Fair trade and ethical trade: are there moves towards convergence?

Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment

Fair Trade and Ethical Trade: Are ThereMoves Towards Convergence?

Sally Smith* and Stephanie BarrientosUniversity of Sussex, UK

ABSTRACTFair trade and ethical trade have traditionally had quite different aims, scope andmodalities, the former principally focused on terms of trade with small scale pro-ducers and the latter on working conditions in mainstream production. Global valuechain analysis suggests that this coincided with different forms of governance in thechain: fair trade reflecting relational governance based on trust and mutual depen-dence, while ethical trade was incorporated into the industrial coordination of buyer-driven, modular value chains. This paper explores the potential for greater synergybetween the two as a result of recent developments, taking UK supermarket valuechains as a case study. We conclude that convergence may occur in some supermarketchains, in a context of relational governance, while in others ethical trade and fairtrade will remain inherently different. Whether and how convergence occurs willdepend largely on the prevailing culture, values and strategies of the supermarketconcerned. Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment.

Received 12 November 2004; revised 2 December 2004; accepted 1 March 2005

Keywords: fair; ethical; trade; supermarket; agriculture; global; value; chain

Introduction

FAIR TRADE AND ETHICAL TRADE HAVE BECOME INCREASINGLY ESTABLISHED IN MANY NORTH

European and American markets (Young, 2003; Jenkins et al., 2002). Both operate within the

broad parameters of international trade and have arisen largely as result of the actions of social

movements (Renard, 2003; Jenkins et al., 2002). Yet each arose for different reasons and their

principles and scope vary, with fair trade principally focused on terms of trade and ethical trade on labour

practices. However, over recent years, as each has evolved and expanded, the issues they confront have

increasingly overlapped.

This paper draws on research carried out in the context of supermarket retailing in the UK. Super-

markets now stock a range of fair trade products, and some have begun to extend fair trade labelling

into their ‘own brand’ goods.1 Many UK supermarkets also apply the principles of ethical trade to their

* Correspondence to: Sally Smith, Institute of Development Studies, University of Sussex, Brighton BN1 9RE, UK. E-mail: [email protected] Details of all branded and own brand Fairtrade products available in UK supermarkets can be found at http://www.fairtrade.org.uk/down-loads/pdf/fairtrade_products.pdf

Sustainable DevelopmentSust. Dev. 13, 190–198 (2005)Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/sd.277

Fair Trade and Ethical Trade: Are There Moves Towards Convergence? 191

Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment Sust. Dev. 13, 190–198 (2005)

own brand lines.2 Therefore, the territorial demarcation that originally existed is becoming more blurred.

The aim of this paper is to explore the common ground and then examine the extent to which fair trade

and ethical trade remain inherently different, or instead are likely to converge.

A key feature of supermarket retailing in the UK (and many other Northern countries) is the domi-

nance of global value chains presided over by supermarket buyers, who exert increasing control over

their suppliers (Dolan and Humphrey, 2004; Vorley, 2004). Global value chain analysis (Gereffi, 1994;

Gereffi et al., 2001) provides a useful framework for examining fair and ethical trade, complemented by

concepts of quality used in convention theory (Boltansky and Thévenot, 1991). This paper will use these

analytical perspectives to compare the principles and scope of fair and ethical trade in the context of

supermarket value chains, and explore their potential convergence.

Differences between Fair Trade and Ethical Trade

Aims of Fair Trade and Ethical Trade

Fair trade is ‘a trading partnership, based on dialogue, transparency and respect, which seeks greater

equity in international trade’.3 The fair trade movement traditionally sought to achieve its goals through

facilitating the involvement of small producers in international trade and providing them with a number

of guarantees, typically a ‘fair’ price for their products, stable supply relationships, access to credit and

a social premium for community development projects. At the same time, through publicizing the plight

of marginalized producers and linking them with consumers in the North, the movement aims to raise

consciousness about ‘unfair’ trading practices and challenge the impersonal capitalist market practices

that characterize global trade (Murray and Raynolds, 2000). During the 1990s fair trade ballooned from

being a small market niche to having total annual sales of approximately half a billion Euro in 2002

(Young, 2003).

