Antidote for Green Protectionism: Fair Trade

The policy mantra in leading up to the planned December, 2009 Copenhagen negotiations on a global climate agreement has been “common but differentiated responsibilities.”  This refers to the important inclusion of several critical fast-growing and large emerging markets in the agreement; unlike that of the Kyoto Protocol. Climate change analysts are looking forward to the reopening of genuine talks on establishing emission caps; nonetheless, there is some trepidation among many going into these talks about the role the current global financial crisis will play in moderating the outcomes.  There is, however, an even more subtle, but potentially contentious item that could influence the outcome.  Negotiators need to be aware of a subtle, but insidious threat lurking in the background that may sabotage any progress made in the negotiations.  This is the impact of growing formal and informal forms of trade protectionism that has infected the public policy agenda in many countries since September, 2008.

colstripIn March, 2009, the Center for Economic Policy Research (CEPR) in London issued an insightful eBook entitled ‘The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20’ edited by Richard Baldwin and Simon Evenett (2009).  There are a number of hard-hitting essays and recommendations to G20 leaders on how to avoid the protectionist tendencies that are creeping into public policies in response to the global financial crisis.  It is a serious piece of scholarship written in record time in response to the events of the 4th quarter of 2008.  Importantly, it includes an essay by Simon Evenett and John Whalley on how to resist what has come to be known as green protectionism. A working definition of green protectionism can be given as “the deliberate use of environmental policy initiatives to discriminate against foreign commercial interests, including subsidiaries of companies owned or headquartered abroad.”

A similar call to resist regulatory arbitrage was made by the World Bank in its recent report ‘Global development finance: Charting a global recovery’ (2009).   They conclude that

“The international spillovers of the crisis in the financial area presently provide a powerful incentive for harmonization, because concerns over stability temporarily outweigh the urge to seek advantages for the ‘home team’.”

Standards Harmonization

Harmonization has been, in the financial and trade arenas, the driving force behind much of the progress made in the past 20 years to open markets and further progress in increasing efficiencies in global supply chains.  This has had a significant effect on lifting millions of people throughout the world out of poverty. This is not to say that there is no inequality in incomes, or that the digital divide has not been widened. This is an issue that will be addressed in a separate essay. The issue here is how the optics of a ‘green’ agenda has given new impetus to those who seek to protect domestic markets at the expense of consumers and global trade. The progress made toward harmonization in trade and financial sectors is threatened now as more and more national governments install provisions in bailout legislation and crisis management initiatives that give preference to in-country procurement. Similarly, governments in many different regions are instituting higher tariffs and implementing other non-tariff measures to protect domestic industries.

And yet, harmonization of global emission standards and approaches to taxation of carbon inputs in production is, undoubtedly, a key objective of the Copenhagen negotiations. Indeed, harmonization of global environmental standards has been included in the General Agreement on Trade in Services (GATS), the Agreement on Technical Barriers to Trade (TBT), among others. And, the principles embodied in these multilateral agreements are seen in several regional agreements, notably, the North American Free Trade Agreement (NAFTA).  But from a trade policy perspective, the environmental agreements that are seen to be least distorting are those that are preferable for a new Copenhagen Protocol.

Nonetheless, many critics of emission caps and global negotiations on climate issues claim that measures committed to by national governments within the context of climate change amelioration will impair business development and progress.  This is a worn out argument that has been used for years in response to Kyoto Protocol pressures. But now, in the post 2008 financial crisis era, these arguments seem to have been given new impetus.  However, the linkage of downturns in global trade, and the associated impacts to economies around the world to the deleterious effects of protectionist measures has rarely been made.  It is these protectionist trends that threaten to take the planet back to a mercantilist regime as was practiced in the 1800s.  And when trade protectionism is coupled with green technologies advocacy, a dangerous condition is set forth that can lead to a vicious downward spiral in the global situation.

It has been documented by the World Bank that since September 2008, governments around the world have proposed or enacted 78 different trade measures that are protectionist in intent.  Furthermore, 17 of the G20 countries are included in the list of offenders.  Importantly, this includes the United States where the global crisis had its genesis due to the syndication of risky mortgages.  Don’t the critics of climate change talks see this more threatening form of regulatory arbitrage as a harbinger of a shrinking global system?  Wouldn’t it make sense to address this problem as part of the climate change agenda?  In this way the potentially contentious negotiations on emissions caps, technology subsidies, and/or tax offsets can be tackled from a proactive point of view within a win/win framework.

