Fair trade

For the product certification system (File:Fairtrade.png), see Fairtrade certification. For other uses, see Fair trade (disambiguation).

File:FairtradeQuinoa.jpg

Certified Fair trade quinoa producers in Ecuador

Kitty Kat Kyle Fair trade is an organized social movement and market-based approach to alleviating global poverty and promoting sustainability. The movement advocates 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. It focuses in particular on exports from developing countries to developed countries, most notably handicrafts, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit, and flowers. Studies have also been undertaken to explore the opportunities for fair trade timber.

Fair trade's strategic intent is to deliberately work with marginalised producers and workers in order to help them move from a position of vulnerability to security and economic self-sufficiency. It also aims at empowering them to become stakeholders in their own organizations and actively play a wider role in the global arena to achieve greater equity in international trade.

Fair trade proponents include a wide array of international religious, development aid, social and environmental organizations such as Oxfam, Amnesty International, and Caritas International.

Like most developmental efforts, fair trade has proven itself controversial and has drawn criticism from both ends of the political spectrum. Some economists and conservative think tanks see fair trade as a type of subsidy. Segments of the left criticize fair trade for not adequately challenging the current trading system.

In 2006, Fair trade certified sales amounted to approximately $2.3 billion worldwide, a 41% year-to-year increase. While this represents less than one hundredth of a percentage point of world trade in physical merchandise, fair trade products generally account for 0.5-5% of all sales in their product categories in Europe and North America. In October 2006, over 1.5 million disadvantaged producers worldwide were directly benefiting from fair trade while an additional 5 million benefited from fair trade funded infrastructure and community development projects.

Definition of fair trade

In 2001, a common definition of fair trade was developed by FINE, an informal association of four international fair trade networks (Fairtrade Labelling Organizations International, International Fair Trade Association, Network of European Worldshops and European Fair Trade Association):

Fair trade is a trading partnership, based on dialogue, transparency and respect, which 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 international trade.

Key fair trade principles

Workers sorting and pulping coffee beans at a fair trade cooperative in Guatemala

Fair trade advocates generally support the following principles and practices in trading relationships:

Creating opportunities for economically disadvantaged producers-

Fair trade is a strategy for poverty alleviation and sustainable development. Its purpose is to create opportunities for producers who have been economically disadvantaged or marginalized by the conventional trading system.

Transparency and accountability-

Fair trade involves transparent management and commercial relations to deal fairly and respectfully with trading partners.

Capacity building-

Fair trade is a means to develop producers’ independence. Fair trade relationships provide continuity, during which producers and their marketing organizations can improve their management skills and their access to new markets.

Payment of a fair price-

A fair price in the regional or local context is one that has been agreed through dialogue and participation. It covers not only the costs of production but enables production which is socially just and environmentally sound. It provides fair pay to the producers and takes into account the principle of equal pay for equal work by women and men. Fairtraders ensure prompt payment to their partners and, whenever possible, help producers with access to pre-harvest or pre-production financing. They also provide money for free primary schools and health care, which really help the people who are not earning enough to send their children to school.

Gender equality-

Fair trade means that the work of men and women is properly valued and rewarded. Each person is always paid for their contribution to the production process and are empowered in their organizations, regardless of gender.

Safe working conditions-

Fair trade means a safe and healthy working environment for producers. The participation of children (if any) does not adversely affect their well-being, security, educational requirements and need for play and conforms to the UN Convention on the Rights of the Child as well as the law and norms in the local context.

Environmental protection-

Fair trade actively encourages better environmental practices and the application of responsible methods of production. Fair trade certifiers for example strictly prohibit the use of genetically modified organisms (GMOs), promote integrated farm management systems that improve soil fertility, and limit the use of harmful agrochemicals in favor of environmentally sustainable farming methods that protect farmers' health and preserve valuable ecosystems for future generations.

