Master Thesis
The other side of Fair Trade through a comparison between Fair Trade and Starbucks
Study program:
International Business and Management (M.Sc.) Rijksuniversiteit Groningen
Supervisors M. van Offenbeek and R. de Vries
Maria Pavlidou- 1739999
To Thanasis & Litsa,
Table of contents
1. Introduction... - 4 -
1.2. The coffee market ... - 7 -
1.3. Main research question and sub- questions ... - 9 -
2. Methodology ... - 13 -
3. Moral analyses of the debate on Fair Trade’s effectiveness ... - 17 -
3.1. Introduction... - 17 -
3.2. Literature Review ... - 18 -
3.2. Ethical perspectives: a framework and theories of the firm ... - 22 -
3.3. The ethical perspectives behind the arguments ... - 26 -
3.4. Conclusions... - 29 -
4. Analysis ... - 31 -
4.1. Fair Trade... - 31 -
4.2. Comments ... - 36 -
4.3. Starbucks Coffee Co. ... - 37 -
4.4. Comments ... - 42 -
4.5. A comparison ... - 43 -
4.6. Analysis of the results based on the literature review... - 47 -
4.7. An extra opinion ... - 49 -
5. Conclusions... - 52 -
5.1 Conclusions... - 52 -
5.2. Reflection: strengths and limitations ... - 54 -
5.3. Recommendations for further study ... - 55 -
7. References... - 56 -
Abstract
Fair Trade is a non- profit organisation (NGO) that seeks greater equity in international trade. It has become a popular, almost fashionable term in the developed countries but there are still arguments against it. This thesis presents the current literature on the counter arguments to Fair Trade and analyses their moral aspects. The findings suggest that authors are mostly interested in the results and the consequences of Fair Trade rather than its driving forces. Also which side they support varies according to their moral beliefs system. In order to examine the accessibility of Fair Trade to the farmers, and the validity of the arguments, the certification procedure, used by Fair Trade, is traced step by step. The same is done for Starbucks Company, a big multinational organisation that has it own certification system. Through the comparison of the two it is discovered that even though the one is an NGO and the other a commercial company, the processes they use are very similar. That is a sign for Fair Trade that it should be more accessible to the farmers that really need it, and to lead the way through the corporate social responsibility schemes.
1. Introduction
often to be found in the spot light. It can be traced back in the fifties when a partnership started between some retailers in the north and a few producers in the developing countries (IFAT, 2007). It has come a long way since then and now it is a much bigger trading partnership, with many organisations involved to facilitate it, certification procedures and various rules, a lot of employees, over a million small-scale producers and workers in the global South and an abundance of shops that sell directly to the end consumer (IFAT, 2007).
In 2005, two Harvard University researchers, Michael Hiscox and Nicholas Smyth, conducted an experiment in a department store on two sets of towels. One set carried a label with the logo “Fair and Square” while the other did not. Over a five months period the researchers were changing the label and increasing the price observing the impact each time. The results were that the sales of towels increased when they carried the Fair and Square label and they carried on increasing each time the price was raised (Economist, 2008). This is indicative of the change of consumers’ attitude towards the Fair Trade products. The public concern about environmental issues and the poverty in developing countries brought about this shift.
non-Fairtrade farmers poorer. (Economist, 2006). But the counter arguments do not end here.
International trade without the intervention of subsidies, tariffs, price controls and politics is by far the most efficient way of matching global supply to demand while making all the members more prosperous (Wayer, 2005). A subsidy is a form of financial assistance paid to a business or economic sector. The Fairtrade Premium is a payment, on top of the buying price, designated for social and economic development in the producing communities. As a form of financial assistance, it can be considered that it functions as a subsidy in effect. Subsidies are usually used to protect a national market, but in this case they protect a certain group of producers. However, there is a lot of debate about whether the subsidies actually improve the financial situation of the group they are supposed to protect or not (Anderson, 2005; Edwards, 1998; Musa, 1993) and the tendency the last years is towards Free Trade, the end of all barriers. The European Union is an example of this; its member states have no subsidies against each other. Also, the World Trade Organisation is there to facilitate the liberalization of trade. Fair trade case resembles in a way the infant industry protectionism arguments, another issue that has raised an equal debate. The problem consists of defining to what extent should protectionism (in form of a standard premium price as is the case with the Fair trade) be applied and how does it affect the economic situation of the country/ group of individuals/ industry it aims to protect.
the moral values behind the counter arguments. Business ethics is a scientific field that examines ethical values and moral or ethical problems that can occur in a business environment. Therefore the analysis based on ethics theories provides valuable insight. In some cases though, the explanation of an argument and the motivation behind it was not very clear. Therefore further investigation was required and one way to gain knowledge about a topic is to compare it against another one.
At the opposite side of Fair Trade we find large multinational companies. They also do business with developing countries, they purchase the same products from underprivileged groups of producers, but on the contrary to a non- governmental organisation (NGO), these companies aim at profit. However, companies today advertise sophisticated corporate social responsibility programs (Starbucks, 2008; McDonalds, 2008; Nestle, 2008) and their business practices, even though they aim at profit, can resemble on the exterior to a certain degree the actions of a non- governmental organisation. The demand for ethical businesses is growing. Especially for corporations which are active in developing countries, for which the public concern is more vigorous, is vital that they comply.
So, a comparison between Starbucks and Fair Trade was estimated to provide additional insight in the topic and further opportunities for analysis of the counter arguments.
1.2. The coffee market
importance it was considered optimal for this research to focus on coffee. Some clarifications about the coffee market are complementary to the analysis.
It has been a long time since some shepards in Ethiopia in the 9th century noticed the stimulation caused to the theirs goats after chewing wild coffee berries. Nowadays it is a primary commodity crucial to the economies and politics of many developing countries; for many of the world's Least Developed Countries, exports of coffee account for a substantial part of their foreign exchange earnings in some cases over 80% (International Coffee Organisation, 2008). The coffee industry currently has a commodity chain that involves producers, middlemen exporters, importers, roasters, and retailers before reaching the consumer. Most small farmers sell directly to middlemen exporters who are commonly referred to as coyotes. These coyotes are known to exploit small farmers, paying them below market price for their harvests and keeping a high percentage for themselves. In contrast, large coffee estate owners usually process and export their own crops that are sold at the prices set by the New York Coffee Exchange Large roasters usually have one blend of recipes and sell to large retailers. Most roasters buy coffee from importers in small, frequent purchases. Roasters have the highest profit margin in the value chain, so they are an important link in the commodity chain. Finally, retailers usually purchase packaged coffee from roasters, although an increasing number of retailers are also roasting their own beans for sale. Around the globe, the annual consumption of coffee is 12 billion pounds and in the U.S. alone, over 130 million consumers are coffee drinkers (Global Exchange, 2007).
