the advent of the twenty first century, the Fair Trade has brought enormous profits and depicts huge growth rate. Many main stream retailers have considered Fair trade as a serious option for their business. Between the years of 2003 and 2004 the sales of products which has been labeled as Fair Trade products have increased by approximately fifty six percent (Schmelzer, 2007). The world wide sales of Fair Trade labeled products are estimated at more than 2.89 billion euros for the year of 2008 (Nelson and Pound, 2011) and is projected to grow further. Critical review of Fair Trade Fair trade strives to protect the small farmers where the large businesses draw special privileges from the government and act as a barrier to growth for the smaller ones (Haight, 2011). The policy of Fair trade is established as an alternative and not a substitute for free trade. In several cases, Fair Trade does not fully address the real cause of low prices of agricultural goods, as in case of prices of coffee which is produced in excessive amounts in Bolivia. Coffee beans is one of the most valuable products of the fair trade market (Mohan, 2010). Argues that the Fair trade model rewards the farmers that produce commodities of poor quality (Sidwell, 2008, p. 13) and there is not very fair entirely. Besides, Fair trade has the ability to change the structure of class systems in countries like Indonesia and the Latin American countries (Criticisms of Fair Trade, n.d.). Conclusion Fair trade is not a way that can bring a solution to the incident of rural poverty in the developing countries. However, it is practiced with the ultimate objective of helping the poor households to improve their conditions of livelihood and come out of their situations of penury. Fair Trade allows the producers of the developing countries to get the right price for their goods, since the buyers are necessitated to pay the Fair trade minimum price, which is calculated over “the costs of sustainable production” (Nelson & Pound, 2011). Therefore it brings higher returns to them than before and stabilizes their income to a large extent. The practice of fair trade is an attempt to reform the trade agreements between the countries of “the North and the South” (Whisler, 2009, p. 3). References Criticisms of Fair Trade, (n.d.). retrieved on February 14, 2013 from https://www.mtholyoke.edu/courses/sgabriel/FairTrade/criticism.htm Fair trade critique, (2010), World hunger relief, retrieved on February 14, 2013 from http://worldhungerrelief.org/fair-trade-critique/ Haight, C. (2011). The problem with Fair Trade coffee, retrieved on February 14, 2013 from http://www.ssireview.org/articles/entry/the_problem_with_fair_trade_coffee Keynes, J. M. (n.d.). The General Theory of Employment, Interest and Money, retrieved on February 14, 2013 from http://gutenberg.net.au/ebooks03/0300071h/chap02.html Mohan, S. (2010), Fair Trade Without the Froth: A Dispassionate Economic Analysis of “Fair Trade”, retrieved on February 14, 2013 from http://www.independent.org/publications/tir/article.asp?a=858 Mare, A. L. (2008). The Impact of Fair Trade on Social and Economic Development: A Review of the Literature, Geography Compass, 2 (6), pp. 1922-1942. Nicholls & Opal, (2005). Fair Trade: Market-Driven Ethical Consumption. SAGE. Nelson, V. and Pound,B. (2011), A review of the impact of fair trade over the last ten years, Natural Resources Institute, retrieved on February 14, 2013 from http://www.fairtrade.org.uk/resources/natural_resources_institute.aspx O’Neill, B. (2007), How fair is fair trade?, retrieved on February 14, 2013 from http://news.bbc.co.uk/2/hi/uk_news/magazine/6426417.stm Political Ideas of the Classical Economists, (2013), retrieved on February 14, 2013 from http://oll.libertyfund.org/index.php?Itemid=282&id=1244&option=com_content&task=view Stenn, T. (2012), Fair Trade and Justice: A Case Study of Fair Trade and its effect on the Freedom of Bolivia’s indigenous women, New England Council for Latin American Studies, retrieved on February 14, 2013 from www.icape.org/d6-stenn.pdf Schmelzer, M. (2007), Fair Trade – In or against the Market?, retrieved on February 14, 2013 from http://www.threefolding.org/essays/2007-01-001.html Sidwell, M. (2008). Adam Smith Institute, retrieved on February 14, 2013 from http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=8&cad=rja&ved=0CGcQFjAH&url=http%3A%2F%2Fwww.adamsmith.org%2Fimages%2Fpdf%2Funfair_trade.pdf&ei=EuMdUf-4IMTprQebloCQAw&usg=AFQjCNEFnX_e7xJyRftk2prw82q62Fu77g&bvm=bv.42553238,d.bmk What is Fairtrade? (2011), Fairtrade International, retrieved on February 14, 2013 from http://www.fairtrade.net/what_is_fairtrade.html Whisler, J. (2009), A Critique of Fair Trade, Journal of Undergraduate Research XII, pp. 1-9. Read More