General structure of the movement

Most fair trade import organizations are members or certified by one or several national or international federations. These federations coordinate, promote and facilitate the work of fair trade organizations. The following are the largest and most influential:

• The Fair trade Labeling Organizations International (FLO), created in 1997, is an association of 3 producer networks and 20 national labeling initiatives that promote and market the Fair trade Certification Mark in their countries. The FLO labeling system is the largest and most widely recognized standard setting and certification body for labeled Fair trade. It regularly inspects and certifies producer organizations in more than 50 countries in Africa, Asia and Latin America, encompassing approximately one million families of farmers and workers.

• The International Fair Trade Association (IFTA) is a global association created in 1989 of fairtrade producer cooperatives and associations, export marketing companies, importers, retailers, national and regional fair trade networks and fair trade support organizations. In 2004 IFAT launched the FTO Mark which identifies registered Fair Trade Organizations (as opposed to the FLO system, which labels products). IFAT has nearly 300 member organizations in over 60 countries.

• The Network of European Worldshops (NEWS), created in 1994, is the umbrella network of 15 national Worldshop associations in 13 different countries all over Europe.

• The European Fair Trade Association (EFTA), created in 1990, is a network of European fair trade organizations which import products from some 400 economically disadvantaged producer groups in Africa, Asia and Latin America. EFTA's goal is to promote fair trade and to make fair trade importing more efficient and effective. The organization also published yearly various publications on the evolution of the fair trade market. EFTA currently has eleven members in nine different countries.

In 1998, these four federations created together FINE, an informal association whose goal is to harmonize fair trade standards and guidelines, increase the quality and efficiency of fair trade monitoring systems and advocate fair trade politically.

• The Fair Trade Federation (FTF), created in 1994, is an association of Canadian and American fair trade wholesalers, importers and retailers. The organization links its members to fair trade producer groups while acting as a clearinghouse for information on fair trade and providing resources and networking opportunities to its members.

• The Fair trade Action Network, created in 2007, is an international fair trade volunteer web-based network. The association links volunteers from a dozen of European and North American countries, actively supports Fairtrade Town initiatives and encourages grassroots networking at the international level.

Student groups have also been increasingly active in the past years promoting fair trade products both on their campuses and their communities. Although hundreds of independent student organizations are active worldwide, most groups in North America are either affiliated with United Students for Fair Trade (USA) or the Canadian Student Fair Trade Network (Canada).

History

Main article: History of fair trade

The first attempts to commercialize fair trade goods in Northern markets were initiated in the 1940s and 1950s by religious groups and various politically oriented non-governmental organizations (NGOs). Ten Thousand Villages, an NGO within the Mennonite Central Committee (MCC) and SERRV International were the first, in 1946 and 1949 respectively, to develop fair trade supply chains in developing countries. The products, almost exclusively handicrafts ranging from jute goods to cross-stitch work, were mostly sold in churches or fairs. The goods themselves had often no other function than to indicate that a donation had been made.

Solidarity trade

Fair Trade goods sold in Worldshops

The current fair trade movement was shaped in Europe in the 1960s. Fair trade during that period was often seen as a political gesture against neo-imperialism: radical student movements began targeting multinational corporations and concerns that traditional business models were fundamentally flawed started to emerge. The slogan at the time, “Trade not Aid”, gained international recognition in 1968 when it was adopted by the UNCTAD (United Nations Conference on Trade and Development) to put the emphasis on the establishment of fair trade relations with the developing world.

The year 1965 saw the creation of the first Alternative Trading Organization (ATO): that year, British NGO Oxfam launched "Helping-by-Selling", a program which sold imported handicrafts in Oxfam stores in the UK and from mail-order catalogues.

In 1969, the first Worldshop opened its doors in the Netherlands. The initiative aimed at bringing the principles of fair trade to the retail sector by selling almost exclusively goods produced under fair trade terms in “underdeveloped regions”. The first shop was run by volunteers and was so successful that dozens of similar shops soon went into business in the Benelux countries, Germany and in other Western European countries.