Exchange (ICE) Futures U.S. coffee futures market was established in 1882 as merchants and traders created the Coffee Exchange of New York to bring order to pricing in the industry ICE Futures U.S. Coffee “C”® is the benchmark contract for coffee. As it is the world’s leading coffee contract, the coffee industry looks to the Coffee "C" contract each day to price coffee (ICE, 2008).
Fair trade coffee creates a trade environment in which the coffee importer has a direct relationship with the coffee producer, excluding the middlemen. It also has a floor price that acts as a safety net, protecting small farmers when fluctuating market prices fall extremely low. The New York "C" market is the basis of calculation, and so the price that Fair Trade offers to the producers is always above that (Global Exchange, 2007).
Starbucks have a policy of working directly with farmers and exporters and they claim that they always pay above the New York "C" market price (Starbucks, 2007). Starbucks also purchases coffee directly from Fair Trade.
1.3. Main research question and sub- questions
Fair Trade but it is not very often that one has the opportunity to hear the other side of the argument.
Therefore the main research question forms as follows:
“What are the main arguments against Fair Trade according to current literature and can they be validated through a comparative analysis between Fair Trade and Starbucks regarding their producer certification procedures?”
change that generates some perceived benefits for people, or as a state of perceived quality of life attained through such a process” (Dale, 2004).
The first part of the research will be focused on the arguments against Fair Trade and then they will be placed in an ethical context according to the most recent business ethics theories. Therefore the question forms as follows:
1. What are the main arguments against Fair Trade according to existing literature?
2. What are the differences between Fair Trade and Starbucks regarding their certification procedures?
At this point it should be clarified what producers actually have to win if they do get the aforementioned certifications. In the case of Fair Trade they get to sell their coffee in a Fair Trade minimum price but also receive a Fair Trade premium on top of that. A Fair Trade minimum price “defines the lowest possible price that a buyer of Fairtrade products must pay the producer” (Fairtrade foundation, 2008) and a Fair Trade premium is “Money paid on top of the Fairtrade minimum price that is invested in social, environmental and economic developmental projects, decided upon democratically by a committee of producers within the organisation or of workers on a plantation” (Fairtrade foundation, 2008).
In the case of Starbucks, certified producers are “awarded” with preferential long term contracts and a price premium. The long term contracts guarantee that the producers have a standing cooperation with Starbucks and they are ensured a buyer. The price premium in this case means an amount above the standard “C” market price (Starbucks, 2008).
To better understand this pricing policy, it is important to clarify what is the “C” market price.
3. Are the counter arguments supported or dismissed through this analysis?
The research aim is to contribute to current literature by presenting an overview of all the argument against fair Trade but also by the comparison of the certification procedures between Fair Trade and Starbucks. It is something that has not been attempted before, so there is value added in the research. This could help NGOs working with Fair Trade, but also Fair Trade itself to make improvements. Additionally, it is useful for the academic world, for future researchers that decide to do something similar.
2. Methodology
The conceptual model defines the respective research units, the selection of the concepts applied in this research and the relationship that exists among these concepts. In the particular case of this research, the conceptual model is established on the following basis:
Figure 2: Research procedure and structure for the comparative procedural analysis
As to adjust this typical basis for a conceptual model to this particular case consisting of the three above mentioned elements (considered research units, respective selection of concepts and content of investigation i.e. relation between the concepts), the following graphic is to give an overview of the underlying research procedure and its structure on which this investigation is further based on.
follows, after which the Starbucks certification systems is traced. The comparison between them offers some valuable insight and the arguments that were presented in the literature review are then validated through the findings. The approach can be characterised as inductive because it is using theory building research in order to iteratively generate theory from the case study is applied. This according to Gill and Johnson (1991) involves an ideographic methodology, applying an emic approach of “explanation by understanding” the actual case.
To be more precise, it is necessary to address each sub- question separately. So, the first one, namely “What are the main arguments against Fair Trade according to existing literature?”, is approached in the theory part. The current literature about Fair Trade is gathered and presented with a focus on the arguments against it. There is thus the opportunity to present the less popular side of Fair Trade. These arguments in consequence are further analysed with the help of business ethics.
will be compared with each other. Furthermore it will be investigated, what are the gains for the producers from each organisation, what happens after they get certified. In the end, it is expect that a clear view of both organisations will be gained and from the comparison to conclusions can be generated as for the ethics behind each organisation and their effectiveness.
That will bring the third and final subquestion, “Are the counter arguments supported or dismissed through this analysis?”. The presentation of the two certification systems, provides the empirical dimension of the matter, meaning how things are actually done. So, then the counter arguments will be compared with the empirical evidence and their validity will be confirmed or dismissed. When referring to validity it is meant the internal validity as explained by Gill & Johnson (1991). That means if the causes or arguments actually produce what is characterized as effects. Additionally, before the conclusions, there will be contact with the organisations under question, as well as with other non- governmental organisations or relevant entities and more opinions will be requested.
All these actions should then answer the main research question.
3. Moral analyses of the debate on Fair Trade’s effectiveness
3.1. Introduction
the arguments against Fair Trade. After a thorough research in the current literature, it was discovered that there are various authors approaching the subject each from a different side, using different methods in their analysis and reaching negative conclusions about Fair Trade.
The literature review is conducted by bibliographical research and the focus in Fair Trade and the coffee production. The database used for the research is Business Source Premier, and the key words were Fair Trade, coffee production, ethics with different combinations. This paper’s interest lies in the current literature, so there were articles that were dismissed because they were thought to be old and obsolete. Further criteria for the inclusion/ exclusion of an argument in the literature review, include their content, if it is positive or negative towards Fair Trade. According to the research question, the arguments that will be presented here are the ones that are mostly against Fair Trade. So, the positively disposed arguments are mostly excluded. Exception is two arguments, one by Bacon and one by Hayes, that were considered to be clarifying and offering a more complete image with their inclusion.
