Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 9

Is Fair Trade Really Fair?
Chocolate comes from small beans that grow on cocoa trees. It takes about 400 beans to make a pound of chocolate, and to harvest the beans, laborers have to chop them from the trees, slice them open, scoop out the beans, spread them on mats, and cover them to ferment. Once the beans are fermented, they're dried, packed in heavy bags, and carried to waiting trucks by the same laborers. At that point, they've entered the supply chain that will take them to the United States or Europe, where they'll be turned into Butterfinger candy bars and Dreyer's Double Fudge Brownie ice cream.
Over 40 percent of the world's cocoa bean supply comes from small farms scattered throughout the West African nation of Ivory Coast, which may ship as much as 47,000 tons per month to the United States. According to reports issued at the end of the 1990s by the United Nations Children's Fund and the U.S. State Department, much of the labor involved in Ivory Coast cocoa production was performed by children, mostly boys ranging in age from 12 to 16. The children-perhaps as many as 15,000 of them-work 12 hours a day, 7 days a week. They are often beaten to enforce productivity, and they sleep on bare wooden planks in cramped rooms. Most of them were tricked or sold into forced labor, many by destitute parents who couldn't feed them. In the first eight years following the initial reports of abusive conditions, efforts to alleviate the problem have met with relatively little success.
How did enslaving children become business as usual in the Ivory Coast cocoa industry? Because a full one-third of the country's economy is based on cocoa exports, Ivory Coast is heavily dependent on world market prices for cocoa. Unfortunately, cocoa is an extremely unstable commodity-global prices fluctuate significantly. Profitability in the cocoa industry, therefore, depends on prices over which farmers have no control. This problem is compounded by unpredictable natural conditions, such as drought, over which they also have no control. To improve their chances of making a profit, they look for ways to cut costs, and the use of slave labor is the most effective money saving measure.
This is where the idea of "fair trade" comes in. Fair trade refers to programs designed to ensure that export-dependent farmers in developing countries receive fair prices for their crops. Several such programs are sponsored by Fairtrade Labelling Organizations International (FLO), a global nonprofit network of fair trade groups headquartered in Germany. Here's how it works. FLO partners with cooperatives representing cocoa producers in Africa and Latin America to establish certain standards, not only for the producers' products but also for their operations and socially relevant policies (such as enforcing anti- child labor laws and providing education and health care services). In return, FLO guarantees producers a "Fairtrade Minimum Price" for their products. As of 2007, FLO guaranteed cocoa farmers a price of $1,750 per ton. If the market price falls below that level, FLO guarantees the difference. If the market price tops $1,750, FLO pays producers a premium of $150 per ton.
Where does the money come from? The cost is borne by the importers, manufacturers, and distributors who buy and sell cocoa from FLO-certified producers. These companies are in turn monitored by a network of FLO-owned organizations called TransFair, which ensures that FLO criteria are met and that FLO-certified producers receive the fair prices guaranteed by FLO. Products that meet the appropriate FLO-TransFair criteria are entitled to bear labels attesting that they're "Fair Trade Certified™." At present, semifinished and branded chocolate products certified by TransFair USA can be found in more than 1,600 U.S. retail locations, including Safeway and Whole Foods stores.
What incentive encourages importers, manufacturers, and distributors not only to adopt FLO TransFair standards but also to bear the costs of subsidizing overseas producers? They get the right to promote their chocolate products not only as "fair trade" but, often, as "organic" products as well-both of which categories typically command premium retail prices. In fact, FLO pays an additional premium on organically certified cocoa-$200 instead of $150 per ton-and the extra cost, of course, shows up in retail prices along with the cost of sustaining fair trade prices in general. Organic chocolate products are priced in the same range as luxury chocolates, but consumers appear to be willing to pay the relatively high asking prices-not only for organic products but also for all kinds of chocolate products bearing the Fair Trade Certified label. TransFair USA chief executive Paul Rice explains that when consumers know they're supporting programs to empower farmers in developing countries, sellers and resellers can charge "dramatically higher prices, often two to three times higher." Consumers, he says, "put their money where their mouth is and pay a little more."
A 3.5-ounce candy bar labeled "organic fair trade" may sell for $3.49, compared to about $1.50 for one that's not. Why so much? Because the fair-trade candy bar, says TransFair USA spokesperson Nicole Chettero, still occupies a niche market. "As the demand and volume of Fair Tradecertified products increase," she predicts, "the market will work itself out... [R]etailers will naturally start to drop prices to remain competitive." Ultimately, she concludes, "there is no reason why fair-trade [products] should cost astronomically more than traditional products."
Some critics of fair-trade practices and prices agree in principle but contend that consumers don't need to be paying such excessive prices even under current market conditions. They point out that, according to TransFair's own data, cocoa farmers get only 3 cents of the $3.49 that a socially conscious consumer pays for a Fair Tradecertified candy bar. "Farmers often receive very little," reports consumer researcher Lawrence Solomon. "Often fair trade is sold at a premium," he charges, "but the entire premium goes to the middlemen." Critics like Solomon suggest that sellers of fairtrade products are taking advantage of consumers who are socially but not particularly price conscious. They point out that if sellers priced that $3.49 candy bar at $2.49, farmers would still be entitled to 3 cents. The price, they charge, is inflated to $3.49 only because there's a small segment of the market willing to pay it (while farmers still get only 3 cents). Fair-trade programs, advises English economist Tim Harford, "make a promise that the producers will get a good deal. They do not promise that the consumer will get a good deal. That's up to you as a savvy shopper."
Are you willing to pay more for fair-trade products? Why or why not?