Throughout the 1960s and 1970s, important segments of the fair trade movement worked to find markets for products from countries that were excluded from the mainstream trading channels for political reasons. Thousands of volunteers sold coffee from Angola and Nicaragua in Worldshops, in the back of churches, from their homes and from stands in public places, using the products as a vehicle to deliver their message: give disadvantaged producers in developing countries a fair chance on the world’s market, and you support their self-determined sustainable development. The alternative trade movement blossomed, if not in sales, then at least in terms of dozens of ATOs being established on both sides of the Atlantic, of scores of Worldshops being set up, and of well-organized actions and campaigns attacking exploitation and foreign domination, and promoting the ideals of Nelson Mandela, Julius Nyerere and the Nicaraguan Sandinistas: the right to independence and self-determination, to equitable access to the world’s markets and consumers.

Handcrafts vs. agricultural goods

In the early 1980s, Alternative Trading Organizations faced a major challenge: the novelty of some fair trade products started wearing off, demand reached a plateau and some handicrafts began to look “tired and old fashioned” in the marketplace.The decline of segments of the handicrafts market forced fair trade supporters to rethink their business model and their goals. Moreover, fair trade supporters during this period became increasingly worried by the impact of the fall of agricultural commodity prices on poor producers. Many then believed it was the movement's responsibility to address the issue and to find innovative remedies to react to the ongoing crisis in the industry.

In the subsequent years, fair trade agricultural commodities played an important role in the growth of many ATOs: successful on the market, they offered a much-needed, renewable source of income for producers and provided Alternative Trading Organizations a perfect complement to the handicrafts market. The first fair trade agricultural products were tea and coffee, quickly followed by dried fruits, cocoa, sugar, fruit juices, rice, spices and nuts. While in 1992, a sales value ratio of 80 % handcrafts to 20 % agricultural goods was the norm, in 2002 handcrafts amounted to 25.4 % of fair trade sales while commodity food lines were up at 69.4 %.

Rise of labelling initiatives

Early Fairtrade Certifications Marks

Sales of fair trade products only really took off with the arrival of the first Fairtrade labelling initiatives. Although buoyed by ever growing sales, fair trade had been generally contained to relatively small Worldshops scattered across Europe and to a lesser extent, North America. Some felt that these shops were too disconnected from the rhythm and the lifestyle of contemporary developed societies. The inconvenience of going to them to buy only a product or two was too high even for the most dedicated customers. The only way to increase sale opportunities was to start offering fair trade products where consumers normally shop, in large distribution channels. The problem was to find a way to expand distribution without compromising consumer trust in fair trade products and in their origins.

A solution was found in 1988, when the first Fairtrade labelling initiative, Max Havelaar, was created in the Netherlands under the initiative of Nico Roozen, Frans Van Der Hoff and Dutch development NGO Solidaridad. The independent certification allowed the goods to be sold outside the Worldshops and into the mainstream, reaching a larger consumer segment and boosting fair trade sales significantly. The labeling initiative also allowed customers and distributors alike to track the origin of the goods to confirm that the products were really benefiting the producers at the end of the supply chain.

The concept caught on: in the ensuing years, similar non-profit Fairtrade labelling organizations were set up in other European countries and North America. In 1997, a process of convergence among labelling organizations – or “LIs” (for “Labelling Initiatives”) – led to the creation of Fairtrade Labelling Organizations International. FLO is an umbrella organization whose mission is to set the Fairtrade standards, support, inspect and certify disadvantaged producers and harmonize the Fairtrade message across the movement.

In 2002, FLO launched for the first time an International Fairtrade Certification Mark. The goals of the launch were to improve the visibility of the Mark on supermarket shelves, facilitate cross border trade and simplify procedures for both producers and importers. At present, the certification mark is used in over 50 countries and on dozens of different products, based on FLO’s certification for coffee, tea, rice, bananas, mangoes, cocoa, cotton, sugar, honey, fruit juices, nuts, fresh fruit, quinoa, herbs and spices, wine and footballs etc.

