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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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  • Number of pages: 2

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Introduction

Fair Trade is an initiative which aids in improving trading conditions and the standard of living in developing countries. Although Fair Trade produce accounts for a small share of the market, the production rate has vastly grown in the past number of years (Fairtrade International 2012b, p. 24). Fair Trade is the term used to refer to the general movement rather than referring to a particular certification such as Fairtrade International. This essay aims to summarize the ideas presented in "The Economics of Fair Trade." Journal of Economic Perspectives, 28 (3): 217-36.

The effectiveness of the initiative has been widely debated. Concerns have been raised whether it is sustainable or makes economic sense, while others, such as Laura Raynolds (2009, p. 1083), have defended it for improving economic stability and increasing incomes in the agricultural sector.

Mechanisms

Fair Trade utilizes a number of mechanisms to achieve its goals. The main procedure is introducing a price floor. A Fair Trade buyer will pay a minimum price which is far above world price as shown in Figure 1 from Fairtrade Foundation. A Fair Trade premium must also be payed by the buyer which facilitates community development. Other mechanisms include providing stability and access to credit for producers, while ensuring good working conditions and environmental practices in farms. All elements in the supply chain must be Fair Trade certified to receive the mark.

Do Consumers Value Fair Trade?

The Fair Trade label offers consumers a credible signal that the goods they are purchasing are produced in a responsible manner. Many studies have been conducted, including one by Hainmuller, Hiscox and Heidkamp (2011), on whether consumers are willing to pay higher prices for responsibly produced goods. Generally, results indicated consumers do value goods produced to Fair Trade standards.

Does Fair Trade Work?

Evidence strongly demonstrates Fair Trade producers receive higher prices and incomes compared to conventional ones as shown by Bacon (2005). This is expected due to the price premium and floor associated with Fair Trade. The higher production volumes associated with Fair Trade also contributes to these higher incomes (Jaffee (2009)). However, when farmers are compared using matching methods or they are examined pre and post certification, this evidence seems to become more inconclusive.

The selection process into Fair Trade seems to be understudied. Studies have been unclear whether selection is positive or negative, although in theory it should be negative as it targets small and disadvantaged farms. This important area requires more research in order to understand the true causal impacts of Fair Trade.

When observing the long run, free entry in certification may bring an end to Free Trade. As more farmers become certified freely, the amount of output that can be sold as Free Trade by each one decreases ceteris paribus. Although monetary benefits for farmers may decline, the social and production development benefits derived from Free Trade spread too.

There are many different certifications available to producers. Evidence shows many producers have more than one certification and this may cause concern as high levels of overlapping certifications with similar requirements may introduce an element of confusion among consumers and make these certifications less effective. New private certifications may also be a marketing ploy to extract more money from consumers. Producers also face more rigorous procedures to obtain these certifications and this may decrease their understanding of what exactly they are. Certifications are growing rapidly yet very little is known of its consequences.

Generally, Fair Trade offers greater financial stability to farmers but there is exceptions to this as observed by Raynolds (2009). She discovered that corporate buyers of coffee often refused to buy from cooperatives that request credit and would only offer short term contracts to producers, usually to fulfill their Free Trade requirement. Despite this she found that cooperatives view financing as one of the most beneficial aspects of Fair Trade, only second to the price floor. Studies often show that Fair Trade farmers possess greater financial stability compared conventional ones in spite of the fact that all their produce may not be sold for Fair Trade prices (Mendez et al. (2010)).

The Fair Trade initiative has been successful in improving environmental practices in its farms. Jaffee (2009) observed that there is a strong association between Fair Trade certifications and environmentally friendly farming practices. Bacon et al. (2008) also found that Fair Trade farmers had implemented soil and water conservation practices at a large rate compared to conventional farmers (43% compared to 10%). This is not unique to Fair Trade as many other environmentally conscious certifications such as Organic evidently have increased environmentally friendly farming practices.

There is minimal research on whether Fair Trade promotes strong relationships within local institutions. Research can often be conflicting, although there are many theoretical reasons as to why it could escalate tensions within a farming cooperative. There is more at stake (increased rents) and farmers often lack considerable knowledge about Fair Trade, causing mistrust.

Distributional Considerations

In the coffee industry farms are small and family owned so workers benefit very little from Fair Trade. Even though farmers’ incomes increase, hired worker’s do not. However, outside of the coffee industry benefits are more noticeable. Certifications have stricter requirements in relation to worker’s welfare on larger plantations which they benefit from. Evidence shows that Fair Trade workers have a better standard of living and working conditions compared to conventional plantation workers. Fair Trade may lead to greater inequality between certified and non-certified farmers due to the increases in income that are earned. In reality, conventional farmers may actually benefit from Fair Trade.  The price premium in Fair Trade aids the wider community with projects in areas such as health and education.

Conclusion

It is clear that Fair Trade does lead to their producers obtaining a higher price for their goods and there is a desire from consumers for responsibly produced goods. In many respects, the initiative achieves many of its objectives. Goods produced are more environmentally friendly and it has helped facilitate change in developing communities across the world. Despite this, Fair Trade, as well as other certifications, and its long-term effects are still grossly understudied. The paper is plagued by uncertainty and conflicting evidence. Until more research is conducted on this topic, Fair Trade will continue to be hotly debated and divisive initiative.

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