Climate Change Control and Retaliatory Actions

Carbon control techniques being discussed among climate changes specialists include a consumption tax and a production tax.  Although the consumption tax is deemed to be fairer, calculating it is complicated by the complexity of global supply chains and rules of origin (RoO) in many countries.  As a result, the fallback position is a carbon production tax. But, as Evenett and Whalley argue

“To offset this adverse effect on competitiveness some proponents, including the high-profile Lieberman-Warner bill that recently failed in the US Congress, have argued for the introduction of taxes on imports from those jurisdictions with lower carbon taxes. Ultimately, it is feared that unilateral and regional measures will induce defensive protectionist pressures that will manifest themselves in measures to limit imports to the detriment of trading partners in particular from those poorer countries, that to date have expressed less interest in reducing carbon usage” (pg. 94).

Indeed, defensive measures in the form of complaints filed with the WTO under the TBT provisions are up 9% in 2009; another form of quantitative proof that these concerns are more than conjecture.

Climate Change and Trade

Other than Evenett and Whalley, advocates of a global climate change agenda have not addressed the trade factor in the ongoing discussions leading up to Copenhagen 2009.  The trade aspects, which include the need to address WTO Doha Round agenda items, as well as progress toward the Millennium Development Goals (MDGs), must be seen systemically just as the earth’s atmosphere is being viewed.  Importantly, the fact that over 3 billion people live on less than US$2/day should be taken into account as a key factor in moving forward (Prahalad, 2006).

This is where the antidote comes in. And it is coming from a most unlikely source; the grassroots movement known as the ‘fair trade’ movement.  If the multi-dimensional human element (as defined so eloquently by Muhammad Yunas in his book ‘Creating a world without poverty: Social Business and the future of capitalism’ [2007]) is factored in, then alternative strategies can be formulated. These alternative strategies would take into account the need to foster social businesses that both meet a market efficiency goal while at the same time satisfying a social goal, that of productive employment for workers in the budding new ‘green’ manufacturing industries.  However, these jobs may not necessarily be located in the countries that are now sounding the battle cry for supporting only their domestic industries. This could be a reason for easing trade restrictions and getting back on track with financial harmonization.

Alternatively, if business models guiding the development of technologies to implement programs for carbon capture and sequestration and/or alternative energies based on renewable resources must be built on the profit motive premise, then the pyramid-to-diamond transition argued so forcefully by C.K. Prahalad in his book ‘The fortune at the bottom of the pyramid: Eradicating poverty through profits’ could guide public policy discussions (2006).  His reference to the pyramid-to-diamond transition is his way of describing how, through focus on developing suitable products for those people living at the bottom of the pyramid (BOP), while at the same time, building the infrastructure to support the productive growth of this sector, a large segment of the population can be lifted from poverty.  In the context of climate change discussions, appropriately sized technologies based on renewable resources could offset some of the carbon emissions from the millions of people that still rely on coal and firewood burning for heat and cooking.

These two approaches to reducing global poverty rely on a harmonized trade and financial services regime; much like the one that was in place before September, 2008.  And, although global trade has declined precipitously, and economies are shrinking on the order of several percentage points (as measured by gross domestic product [GDP]), free trade is not in total retreat.  There is a solid foundation upon which to build.

Climate Change and Fair Trade

This is where a fair trade approach to production in carbon control and sequestration technologies can come into play. With a systematic approach to global climate change talks that guard against green protectionism and, at the same time, seek to enhance efforts to design appropriate energy sources for the BOP segment, whole new markets for products and services can be created.  Importantly, with a premise that seeks as a primary goal to use climate change progress as a mechanism for empowering those people who will be most affected by the energy resources that will be used as substitutes for fossil fuels, the creative and entrepreneurial power of these individuals can be unleashed to help design systems for carbon capture.

This approach can help negotiators from becoming schizophrenic in the Copenhagen meetings; allowing them to avoid opposing protectionist measures to the financial crisis, while at the same time, advocating for policies that would limit imports on the basis of RoO or TBT.

How this will work is still a bit murky.  It is, right now, just a germ of an idea.  But, by voicing the potential for this nexus, it is my hope that techniques for merging climate change and trade policy with practical, implementable solutions can be formulated. Then the empowered people from all countries can become part of the global trading system, rather than sitting outside watching the sky get smoggier with each passing year.

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Is Fair Trade Really Fair? Does it Matter?

I recently got into a debate with someone that argued that the fair trade movement is really just a marketing ploy that preys on the goodwill of consumers in an effort to increase sales.  Importantly, I noted the important work of the Fairtrade Labelling Organizations International (FLO) in Bonn, Germany as a counter to the critic’s points.[i] Upon reflection, I realized that the assertions of this critic should be closely examined.  It has been recently reported by FLO that world fair trade products expanded by 22% in 2008 despite the onset of the global financial crisis.  If there is a growing demand for these products, while demand for many other products is either leveling off or declining, then there must be something important happening at the international level.

