Differences between Fair Trade and Free Trade

OUTLINE
A. INTRODUCTION B. BODY I. What are Fair Trade and Free Trade? 1. Fair Trade 1.1. Definition 1.2. History 1.3. Products certificated Fair Trade 2. Free Trade 2.1. Definition 2.2. History 2.3. Goods and services under Free Trade II. Differences between Fair Trade and Free Trade 1. Basic differences 2. Differences in some specific fields 3. Fair Trade vs. Free Trade, which one is better? III. Some arguments for and against Fair Trade 1. For 2. Against C. CONCLUSION

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Differences between Fair Trade and Free Trade

A. INTRODUCTION 1. Topic Differences between Fair Trade and Free Trade Arguments for and against Fair Trade 2. Purpose Provide some information about Fair Trade and Free Trade Analyze basic differences between Fair Trade and Free Trade Point out some arguments for and against Fair Trade

B. BODY I. What are Fair Trade and Free Trade? 1. Fair Trade 1.1. Definition During its long history there have been many different definitions of Fair Trade, but in an attempt to come up with an understanding that can be widely accepted, an informal network of the most important Fair Trade organizations called FINE produced the following definition in 2001: Fair Trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers especially in the South. Fair Trade organizations (backed by consumers) are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional

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Differences between Fair Trade and Free Trade international trade. Fair Trade is not an enforceable, it is more a social movement. Fair Trade is an agreement by certain companies that believes that a certain good should only be brought when the price of the good reflects the real value of that good. Instead of buying really low priced goods, the practice of Fair Trade will price the goods at what they are worth so that the country of origin gets the amount of money that they deserve. Under Fair Trade, producers receive a minimum set price for their goods, financial and technical support, healthy and safe working conditions, economic development of their communities, and educational opportunities for their children. Consumers receive excellent products plus the peace of mind that comes with knowing they are actively addressing poverty, preserving the environment, and promoting an end to child labor. The planet receives a chance at health and healing since Fair Trade actively promotes sustainable farming techniques, biodiversity, and bird and animal habitat preservation. 1.2. History Fair Trade has been around for

approximately 40 years according to FINE, an informal association of the four main trade networks. After World War II, Fair Trade Organizations (FTOs) called Alternative Trade Organizations in their first yearsstarted buying handcrafts from impoverished Puerto Ricans and

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Differences between Fair Trade and Free Trade Europeans and later developing nations. Most FTOs began as missionary projects, humanitarian efforts or activists statements. The concept gained support from non-governmental organizations that worked with FTOs to support producers and workers in developing countries. Then in 1969, Oxfam (Dutch division) started selling Fair Trade goods made by cooperatives in developing regions to build awareness and campaign for trade reform, which led to over 1000 Third World shops in the UK and Switzerland. Producers together with Max Havelaar later introduced the first Fair Trade product certification system and label. By the 1980s to the 2000s, FTOs grew rapidly in response to the hardships in poorer countries and economic unfairness, and saw the creation of networks and associations. Sales topped $2.5 World Fair Trade day 2011 poster billion worldwide by 2007. In 2009, over 65,000 people participated in World Fair Trade Day the largest Fair Trade event in North America. 1.3. Products certificated Fair Trade It is mostly foods that are certified Fair Trade including coffee, tea, chocolate, cocoa, spices, honey, sugar, vanilla, molasses, rice and quinoa, olive oil, avocados, bananas and other tropical fruits. The most notable good that is enforced using Fair Trade is that of the coffee bean. There are also Group 1 English skill 4

Differences between Fair Trade and Free Trade certified flowers and clothing.

Apples and bananas certificated Fair Trade Many products such as crafts, jewelry, and clothing are not yet Fair Trade Certified. Other products on the market that are not Fair Trade Certified or sold through Fair Trade Federation members may also be fairly traded thanks to retailers, who purchase directly from artisans, pay fairly, and ensure that Fair Trade standards are met. 2. Free Trade 2.1. Definition Free Trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports). According to the law of comparative advantage the policy permits trading partners mutual gains from trade of goods and services. In other words, Free Trade is the term for trading between nations, usually two or more nations. It is agreed between these countries that trade between them on certain goods will not be subjected to government interference. Government interference can come in the form of taxes, tariffs, blockades, police force or another type of government issue. Group 1 English skill 5

Differences between Fair Trade and Free Trade Free Trade agreements are usually drawn up between countries using the World Trade Organization and can take a number of years to draw up and agree upon. 2.2. History Free Trade dates back to ancient times from the Phoenicians to the Greeks and Romans to Western European empires. The expanding trade of the late 19th century saw a precursor to Free Trade and globalization. The term laissez-faire (leave it be or let do) was common in political writings throughout the 18 th and 19th centuries and transformed into a school of thought calling for less regulation particularly in international trade. Around World War I, Free Trade policies were revised in favor of protectionism policies, which lasted until the end of World War II until the Breton Woods system standardized trade policies and exchange rates. This accelerated trade not under the Communist bloc. When the Soviet Union fell in 1989, remaining closed markets opened. Free Trade increased in the 1990s and early 2000s into the global economy we have today.