While fair trade is principally concerned with the terms of trade between buyers and producers, ethical

trade (as it is understood in the UK) is focused on ensuring that working conditions in global value

chains meet minimum international standards.4 NGO and trade union campaigns against poor working

conditions in garment, footwear and agricultural industries during the late 1980s and 1990s prompted

many major US and EU retailers and marketing brands to adopt ‘codes of labour practice’ for their

supply chains (Jenkins et al., 2002). The adoption of voluntary codes has in turn spawned a number of

certification schemes and multi-stakeholder initiatives. One of the most prominent of these is the UK’s

Ethical Trading Initiative (ETI), which currently has 37 company members with a combined annual

turnover of over £100 billion, as well as non-government and trade union organization members.

Analysis of Differences Between Fair Trade and Ethical Trade Using a Global Value Chain Framework

Fair trade and ethical trade have different scopes when viewed in the context of global value chains.

Global value chain analysis has been developed to explore the linkages from inception, through pro-

2 The following supermarkets were members of the UK’s Ethical Trading Initiative (ETI) at the time of writing: Asda, the Co-Operative Group,J Sainsbury, Somerfield and Tesco (information obtained on 19 January 2005 from the ETI’s website: http://www.ethicaltrade.org/Z/abteti/who/memb/list.shtml#co).3 This definition of fair trade was agreed by the four main networks of fair-trade-related organizations: Fair Trade Labelling Organisations Inter-national (FLO); International Federation for Alternative Trade (IFAT); Network of European World Shops (NEWS!) and European Fair TradeAssociation (EFTA). The full definition of fair trade can be accessed at http://www.bafts.org.uk/fair-trade/fine.htm4 I.e. the rights enshrined in the UN Declaration of Human Rights and International Labour Organisation (ILO) Core Conventions, includingprovisions on discrimination, freedom of association and collective bargaining and child and forced labour, as well as health and safety.

192 S. Smith and S. Barrientos

duction, distribution and retailing of goods to the final consumer (Gereffi, 1994; Gereffi et al., 2001;

Kaplinsky, 2000; Schmitz and Knorringa, 2000). Traditionally these linkages reflected arms-length

market relations between suppliers, agents and retailers, but increasingly global value chains are char-

acterized by more direct inter-connections and co-ordinated ‘governance’ of the chain. ‘Buyer driven’

chains are dominated by large global buyers, who do not own production but are able to exert power

over suppliers and smaller agents with whom they have established commercial relations (Gereffi, 1994).

Buyer driven global value chains are particularly prevalent in the food sector, where there has been an

expansion and consolidation of supermarkets (Vorley, 2004).

Gereffi et al. (2005) have characterized five different types of value chain governance. These range

from distant, hands-off market relationships through to vertically integrated hierarchies in which single

firms perform all aspects of distribution and production. In the UK, as supermarkets have increased

their dominance of food retailing they have moved from market towards ‘modular’ value chain relations,

in which a number of agents and producers are closely linked and suppliers produce according to spec-

ifications and standards set down in advance by the supermarket (Dolan and Humphrey, 2004).

Strengthening the direct linkages within the food chain has facilitated traceability and monitoring of

food production back to its source (important in the context of food scares such as BSE), as well as

enhanced cost effectiveness and the efficiency of ‘just in time’ delivery systems. Modular value chains

are increasingly characterized by sourcing from larger commercial producers who are more able to meet

buyer demands. Supermarkets use their buying power to control the chain to meet their needs, enabling

them to extract higher economic rents, or profits, through their dominant commercial and marketing

position.

This trend has been further analysed using convention theory concepts of product quality, as first

developed by Boltansky and Thévenot (1991). Social and environmental standards, including labour stan-

dards and fair trade, can be understood as a dimension of the quality of a product, along with aspects

such as appearance, origin and nutritional value, all of which play a role in determining demand for

that product (Raynolds, 2004; Renard, 2003). Sylvander (1994, 1995, cited by Renard, 2003, p. 88) dis-

tinguishes four ways to define quality in the agro-food sector.

• Industrial coordination, which rests on standards, norms, objectivized rules and testing procedures.

• Domestic coordination, based on face-to-face relations, on trust of people, places or brand names.

• Civic coordination, which rests on the adherence of a group of actors to a set of collective principles;

it structures its economic relations.

