A Brief Look at Free Trade in the Global Economy
From around the world, we hear heart-wrenching stories about mistreated and abused workers who earn meager wages. Or worse, we hear about millions of children sold into servitude or forced to work in unsafe conditions for pittance wages to contribute to their family's survival. Unfortunately, these stories are all too common in the new global economy where competitiveness and profits to stockholders are paramount, and poverty is rising. Increasing globalization, along with U.S. government support for free-trade and investment agreements, are exacerbating three intractable problems that now plague almost every nation on earth: income inequalities, job losses and environmental damage.
Around the world, production, trade and retailing of most goods and services are increasingly concentrated under the control of a small number of corporations. Economist John Cavanagh and Frederick Clairmonte have calculated that just over a quarter of the world's production comes from General Motors, Mitsubishi, Shell, Philip Morris and 200 of the other largest firms. These firms are the primary beneficiaries of the world's rapidly growing trade. As they compete with one another to capture global markets, their primary mode of reducing costs has been through cutting jobs, wages and benefits. Between 1979 and 1992, for example, the Fortune 500 largest firms in the U.S. cut 4.4 million workers from their payrolls globally to remain competitive and keep profits high.
Backed by conventional economists, large corporations have convinced most of the world's governments that they should maximize global competitiveness through freer trade. Corporate and government officials often theorize that free trade will be beneficial for workers, whose wages and benefits can rise as foreign markets expand for their goods and for consumers who can buy cheap foreign imports. Following this theory, new regional trade agreements, like the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT) are reducing barriers to trade and investment for firms. These free trade agreements offer firms global protection for their intellectual and property rights but there are currently no equivalent enforceable global standards to protect workers and the environment. Furthermore, as barriers to entering local markets are removed, large scale manufacturers edge small businesses and local cooperative enterprises out of the market. Local economies suffer when these firms' profits are channeled out of the country rather than being reinvested locally. According to World Bank figures, roughly half of the new foreign direct investment by global corporations in the South in 1992 quickly left those countries as profits.
As a result of these trends, the gap between the rich and the poor has increased dramatically in recent decades. Today, the richest 20% of the world's population has 60 times the income of the poorest 20%. The benefits of trade are similarly concentrated among the wealthiest segments of the world's population and only a handful of developing countries. For example, of the $102 billion in private investment that went to developing countries between 1970 and 1992, 72% went to only 10 countries. Most of those ten were the emerging markets such as China, Hong Kong Singapore, South Korea and Taiwan. Even in many countries that are currently experiencing high growth rates from expanded trade, the benefits of growth are not trickling down to the poor.
Another problem is that the bulk of exports from developing countries tends to be in primary product commodities, such as sugar, cocoa, coffee, etc., whose prices generally rise much more slowly than the prices of manufactured goods imports. This "terms of trade" decline was particularly sharp between 1985 and 1993 when the real prices of primary commodities fell 30%. This translates into losses of billions of dollars. Free trade agreements do little to enhance the trading positions and commodity prices of these poor countries. In many cases, the world market price for commodities such as coffee and cocoa falls below the cost of production, forcing farmers to sustain huge losses. Fair Trade organizations offer a crucial alternative by paying farmers a price that always covers at least production costs.
FAIR TRADE HAS NEVER BEEN MORE IMPORTANT
The business generated by Fair Trade Organizations in Europe and the U.S. now accounts for an estimated US$400 million, just .01 % of all global trade. Small as it may be, the rapidly growing alternative or fair trade movement is setting standards that could redefine world trade to include more social and environmental considerations. Fair traders believe that their system of trade, based on respect for workers' rights and the environment, if adopted by the big players in the global economy, can play a big part in reversing the growing inequities and environmental degradation that have accompanied the growth in world trade.
Hilary French, author of Costly Tradeoffs: Reconciling Trade and the Environment, reflects the views of many Fair Trade Organizations: "Trade is neither inherently good nor bad. But how it is conducted is a matter of great concern-and an unprecedented opportunity. Trade can either contribute to the process of sustainable development or undermine it. Given the rapidly accelerating destruction of the earth's natural resource base, there is no question what the choice must be."
For Fair Trade Organizations, the choice is simple. Whether trade is good for producers and consumers depends entirely on how the goods are made and how they are sold.
Fair Trade brings the benefits of trade into the hands of communities that need it most. It sets new social and environmental standards for international companies and demonstrates that trade can indeed be a vehicle for sustainable development. Today, a growing movement of workers, environmentalists, consumers, farmers and social movements worldwide is calling for a different framework for trade. They want a global trading system that promotes workers' rights, protects the environment and sustains the ability of local producers to meet community needs. Together, as consumers, they can make a huge difference by demanding significant changes in the ways goods are produced, and vote with their dollars for a more just and environmentally sound trading system.
Fair Trade means an equitable and fair partnership between marketers in North America and producers in Asia, Africa, Latin America, and other parts of the world. A fair trade partnership works to provide low-income artisans and farmers with a living wage for their work. Fair Trade Federation (FTF) criteria are:
· Paying a fair wage in the local context.