Free Trade areas

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Differences between Fair Trade and Free Trade Under a Free Trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. Free Trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from those that would emerge under deregulation. These governed prices are the result of government intervention in the market through price adjustments or supply restrictions, including protectionist policies. Such government interventions can increase as well as decrease the cost of goods and services to both consumers and producers. 2.3. Goods and services under Free Trade Under Free Trade, goods and services are trade without taxes (including tariffs) or other trade barriers (e.g. quotas on imports or subsidies for producers). There is no trade-distorting policies (such as taxes, subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others, free access to markets and market information, no markets distortion through government-imposed monopoly or oligopoly power. II. Differences between Fair Trade and Free Trade 1. Basic differences Free Trade and Fair Trade share some common goals. Both emphasize the need to assist producers and workers in obtaining access to the global market and to improve wages. Their ideologies when compared closely, however, show some differences. According to the Fair Trade Resource Network: Free Trade is a market model in which trade in goods and services between or within countries flow unhindered by government-imposed restrictions. Fair Trade is an organized social movement and market-based approach to alleviating global poverty

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Differences between Fair Trade and Free Trade and promoting sustainability. The Fair Trade movement promotes the payment of a fair price as well as social and environmental standards in areas related to the production of a wide variety of goods. Fair Trade is not an attempt to erase all principles of Free Trade, or to reverse the global nature of the business environment today. A common misconception is that Fair Trade is the opposite of Free Trade, and the two are often confused. According to Paul Rice of TransFair USA, Fair Trade makes globalization and Free Trade work for the poor (TransFair USA, 2005 Shareholder Report). Fair Trade encourages that rules are needed in order to protect disadvantaged producers. The rules are set to help producers in emerging countries have better trading conditions and awards producers who implement sustainable practices. Rather than leaving wages and environmental standards up to the market, Fair Trade advocates lobby for higher prices and social and environmental standards for producers. Free Trade relies on government tax or monetary gifts/tariffs, subsidies, politics or price controls. Free Trade advocates believe that a leveled trading system among producers around the world matches the global supply chain to demand, while indirectly creating prosperity for everyone involved. Free Trade purports an advantage but actually creates a disadvantage in developing countries for producers and workers who lack the safety nets from social programs found in developed nations. Producers end up losing more when prices are low because they must sell quickly, unlike producers in wealthier nations who can wait to sell their products. It is not unusual to think that Free Trade and Fair Trade are opposing ideas. It is important to understand, however, that government actions and transnational corporations influence the market and that prices respond to weather activities, natural disasters and any existing trade agreements. Due to these uncertainties, the price of

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Differences between Fair Trade and Free Trade goods can fluctuate. As a result, the wages of producers and workers fluctuate. Additionally, there is a supply chain between the producer and the consumer, causing additional loss to intermediaries, even when higher prices are in play. 2. Differences in some specific fields 2.1. Labor and Human rights The treatment of workers is a major departure between free and Fair Trade. Free Trade usually does not include minimum safety, human rights and wage standards, as these are not consistent with the goals of Free Trade. Fair Trade, however, places these issues at its core, insisting on reasonable compensation for workers and reasonable safety, health and human standards of workers.

Child labor, condemned under Fair Trade and accepted under Free Trade 2.2. Financing

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Differences between Fair Trade and Free Trade Free Trade is financed on a cash-on-delivery basis, with workers being paid when they produce. Fair Trade, by making Third World labor a partner in the supply chain, is able to extend credit that can provide income during lean periods. 2.3. Marketing The different marketing approaches of Free and Fair Trade products underscore their divergent orientations. Free Trade products are marketed in a way that maximizes sales and profits. Fair Trade marketing, while seeking profit and sales, focuses on educating the consumer. The table below sums up some differences between Fair Trade and Free Trade: Point of difference Scope

Fair Trade Conventional market mechanism Profit maximization by increasing sales and decreasing overheads

Free Trade Voluntary to engage in fair trade Financial producers countries Protect the interest of vulnerable parties sustainability from to