• Market coordination, or coordination by market laws, basically through the mechanism of prices.

Ponte and Gibbon (2005) hypothesize that, in order to minimize transaction costs, lead firms in buyer

driven global value chains tend to rely on industrial and market forms of coordination. They point out

that processes of standardization, or ‘codification’, in industrial coordination do not imply any less buyer

control over the chain: ‘. . . as one moves from “hands-on” to “hands-off” coordination, the way power

is exercised changes, not its magnitude or who exercises it’ (Ponte and Gibbon, 2005, p. 19).

In response to civil society pressures, many UK supermarkets include minimum labour standards as

one of the criteria producers have to meet (Barrientos and Kritzinger, 2004). Suppliers are typically

monitored for compliance with a code of labour practice in a manner characteristic of industrial coor-

dination in buyer driven, modular chains. Ethical trade affects only the criteria for producers entering

and selling within the chain, not trading relations or governance of the chain. This is consistent with

the view that alternative forms of governance usually develop only when product specifications cannot

easily be ‘codified’ into technical standards (Gereffi et al., 2005).

Fair trade operates according to different principles, setting parameters for what is ‘fair’ in trading

relations, with the explicit aim of strengthening the position of producers. ATOs could be said to have




developed what Gereffi et al. (2005) termed ‘relational’ value chain governance. Here, there are more

complex interactions between buyers and sellers and ‘the power balance between firms is more sym-

metrical’ (Gereffi et al., 2005, p. 8). This may be mediated by social ties, trust and reputation, which

link buyers and producers, and can be seen in the close relations ATOs tend to have with their suppli-

ers. The principles of fair trade, such as stable supply relations, minimum prices and the provision of

a social premium, facilitate this relational interdependence. The establishment of trading principles

according to moral rather than market values is a classic form of civic coordination.

Fair trade and ethical trade thus involve different types of value chain relation, as summarized in

Table 1. Fair trade is characterized by relational value chains and civic coordination (as well as domes-

tic). It focuses on sourcing from small scale producers and is based on developing ties between actors

along the chain. Ethical trade is characterized by buyer driven modular value chains and industrial co-

ordination (alongside market coordination). It normally involves sourcing from larger producers and

extends the setting of standards to labour conditions as part of the governance of the chain. However,

this differentiation has begun to change as fair trade and ethical trade have expanded and matured. In

the next section we explore these changes and the extent to which they have led to a blurring of the dis-

tinction between fair and ethical trade.

Emerging Overlap Between Fair Trade and Ethical Trade

Expansion of Fair Trade into Supermarkets

For many years fair trade sales were largely of traditional handicrafts, supplemented by a limited range

of commodity food products such as tea and coffee. In the late 1980s the first fair trade label, Max Have-

laar, was established in the Netherlands in order to expand the fair trade market beyond the clients of

World Shops (Renard, 2003). Other fair trade organizations soon followed suit and in 1997 these

National Initiatives jointly formed FLO5 as the custodian of fair trade labelling standards worldwide

(Raynolds, 2000). The introduction of ‘certified’ fair trade products facilitated a move into mainstream

retailing, particularly in European supermarkets, and greatly expanded the potential scope and impact

of the movement (Renard, 2003). It also coincided with a greater focus on food and beverage products.

‘Traditional’ fair trade ‘Traditional’ ethical trade

Classic features • Guarantees of a ‘fair’ price for producers • Codes of labour practice to ensure decent• Long term relationships and trust conditions for workers in global value chains• Premium for social development • Buyer monitoring of supplier compliance• Campaigns against conventional

trade rules and practicesParties involved • Small scale producers in developing • Medium and large scale producers

countries • Retailers, brands and their agents• Alternative trading organizations

and world shopsValue chain governance Relational Modular (buyer driven)Quality coordination Civic (and domestic) Industrial (and market)

Table 1. Comparison of ‘traditional’ fair trade and ethical trade

5 FLO currently includes National Initiatives from 19 countries.



Sales of fair trade goods in UK supermarkets have contributed greatly to overall international growth

figures. All major supermarkets now stock at least one fair trade product and they have seen impressive

year-on-year growth in fair trade sales – a 112 per cent increase from 2002 to 2003 for the Co-Op, 70

per cent for Tesco and 24 per cent for Waitrose.6 A more recent development has been the inclusion

of fair trade products in supermarkets’ own brand range. For example, the Co-Operative Group

supermarket sells own brand fair trade coffee, chocolate, bananas, mangoes and chocolate cake, while