3.2. Literature Review
exports of coffee account for a substantial part of their foreign exchange earnings in some cases over 80% (ICO, 2008).
It started centuries ago when according to a story, an Ethiopian goatherd was amazed at the lively behaviour of his goats after chewing red coffee berries (ICO, 2008). It has surely come a long way since and it is today one of the most valuable primary products in world trade, in many years second in value only to oil as a source of foreign exchange to developing countries (ICO, 2008). Fair Trade coffee first hit the markets in Europe in the 1970s and North America in the 1980s on the heels of the initiation of the sale of Fair Trade handicrafts after the Second World War (Fridell, 2007).
Bacon (2005) examines closely the life and coffee production of the farmers in a region in Nicaragua. The author was there in person and conducted the research interviewing the producers and examining in person their practices. In the end, his results suggest that participation in Fair Trade networks reduces the farmers’ vulnerability.
Hayes (2006) approaches the subject from a financial point of view and uses the theory of competitive equilibrium to analyze the economic efficiency of Fair Trade. The author concludes that “fair trade complements and strengthens the competitive market and has nothing to do with protectionism” (Hayes, 2006). He also argues that it can be a complement to free trade policies and that it is a genuine way of assisting the poor.
coffee- producing countries remain largely unchanged by the existence of Fair Trade. This means that while fair traders promote democracy and egalitarian aims within their own cooperatives, the national and international policies that forge the broader context within which they must operate, continue to be outside the meaningful democratic control of poor farmers and workers (Fridell, 2007).
Additionally, according to Weber (2007), Fair Trade ensures a minimum price to the organisation of producers not to individual producers. Weber argues that producers receive the price stipulated in the organization’s export contract which must meet or exceed the Fair Trade minimum price minus the expenses of the organisation. Since the Fair Trade removes all the intermediaries, the organisation has to do all the work that intermediaries would normally do, like coffee processing and logistics. In some cases the expenses are so high that the money that actually goes to the producers is very little and in some cases they prefer selling to the local market rather than to their organisation.
showed that 4 out of 5 farms paid the workers below the Peruvian minimum wage (Weber, 2007).
The same author argues that if there were a free market, new entrants would increase supply and decrease the price. The Fair Trade minimum price of 1,24 $ per pound, by definition prevents that from happening. The problem in this case is that increased supply leads to increase competition amongst producer organisations for a limited number of Fair Trade contracts. This competition within the Fair Trade supply side of the market, threatens to exclude marginalised coffee growers who Fair Trade claims to support (Weber, 2007).
According to the longitudinal study of Moore (2004) “it seems that both free trade and protectionism work better than Fair Trade, and direct donation is also claimed to be superior to Fair Trade”. This author argues that the advantageous price can cause the producers to grow dependent on Fair Trade, whereas one of its goals is to enable them to develop more sustainable businesses in the local, regional and international marketplaces (Moore, 2004). Adding to this but from a different point of view, Kocken (2002) claims that “many studies point out the need to gradually terminate current relationships with successful producer groups. This may offer opportunities for supporting new groups. This would allow a greater number of producers to benefit from Fair Trade”.
(2000) continues this claiming that they just understand Fair Trade in terms of market access.
At this point, the International Coffee Agreement (ICA) should be mentioned. It is a United Nations agreement that was designed to help stabilize coffee prices. It was created as a response to a crash in the coffee market in the late 1950s which lasted into the early 1960s. Since the original agreement, there have been five subsequent ones, ratified in 1968, 1976, 1983, 1994, 2001 and 2007 (ICO, 2008). Prior to the original agreement, the global coffee market was prone to wild swings in price, with overproduction often drastically affecting the income of major exporters of coffee and the idea behind it, is to prevent the worsening of poverty conditions. However, the voices against ICA argue that it artificially increases the coffee price and producers are encouraged to produce more in search of higher profits when the price is guaranteed. In this case, Fair Trade in order to find a solution to overproduction and to ensure that the price does not fall below the Fair Trade minimum, decided that any over- supplied coffee beans will simply be destroyed to assist in balancing supply with demand. This is a questionable outcome for consumers, producers and the environment (Wilson, 2006).
3.2. Ethical perspectives: a framework and theories of the firm
Figure 3: A map of ethical theories (Fisher, Lovel, 2006)
have four big categories: Virtue ethics, Deontological ethics, Ethical learning and growth and Teleological ethics.
Virtue ethics is a set of personal characteristics more than a system of rules, which function as a compass for the person to decide how to act in an ethically difficult situation. Those personal characteristics or virtues, as they are usually called, vary greatly in different historical time periods. Based on this ethics theory and depending on a person’s values,
the opinions about Fair Trade can also be formed accordingly. For example someone that holds the virtues of authenticity and philanthropy very high on their list, can
present strong arguments in favour
of Fair Trade.
buy the best quality coffee. This person always has this principal a priori and does not take under consideration other factors, for example the price or the circumstances under which the coffee was produced (e.g. child labour). In this case, the Fair Trade coffee would only be an option for this person if it provided the best quality.
Ethical learning and growth theories are all about setting policies as indirect methods with which people can learn how to act ethically. There is a lot of literature about how individuals can personally morally develop, make themselves aware of how to behave in various situations and explore their ethical potential. These theories deal with learning as an ethical end in itself. A supporter of this ethical theory could argue that a good plan of action for Fair Trade would be to better educate people about the living conditions of the farmers in the developing countries. That way when it comes for them to buy a certain type of coffee they would choose Fair Trade because they would think this is the ethical thing to do.
Last group of theories, with this categorization, is the teleological ethics. “They combine an intention to work towards an end with a particular view of what institutions are necessary to achieve it”, (Fisher, Lovel, 2006). These institutions are responsible for setting the measures with which the appropriateness of an act towards an end is evaluated. Therefore, in teleological ethics, what is most important is not the act itself but rather its consequences; it’s the consequence that should be judged if it is right or wrong. Many arguments about Fair Trade, move in this sphere of theories. Examples of this are those authors who evaluate Fair Trade based on its economical results on the population of farmers in developing countries.
