Fair Trade Analysis

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An Economic View of Fair Trade
Veranika Zhavaranak
LCC International University
Coffee is one of the most valuable products in world market. It makes a big business for farmers around the world, especially those in developing countries, where a large number of growers depend on coffee because it provides a particularly important part of the export earnings. Even though international trade provides benefits by allowing countries to export goods whose production make relatively heavy use of resources that are locally abundant, financial returns from trade are not always able to improve the standard of living in poor exporting countries (Krugman, 2005). Fair trade is supposed to resolve this problem because its main purpose is to give an opportunity for developing countries to rise above poverty and to increase living standards (Wielechowski, Roman, 2012). Yet while having a variety of benefits, fair trade has been intensively criticized by exporting countries as well as consumers of fair trade products. For countries producers the negative aspects of fair trade are mostly connected to the variety obstacles for export, such as specific requirements along with costs for product certifications; meanwhile the consumers express most of their concerns about high prices of fair trade goods. Trade between wealthy and poor countries has always been a sophisticated issue. On the one side, businesses in less technologically advanced countries often worry the opening their economies to international trade will lead to disaster because their industries won’t be able to compete. On the other side, people in technologically advanced nations where workers earn high wages often fear that trading with less advanced, lower-wage countries will drag their standard of living down (Krugman, 2005). Fair trade organizations nevertheless are aimed to operate in order to provide more equal distribution of returns between developed and undeveloped countries (Wielechowski, Roman, 2012). A primary goal for fair trade organizations is to work for the development of the poorest countries of the third World communities and building sustainable, direct relations between the people in poor countries and consumers in wealthy parts of the world. Even though the value of retail sales of Fair Trade products has increased 5 times over the past 8 years from 2004 till 2011, Fair Trade system continues to be criticized (Wielechowski, Roman, 2012). Most of the complaints are connected to high prices of fair trade products which lead to a variety of unpleasant consequences, such as overproduction (since fair trade farmers are paid higher prices, they increase the production), which becomes harmful for non-fair trade producers, and producing lower quality products (because of paying extra price for commodities based not on quality but on employment and other conditions). Furthermore, it is believed that much of the price-premium goes to fair trade bureaucracy rather than to the producers, thus there’s no evidence where the money goes (Wielechowski, Roman, 2012). Besides, the consumers consider that higher prices are not really relevant to get a real premium for social environmental and developmental quality (Pedregal, Ozcaglar-Toulouse, 2011). According to Pedregal and Ozcaglar-Toulouse’s research, 10% executives share this opinion against 22% laborers, 26% employees and 32% tradesmen, craftsmen and business owners. It is seen price dissatisfaction applies to all social classes (Pedregal, Ozcaglar-Toulouse, 2011). According to Krugman trade should be allowed only if it doesn’t hurt lower-income people (Krugman, 2005). Even though in this case trade doesn’t hurt any group of people dramatically, there’s a certain percent of people in every social class, who find the trade not appropriate for their consumption capabilities. Krugman states changes in the relative price would have strong effect on income...
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