HandbagShopkeeper
In truth, the fair trade movement has led to many unique unconnected, nonetheless, worldwide initiatives that seek to advocate for workers being paid a fair wage.  Furthermore, the advocacy doesn’t end there.   The World Fair Trade Organization (WFTO) audits their members to ensure that, not only the producers, but everyone along the supply chain, all the way to the ultimate consumer is being adequately compensated.  And, it is true in some cases, as some critics of fair trade point out; the end price to the consumer is generally higher than prices on similar items sold without the certification of fair trade.

But the questions remain:

  1. Are these efforts by a growing number of businesses from around the world making an impact on the lives and fortunes of those they are seeking to represent?
  2. Is the new so-called “LOHAS” consumer group, just that; a marketing ploy to those who live Lifestyles of Health and Sustainability (LOHAS)?
  3. Is there truly a growing worldwide demand for fairly traded products?

The Institutional Framework

Some of the most important organizations that are leading the fair trade movement worldwide are as follows:

  • The WFTO, based in the Netherlands, has developed a set of 10 principals that have become the de facto charter for fair trade organizations around the world. [ii] WFTO is over 20 years old and maintains the FT100 list; a list of member companies that are fully committed to creating a sustainable future.
  • The Fair Trade Federation (FTF), based in Washington, D.C., serves as a resource for organizing trade fairs and conferences for U.S. and Canadian wholesalers and retailers who are working with producers from around the world. [iii]
  • FLO, mentioned above, is made up of 24 member organizations from around the world. It has developed a trademark that only its member organizations can use when selling products on the open market.  It has established both generic and product standards, and maintains a standards evaluation unit for ongoing review of members.
  • The Fair Trade Resource Network (FTRN), based in Philadelphia, is an information hub that serves the worldwide fair trade community with educational materials and networking ideas.[iv]

These organizations, as well as many other industry-specific or region-specific non-governmental organizations (NGOs) are the thought leaders of this worldwide grassroots movement.

Is Fair Trade Making An Impact on the Lives of Producers?

HappyKidsGift2Testimonials given on hundreds of corporate sites of the members of the FTF and WFTO seem to suggest that the movement is, indeed making an impact on the lives of producers.  For example, FTF member Baladarshan, based in Chennai, India sells handmade objects through a storefront and on the Internet.  Handicrafts are constructed in vocational training programs supported by the SPEED Trust (Slum People Education and Economic Development).  SPEED is also involved in microfinance, elementary education, and prenatal education for members of the community.

optGroupSimilarly, in Luang Prabang, Laos, the storefront Ock Pop Tok is providing employment for a group of about 40 weavers and trainers and shop-keepers, all involved in selling the masterful weavings that characterize the traditional arts of Laos.

ThaiCraft1In Thailand WFTO member Thai Tribal Crafts brings together the traditional crafts of the Hmong, Lahu, Mien, Karen, Akha, and Lisu tribes to sell to the growing tourist traffic in Chiang Mai.  These artisans produce a wide range of products from silversmithing, to baskets to wood and stone carvings to beautiful weavings.

As encouraging as these isolated examples are, it remains to be seen whether or not many small-scale, regionally focused initiatives can make a dent in the profound need for jobs in the developing world.  To address this on scale large enough to matter, traditional news outlets and political pundits need to forego the call for protectionist policies in developed world countries and start educating people on the systemic benefits of a trading system that holds all its producers in esteem.

Until then, this question remains unanswered.


Is Fair Trade Just A Marketing Ploy?

The LOHAS magazine defines LOHAS as: a market segment focused on health and fitness, the environment, personal development, sustainable living, and social justice.[v] According to researchers at the WorldWatch Institute, the LOHAS market was estimated to be worth $300B in 2006. [vi]

Big corporations are also moving aggressively to market to this segment.  For example, eBay (NASDQ:EBAY) has formed a joint venture relationship with World Of Good to launch WorldOfGood.com, a web-based auction and product sales portal that only sells LOHAS products.

Furthermore, in specific market segments, peer-reviewed, scientific publications are beginning to emerge that suggest that this is an increasingly important phenomenon, and that, beyond the hype, there is some validity to it.

In the agricultural sector, for example, the World Bank published a Working Policy Paper on Fairtrade coffee in Costa Rica.[vii] The abstract states:

“This paper concerns an NGO intervention in agricultural commodity markets known as Fairtrade. Fairtrade pays producers a minimum unit price and provides capacity building support to member cooperative organizations. Fairtrade’s organizational capacity support targets those factors believed to reduce the commodity producer’s share of returns. Specifically, Fairtrade justifies its intervention in markets like coffee by claiming that market power and a lack of capacity in producer organizations ‘marks down’ the prices producers receive. As the market share of Fairtrade coffee grows in importance, its intervention in commodity markets is of increasing interest [emphasis added].