Lovel (2006) present four broad theories of the firm and their implications as they are useful for prioritizing needs and autonomously exercising moral judgement.
The classical- liberal economic approach “places the organisation within an economic system that is made up of myriad of interconnecting but legally separate parts and where relationships between these many parts are defined in terms of free exchange” (Fisher, Lovel, 2006). The point here is that if there is no company or individual to affect the market then the prices reflect people’s wishes. This is the justification of the ethicality of free markets that has been used by many authors till today. The main representative of this norm in Ayn Ran a Russian author that rejects government in anything than what can be justified for protecting individual rights. However, there is only one objective recognised by these systems and this is to meet the demands of equity shareholders. This theory comes in direct conflict with Fair Trade since it supports free trade and rejects any form of regulation, be it fair or not.
pluralist perspective Type B does not place such high emphasis on stakeholders groups being represented but rather focuses on the wider social implication of corporate decisions. The pluralist perspectives require higher responsibility as well as ethicality and humanity from the people that make decisions in corporations. Based on this perspective, one could argue in favour of Fair Trade, since its functions have humanity as a starting point.
Finally, the critical perspective is a series of many theories, regarding a table of choices, varying from politics in organisations to exploitation of people. What is interesting is that they all present the corporate life as being really complex and much more intricate than the other theories seem to believe. Critical theorists have commitment to societal change and they realise society as a series of spheres with dynamic relationships “which contain and constrain differing elements of societal existence” (Fisher, Lovel, 2006). According to this theory, one could support the opinion that Fair Trade is one sphere and can make very little difference or can make great difference, depending on it relationships with the other spheres.
3.3. The ethical perspectives behind the arguments
It is very interesting to analyse the arguments concerning Fair Trade that were enlisted in the literature review, that is which business ethic theories are they based on- explicitly and inexplicitly.
category of the critical perspective since they both deal with the Fair Trade system as being a complex structure and they measure its effects and side effects. These authors’ work acts as an organisational window through which we observe the reactions and consequences of Fair Trade, and this is consistent with the critical perspective as explained in Fisher and Lovel (2006).
The arguments raised by Fridell (2007) as they were presented in the above chapter, and also these made by Lyon (2006), Utting- Chamorro (2005) and Tallantoire (2000), concern the lack of effect in the broader political and economical situation of a developing country. So these authors belong to the teleological ethics theory, since what is important to them are the consequences, and in this case, the broader consequences of Fair Trade and not just its effects on a group of participating producers. Additionally, their arguments can be placed in the corporatist approach since they discern a broader- based set of perspectives. Also, their judgment against Fair Trade focuses on the economic and political stability that the organisation fails to offer and that is exactly the point of the corporatist approach and the reason why it is preferred, because of the stability it offers since it includes broader set of perspectives.
argument about the excess of supply due to overproduction and increase in the number of certified cooperations belongs to the same ethical categories, since in this case things seem to be run under the free market rules and the principles applied are standard. The same theories apply for the argument about the competition amongst producer organisations and how that excludes marginalised growers, because this is also a case where things seem to work like in a free market, so the classical liberal economic approach fits. Additionally the same can be said for the argument made by Moore (2004).
The claim of Weber (2007) about the seasonal personel of the farms being paid below the minimum wage and only the employees of the organisation receiving the Fair Trade privileges, belongs to the virtue ethics category since it is a direct hit against the virtues of the Fair Trade that focuses only on the standard personnel ignoring what happens outside the organisation.
The argument made by Kochen (2002) fits in the ethical learning growth category since it requires of successful organisation to be able to be independent after their cooperation with Fair Trade so that other less successful ones can take their place and in their turn to be aided so as to be independent. Furthermore, it also goes under the Pluralist perspective since it requires higher responsibility of the organisation, so that more cooperation can be part of Fair Trade.
3.4. Conclusions
To sum up the above information it is interesting to look at these arguments collectively and find a pattern for their categorization. To this end, figure 3 and figure 4 make things more clear.
Figure 5: Classification of the arguments according to the theories of the firm.
It is evident from the above figures that most of the authors base their arguments on a teleological ethical theory. That means that they are mostly interested in the results and the consequences of Fair Trade. However, an organisation so big that affects the lives of so many people in the developing countries, when evaluated should be examined from more perspectives. The consequences are important, but it is also significant to know which the driving forces, on an ethical level, are. That means, which are the virtues, which are the principles, which arguments could one make based on virtue or deontological ethics. If the majority of the authors’ line of reasoning comes from a teleological perspective, then one could assume that there is something more missing.
Furthermore, if we look at figure 4, at the theories of the firm, then we see that most of the authors follow the corporatist approach. In case of Weber (2007), all his arguments are according to the classical- liberal economic approach. So, one the one hand we see a tendency from the authors to include many variables in their examination of the Fair Trade system, hence the use of the corporatist approach. On the other hand with Weber, one can discern an inclination towards free trade, thus the use of the classical- liberal economic approach in his arguments.
real life situations, one would expect to see more arguments based on that theory. Additionally, it can be observed that arguments of authors in favour of free trade that use the classical- liberal economic theories are almost by definition against Fair Trade. One can argue convincingly in favour of the one or the other side but in the end it is all about what one believes in and which system of moral values one supports.
4. Analysis 4.1. Fair Trade
Fair Trade organizations through out the world support producers, raise awareness and campaign for changes in the rules and practices of conventional international trade. All of them are under an umbrella organisation called Fairtrade Labelling Organizations (FLO) International. FLO is responsible for developing the Fair Trade standards and providing support to the Fair Trade Certified producers. The Fairtrade Standards are the points of reference for Fairtrade Certification. The certification is conducted on behalf of FLO from an independent organisation, namely FLO-CERT GmbH. FLO- CERT independently inspects and verifies the compliance of producers organisations to the Fair Trade standards. For the purposes of this master thesis, I approached the organisation from a farmer’s position with the aim to research how accessible is a Fair Trade certification to coffee producers in developing countries.
to be certified. It also has to do with the type and size of the farm. That pre- check can also be done online by the producer simply by answering a few questions.
