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How Fair is Fair Trade? - Canadian Fair Trade fair is fair trade.pdf · PDF file fair trade constitutes an improvement to free trade and protectionism in compara-tive cost based models

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    This paper investigates to what extent fair trade programmes, are indeed ‘fair.’ This is accomplished by comparing fair trade with free trade and protectionist trade regimes on their compliance of the criteria set by the fair trade movement itself. This comparison is made using comparative cost based models and economies of scale models. It is found that whether or not fair trade is superior to free trade or protectionism is highly dependent on a number of characteristics of the products to which fair trade is applied as well as on the context within which international trade takes place.


    A long-standing debate in development economics has been the one between ad- vocates of free trade and proponents of protectionism in developing countries. While the former argued that free trade would offer large opportunities for poor countries to improve their situation, the latter considered trade to be harmful to poorer countries and typically preferred a combination of protectionism and de- velopment aid. This opposition tended to dominate the discussion about the role of international trade in the Third World. �Bhagwati �1993�, Krueger �1990��

    However, in recent years, a third position has come up. This position main- tains that international trade can be beneficial to developing countries as long as it is performed in a just manner. The idea behind this is that, in conducting trade, we have a moral obligation to pay decent prices for products that have been pro- duced under decent conditions. In many western countries organisations have emerged which conduct trade in such a way and which succeed in selling prod- ucts for a price above market level, because of their guarantee that the extra money is directly going to the producers. Such organisations, which include for example Oxfam in the United Kingdom, Max Havelaar in the Netherlands or Solidar’monde in France, have become known as Fair Trade Organisations

    * University of Nijmegen. Mailing Address: A. de Vaal, Nijmegen School of Management, Univer- sity of Nijmegen, PO Box 9108, 6500 HK Nijmegen, the Netherlands; [email protected] ** The authors would like to thank Marcel Wissenburg, Harry Garretsen, Eelke de Jong, Richard Nahuis, and three anonymous referees for their helpful comments on an earlier version of this paper.

    DE ECONOMIST 150, NO. 3, 2002

    De Economist 150, 251–272, 2002. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.

  • �FTO’s�.1 The past two decades saw a strong growth of the market share of these organisations as well as of the range of products they offer. In addition, the type of conduct they embody – fair trade – has succeeded in gaining widespread ac- ceptance among the public as being an effective tool for alleviating poverty and a reasonable alternative to aid and free trade �Beuningen �2000��.2

    The idea that paying higher prices for products from Third World countries will help developing countries may have a certain intuitive appeal, but if one looks beyond the direct income transfer effect, it is far from evident that this would be the case. One can imagine that the practice of fair trade organisations might lead to market distortions that cause adverse effects if one takes on a more broad perspective. In spite of this, these organisations claim that trade conducted the way they do is fair, which is a view that is widely shared among the public. In this paper we would like to study the validity of this claim.

    In order to do this we first need to make clear what fair trade exactly is. Con- fusing in this respect is the fact that the term ‘fair trade’ nowadays is used to indicate two entirely different positions. The first of these is the fair trade that calls for protectionist measures by developed countries against products that have been produced in poorer countries at prices developed countries cannot compete with because of their different economic circumstances. Protectionism is de- fended by arguing that trade should only be conducted on a level-playing field. Products that have been produced cheaper in a country because of specific favourable circumstances have to be excluded from trade in this view. Taken to the extreme, this would mean that all trade based upon comparative advantage should be abolished; in practice, the argument is mostly used to protect domestic industries in developed economies against cheaper imports from countries with low labour costs. This argument has been attacked convincingly in Bhagwati �1993�.

    This protectionist stance is completely different from the concept of fair trade we will discuss. The fair trade with which we will deal here is a manner of con- duct by consumers, engaged in pro-poor trade with developing countries. Instead of prohibiting trade in products produced with, for example, cheaper labour in developing countries, this kind of fair trade attempts to redress the income con- sequences of such differences through trade. ‘Fair trade’ in this paper refers to the consumer movement that has come up in several Western countries in the past decades, in which people feel obliged to pay prices above market level for products produced under certain conditions in Third World countries. Crucial in this practice is that restricting oneself to goods produced under these conditions

    1 Although this movement is a relatively recent phenomenon, it shows some resemblance with much older �pre-capitalist� ideas about economy and society. The idea of a morally just price, for example, was one of the hurdles capitalism had to take before becoming established in Western Europe. See, for example, Thompson �1971�. 2 Although recently the growth seems to have stagnated, as can be deduced from following the media.


  • and paying higher prices are both considered to be moral obligations rather than preferences; only this type of conduct is considered to be just. The fact that fair- trading is a moral obligation means that there is no trade-off possible between these principles and consumer preferences. This could be compared with certain religious prohibitions: the prohibition to eat pork for a Muslim, for example, is absolute, and it will hold no matter how much utility could be gained by eating pork. Such principles can be seen as ‘ideological constraints,’ analogous to a bud- get constraint; preferences have to be weighed within such constraints, which are themselves not part of a utility function.

    The moral obligation to act in this fair trade manner stems from an idea of justice that lies underneath the fair trade concept. The conduct called fair trade, in other words, is an operationalisation of an idea of what just trade would be. Whether this underlying idea of justice is correct or not is a question that lies far beyond the scope of economics and we will therefore not address it here. One could question, however, whether fair trade’s operationalisation of the idea of jus- tice in trade is correct or not; does the practice of fair trade indeed comply with the ideas of justice behind the fair trade concept? In other words, is fair trade fair according to its own standards in comparison with free trade and protection- ism?

    This question will be studied from the two analytical angles that are central stage in international trade theory. First, we will answer it using a Heckscher- Ohlin framework, focusing on comparative cost based inter-industry trade. In such models, trade is typically superior to no-trade on a country level of analysis, but there are strong effects on the income distribution within countries. Second, we will discuss the question from the point of view of trade models where intra- industry trade and scale economies play a role. In such models, income distribu- tion effects within countries are generally absent �unless they also incorporate comparative advantage elements�, but then the gains from trade on a country level are not always positive.3

    The outline of this paper will be as follows. In section 2 we discuss ideas of justice behind the fair trade concept. Section 3 is devoted to the question whether fair trade constitutes an improvement to free trade and protectionism in compara- tive cost based models. In section 4 we deal with the same question for models based on scale economies. Section 5, finally, concludes.

    3 This is mainly true for models that incorporate external economies of scale, which are either di- rectly modelled �e.g. Ethier �1979��, or come about as a result of pecuniary externalities that are generated by the interaction of returns to scale at the firm level and the existence of transportation costs �e.g. Krugman �1991�, Krugman and Venables �1995��.



    To answer the question whether fair trade is fair according to its own standards we first need to make clear which ideas of justice lie underneath the fair trade approach. A problem with this is that adherents of fair trade are organised in a myriad of organisations, which all have their own particular understanding of what fairness in trade constitutes or should constitute. Upon inspection of many of the arguments raised it is possible though to come up with a crude categori- sation of fair trade arguments in: �a� arguments that relate to certain conditions under which trade, and the production of traded goods, should minimally take place, and �b� arguments that deal with the consequences of trade.4

    With respect to the first group of arguments, the main arguments are that the

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