Fair trade today

Global fair trade sales have soared over the past decade. The increase has been particularly spectacular among Fairtrade labelled goods: in 2006, these sales amounted to approximately $2.3 billion worldwide, a 41 % year-to-year increase. As per December 2006, 569 producer organizations in 58 developing countries were FLO-CERT Fairtrade certified and over 150 were IFAT registered..

Fairtrade Labelling Organizations (FLO) product certification

File:Fairtrade.png

International Fairtrade Certification Mark

File:TransFair.gif

Fair Trade Certified Mark (USA & Canada)

Main article: Fairtrade certification

Note: Customary spelling of Fairtrade is one word when referring to the FLO product labeling system

Fairtrade labelling (usually simply Fairtrade or Fair Trade Certified in the US) is a certification system designed to allow consumers to identify goods which meet agreed standards. Overseen by a standard-setting body (FLO International) and a certification body (FLO-CERT), the system involves independent auditing of producers and traders to ensure the agreed standards are met.

For a product to carry either the International Fairtrade Certification Mark or the Fair Trade Certified Mark, it must come from FLO-CERT inspected and certified producer organizations. The crops must be grown and harvested in accordance with the international Fairtrade standards set by FLO International. The supply chain must also have been monitored by FLO-CERT, to ensure the integrity of labelled products.

Fairtrade certification guarantees not only fair prices, but also the principles of ethical purchasing. These principles include adherence to ILO agreements such as those banning child and slave labour, guaranteeing a safe workplace and the right to unionise, adherence to the United Nations charter of human rights, a fair price that covers the cost of production and facilitates social development, and protection and conservation of the environment. The Fairtrade certification system also promotes long-term business relationships between buyers and sellers, crop prefinancing and greater transparency throughout the supply chain and more.

The Fairtrade certification system covers a growing range of products, including bananas, honey, coffee, oranges, cocoa, cotton, dried and fresh fruits and vegetables, juices, nuts and oil seeds, quinoa, rice, spices, sugar, tea and wine. Companies offering products that meet the Fairtrade standards may apply for licences to use one of the Fairtrade Certification Marks for those products.

The International Fairtrade Certification Mark was launched in 2002 by FLO, and replaced twelve Marks used by various Fairtrade labelling initiatives. The new Certification Mark is currently used worldwide (with the exception of Canada and the United States).

The Fair Trade Certified Mark, used in Canada and in the United States, also still identifies Fairtrade goods in both countries. Full transition to the new Mark should become reality in the future as it gradually replaces the old Certification Marks in both countries.

IFAT Fair Trade Organization membership

File:Ftomark.jpg

IFAT Fair Trade Organization Mark

In an effort to complement the Fairtrade product certification system and allow most notably handcraft producers to also sell their products outside worldshops, the International Fair Trade Association (IFAT) launched in 2004 a new Mark to identify fair trade organizations (as opposed to products in the case of FLO International and Fairtrade). Called the FTO Mark, it allows consumers to recognize registered Fair Trade Organizations worldwide and guarantees that standards are being implemented regarding working conditions, wages, child labour and the environment.

The FTO Mark gave for the first time all Fair Trade Organizations (including handcrafts producers) definable recognition amongst consumers, existing and new business partners, governments and donors.

Fair trade impact studies

Main article: Fair trade impact studies

Several independent studies have recently measured the impact of fair trade on disadvantaged farmers and workers. The following studies are described and discussed on the Fair trade impact studies page.

• Brewing Justice: Fair Trade Coffee, Sustainability and Survival
• The Impact of Fair Trade on Producers and their Organizations: A Case Study with Coocafe in Costa Rica
• One Cup at a time: Poverty Alleviation and Fair Trade coffee in Latin America
• Étude d'impact du commerce équitable sur les organisations et familles paysannes et leurs territoires dans la filière café des Yungas de Bolivie
• Confronting the Coffee Crisis: Can Fair Trade, Organic, and Specialty Coffees Reduce Small-Scale Farmer Vulnerability in Northern Nicaragua?
• Fair Trade on marginalised producers: an impact analysis on Kenyan farmers
• Assessing the Potential of Fair Trade for Poverty Reduction and Conflict Prevention: A Case Study of Bolivian Coffee Producers

Fair trade and politics

European Union

Display of Fairtrade products at the Derbyshire County Council head office

As early as 1994, the European Commission prepared the “Memo on alternative trade” in which it declared its support for strengthening Fair Trade in the South and North and its intention to establish an EC Working Group on Fair Trade. Furthermore, the same year, the European Parliament adopted the “Resolution on promoting fairness and solidarity in North South trade” (OJ C 44, 14.2.1994), a resolution voicing its support for fair trade.

