Fair Trade: Risks And Opportunities

Introduction

Fairtrade is a non-profit organisation with the purposes of offering producers in developing countries acceptable prices, better market, social and environmental resources (Raynold, 2009). Based on the analysis of unfavourable external environment and potential risks, this essay will provide insights about why businesses, especially small businesses, should not join Fairtrade.

Critical Evaluation

Imperfections exist in Fairtrade system, one of the fundamental problems is the certification issues. Organisations such as Fairtrade Labelling Organisation (FLO), define fair-trade standards and certify products. According to Hira and Ferrie (2006), these outside non-governmental organisations set strict standards for fair-trade participants, however, the enforcement goes against the normal interests of businessmen who intend to optimize their supply chains and switching marketing strategies based on market information such as changes in prices and demand. For instance, prices act as signals in business to increase/decrease demand and/or supply, since Fairtrade offers a minimum price level for producers, which may not reflect demand and supply fluctuation effectively. (Maseland & Vaal, 2002). In other words, the minimum price level does against the basic sense of business.

Another problem is Fairtrade may not help the poorest producer. Businesses intend to help disadvantaged producers in developing countries from a sense of social responsibility, however, Fairtrade only cooperates with certified producers who are required to purchase the certification (Sidwell, 2008), therefore, the poorest producer such as numerous landless workers have no access to benefits from fair-trade.

Nevertheless, advantages of Fairtrade are significant. According to Renard (2005), Fairtrade plays an important role in some aspect, for example, environmental conservation, food safety, better working and living condition for producers, and higher income, these achievements also bring Fairtrade partners good reputation. To companies, good reputations are significant because they have the potential to create value. Moreover, researches show that consumers do care about responsible reputation of a company and to whom consumers are willing to pay substantially more (Pelsmacker, Driesen, & Rayp, 2005). Thus, for companies intending to expand their market share, joining Fairtrade could be an unmissable chance.

On the one hand, company may gain positive reputations and achieve better financial performance by becoming a partner of Fairtrade, on the other hand, the potential risks should not be ignored, especially for small-sized businesses. In general, Fairtrade partners are required to pay a price premium on specific products, the burden may shift to consumers so that they will pay more to get the same products. However, coffee is a commodity with relatively low price, and there are hundreds of different products in the market, indicating that the switching cost would be low and consumer bargaining power would be relatively high (Muradian & Pelupessy, 2005). Rising price in a product may lead customers switching to other, and the loss for a small business is difficult to gauge. Flourishing coffee industry benefits from growing population and sinking global coffee price, meanwhile, although fair-trade market grows rapidly in recent years, fair-trade products still represent a minor share comparing with world market (Raynolds, Murray, & Taylor, 2004). Therefore, for a small business, joining Fairtrade without considering the risk of consumer attrition will be counterproductive.

Conclusion

This essay demonstrates critical problems and risks of joining Fairtrade and the conclusion is that joining Fairtrade for a business maybe an unwise choice. Fairtrade offers its partners opportunities to improve businesses’ reputation, so consumers are willing to purchase fair-trade labelled products. Whereas, Fairtrade may be not ‘fair’ – the poorest group have no access to fair-trade, the size of fair-trade market is small, the minimum price level does against market rules, and small businesses may not afford the loss due to potential consumer attrition. Therefore, for small-size businesses, instead of joining Fairtrade, it is better to follow fair-trade principles without getting the certification, or simply to establish a charity fund to help poorest producers.

Reference List

1. Hira, A., & Ferrie, J. (2006). Fair trade: three key challenges for reaching the maintainstream. Journal of Business Ethics, 63(2), 107-118. doi: 10.1007/s10551-005-3041-8
2. Maseland, R., & Vaal, A. d. (2002). How fair is fair trade? De Economist, 150(3), 251-272. doi: 10.1023/A:1016161727537
3. Muradian, R., & Pelupessy, W. (2005). Governing the coffee chain: the role of voluntary regulatory systems. World Development, 33(12), 2029-2044. doi: 10.1016/j.worlddev.2005.06.007
4. Pelsmacker, P. D., Driesen, L., & Rayp, G. (2005). Do consumers care about ethics? Willingness to pay for fair-trade coffee. Journal of Consumer Affairs, 39(2), 363-385. doi: 10.1111/j.1745-6606.2005.00019.x
5. Raynold, L. (2009). Mainstreaming fair trade coffee: from partnership to traceability. World Development, 37(6), 1083-1093. doi: 10.1016/j.worlddev.2008.10.001
6. Raynolds, L. T., Murray, D., & Taylor, P. L. (2004). Fair trade coffee: building producer capacity via global networks. Journal of International Development, 16(8), 1109-1121. doi: 10.1002/jid.1136
7. Renard, M.-C. (2005). Quality certification, regulation and power in fair trade. Journal of Rural Studies, 21(4), 419-431. doi: 10.1016/j.jrurstud.2005.09.002
8. Sidwell, M. (2008). Unfair trade. London: Adam Smith Institute.