· Offering employees opportunities for advancement.
· Providing equal employment opportunities for all people, particularly the most disadvantaged.
· Engaging in environmentally sustainable practices.
· Being open to public accountability.
· Building long-term trade relationships.
· Providing healthy and safe working conditions within the local context.
· Providing financial and technical assistance to producers whenever possible.
Please see our Frequently Asked Questions page for further information about the meaning of these criteria.
· Worldwide, fair trade sales total $400 million each year.
· In North America, fair trade retail sales totaled $35 to 40 million in 1998.
· Of $3.6 trillion of all goods exchanged globally, fair trade accounts for only .01%.
· Fair trade businesses return 1/3 to 1/4 of profits back to producers in developing countries.
· According to the National Labor Committee, a Haitian sewing clothing for the U.S. market may earn less than 1% of the retail price.
· Sales for Ten Thousand Villages, the largest fair trade organization in the United States, grew from nearly $3 million in 1985 to nearly $12 million in 1998. Ten Thousand Villages' Canadian operations reported another $3 million. Combined, that represents the creation of the equivalent of 12,500 full-time jobs for disadvantaged artisans and farmers.
· Of its $5.2 million in sales for 1998, SERRV International returned nearly $2 million directly to producers.
· North American consumers pay $4 to $11 a pound for coffee bought from growers for about 80 cents a pound. Growers who sell to fair trade organizations earn $1.12 to $1.26 a pound.
· Sixty to seventy percent of the artisans providing fair trade hand-crafted products are women. Often these women are mothers and the sole wage earners in the home.
How Fair Trade Organizations Differ from Commercial Importers
· Their goal is to benefit the artisans they work with, not maximize profits. By reducing the number of middlemen and minimizing overhead costs, FTOs return up to 40 percent of the retail price of an item to the producer.
· They work with producer co-operatives that use democratic principles to ensure that working conditions are safe and dignified, and that producers have a say in how their products are created and sold. Co-operatives are encouraged to provide benefits such as health care, child care and access to loans.
· They encourage producers to reinvest their profits into their communities. Many producers who work with FTOs have committed time and money to build health clinics and support other community projects in their villages.
· Some Fair Trade Organizations work to shift processing and packaging activities to the developing world, so that as much work as possible will remain in the producer country. Often, such activities are performed abroad, depriving the neediest countries of the opportunity to boost their incomes.
FTF Principles and Practices
FTF members are committed to the following principles and practices in their trading relationships:
Producers are paid fairly for their products, which means that workers are paid at least that country's minimum wage. Since the minimum wage is often not enough for basic survival, whenever feasible, workers are paid a living wage, which enables them to cover basic needs, including food, shelter, education and health care for their families. Paying fair wages does not necessarily mean that products cost the consumer more. Since Fair Trade Organizations bypass exploitative middlemen and work directly with producers, they are able to cut costs and return a greater percentage of the retail price to the producers.
Cooperatives and producer associations provide a healthy alternative to large-scale manufacturing and sweatshops conditions, where unprotected workers earn below minimum wage and most of the profits flow to foreign investors and local elites who have little interest in ensuring the long term health of the communities in which they work. Fair Trade Organizations work primarily with small businesses, worker owned and democratically run cooperatives and associations which bring significant benefits to workers and their communities. By banding together, workers are able to access credit, reduce raw material costs and establish higher and more just prices for their products. Workers earn a greater return on their labor, and profits are distributed more equitably and often reinvested in community projects such as health clinics, child care, education and literacy training. Workers learn important leadership and organizing skills, enabling self-reliant grassroots-driven development. Safe and healthy working conditions are maintained and producers gain greater control and decision making power over the use of their local resources.
Fair Trade Organizations educate consumers about the importance of purchasing fairly traded products which support living wages and healthy working conditions. By defining fair trade and conducting business in a manner that respects workers' rights and the environment, the fair trade movement strives to educate consumers about the often hidden human costs of their "bargains." By providing information about producers' history, culture and living conditions, Fair Trade Organizations enhance cross-cultural understanding and respect between consumers and communities in the developing world. They also educate consumers and policy makers about inequities in the global trading system.
Fair Trade Organizations encourage producers to engage in environmentally friendly practices which manage and use local resources sustainably. Many FTF members work directly with producers in regions of high biodiversity to develop products based on sustainable use of their natural resources, giving communities an incentive to preserve their natural environments for future generations.
FINANCIAL AND TECHNICAL SUPPORT
Small-scale farmers and artisans in the developing world lack access to affordable financing, impeding their profitability. FTF members that buy products directly from producers often provide financial assistance either through direct loans, prepayment or by linking producers with sources of financing. Unlike many commercial importers who often wait 60-90 days before paying producers, Many FTOs ensure prepayment so that producers have sufficient funds to cover raw materials and basic needs during production time. They also often provide other critical technical assistance and support such as market information, product feedback and training in financial management. Unlike commercial importers, FTOs establish long term relationships with their producers and help them adapt production for changing trends.
RESPECT FOR CULTURAL IDENTITY