J Sainsbury’s has own brand fair trade tea, coffee, bananas, chocolate and drinking chocolate.7

As part of the expansion of fair trade, products are now increasingly being sourced from medium to

large scale commercial farms or plantations, which do not fit the traditional model of small marginal-

ized producers supplying through co-operatives. Examples include fruit, tea, flowers and wine originat-

ing from farms and plantations in Africa and Latin America. The developmental goals of fair trade in

this case relate to waged workers, rather than marginalized producers. As well as benefiting from a social

premium fund for socio-economic development, workers are guaranteed decent working conditions

through FLO’s established standards for hired labour. These standards are very similar to the codes of

labour practice used in ethical trade, though they also provide for continual improvement.

The move into mainstream distribution channels, including supermarket own brand lines, and the

use of standards for labour practices, takes fair trade into the terrain of ethical trade. We now turn to

developments in the field of ethical trade, which we will see increase the degree of overlap between the

two.

Recent Developments in Ethical Trade

Ethical trade has been established amongst UK supermarkets since the foundation of the ETI in 1998,

of which all but one of the major supermarkets are members.8 The experience of implementing codes

of labour practice has bought to the fore issues that illustrate the complexities of addressing labour stan-

dards through voluntary initiatives. In particular, a recent report by Oxfam (2004) focused attention on

buyers’ purchasing practices and the extent to which these exacerbate the poor labour conditions that

codes are meant to address. Summarizing research in food and garment production in 12 countries,

Oxfam highlighted the commercial pressure buyers put on suppliers, such as insecure contracts, falling

prices and shortening lead times to fulfil orders and deliver goods. It argued that suppliers offset these

pressures onto workers through the use of short term contracts (with workers hired or laid off as orders

vary), lowering of wages and increased work intensity (to counteract falling prices) and long and unpre-

dictable overtime (to meet short lead times). All of these practices are in violation of the codes that the

same corporate buyers insist suppliers meet.

The possibility of poor purchasing practices undermining ethical sourcing commitments was further

highlighted in a report commissioned by Insight Investment (Acona, 2004). It identified this as a source

of risk and recommended that companies manage the risk through more integrated supply chain man-

agement strategies. In an indication of how recognition of the role of purchasing practices is growing,

the chair of the ETI stated in his introduction to the 2002/3 Annual Report (p. 1) ‘It is increasingly

obvious that ethical trade personnel need to work more closely with their commercial colleagues to

ensure that buying practices do not adversely affect the impact that code implementation can have’.

As a result of issues such as these, some have argued that ethical trade needs to move beyond simple

code compliance to a more developmental and holistic approach (Allen, 2002). This includes address-

6 Figures released by the UK’s Fairtrade Foundation in 2003, cited in the Freshinfo news bulletin for 7 July 2003, www.freshinfo.com7 See http://www.co-op.co.uk and http://www.fairtrade.org.uk/downloads/pdf/fairtrade_products.pdf for details.8 Following their takeover of Safeway in 2004, Morrisons joined Tesco, J Sainsbury and Asda as the leading British supermarkets, all three ofwhich are members of the ETI at the time of writing. Morrisons is not currently an ETI member.



ing value chain relations between buyers and suppliers and facilitating change through more stable and

sustainable sourcing (Oxfam, 2004; Smith et al., 2004). This would involve a move in the direction of

at least some of the principles of fair trade. While products may not necessarily be labelled fair trade, it

implies a greater relational commitment between the different actors along the value chain.

Potential for Convergence of Fair Trade and Ethical Trade

These pressures and developments within ethical trade and fair trade are stimulating greater synergy

between them, illustrated by the fact that some producers are now applying simultaneously both ethical

and fair trade standards. An example is Kenyan roses, which are subject to ethical trade standards when

they are sold on a normal commercial basis to UK supermarkets, but also to fair trade criteria on the

commercial farms that sell fair trade roses to Tesco. However, does the increasing recognition within

ethical trade of the critical role of trade incentives and disincentives in improving labour standards, and

conversely the move of fair trade into mainstream production and distribution channels, mean that their

convergence is on the horizon?

