How Fair Trade Works

© Steffers

We might not give it a lot of thought at the cash register, but some of the products we buy travel around the world to reach us. From fruits and vegetables to manufactured goods, you can trace various products back through the retailers, wholesalers, transporters and middlemen to many of the world's i­mpoverished areas.

When you buy an espresso at the local coffee shop, a lot of the freshness and quality of the original handpicked beans comes through in the finished product. But how much of the money you paid actually makes its way back to the impoverished laborers who picked the beans? Not much. And when you figure in the dropping price of coffee and the high tariff barriers intended to keep imported goods from outselling domestic goods, the profit for farmers sinks even lower.


But what if you paid a little more for that espresso so that more money would reach the farmer at the bottom of the production line? Fair trade products allow consumers to do just this. The fair trade movement sets out to empower producers at the local level by paying them fairer wages for their labor, strengthening their local living conditions and giving them a stronger voice in the market.

While free trade advocates push for international trade devoid of as much regulation as possible, fair trade advocates insist that free trade isn't enough. They argue that without regulation, a global trade system with power centralized at the international level will always hurt local-level workers. This is one of the key criticisms against globalization.

While governments and global organizations continue to wrestle with the best ways to manage free trade from an international perspective, fair trade advocates have been trying to make a difference from the consumer end since the late 1980s. Instead of waiting for global and national groups to change the rules that govern business, they simply changed the way they did business.

How do fair trade businesses and organizations carry this out? It's all in the label.


The Fair Trade Movement

Mario Tama/Getty Images News/Getty Images

The basic concept is simple, but enacting it in the world of international business is more involved. After all, you can't just hand the cashier at the candy store a few extra dollars and tell him to pass it on to the family who grew the cocoa.

The modern, fair trade movement began in the 1950s with Alternative Trade Organizations (ATO). Humanitarian groups started ATOs to help alleviate poverty in developing nations. They did this by cutting the middleman out of trade between small producers in the Northern Hemisphere and small businesses in the Southern Hemisphere. This meant more direct profits for workers in developing nations.


In 1988, Dutch ATO Solidaridad proposed a labeling system to help introduce products into mainstream markets without compromising consumer trust in their humanitarian efforts. Since then, fair trade has grown into a globalized initiative. A number of fair trade products ranging from wine to soccer balls are currently available. Product availability varies from country to country, but one of the most widespread and well-known fair trade items is fair trade coffee.

Coffee is a fluctuating market. As recently as 2001, the price dipped so low that the average coffee grower received only 45 cents per pound of coffee. However, fair trade buyers that year paid $1.21 per pound of coffee, better enabling coffee growers to purchase necessities [source: FLO]. Fair trade certification made this possible.

Fairtrade Labelling Organizations International (FLO) oversees fair trade certification on the production end, inspecting farms and facilities in several countries. They ensure agricultural products are produced by small farms and that those involved are engaged in a democratically-operated cooperative. The farms must also follow basic environmental, health, safety, labor and human rights regulations.

To ensure these standards and to justify the higher-than-market fair trade prices, customers want to know which products they can put their conscious-driven spending dollars behind. National fair trade labeling organizations such as TransFair USA and the European Fair Trade Association work with the FLO to handle product labeling.

In some cases, the additional funds created through fair trade pricing go toward the improvement of local conditions, especially in cases where laborers have no ownership in production. This sum, paid in addition to fair trade prices, is called a social premium. These funds help establish scholarships, health care programs, better sanitation and small-business loans in some impoverished areas.

Fair trade products are often high quality or organic. But beyond these qualities, consumers are usually willing to pay more because they believe the producers have a basic human right to fair wages and living conditions.

Despite its humanitarian aims, the fair trade movement has its share of critics. On the next page, we'll look at some of the pros and cons of fair trade.


Criticisms of Fair Trade

AFP/Getty Images

Fair trade products only account for a segment of overall sales for any given product, but advocates insist the programs foster better relations between developed and developing nations, improve workers' lives and set a positive business example. Who could possibly have a problem with that?

Critics of fair trade don't have issues with the positive impacts of the programs or the humanitarian intentions behind them, but rather some of the possible flaws in the long-term effects of fair trade.


One frequent criticism is that fair trade prices artificially inflate prices above the market value without doing anything to address real problems, like oversupply. The more coffee available for purchase, the lower coffee prices drop. Critics argue that all fair trade does in these circumstances is prop up underperforming farming or manufacturing practices.

Critics also charge that fair trade certification's emphasis on agricultural cooperatives (co-ops) discriminates against smaller farmers who are wary of becoming entangled with a co-op. These organizations typically involve a group of farmers who have banded together to command better prices for their crops. While these organizations exist to empower farmers, critics have accused some cooperatives of allegedly mismanaging fair trade proceeds.

How do fair trade advocates answer these charges? Supporters say fair trade was created to improve the lives of laborers; the movement wasn't intended to single-handedly solve global poverty problems. Farmer cooperatives, though far from corruption-proof, give many small farmers advantages they didn't have before -- like access to market information and a voice in their business dealings.

Theoretically, by empowering small farmers and laborers, fair trade can shift the power structure to favor the underprivileged. In addition, as fair trade wages allow workers to get out of debt and improve their communities, they can better position their communities for growth. Fair trade benefits more than 800,000 farmers worldwide [source: Global Exchange]. Certified products continue to appear on more shelves as mainstream acceptance of fair trade brands increases throughout the developed world.

Explore the links on the next page to learn more about fair trade.


Lots More Information

Related HowStuffWorks Articles

More Great Links


  • Downie, Andrew. "Fair Trade in Bloom." The New York Times. Oct. 2, 2007.
  • Economics A-Z. "Fair Trade." The Economist. 2008. (May 16, 2008)
  • Economics A-Z. "Free Trade." The Economist. 2008. (May 16, 2008)
  • Fairtrade Labelling Organizations International. "About Fair Trade." 2006 (May 16, 2008)
  • Fairtrade Labelling Organizations International. "Generic Fair Trade Standards for Small Farmers' Organizations." Dec. 17, 2007. (May 16, 2008)
  • Fairtrade Labelling Organizations International. "Shaping Global Partnerships." March 2007.
  • Fair Trade Toronto. "Coffee." (May 16, 2008)
  • Global Exchange. "Understanding Fair Trade." Feb. 5, 2008. (May 16, 2008)
  • Kornell, Sam. "The Pros and Cons of Fair-Trade Coffee." The Santa Barbara Independent. April 5, 2007.
  • Mitchell, Dan. "The Economist on 'Fair Trade.'" The New York Times. Dec. 16, 2006.
  • Shenck, Marcia Catherine. "Criticism of Fair Trade." Mount Holyoke College. Spring 2006. (May 16, 2008)
  • Van Loo, Rory. "How Rich Consumers Are Aiding Poor Nations." The World and I. May 2004. (May 16, 2008)