Objective

developing

Usability

Promote innovation and invention Facilities exchange of

Advantages Price

human Seek non-violation of human rights

resources and technology

Supply and price are determined Pricing of fair products is slightly higher than average

determination by market forces

3. Fair Trade vs. Free Trade, which one is better? Ultimately, all governments aspire to achieve fairness in trade to solve many issues plaguing the trade market through free trade or fair trade, whichever matches their belief system. However, from the above, the points highlighting the what should Group 1 English skill 10

Differences between Fair Trade and Free Trade be and what is aspect of both approaches clearly indicate that fair trade is better than free trade. Even the marketing approach of goods produced under free trade and fair trade are largely distinct. While free trade aims at attracting more consumers to increase sales turnover and generate more profits, fair trade aims at educating the consumers about the benefits of producing goods without the exploitation of labor or the environment. Thus, fair trade mainly thrives on the demand created by the consumers for such products. Often, fair trade products may not be labeled so because labeling has not been made mandatory by most governments. However, free trade products may be labeled as being "recycled" or "sustainably cultivated" but it does not mean that these products were produced with fair means. Several studies conducted by Hicks and Basu indicate that consumers that are less price sensitive are willing to pay extra for products manufactured under fair trade to support such a trade practice that improves the living conditions of those producing their food and promote economic development.

Both Fair Trade and Free Trade are supported If a trade approach cannot solve problems of both sides, the developed and the developing nations as well as the producers and consumers, it is ineffective in

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Differences between Fair Trade and Free Trade fulfillment of the objectives for which it was formed. It must be noted that fair trade has often been criticized by economists for being a means to cover up an inefficient market system. Deemed as the world's largest food and nutrition company - Nestl came under fire in 2005 when it was also dubbed as the globally least responsible company for its role in provoking the coffee crisis that left millions of coffee producers cash-strapped. To improve its public image, the company ran a fair trade for coffee campaign called Coffee with conscience, in 2007. The heavily promoted advertisements stated that Nestl was trying to enhance the living condition of farmers affected by low coffee prices (the fate brought upon by the company itself). Internationally recognized consumer brands like Sainsbury, Cadbury, and Starbucks have already initiated a fair trade conversion process for their products. The government's efforts to effectuate a prosperous economy can be achieved by the coexistence of free trade and fair trade. The latter can help bring poor farmers and producers at par with their affluent counterparts so they may participate in free trade with equal opportunity. This can only be effective on the condition that producers do not resort to unethical ways to bring down costs. This will give rise to a globally effective trading system. III. Some arguments for and against Fair Trade 1. For Fair Trade products are one of the fastest growing branches of food items. Initially focused on coffee growers, Fair Trade now includes many agricultural products. Retail sales of Fair Trade products are increasing rapidly. According to the Fair Trade Labeling Organizations International (FLO), in the year 2009, the sales turnover of fair trade products was 3.4 billion, showing an upward trend. In 2006, UK retail sales of Fair Trade products accounted for 300 million up from 20 million in 1998. The market is expected to keep growing as consumers increasingly choose products based Group 1 English skill

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Differences between Fair Trade and Free Trade on ethical standards. Fair Trade has helped 1.2 million farmers so far by providing adequate infrastructure to improve living conditions and garner sufficient funds to harvest crops since the past 40 years. According to Fair Trade Foundation, Fair Trade is considered to transform trading structures and practices in favor of the poor and

disadvantaged. By facilitating trading partnerships based on equity and transparency, Fair Trade provides farmers with a higher share of the final selling price and enter into long term partnerships with farmers, helping them to deal with volatile swings in prices. There are numerous examples of farmers in developing countries who have been able to use extra income to improve the long term infrastructure of the agricultural sector. 2. Against Beside arguments for Fair Trade, there also exists criticisms of Fair Trade. They are based on the fact that there is a small number of farmers who benefit from higher prices. Other farmers will be worse off. The majority of farmers who benefit are in Mexico a relatively developed country. Only small parts of the poorest African countries are included. According to the Adam Smith Institute, just 10% of the Fair Trade premium actually goes to the produce. Firms at other stages of the production process take the rest. Fair Trade should be considered unfair.

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Differences between Fair Trade and Free Trade

An anti-Fair Trade poster Fair Trade may distort market signals. For example, the coffee industry has suffered from oversupply. Giving some farmers subsidies only encourages them to remain in an oversupplied industry. The falling price of coffee is indicative of too many farmers. The Fair Trade subsidy only supports farmers in an uncompetitive industry. The real long term solution is for farmers to diversify into other income sources. C. CONCLUSION

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