Does Fairtrade do more harm than good?

The idea behind the Fairtrade brand is to give developing-world companies, farmers and workers a better deal. But does it actually work?

The idea behind the Fairtrade brand is to give developing-world companies, farmers and workers a better deal. But does it actually work?

What is Fairtrade?

Fairtrade is a brand for goods that are supposed to guarantee a better deal for producers and communities in the developing world. Firms that market Fairtrade products enter into long-term agreements with their suppliers, covering areas such as the environment, labour standards and a minimum price for the goods, which is usually well above the standard rate. For example, coffee prices are around 10% above the current market price and were more than 50% above the market during the 2002 slump. As a result, Fairtrade products have higher retail prices than non-Fairtrade, although the premium varies: for commodity goods, such as coffee and bananas, the difference is often relatively small because the extra paid to the supplier is insignificant compared to other costs, such as transport.

How does it work?

A group called the Fairtrade Labelling Organisation (FLO) decides which products can be branded Fairtrade and monitors everyone involved in the supply chain to make sure they stick to the standards. The suppliers are co-operatives or small, developing-world firms. The processors and traders who originally bought from them also tended to be small and quite idealistic: the first product, launched in 1989, was a Mexican coffee sold in the Netherlands under the name of Max Havelaar, after a fictional anti-colonialist in a Dutch novel. But in recent years, major food groups have moved into the market. Nestl recently launched a Fairtrade coffee blend and most UK supermarkets carry Fairtrade goods.

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How big is the market?

In industry terms, it's tiny. Worldwide, Fairtrade retail sales in 2004 were estimated at $1bn, compared with total food retail sales of around $2trn. Coffee is the biggest seller, with annual revenue of around $87m, but that's still less than 1% of world coffee trade. However, in some countries Fairtrade has cornered a large slice of the retail market. In Switzerland, 47% of bananas, 28% of flowers and 9% of sugar are Fairtrade, according to the FLO. In the much larger UK market, it accounts for 20% of ground coffee, 5.5% of bananas and 5% of tea. And demand is growing as people become more conscious of global inequality and feel that buying Fairtrade is a way of combating it.

How fast is it growing?

The FLO claims that it's one of the fastest-growing markets in the world, with European sales doubling in five years. The UK seems to be embracing it wholeheartedly in March, Sainsbury's reported that it was selling £1m worth of Fairtrade goods each week, a 70% increase on the previous year. As awareness of the brand grows the FLO says that over half of UK consumers know the Fairtrade label more and more large firms are flocking into the market. But this move into the mainstream has not been without problems. The decision to let Nestl use the Fairtrade brand on its coffee was heavily criticised, as many of the same people who support Fairtrade accuse Nestl of business practices that damage the developing world. And the brand's higher profile has brought a good deal of scrutiny, much of it critical.

What do its supporters say?

Fairtrade makes a major difference to millions of developing-world farmers and workers. The FLO says that, in 2004, producers got an extra $100m in revenue as a result of Fairtrade 10% of the value of Fairtrade retail sales that year. But it's not just about prices close co-operation with producers and the assurance of long-term contracts encourages community development in areas such as education and health.

What do the critics say?

In big-picture terms, Fairtrade does nothing to help the developing world. At present, it's too small an initiative to have any significant impact and is likely to stay that way because there are only a limited number of consumers who will shop on politics rather than value and quality. But if it were to expand substantially, the effect would be damaging because of the distortion it would cause in the market for developing-world goods. Prices for commodities such as coffee are weak because markets are oversupplied, but the widespread guarantee of long-term higher prices would encourage an expansion in production. This would worsen the oversupply and cause non-Fairtrade prices to collapse even further thus putting farmers who aren't lucky enough to be under Fairtrade contracts in an even worse situation (and if supply glut was serious enough, threatening the viability of the Fairtrade system). Instead of propping up prices in these markets, producers should be encouraged to diversify into less crowded ones.

So does Fairtrade help?

It helps producers with Fairtrade deals, but it isn't the solution to the developing world's problems. Abolishing agricultural subsidies in the West would have a far greater effect these cost the developing world $24bn a year in lost revenue, according to one study.

Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.