What Is a Fair Trade Price?

A fair trade price is the minimum price paid for certain agricultural products imported from developing countries.

Fair trade is a movement that believes it is unethical to pay producers in developing countries the market price if that price is too low to provide a sufficient quality of living. Instead, certain importers agree to pay producers in the developing world at least a minimum price for their goods. Developed nations then import the goods where they promote them as fair-trade products and, normally, sell them at a higher price.

Key Takeaways

  • A fair trade price is an ethical minimum price with which to pay producers in economically developing nations for their goods or services.
  • Fair trade is a global social movement aimed at reducing the exploitation of workers and small business owners in developing nations.
  • Opponents of the fair trade movement argue that establishing an artificially high price floor results in an oversupply that can lead to lower market prices for producers who cannot sell to fair trade buyers. 
  • The main tenets of the fair trade social movement include fair pricing, humane working conditions, environmental sustainability, direct trade, and transparent communication.
  • Benefits of fair trade pricing include guaranteed basic income for farmers, a reduction in abusive work practices, community investment, and environmental protection.
  • Limitations to fair trade pricing include the high fees associated with being certified as "Fair Trade," little incentive for producers to become more efficient, higher prices for consumers, and a lack of accountability placed on producers.

How a Fair Trade Price Works

For goods to carry the Fair Trade Certified label, they must comply with standards outlined by the non-governmental organization FLOCERT or other local fair-trade labelers.

FLOCERT broke up the set of standards it put in place into seven categories with standards for small producer organizations, hired labor, contract production, traders, climate, textile, and gold, and associated precious metals. Within each category, there is a set of specific standards for products.

For example, within the small producer standards, there is another set of standards for products like cocoa, cane sugar, cereals, coffee, fresh fruit, honey, nuts, tea, and so on. These specific product standards cover issues like product composition, production, contracts, pre-financing, and pricing. However, these standards aren't set in stone.

The most sold fair trade products in the world are flowers and plants, bananas, cocoa beans, coffee beans, and sugar canes.

The Fair Trade International Standards Committee

The body responsible for setting these standards is the Fair Trade International Standards Committee, a committee appointed by the Fairtrade International Board, which constantly reviews how individual international markets shift and economies change.

Yet, while the specifics of these standards are always subject to change, the principles that inform them are much more firm.

It's FLOCERT's mission to provide producers in economically developing countries with living wages for their work and to make sure unfair trade doesn't put their livelihood at risk. While the intentions of FLOCERT are virtuous, not all believe the Fair Trade system is completely fair to producers.

Tenets of Fair Trade Pricing

The overall goal of fair trade pricing is to minimize poverty for farmers and workers in developing countries. In order to work towards that goal, organizations such as Fair Trade USA and the Fair Trade Federation have detailed several main tenets for both buyers and sellers to follow.

Fair price. As we've discussed, fair trade basically ensures that farmers receive a reasonable minimum price for their products, regardless of market conditions. Purchasers agree to pay farmers on time, and farmers agree to pay a fair wage to their workers. Purchasers are also required to extend credit to producers in order to bring in the harvest.

Humane conditions. Another element of fair trade is the requirement that farmers offer safe, healthy, and humane conditions for their workers. That includes completely banning the practice of child labor and forced labor. Specifically, fair trade rules ban all forms of worker discrimination, abuse, and harassment.

Direct trade. Fair trade rules seek to cut out the middleman as best as possible. By working directly with producers, fair trade importers are able to pay more share of the profits to the farmers themselves.

Open communication. Fair trade seeks to keep the information among farmers, buyers, and consumers as transparent as possible. Producers look to give farmers as much information as possible about market conditions, technological advances, and best practices in order to build a sustainable long-term relationship.

Environmental sustainability. Fair trade rules require farmers to only use sustainable growing methods that protect the environment. Therefore, things like pesticide and fertilizer use are restricted. Meanwhile, the use of genetically modified organisms (GMOs) is completely banned. Farmers also promise to minimize waste as much as possible.

Benefits of Fair Trade Pricing

The benefits of fair trade pricing include:

  1. Basic needs met. No matter what the commodity market is doing, fair trade pricing guarantees that farmers and workers are still able to earn enough money to cover the basic costs of living.
  2. Humane working conditions. Fair trade rules lead to reduced child labor, slave labor, and abusive practices.
  3. Community development. Fair trade benefits extend beyond individual basic needs and into the community with investments in clean water systems, hospitals, and schools.
  4. Environmental protection. Fair trade helps protect our natural resources such as water, soil, and vegetation through sustainable farming practices.

Criticisms of Fair Trade Pricing

Opponents of the fair trade system argue that establishing a price floor results in an oversupply that can lead to lower market prices for producers that cannot sell to fair trade buyers.

For example, many in the North American coffee industry have shifted from using the Fair Trade system to buy and source beans to a direct trade model. By forming direct business relationships with the farmers, many roasters and coffee suppliers find they can get a better product and ensure fair pay to producers.

Other limitations to fair trade pricing include the high fees associated with being certified as "Fair Trade," lack of incentives for producers to become more efficient, higher prices for consumers, and a lack of accountability placed on producers.

Fair-Trade Investing

Fair trade investing involves specifically investing in companies or projects that promote fair trade with producers in economically developing nations.

Basic fair trade philosophies call for a living wage for suppliers of raw goods and materials and respect for strong environmental practices and a focus on the trading relationships between advanced economies and economically developing nations.

In terms of picking investments that promote fair trade principles, there's no push-button answer. An investor must investigate each company to learn their practices. Socially responsible mutual funds and other investments are available. Each may have its own definition of fair trade practices.

Common themes for socially responsible investments (SRI) include avoiding investment in companies that produce or sell addictive substances (like alcohol, gambling, and tobacco) and seeking out companies engaged in social justice, environmental sustainability, and alternative energy/clean technology efforts.

Socially responsible investments can be made in individual companies or through a socially conscious mutual fund or exchange-traded fund (ETF).