What Is Fair Trade Price?

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.

How Fair Trade Price Works

For goods to carry the Fair Trade Certified label, they must comply with standards outlined by the non-governmental organization FLO-CERT or other local fair-trade labelers. FLO-CERT broke up the set of standards it put in place into six categories with standards for small producer organizations, hired labor, contract production, traders, climate and textile. 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. 

Key Takeaways

  • Fair trade price refers to an ethical minimum price with which to pay producers in developing countries for their goods or services.
  • Fair trade is a global social movement aimed at reducing exploitation of workers and small business owners in the developing world.
  • Opponents of the fair trade movement argue that establishing an artificially high price floor results in oversupply that can actually lead to lower market prices for producers that cannot sell to fair-trade buyers. 

Fair Trade International Standards Committee

The body responsible for setting these standards is the Fair Trade International Standards Committee, a committee appointed by the board of the FLO, which constantly reviews how individual international markets shift and economies change. Yet, while the specifics of these standards are always subject to change, the principals that inform them are much more firm. It's FLO-CERT's mission to provide producers in developing countries living wages for their work and to make sure unfair trade doesn't put their livelihood at risk. While the intentions of FLO-CERT are virtuous, not all believe the Fair Trade system is completely fair to producers.

Fair Trade Investing

Fair trade investing involves specifically investing in companies or projects that promote fair trade with producers in developing nations. Basic fair trade philosophies call for a living wage for suppliers of raw goods and materials, as well as respect for strong environmental practices and a focus on the trading relationships between advanced economies and 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).

Fair Trade Opposition

Opponents of the fair-trade system argue that establishing a price floor results in 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.