Fair Trade

Fair trade is a social movement and a system of product certification that seeks better terms for farmers and workers in developing countries. Certified buyers commit to pay at least a guaranteed minimum price, plus an extra premium that producer groups invest in community or business projects, and producers commit to labour, environmental and governance standards. Coffee, cocoa, bananas, tea, sugar, cotton and flowers are the best-known fair trade goods.

The phrase is used in two ways. In lowercase, "fair trade" describes the wider movement and its ideas. "Fairtrade" (one word) is the registered mark of Fairtrade International, the largest certification system. Other schemes include Fair Trade USA and the World Fair Trade Organization (WFTO), which certifies whole enterprises. Fair trade is distinct from free trade, which concerns the removal of government barriers rather than the prices private buyers pay.

Imagine a group of small farmers who sell their crop to a trader at whatever price the market sets that week. In a good year they do fine; in a bad year the price can drop below what it cost them to grow it. Under a fair trade deal, the buyer agrees in advance never to pay less than a set floor, and to add a small extra amount that the farmers' group can spend on a school, a clinic or better equipment.

Shoppers who see the label on a jar of coffee know that this promise was made somewhere along the chain. They often pay a little more, choosing to share some of the risk the farmers usually carry alone.

The movement grew from charitable and church-based trading. Ten Thousand Villages traces its roots to 1946, when Edna Ruth Byler began selling Puerto Rican needlework in the United States, and Oxfam opened shops selling crafts in Britain from the 1960s. In 1988 the first fair trade label, Max Havelaar, was launched in the Netherlands for coffee from a Mexican cooperative. National labels joined to form Fairtrade Labelling Organizations International in 1997, now Fairtrade International, based in Bonn. Fair Trade USA left that network at the end of 2011 and runs its own standards, which also certify large plantations. The WFTO, founded in 1989, certifies organisations whose whole business follows fair trade principles.

For many products Fairtrade International sets a Fairtrade Minimum Price and a separate Fairtrade Premium. The price a certified buyer pays is:

• $P$ is the price paid to the producer organisation.
• $P_{\text{min}}$ is the Fairtrade Minimum Price.
• $P_{\text{mkt}}$ is the prevailing market price, often a commodity futures contract price plus quality differentials.
• $\text{Premium}$ is the fixed amount reserved for community or business investment.

Worked example: since 1 August 2023 the minimum for washed arabica coffee has been US$1.80 per pound, with a premium of 20 cents (Fairtrade International). If the market price is $1.50, the cooperative receives $1.80 + 0.20 = 2.00$ dollars per pound. If the market price is $3.00, the floor does not bind and it receives $3.00 + 0.20 = 3.20$ dollars. The minimum acts like a put option, a type of options contract, for producers, a protective floor in a volatile commodity market subject to the commodity cycle; when world prices are high, as with record arabica prices in 2024–25, the premium is the main benefit. Organic coffee earns an additional differential.

Research on outcomes is mixed. A 2014 review in the Journal of Economic Perspectives by Raluca Dragusanu, Daniele Giovannucci and Nathan Nunn found evidence that certification raises prices received by producers and gives better access to credit, with more modest and less certain effects on household incomes. Gains depend on how much of a cooperative's output is actually sold on fair trade terms, often only part of it, and on the gap between minimum and market price. A 2014 study led by researchers at SOAS, University of London, found that hired wage workers in some Fairtrade-certified areas of Ethiopia and Uganda were paid less than comparable workers elsewhere, highlighting that benefits flow mainly to farm owners rather than labourers. Certification costs and standards can also be a barrier for the poorest producers.

Critics from a market-oriented perspective argue that guaranteed minimum prices blunt price signals and may encourage oversupply of crops facing falling demand, that only a small share of the retail mark-up reaches farmers, and that development comes mainly from rising productivity and diversification rather than higher prices for traditional exports, echoing debates over the terms of trade. Critics from the left and some campaigners argue the opposite concern: that fair trade is too small, too dependent on consumer charity and too accommodating of large corporations to change structural economic inequality or world trade rules. Supporters respond that fair trade reduces risk, strengthens cooperatives and raises awareness of supply-chain conditions, and that it complements rather than replaces public policy on poverty and agriculture (economics).

Fair trade now sits alongside newer approaches such as corporate sustainability programmes, ESG investing criteria and due-diligence laws on supply chains, and its standards are linked to the Sustainable Development Goals (SDGs). Its share of global trade remains small, but it shaped how consumers and companies think about ethics in globalization and in the exports of poorer countries.

• Fairtrade International
• World Fair Trade Organization