Globalisation has been one of the most significant developments of the last half century, and issues such as trade and international commerce have become increasingly important. In consequence, problems such as poverty, unfair wages and poor working conditions in third world countries have been drawn to the attention of consumers (Hayes and Moore, 2007). This is a growing global issue which cannot be ignored by anyone concerned about the problems in developing countries. Free trade and Fair Trade have both been offered as solutions to these issues.
Fair Trade is considered as an alternative trading system, which aims to protect the economically disadvantaged producers, especially in developing countries. It provides transparency and respect in international trade (Gingrich and King, 2012). Besides, Fair Trade also contributes to sustainable development by offering better trading conditions for marginalised producers and workers and securing their rights (Mohan, 2010).
On the other hand, free trade not only gives primacy to market forces, it also reduces trade barriers such as tariffs and quotas and requires the harmonisation of trading rules (Hayes and Moore, 2007). It arises from the free choices of producers and consumers, which is why it is often believed that Fair Trade is derived from the system of free trade.
The term “suppliers” in this context refers to the farmers and producers in developing countries, often running small concerns with limited investment or capacity.
In the long run, despite the apparent advantages of Fair Trade and the opportunities it appears to offer small suppliers, free trade provides a more sustainable development for suppliers than Fair Trade. It is also more effective in increasing suppliers’ incomes and providing openings for them on the international trade platform. This essay aims to highlight the advantages and disadvantages of both trade systems.
Guaranteed Price vs. Guaranteed Quantity
The Fair Trade system provides a type of insurance for its suppliers. A vast majority of the Fair Trade products are traded in the commodity market (Booth and Whetstone, 2007). Due to the nature of economics, the quantity supplied and demanded for a product will have a huge influence on the price level for suppliers. When the economy is in recession, the demand for goods falls and thus the price will drop. In order to remain in the market, suppliers are forced to reduce their price and downsize their production (Sloman et al, 2012). However, a lower price will reduce the profitability as well as the competitiveness of suppliers in the trading market. Marginalised suppliers from developing countries might find it even harder to survive in the market if they have to keep their price constantly low. Therefore, the Fair Trade price floor can act as an insurance mechanism, which can insure primary commodity suppliers against price volatility in the free market (Mohan, 2012).
At the same time,...