Convergence of ethical trade and fair trade could be said to take place if their principles lead to the

same outcomes in a single arena. Our analysis suggests the potential exists for this to occur in UK super-

market value chains through the transformation of governance in those chains. We will now examine

the likelihood of this happening.

Transformation of Supermarket Value Chain Governance Through Ethical Trade and Fair Trade

Transformation Through Ethical TradeExperience suggests that if supermarkets succumb to civil society pressure to fulfil their commitments

to ethical trade this would require a move to more relational governance. However, strong commercial

forces act against such a transformation in the UK, where leading supermarkets are engaged in a price

war for customers and investor pressure encourages a short-term outlook (Blythman, 2004). In a case

study of horticulture, Dolan and Humphrey (2004) reflected that while UK supermarkets first responded

to the need for product differentiation and traceability with a move from market to relational forms of

governance they soon moved towards modular governance in order to limit costly hands-on manage-

ment of their value chains. Unless the costs of ‘unethical’ trade outweigh the savings from hands-off

governance, they may be unlikely to pursue a path of relational governance.

Since there is currently a shared level of risk when it comes to labour standards (as exemplified by

common membership of the ETI), the cost of unethical trade is reduced. However, this may not always

be the case, especially if civil society campaigns become more sophisticated and have an impact on the

market position of individual companies that are seen to not do enough. Second, the organizational

culture and values of companies, as well as their market strategies, have an important role to play. Those

that are pursuing strategies that rely heavily on corporate social responsibility, or that have a client base

that is sensitive to ethical concerns, are beginning to respond to current contradictions between ethical

trade and purchasing practices.9 Others that are more focused on the commercial battle for market share,

especially in consumer markets or countries where price is crucial, are less likely to follow their lead.

This implies that retailers may become more differentiated in their commitment to ethical trade, with

limits to the advance of relational value chain governance.

9 Personal communications with certain ETI members.



Transformation Through Fair TradeEarlier we suggested that, to date, the practice of ethical trade has tended to reflect industrial coordina-

tion of the value chain, doing little to alter power relations. In contrast, fair trade has involved civic coor-

dination, which specifically aims to redress the balance of power in the trading chain. However, fair

trade certification and labelling standardizes fair trade criteria in a way that may allow lead companies

such as supermarkets to absorb fair trade into their customary strategies for coordinating quality, i.e.

through industrial (and market) rather than civic coordination. Industrial coordination relies on ‘stan-

dards, norms, objectivized rules and testing procedures’ (Sylvander, 1995, 1996, cited by Renard, 2003,

p. 88). As things currently stand, FLO auditing of licensees and traders is limited to checking that the

minimum price and social premium have been paid.10 Other fair trade principles, such as formation of

a long term relationship based on dialogue and respect (which is linked to relational governance), are

not monitored. If supermarkets are able to sell fair trade products without incurring the extra ‘costs’ of

relational governance, their profit motivation may well lead them to do so, potentially limiting any

changes in the balance of power higher up in the chain.

In thinking through the possibilities for transformation of governance we need to distinguish between

fair trade branded goods and supermarket own brand labels. Some fair trade brands have seen marked

success in competing with commercial brands in the mainstream, with the brand creating a degree of

power in the lower part of the chain and potentially improving the bargaining position of producers.

This is particularly true where producers they have an ownership stake in the brand, permitting them

to ‘upgrade’ their position in the value chain. The most prominent examples of this in the UK are Cafédi-

rect and the Day Chocolate Company. Cafédirect has developed a strong brand image for its fair trade

coffee and in 2004 captured 8.9% the UK’s roast and ground coffee market, and 3.9% of the freeze

dried market.11 Following a public share issue in 2004, producers own a 4.9% share of Cafédirect.

Another example is the Day Chocolate Company, which markets a range of fair trade chocolate bars,

including the brands Divine and Dubble, which are now sold in over 4500 outlets including several

major supermarkets.12 Day Chocolate is a third owned by the Ghanaian producer cooperative, Kuapa

Kokoo, which has over 40000 members (Ronchi, 2002).