Additionally, in cases of cooperations where farmers apply all together, they have to pay the 500 euros application fee, but also 300 euros for each additional operating entity, therefore for each farm. By sending this questionnaire, the applicant formally requests to be certified by FLO-CERT according to their standards. The main Certification Process begins from this step onwards.
Figure 7: Calculation of the initial certification fee for 1st grade organisations.
that represents the partnership between a promoting body and the producer organisation.
Depending on the category in which the applicant falls, but also on the number of members, products and processing installations, FLO-CERT charges different fees that are calculated accordingly.
them can also be present. He/ she then explain the process as well as the actual functions of Fair Trade, the major structural changes that the organisation will undergo after the certification and the price policy with the Fair Trade Minimum and Premium. After the inspection FLO-CERT Auditor will present and explain to the organisation a list of detected non-conformities with the Fairtrade standards and a report will then be sent to FLO-CERT for evaluation. The organisation is then asked to send their proposal on the best way to address solutions to these non-conformities. FLO-CERT will decide to certify or not, but for a positive answer all the non- conformities must first be addressed.
In the final step of the process, the certification decision is communicated, usually within 14 days for the date of the decision. The organisation has the right to appeal, but must be able to present adequate information that support the appeal. Thus ends a Fair Trade certification process.
4.2. Comments
It is really interesting to observe a procedure like that from the producers’ point of view. The term “producer” is very broad and can mean anything from the hired labour personnel to the manager of a cooperation of farmers. It is important though to focus on the lower scale of producers, the ones that actually need the financial assistance that the Fair Trade certification promises.
Let us imagine now the hired worker or the owner of a very small farm. In the first case, he has to work maybe overtime to meet the standards his boss is trying to achieve but if the certification is successful, his working conditions will be improved. Fair Trade supports high level social responsibility practices, so a certified farm is obliged to treat its workers fairly. Therefore, his salary is expected to increase and the working hours to decrease to an acceptable lever, as set by the International Labor Organisation.
In the case of the owner of a small farm, he is not eligible to apply on its own for the Fair Trade certification. However, he can participate in a cooperation and together with other producers to make the application. The costs are then shared per member and when the process is successful they all share the price premium and the benefits originating from the certification.
It is important to pay attention to how many resources the whole process requires from the applicants. It is a lengthy and time consuming procedure, and of course expensive if seen as a percentage of the farmers’ income. However, if the outcome is successful it can result to a good return of their investment.
4.3. Starbucks Coffee Co.
conditions and their campaign had been highly successful (Argenti, 2004). Therefore, Global Exchanged posed a serious threat in the company’s public image and in the years that followed, they tried very hard to work on this. At first they started actually buying Fair Trade coffee, the percentages though always remained low. According to Starbucks executives, the problem on their side was that Fair Trade certified cooperatives did not meet the Starbucks quality criteria. So, they argued that they did not want to risk quality for social responsibility (Argenti, 2004).
Figure 9: Components of the C. A. F. E Practices certification procedure, Starbucks Social Responsibility
Report, 2007.
The first step is that the farmer who’s interested in participating in the program, has to acquire further information. Information can be acquired from their local cooperative or from the SCS website. The Starbucks website mentions very little about this actually and it takes quite some research to find out about the actual certification process. The
author can only assume that the information provided from local cooperatives is
comparatively more enriching. In order to fill in
the application form which will trigger the certification procedure, the farms under
consideration, must fulfil two prerequisites: Economic
The next prerequisite is Sample approved, that means that if the farm has no previous contract history with Starbucks or no approved sample, they have to send in some of their coffee for evaluation. For further details applicants are prompted to special personnel that are responsible for this function.
Next thing to do is fill in the application form (see appendix) and submit it to Starbucks Coffee Agronomy Company. That is an organisation in Costa Rica set up to ensure the availability of sustainable high quality coffee according to the company standards (Corporate Social Responsibility Newswire, 2008). Once the organisation has received the complete application, they will send to the applicant an ID number and further detailed information on the verification process.
Next step in the process is choosing an approved verifier to evaluate the farm/ network of farms. An approved verifier is a person or company that has been previously under the examination of SCS and has been approved by them. So, the applicant farmer can go to the SCS website, get the list of all official verifiers and select one that is closet to their area or fits theirs requirements. The verifier sets the procedure that will follow for the verification process and also sets the fee. One German- based organisation, called CERES charges 500 Euros per day for a certification procedure. That means that if the applicant is a big network of farms and the certification takes longer, then the fee is accordingly set higher.
C. A. F. E. Practices of Starbucks Coffee Company. Mayacert publishes in their website a list of the criteria that will be examined during the verification process. According to this, prerequisites to the program are the following: the approved Starbucks application, an auto evaluation manual for every production unit of the farm and documents proving the existing payment system and identify all the beneficiaries and producers of the farm. Additional to that, during the audit, the applicant will be required to present documents that address three key issues: social responsibility, coffee production, beneficiaries of coffee. Social responsibility refers mainly to the labour conditions and the minimum wages of the workers. Coffee production is about the quality of the coffee and the conditions under which the coffee beans are treated. Finally, beneficiaries of coffee, refers to the environmental impact of the production.
After the verification process is complete, the verifier submits a report to the applicant so that they can review it and submit any comments they may have. The verifier will also aggregate the points for the applicant and issue a total score. The final version will be submitted to the Starbucks Coffee Agronomy Company for review. They then review the report and notify the applicant of the approval status. It is important to be noted, that the applicant can be granted conditional status which means that all the requirements have been fulfilled but there has not been a purchasing contract with Starbucks yet. Only after a purchase is the status converted to full C. A. F. E. Practices status but even then that does not guarantee a next purchase.
4.4. Comments
theoretically speaking, owners of small farms can apply just as well as big ones, without having to form cooperations with other farms. However, as Rob Hale from the non governmental organisation Africa Now, informed me “It is very unlikely that a single farmer will supply Starbucks because of quantities so it is mostly co-operatives and larger producers”.
Additionally to that, the verification procedure is lengthy, time consuming and would require apart from high fees also the time of the farm’s personnel. So, many working hours will have to be dedicated to that purpose and deducted from the coffee production. However, it can be seen as an investment, where one expects to have some gain from in the long term. Also, another option as Rob Hale from Africa Now informed me is that in many cases it is the exporter who pays this cost- NOT the small farmer or the co-operation.