Using an original data set collected from fieldwork in Costa Rica, this paper assesses the role of Fairtrade in overcoming the market factors it claims limits producer returns. Features of the Costa Rican input market for coffee permit a generalization of the results. The empirical results find that market power is a limiting factor in the Costa Rican market and that Fairtrade does improve the efficiency of cooperatives [emphasis added], thereby increasing the returns to producers. These results do not depend on the minimum price policy of Fairtrade and therefore can inform on its organizational support activities…..”

It would appear then, from this initial study that there is more to the Fairtrade agenda then a marketing ploy.  Indeed, many opportunists will be tempted to take advantage of the vulnerability of buyers seeking to do well with their purchasing decisions.  However, as Paul Hawken points out in his book Blessed Unrest: How the Largest Movement in the World Came into Being and Why No One Saw It Coming (2007), there is documented evidence that a major global shift in awareness is taking place by millions of people in many different locales.

I would give a tentative no in answer to this question.  Fairtrade is not just a marketing ploy; it is a genuine global movement with advocates all around the world whose actions are aimed at making world markets fairer to those who produce the goods for the consumers.
Is There a Growing Worldwide Demand for Fair Trade Products?

A survey, carried out by the Dutch Association of World Shops, in 28 European countries plus the United States, Canada, Japan, Australia and New Zealand, showed that global fair trade sales in 2007 reached a record figure of $3.61B.  When coupled with the 2008 Alter Eco consumer attitudinal survey which showed that 65.31% of those surveyed in the US had previously purchased fair trade products, this seems to confirm the trends, at least in the developed world. [viii]

To supplement these findings FLO conducted a global survey in 2008 which reveals that support for Fairtrade is on the rise.

“Ahead of World Fair Trade Day on May 9, 2009, this global consumer survey on Fairtrade shows that shoppers increasingly expect companies to be more accountable and fair in dealing with producers in developing countries. The survey by GlobeScan was commissioned by Fairtrade Labelling Organizations International (FLO) with a sample size of 14,500 in 15 countries. Among those surveyed, almost three quarters of shoppers believe it is not enough for companies to do no harm, but that they should actively support community development in developing countries. Consumers are calling for a new model in trade in which justice and equity are integral parts of the transaction. ‘Active ethical consumers’ make up more than half the population (55%) in the countries surveyed.” [ix]

As useful as these data are, these survey data are missing the added benefit of standard definitions for cross-border measurements.  One has to conclude that the most effective way of answering this question is to conduct statistical analysis on macroeconomic and trade trends at the global level.

This is, in fact, what the Global Trade Analysis Program (GTAP) at Purdue University is doing.  The problem is that the raw data that is analyzed from all of the countries of the world does not yet differentiate between widgets made using sweatshop labor, and widgets made by fair trade producers.

The UK-based New Economics Foundation (NEF) is not waiting, however.  They have recently published the 2nd Annual Happy Planet Index (HPI) report.[x] In this analysis they use a number of indicators including the United Nation’s Human Development Index (HDI) and other measures of ecological balance and social welfare.

As useful as this index is for developing an understanding of the state-of-the-art in quantifying these global economic trends, the only real remedy to this would be a world-wide effort to incorporate fair trade measures in standard census counts and industrial activity surveys.  An agency such as the World Bank would be appropriate for this task; and the surveys could be conducted by all its member countries.  Countries would benefit from the standards definitions work that has been conducted to date by FLO and insight about the synergistic effects of fair trade on other measures of welfare from the members of the WFTO and FTF, among others.

Once standardized data were being collected the researchers of the GTAP project, NEF and others would be able to evaluate the true nature of the economic trends that fair trade advocates are documenting through regional analyses and case studies.  In this way, this final question could be answered.

In the end, NEF’s Happy Planet might just turn out to be very happy indeed.


[i] http://www.fairtrade.net/

[ii] See these principles here:  http://www.wfto.com/index.php?option=com_content&task=view&id=2&Itemid=14

[iii] http://www.fairtradefederation.org/

[iv] http://www.fairtraderesource.org/

[v] http://www.lohas.com/

[vi] Halweil, Brianink =; Lisa Mastny, Erik Assadourian, Linda Starke, Worldwatch Institute (2004). State of the World 2004: A Worldwatch Institute Report on Progress Toward a Sustainable Society. W. W. Norton & Company. pp. 167.

[vii] Ronchi, L. (2006). “Fairtrade” and Market Failures in Agricultural Commodity Markets. World Bank, Policy Research Working Paper # WPS4011

[viii] http://www.wfto.com/index.php?option=com_docman&task=cat_view&gid=94&&Itemid=109

[ix] http://www.kamcity.com/namnews/asp/newsarticle.asp?newsid=46924

[x] http://www.happyplanetindex.org/public-data/files/happy-planet-index-2-0.pdf