In 1996, the Economic and Social Committee adopted an “Opinion on the European “Fair Trade” marking movement”. A year later, in 1997, the document was followed by a resolution adopted by the European Parliament, calling on the Commission to support Fair Trade banana operators. The same year, the European Commission published a survey on “Attitudes of EU consumers to Fair Trade bananas”, concluding that Fair Trade bananas would be commercially viable in several EU Member States.

In 1998, the European Parliament adopted the “Resolution on Fair Trade” (OJ C 226/73, 20.07.1998), which was followed by the Commission in 1999 that adopted the “Communication from the Commission to the Council on “Fair Trade” COM(1999) 619 final, 29.11.1999.

In 2000, public institutions in Europe started purchasing Fairtrade Certified coffee and tea. Furthermore, that year, the Cotonou Agreement made specific reference to the promotion of Fair Trade in article 23 g) and in the Compendium. The European Parliament and Council Directive 2000/36/EC also suggested promoting Fair Trade.

In 2001 and 2002, several other EU papers explicitly mentioned fair trade, most notably the 2001 Green Paper on Corporate Social Responsibility and the 2002 Communication on Trade and Development.

In 2004, the European Union adopted the “Agricultural Commodity Chains, Dependence and Poverty – A proposal for an EU Action Plan”, with a specific reference to the Fair Trade movement which has “been setting the trend for a more socio-economically responsible trade.” (COM(2004)0089).

In 2005, in the European Commission communication “Policy Coherence for Development – Accelerating progress towards attaining the Millennium Development Goals”, (COM(2005) 134 final, 12.04.2005), Fair Trade is mentioned as “a tool for poverty reduction and sustainable development”.

And finally, on July 6, 2006, the European Parliament unanimously adopted a resolution on Fair Trade, recognizing the benefits achieved by the Fair Trade movement, suggesting the development of an EU-wide policy on Fair Trade, defining criteria that need to be fulfilled under Fair Trade to protect it from abuse and calling for greater support to Fair Trade (EP resolution “Fair Trade and development”, 6 July 2006)

"This resolution responds to the impressive growth of Fair Trade, showing the increasing interest of European consumers in responsible purchasing," said Green MEP Frithjof Schmidt during the plenary debate. Peter Mandelson, EU Commissioner for External Trade, responded that the resolution will be well-received at the Commission. "Fair Trade makes the consumers think and therefore it is even more valuable. We need to develop a coherent policy framework and this resolution will help us."

Belgium

Belgian lawmakers discussed as early as 2006 a possible legislation on fair trade. In January 2008, lawmakers proposed possible definitions and three proposals were debated. A consensus on a common definition, however, has not yet been reached.

France

In 2005, French parliament member Antoine Herth issued the report “40 proposals to sustain the development of Fair Trade”. The report was followed the same year by a law, proposing to establish a Commission to recognize Fair Trade Organisations (article 60 of law no. 2005-882, Small and Medium Enterprises, 2 August 2005).

In parallel to the legislative developments, also in 2006, the French chapter of ISO (AFNOR) adopted a reference document on Fair Trade after five years of discussion.

Italy

In 2006, Italian lawmakers started debating how to introduce a law on fair trade in Parliament. A consultation process involving a wide range of stakeholders was launched early October. A common definition of fair trade was most notably developed. However, its adoption is still pending as the efforts were stalled by the 2008 Italian political crisis.