The C. A. F. E. Practices program though guarantees Starbucks a pool of quality coffee to choose from but does not guarantee to the producers a buyer at all times that purchases in premium prices. It establishes a score system and it is the high scorers that have the most chances of actually selling their coffee to Starbucks and getting the advantageous terms of the contract. Many of the others producers that also got certified and made the investment with everything that this implies, can still be left outside.
4.5. A comparison
At this point it is interesting to clarify some points concerning the relation of the two organisations, Fair Trade and Starbucks but also their differences concerning the certification procedures and the accessibility to farmers.
on the other hand is a big multinational company, aiming at profit and having recently integrated social responsibility in their commercial activities. Their mission, as stated in each organisation’s profile on their websites, is as follows:
“Setting international Fairtrade Standards, facilitating and developing Fairtrade business, making the case for trade justice” (FLO, 2006) and “Provide a great work environment and treat each other with respect and dignity, embrace diversity as an essential component in the way we do business, apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee, develop enthusiastically satisfied customers all of the time, contribute positively to our communities and our environment, recognize that profitability is essential to our future success” (Starbucks, 2008). The differences in the mission of each organisation can explain also the differences in the certification procedures, since their aim is basically different. Fair Trade is more social orientated while Strabucks are more commercial. The Fair Trade certification means that the certified cooperations will then sell their members’ coffee directly to Fair Trade or Certified Operators, for premium prices. From there it reaches the public- through the organisation’s own retailer shops or through its partnership agreements with other companies, chain supermarket or big retailers.
prices farmers were getting from the commodity markets fell to historic lows of $0.40-$0.50. The best performing suppliers (those scoring an overall performance rating of 80 per cent or over on the points-based system devised by the CAFE Practices programme) are eligible for an additional $0.10 premium”, (Ethical Corporation, 2004). It is an attractive deal, but it is not guaranteed that even the high scorers of the program will get it, as it is clearly mentioned already in the application. It only means that they are eligible, but not that they are one hundred per cent there.
Another issue to focus on is the eligibility of applicants. Individual farmers are not eligible to apply to the Fair Trade program, and there are eight different predefined categories of producer organisations as we saw above. On the other hand, on the C. A. F. E. practices program, exist three sizes of farms based on the number of hectares dedicated to the growing of coffee: large farm is 50 hectares or bigger, medium farm is between 12 hectares to 49,9 and a small holder farm is less than 12 hectares. The program also recognises six different types of networks: Stand alone- vertically integrated, which is a farm that produces its own coffee in its own mills, under one ownership, the single farm supply network under single management/ ownership, the multiple farms supply network under single management/ ownership, the single farm supply network not under single management, multiple farms supply network not under single management and complex supply network. So, while in the Fair Trade program, a farm on its own cannot apply for the certification, but must be in some sort of network or cooperation, in the C. A. F. E. practices program there is the provision for a stand alone farm, and therefore it is possible for a single farm to apply individually.
approved sample of the crop even before the verification procedure begins. In Fair Trade there is no such a criterion as a precondition for the commencement of the certification process. Also all the Fair Trade standards are almost exclusively socially and environmentally orientated and they do not specify certain product quality criteria (Fair Trade, 2007).
Additionally, another point that stands out between the two certification systems has to do with the way the certification procedure is concluded. In the Fair Trade program, the applicant is either certified or not. In the C. A. F. E. practices program, the applicant gathers points, the total being 105 points. There are three acceptance categories for C.A.F.E. Practices suppliers according to their score: Strategic, Preferred and Verified, with Strategic supplier being the highest in the rank and Verified the lowest. So, the Starbucks program differentiates greatly between certified suppliers and grants them different status (Scientific Certification Systems, 2008), whereas Fair Trade does not provision in between states, they either certify an applicant or not.
4.6. Analysis of the results based on the literature review
It is interesting to look back in the literature review now and see how the arguments in favour or mainly against Fair Trade are standing after having analysed the certification procedure.
According to Bacon the participation in Fair Trade networks reduces the farmers’ vulnerability and according to Hayes it strengthens the market. Both statements can be true under circumstances. It can be supported that the farmers’ vulnerability is reduced anyway, the moment they decide to form cooperation, because as a whole they have higher bargaining power than they would individually and therefore strong cooperations that are not prone to crises also strengthen the market. Both arguments are relative to the author’s point of view and no conclusion can be withdrawn concerning their accuracy, from the analysis of the certification process.
focuses on democratic controls inside the cooperation and on social justice within the farms but it does not affect the countries in which they operate.
The arguments raised by Weber, about all the extra administrational costs imposed by Fair Trade seem to be confirmed, since the whole procedure requires a lot of administrational work. The surplus of offer that is another argument by the same author cannot be approached by the analysis of the certification procedure, but the idea that only employees of the certified organisation get the legal benefits and not the seasonal personnel, can be seriously doubted. The economic transparency condition and the thorough audit would give the auditors the opportunity to see if there is illegally paid personnel, even seasonal, working for the farm that fights for the certification. The same author argues that there are only limited Fair Trade contracts and thus there is competition between the producers. That is a statement that could be accurate; since the Fair Trade is a very prestigious buyer and the certification procedure open to a variety of farms and organisations. It is highly probable that there is competition between the producers about this, even though not everyone can afford the procedure.
Moore’s argument that with Fair Trade producers can grow dependent and not able to grow sustainable businesses, it can be considered as false, since Fair Trade Premium that is offered to certified producers, is money paid on top of the Fairtrade minimum price that is invested in social, environmental and economic developmental projects. Therefore, the farmers’ are offered the chance to independence and do not have to remain in the Fair Trade payroll for a long time.
sensible way, they can help the farmers diversify. Again it is about which point of view each author assumes.
The argument by Utting- Chamorro that producers are passive suppliers of product, it does not appear to be validated. Reason for that is that producers are consciously choosing for Fair Trade (they can opt for the Starbucks certification), they are creating cooperations and they are taking action even when they are just choosing to be part of Fair Trade. This is not a passive standing. The rest of the arguments stated in the literature review, cannot be assessed by the analysis of the certification procedure but are complimentary to the research as they provide additional points of view.