In the case of supermarket own brand fair trade products, these are increasingly sourced through cat-

egory managers (as part of modular value chain governance). Category managers are agents or large

suppliers that are contracted to supply a range of items within one product category (e.g. ‘salads’ or

‘citrus fruit’). Fair trade products may be treated by the supermarket as no different from any other

product in a particular category. The category manager is usually responsible for the relationship with

producers, ensuring that they deliver according to the supermarket’s standards, and the supermarket

may have little direct contact with individual producers. However, some supermarkets, especially those

with lower market share and eager to differentiate themselves amongst more exacting consumers, are

keen to pursue strong direct relationships with the producers of their own brand goods. This has a

greater synergy with the relational commitments of fair trade. For these supermarkets fair trade may

facilitate dialogue and increased awareness of the producer’s position, and foster a more equitable

balance of power in the trading relationship.

The potential for fair trade to transform governance of supermarkets’ own brand chains may there-

fore come down to company values and strategies, as with ethical trade. Importantly, fair trade labelling

may act to constrain the need for relational commitments within these chains. It should be emphasized

however that conventions evolve and, in a reflection of civic coordination, the FLO auditing system may

10 http://www.fairtrade.net/sites/certification/tradeauditing.html11 Figures cited on Cafédirect website: http://www.cafedirect.co.uk/pressoffice/pdf/Key_Facts.doc12 Figures cited on Day Chocolate Company website: http://www.divinechocolate.com/where.htm


in future be strengthened to more rigorously check that the principles of fair trade are being

adhered to.

Conclusion: To What Extent are Fair Trade and Ethical Trade Drawing Together Through Expansion?

The above analysis suggests that fair trade and ethical trade may merge in some UK supermarket value

chains, while in others they will continue as inherently different, depending on the values, culture and

strategies of the companies involved. These are difficult to ascertain, as companies tend not to publicly

acknowledge the more commercial, and less populist, reasons for adopting codes of labour practice or

stocking fair trade. However, one could surmise a relatively high degree of commitment when a super-

market switches an entire own brand line to fair trade. So far the only example of this in the UK comes

from the Co-0perative group, which converted all its own brand chocolate to fair trade in 2002, followed

by its own brand coffee the following year.

This is not to say that fair trade producers do not benefit from selling into supermarket value chains

with traditional buyer driven governance. Selling to supermarkets substantially increases the number of

producers and workers in developing countries that could benefit from fair trade. To the extent that

supermarkets are under pressure to adopt more ‘ethical’ purchasing practices as part of their commit-

ment to ethical trade, some of these benefits could extend to producers and workers beyond fair trade

labelled products. Experience suggests there may also be knock-on, indirect benefits for producers and

workers outside fair trade or ethical trade programmes as a result of the impact they have on local and

international industry norms and practices. However, empirical evidence for this is currently lacking

and is an important area for future research.

In this paper we propose that differences in value chain governance are important in determining the

outcomes of fair and ethical trade. Relational value chains facilitate both fair trade and ethical trade,

whereas modular value chains perpetuate industrial and market coordination without the need for

ethical ties. With modular forms of governance currently dominating, fair trade and ethical trade in

mainstream global value chains may do little to address the unequal balance of power that lies at the

heart of much conventional commercial trade.

Acknowledgements

This paper draws on research funded by the Leverhulme Foundation (reference F/00230/L) and the UK Department for Inter-national Development (SSR Project No. R8077 2002–4), to whom we are grateful for their support. The views and opinionsexpressed in the paper are those of the authors alone.

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Biography

Sally Smith (lead author – addressee for correspondence) is employed at IDS as a Research Officer in

the Poverty and Social Policy team. She can be contacted at the Institute of Development Studies, Uni-

versity of Sussex, Brighton BN1 9RE, UK.

Tel.: 01273 873663

Fax: 01273 621202

E-mail: [email protected]

Dr Stephanie Barrientos is employed at IDS as a Research Fellow in the Poverty and Social Policy team.

She can be contacted at the Institute of Development Studies, University of Sussex, Brighton BN1 9RE,

UK.

Tel.: 01273 877032

Fax: 01273 621202


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Fair trade and ethical trade: are there moves towards convergence?