Netherlands

The Dutch province of Groningen was sued in 2007 by coffee supplier Douwe Egberts for explicitly requiring its coffee suppliers to meet fair trade criteria, most notably the payment of a minimum price and a development premium to producer cooperatives. Douwe Egberts, which sells a number of coffee brands under self-developed ethical criteria, believed the requirements were discriminatory. After several months of discussions and legal challenges, the province of Groningen prevailed in a well-publicized judgment. Coen de Ruiter, director of the Max Havelaar Foundation, called the victory a landmark event: "it provides governmental institutions the freedom in their purchasing policy to require suppliers to provide coffee that bears the fair trade criteria, so that a substantial and meaningful contribution is made in the fight against poverty through the daily cup of coffee".

United Kingdom

In 2007, both Scottish and Welsh governments were actively attempting to become the "world's first fair trade country". In Wales, the campaign to make Wales the world’s first Fair Trade country was launched in 2004 by the National Assembly for Wales. In Scotland, First Minister Jack McConnell pledged that Scotland will aim to become a "Fair Trade Nation".

In June 2007, a parliamentary committee published the report Fair Trade and Development, criticising the government for "failing to adequately support fair trade despite having said it wanted to help poor countries trade their way out of poverty". The MPs, led by Malcolm Bruce, said the Department for International Development "had not kept pace with growing support for fair trade among the public and retailers".

The committee report examined several ethical trading schemes and concluded that fair trade was "gold standard in terms of trading relations with producers". It called for greater support both domestically and internationally of fair trade organisations and recommended making a senior official responsible for fair trade within the government. The report also suggested to commission research on the feasibility of a labelling scheme which will force all retailers to show how much they paid farmers and workers in the developing world for each particular product.

Common justifications for fair trade

Fairtrade Certified Rice Producer in Thailand

Implicit and often explicit in fair trade is a criticism of the current organization of international trade as being "unfair". Fair trade advocates argue in favor of the need for fair trade by mentioning the purported microeconomic market failures of the current system and an alleged commodity crisis and its impact on developing country producers.

Free trade and market failures

All FINE members and fair trade federations support in theory the principles of unhindered free trade. However, as Alex Nicholls, social entrepreneurship professor at Oxford University, states, the "key conditions on which classical and neo-liberal trade theories are based are notably absent in rural agricultural societies in many developing countries." Perfect market information, perfect access to markets and credit, and the ability to switch production techniques and outputs in response to market information are fundamental assumptions which "are fallacious in the context of agricultural producers and workers in developing countries".

The example of coffee is particularly telling: "since it takes from three to four years for a coffee plant to produce significant quantities of coffee, and up to seven years before the plant reaches peak productivity, it is difficult for coffee farmers to react quickly to price fluctuations. As a result, coffee supply often increases even as market prices plummet. Further, this leads to a collective action problem, where each farmer has an incentive to increase production as price falls in order to reduce per unit cost and increase his or her margins. In aggregate, this activity creates a negative feedback loop and further depresses the world price."

According to Fair trade proponents, this example clearly shows how the absence of perfect microeconomic conditions can nullify or even reverse the potential gains to producers from trade. While Nicholls agrees that the win-win situation for all actors involved may be broadly correct in some markets, nevertheless, "within developing countries market conditions are not such that producers can unambiguously be declared to be better off through trade." The existence of these market failures lessens the capacity trade has to lift developing countries out of poverty.

Fair trade is seen as an attempt to address these purported market failures by providing producers a stable price for their crop, business support, access to premium Northern markets and better general trading conditions.

The commodity crisis

Fair trade advocates also often point out that unregulated competition in global commodity markets ever since the 1970s and 1980s has encouraged a price "race to the bottom". During the 1970-2000 period, prices for many of the main agricultural exports of developing countries, such as sugar, cotton, cocoa and coffee, fell by 30 to 60 percent. According to the European Commission, “the abandonment of international intervention policies at the end of the 1980s and the commodity market reforms of the 1990s in the developing countries left the commodity sectors, and in particular small producers, largely to themselves in their struggle with the demands of the markets”. Today, “producers… live an unpredictable existence because the prices for a wide range of commodities are very volatile and in addition follow a declining long-term trend”. The total loss for developing countries due to falling commodity prices has been estimated by the Food and Agricultural Organisation (FAO) to total almost $250 billion during the 1980-2002 period.