The argument by Tallantoire seems hard to validate or dismiss, it is hard to generalise and say that the producers just understand Fair Trade in terms of market case. It cannot be doubted that it may be the case for some, but also it cannot be argued that this is the case for all. However, with reference the certification procedure, it is possible to say that yes, producers see the market access when they apply, but the argument cannot be generalised or assumed to be valid after the certification procedure. It is possible that once in the Fair Trade system, the producers change their mind and see more of it than just market access.
4.7. An extra opinion
their constitutional differences (one is an NGO, the other is a multinational company), their policies were expected to be also very different. The receiver of the email was asked to comment on this and provide a personal opinion on how accessible is actually Fair Trade to the producers. Also, they were asked to provide some differences between Fair Trade and Starbucks according to their opinion.
The results of this action are very interesting. Out of twenty emails, nine responses were received. The organisations that were contacted are mostly NGOs active in the area of Fair Trade with lots of campaigns about this topic in their portfolio. Additionally, some verifier organisations were also contacted. Many replies are not deemed fit for the purposes for this thesis, as they were just providing some general information about Fair Trade that is usually encountered in their marketing materials.
Additionally, it is worth to mention a response received from the Fair Trade in Greece, the Athens branch. The correspondent replied to the question by mentioning a story that had received considerable media attention some years ago. In 2005 the Ethiopian government filed applications to trademark its most famous coffee names, Sidamo, Harar and Yirgacheffe. Securing the rights to these names would enable Ethiopia to capture more value from the trade (Oxfam, 2006). However, Starbucks acted to block Ethiopia's application to the US patent and trademark office. That is the story that the communication manager of Fair Trade in Athens, chose to provide me with as an answer to the above described email. It is my personal estimation, that resolving to famous infamous stories in order to make a point against the opposing party is not the optimal way of resolving an issue.
CAFE Practices is very thorough and I was personally very surprised at the level of detail of assessments to measure environmental sustainability and social equity”. It is an interesting insight coming from an insider, from an organisation that is actually conducting the verifications for the C. A. F. E. Practices program.
An additional reply, that is interesting to mention, came from Allison van Vlerken, the communications officer for the International Fair Trade Association (IFAT). IFAT is the “the global network of Fair Trade Organizations. IFAT’s mission is to enable producers to improve their livelihoods and communities through Fair Trade” (IFAT, 2007). Their response was that “the foundation (Fair Trade) is based on long-term relationships that help producers build their capacity, and create opportunities for growth and improvement in many areas. It is much more than just paying a better price than conventional markets”. Interesting to consider this point of view as well, what do the producers win from the certification on the long term, apart from the premium prices. If they are ever to escape poverty, development should be sustainable, so the long term prospects are important.
The final reply that was received, came from the human right’s organisation Global Exchange, that have undertaken the last years a very active campaign for the promotion of Fair Trade. Mr. Rodney North, their spokesperson, addressed the point of the Fair Trade certification fee “The Fair Trade standards are rigorous and sending in monitors and inspectors does cost money. There has been talk of trying to find ways to merge organic certification with Fair Trade, even if only in certain criteria, to keep the costs down.” He also added that “we do believe the Fair Trade system delivers more benefits to small-scale farming families, and does more to positively transform the rural economy of these farming communities”. These are both two points that were not encountered during this research, no justification of the fee nor clear accessibility information for the small farmers.
5. Conclusions
5.1 Conclusions
This research aimed to present an objective viewing of Fair Trade as well as an analysis of its certification procedure. The comparison to a multinational company like Starbucks, served to provide an opportunity for conclusions to be withdrawn from the “clash” between the two.
They are both operating in the same part of the world, the developing countries and they are both purchasing coffee. The similarities but also the complete differences in their mission and constitution, is what makes the comparison interesting.
Fair Trade, is generally encountered by the public as a very positive system, however a thorough research in the current literature shows that there are many arguments against it. If examined closely, the arguments originate from two types of authors: the economists who add up the numbers and they do not turn in favour of Fair Trade and those who believe in the Free Trade instead. The arguments are robust and have a possible basis, but as the analysis with the ethical theories showed, it is also a matter in which ethical system does the author belongs to. Depending on the author’s ethics, the theories and the arguments come accordingly.
As for the certification system itself, it is not without flaws. The analysis showed high fees and inaccessibility of the real small farmers who are mostly stricken by poverty. The corruption in many developing countries can be a possible factor that prohibits their access to cooperations and they are then left outside the system. Having said that, it is not possible to ignore the good work as well, which is done by Fair Trade. They are making a step towards a more ethical trade of goods, they are being heard and they raise awareness. The popularity in the public is so much that even mainstream retailers are buying and offering Fair Trade products due to the high demand for them. However, it is my personal estimation, after this research that Fair Trade should proceed in reforms to the certification system that will allow a broader group of producers to enjoy its benefits.
program is very thorough, but what is also important that more people can actually participate in it to begin with. However, Starbucks is a multinational company and as such, it has to make profit, otherwise it cannot continue to operate. There can be a way though to combine economic growth with environmental and social sustainability. My personal opinion is Starbucks to a certain extent, use the C. A. F. E. Practices program to make sure that they do not run out of a pool of quality coffee to choose from. But there is nothing condemnable about wanting to offer quality products to the customers. It is surely better though, if all the people that worked for it, get equally rewarded. Starbucks has received many time negative publicity from NGOs and to the best extent of this research, they are surely showing some effort.
5.2. Reflection: strengths and limitations
The main obstacle to this research has been the inability of a personal survey. I did not have the opportunity to travel and observe a certification process, so all the work was done with the help of modern media from a distance. All the information that was received and processed came from a third party account. An on- site survey would have improved the credibility of this paper.
Also, lack of information in some cases, or its disparity made it difficult. There are verifiers’ sites that are in another language than English. Also there was information missing and people actually working on a developing country had to be contacted by phone. Quality of the telephone lines and the people’s response time in every country varies greatly. So, there were difficulties because of these practical issues.
thinking. Also, the comparison of the certification procedures between Fair Trade and Starbucks is something that had not been attempted before. The only thing closer to this that is to be found is a comparison between their standards and criteria. However, the certification procedure is that actually grants access to the farmers to these organisations social aid programs. Therefore its importance cannot be underestimated. So, due to the original nature of the subject and the research, there is value added for the current literature.
