Some may think that “fair trade” is about ensuring balanced national trade flows – or a zero trade deficit – similar to what President Trump is pushing for in the United States. However, “fair trade” is a global movement to develop transparent supply chains that support equity in trade for socially, economically, and environmentally sustainable development. Backed by consumer support across the world, the growing demand for fair trade has promoted sustainable economic development by facilitating trade between developing economies and advanced economies through both private-sector and public-sector initiatives.
For example, in the private sector, companies may pursue Fair Trade Certified labeling, and in the public sector, developing countries may take advantage of what is known as “Generalized System of Preferences” (GSP) programs offered by developing nations to encourage sourcing from developing countries.
Today, fair trade practices are applied to many foods and other products, generating 7.88 billion Euro (9.22 billion USD) of trade, and positively impacting more than 1.66 million people’s lives. By participating in fair trade practices and initiatives, multinational companies as well as SMEs not only help support the sustainability of trade but also benefit from expanding its sourcing opportunities.
What is Fair Trade Certification? The fair-trade assurance mechanism, including the use of fair trade certified labels, is a non-governmental effort to ensure producers support their living without exploitation of labor, environmental standards, and/or development standards. Through fair trade labeling, fair trade certification agencies help establish sustainable supply networks, promising producers/workers a guaranteed minimum price.[i]
In addition, registering fair trade certification for products and organizations enables socially-conscious consumers to recognize fair trade certified products with ease. To attract such consumers, it is important for companies to build trust and differentiate brands through certifications. For instance, Fairtrade America identifies a list of fair-trade certified brands and products that helps companies form brand awareness and allows socially-conscious consumers to build trust with brands.
What is GSP and how does it work? Governments in advanced countries have established unilateral (one-way trade) preference programs, such as GSP, in the United States, European Union, Australia, Japan, etc., allowing selected products originating from developing countries to enter more advanced countries at lower or zero-duty, called “preferential access”.[ii] GSP preferential access allows developing countries’ exporters to be more cost-competitive in the global market, and create more economic opportunities in their own country as their farming and value-added industries grow.
By design, GSP programs are not reciprocal which means developing countries do not have to provide preferential duties to imports from developed countries. However, GSP is not meant to be a free-ride into a developed market with no responsibilities by the beneficiary country. GSP programs may require that certain criteria or conditions are met by developing country beneficiaries, such as improved labor rights, stricter environmental standards, and/or removal of onerous trade barriers in their markets[iii].
Preferential programs like GSP stemmed from good will, but are evolving. Many governments aim to gradually phase out these one-way preferences over time as developing countries improve their economic status and therefore “graduate” from GSP. Furthermore, some countries, like the United States, have increased scrutiny over GSP-eligibility for countries and/or the scope of products covered[iv]. These changes do not mean the end of GSP programs entirely, but rather stricter criteria to ensure a wider scope of benefits to developing countries and their populations beyond just lower tariffs into important export markets.
How can SMEs utilize Fair Trade practices as business opportunities? As socially-conscious consumerism has become popular over the years, companies -- including SMEs -- participating in fair trade practices are growing rapidly across the world. In 2014, fair trade consumption in the US reached 1.45 billion USD. Furthermore, 25% of US consumers said they are willing to pay more for sustainable foods.
To tap into this growing niche market, SMEs can expand their product portfolios by exploring a more sustainable supply chain. This includes sourcing inputs from countries eligible for GSP or other preferential trade programs, seeking out inputs that are certified Fair Trade, or registering their products or organizations through Fair Trade certification agencies. While complying with sustainability standards takes time and effort, many SMEs have kept up with the trend by seeking assistance from government agencies and non-profit organizations, such as fair trade practices program, USDA and the Sustainability Food Trade Association.
With the support of public and private efforts, producers and workers in many developing countries have made improvements in workers’ rights and environmental standards, and have benefited from the promotion of fair trade practices. Fair trade certification and GSP are examples of ways for companies to establish secure supply chains as they increase transparency of transactions and establish trust with customers.
We hope more SMEs will explore the benefits of fair trade in their supply chain. Let us know how we can help.