Millions of poor farmers are dependent on commodities and on the price they receive for their harvest. In about 50 developing countries, three or fewer primary commodity exports constitute the bulk of export revenue.

Many farmers, often without other means of subsistence, are obliged to produce more and more, no matter how low the prices are. Research has shown that those who suffer most from declines in commodity prices are the rural poor — i.e. the majority of people living in developing countries. Basic agriculture employs over 50% of the people in developing countries, and accounts for 33% of their GDP.

Fair trade supporters believe current market prices do not properly reflect the true costs associated with production; they believe only a well-managed stable minimum price system can cover environmental and social production costs.

Criticism

Main article: Fair trade debate

Fair trade's increasing popularity has drawn criticism from both ends of the political spectrum. Some economists and think tanks see "fair trade" as a type of subsidy that impedes growth. Segments of the left criticize fair trade for not adequately challenging the current trading system.

Price distortion argument

Effects of a Price Floor

Criticism: Fair trade opponents such as the Adam Smith Institute claim that similar to other farm subsidies, fair trade attempts to set a price floor for a good that is in many cases above the market price and therefore encourages, as fair trade opponents claim, existing producers to produce more and new producers to enter the market, leading to excess supply. Through the laws of supply and demand, excess supply can lead to lower prices in the non-Fair Trade market.{.

In 2003, Cato Institute's vice president for research Brink Lindsey referred to fair trade as a “well intentioned, interventionist scheme...doomed to end in failure." Fair trade, according to Lindsey, is a misguided attempt to make up for market failures in which one flawed pricing structure is replaced with another.Lindsey's comments echo the main criticisms of Fair Trade, claiming that it "leads fair trade producers to increase production." While benefiting a number of Fair Trade producers over the short run, fair trade critics worry about the impact on long run development and economic growth. Economic theory suggests that when prices are low due to surplus production, adding a subsidy or otherwise artificially raising prices will only exacerbate the problem by encouraging more supply and also encouraging workers into unproductive activities.

Response: The Fairtrade Foundation counters the price distortion argument by claiming that fair trade does not ‘fix prices’. "It rather has a minimum floor price that ensures farmers can meet the costs of sustainable production should market prices fall below this level. The minimum price is not a fixed price but the starting point for a market-based price negotiation. Many fair trade growers routinely earn more than this for the quality, type of coffee bean (or other product) or the particular origin they offer. The minimum price mechanism provides the most vulnerable people in the supply chain the security to meet their basic costs in time of crisis. Effectively, it provides a safety net should markets fall below a level considered necessary for farmers to earn back the costs of sustainable production".

Moreoever, the fair trade minimum price only applies if the market price is lower than this. When market prices exceed the minimum price, traders must negotiate on the basis of market prices, not fair trade minimums.

Several academics, including Hayes, Becchetti and Rosati, identify two other counterarguments to this criticism.

1. First, in many cases the exchange between producers and intermediaries does not occur in a competitive framework. In such case the market price is a distortion because it does not reflect the productivity of producers but their lower market power.
2. Second, the price distortion argument does not take into account the principles of product differentiation. Coffee, for example, cannot be compared to other commodities such as oil: there is not one single type of coffee but instead many different brands that are differentiated from one another in terms of quality, blends, packaging, and now also "social responsibility" features. Consumer demand and taste define what different market prices are acceptable for each of these products. In this sense, fair trade can be considered as a market-driven innovation in the food industry that creates a new range of products for which a growing segment of consumers are willing to pay more based on environmental and social responsibility claims.

And finally, beyond these elements, it is also important to also take into account all the other non-price related potential benefits of the fair trade value chain in terms of technical assistance, democratization of markets through increasing consumer power, crop diversification programs, etc.