5.3. Recommendations for further study
7. References
Anderson, K. 2005. On the virtues of multilateral trade negotiations. The economic record, vol.81, No 255, 414- 438
Bacon, C. 2005. Confronting the coffee crisis: Can Fair Trade, organic and specialty coffees reduce small- scale farmer vulnerability in Northern Nicaragua? World Development. 497- 511
Consultative Group to Assist the Poor. 2007. What Is Microfinance?
http://www.cgap.org/portal/site/CGAP/menuitem.b0c88fe7e81ddb506780801059101 0a0/ Accessed Mar. 14, 2008
Corporate Social Responsibility Newswire. 2008. Starbucks Coffee Agronomy Company Opens in Costa Rica to Help Farmers Improve Their Coffee Quality. http://www.csrwire.com/News/2447.html Accessed Jul. 15, 2008
Economist. 2006. Voting with your trolley. Dec 7th 2006
Economist. 2006. The good consumer. Jan 17th 2008
Edwards, S. 1998. Openess, productivity and growth: what do we really know? The Economic Journal, 383- 398.
Fairtrade Foundation. 2008. FAQs.
http://www.fairtrade.org.uk/what_is_fairtrade/faqs.aspx Accessed Mar. 29, 2008
FLO. 2006. About us. http://www.fairtrade.net/about_us.html Accessed Mar. 14, 2008
FLO. 2006. FLO's Main Tasks. http://www.fairtrade.net/tasks.html?&L= Accessed Mar. 14, 2008
FLO. 2007. Generic Fair Trade Standards for small farmer’s organisations.
http://www.fairtrade.net/fileadmin/user_upload/content/Generic_Fairtrade_Standard_ SF_Dec_2007_EN.pdf Accessed Aug. 5, 2008
Fridell, G. 2007. Fair trade coffee: The prospects and pitfalls of market driven social justice, University of Toronto Press
Gill, J., Johnson, P. 1991. Research methods for managers. London, Sage.
Global Exchange. 2007. Frequently Asked Questions About Fair Trade Coffee. http://globalexchange.org/campaigns/fairtrade/coffee/faq.html#1 Accessed Aug. 26, 2008
Intercontinental Exchange. 2008. Coffee - ICE Futures U.S. https://www.theice.com/coffee.jhtml Accessed Aug. 5, 2008
International Coffee Organisation. 2008. The story of coffee. http://www.ico.org/coffee_story.asp Accessed May 27, 2008
IFAT. 2007. What is Fair Trade?
http://www.ifat.org/index.php?option=com_content&task=view&id=1&Itemid=13 Accessed Mar. 14, 2008
IFAT. 2007. Mission Statement.
http://www.ifat.org/index.php?option=com_content&task=view&id=9&Itemid=5 Accessed Aug. 8, 2008
Kocken, M. 2002. The Impact of Fair Trade. A Summary of Studies on the Impact of Fair Trade, EFTA.
Lyon, S. 2006. Evaluating fair trade consumption: politics, defetishization and producer participation, International Journal of Consumer Studies, pp 452- 464
Mayacert. 2008. Who we are.
http://www.mayacert.com/index.php?id_lang=2&id_category=1 Accessed Jul. 23, 2008
McDonalds. 2008. Open doors.
Moore, G. 2004. The Fair Trade Movement: Parameters, Issues and Future Research, Journal of Business Ethics, 53: 73- 86
Mussa, M. 1993. Making the practical case for freer trade. American Economic Review, 372.
Nestle. 2008. Creating shared value.
http://www.nestle.com/SharedValueCSR/Overview.htm Accessed May 23, 2008 Oxfam. 2006. Starbucks opposes Ethiopia’s plan to trademark specialty coffee names that could bring farmers an estimated $88 million annually.
http://www.oxfam.org/en/news/pressreleases2006/pr061026_starbucks Accessed Aug. 8, 2008
Reidar, D. 1998. Evaluating development programmes and projects. London, Sage.
Scientific Certification Systems. 2008. Starbucks C.A.F.E. Practices. http://www.scscertified.com/csr/starbucks.html Accessed July 28, 2008 Scientific Certification Systems. 2008. C.A.F.E. Practices overview.
http://www.scscertified.com/csrpurchasing/docs/C.A.F.E.PracticesOverview1105.pdf Accessed 25 Jul, 2008
Starbucks. 2008. Corporate social responsibility.
Starbucks. 2008. Strabucks mission statement.
http://www.starbucks.com/aboutus/environment.asp Accessed Jul. 24, 2008
Tallantoire, A. 2000. Partnerships in fair trade: reflections from a case study of Cafedirect. Development in practice, 10, 166- 177
Utting- Chamorro, K.2005. Does fair trade make a difference? The case of small coffee producers in Nicaragua. Development in practice, 15, 584- 601
Wayer, M. 2005. Can free trade be fair trade? New Statesman, p22-25
Weber, J. 2007. Fair trade coffee enthusiasts should confront reality. Cato Journal, Vol. 27, No. 1
Appendix
The email that was sent for the purposes of the chapter 4.7.
Dear Sir/ Madame,
I am an international student at Rijksuniversiteit Groningen in the Netherlands and I am writing my master thesis on Fair Trade vs Starbucks. My interest was sparkled by an article, explaining how Starbucks have a certification system of their own, also supporting the certified producers, very much like Fair Trade does. So I traced the certification procedure, step by step and was surprised to find actually that they are so similar. They both charge very high fees and require a lot of time and resources from the producers' part. As I expected an NGO like Fair Trade to rise and shine out of the comparison to a multinational like Starbucks, I believe you can understand my
surprise. I would be very interested to hear your comments on this matter, what do you think are the differences of Fair Trade to Starbucks? And how accessible is Fair Trade really to the producers that really need it? I highly appreciate any information you can spare and your opinion counts a lot. It will be a part of my thesis and an essential step towards a more objective and overall point of view. I can guarantee your anonymity of course if you prefer and a copy of my thesis will be gladly sent to you upon request. Thank you very much in advance and I am anticipating your reply with high interest.
Kind Regards,
