Fair Trade /ˌfɛəˈtreɪd/: trade between companies in developed countries and producers in developing countries in which fair prices are paid to the producers
Blockchain can make trade fairer. In this context, ‘Fair Trade’ means ensuring that producers are paid fairly, and work in conditions that are safe and humane, and that consumers can be guaranteed the origins and quality of the products they consume. These requirements imply notions of social responsibility. For the purposes of this discussion, this chapter focuses on trade in agricultural produce and extracted minerals. Issues around how Blockchain might solve Wicked Problems in other areas of trade are either dealt with directly elsewhere in this book or may be applied by analogy.
Fair Trade is a way of buying and selling products that ensures that the people who produce the goods receive a fair price. Fair Trade brings a better standard of living to poor farmers in developing countries.
Fair Trade is about stable prices, decent working conditions, and the empowerment of farmers and workers around the world. For consumers of food and other goods produced in developing countries and vulnerable communities, Fairtrade is a label that is attached to products to ensure the quality of the product and the claims made on its label.
There is a strong relationship between Fair Trade and ethics. In this discussion of Fair Trade, the authors adopt the United Nations’ definition of ethics as understood in the human rights context. The UN’s Principles on Business and Human Rights are the product of six years of research conducted by Harvard Professor John Ruggie [274]. They are based on 47 consultations and site visits in more than 20 countries, and involve governments, companies, business associations, civil society, and investors. According to Oxfam, they are an authoritative global reference point for business and human rights, and they implement ethical trade by ensuring that governments and companies have a collective responsibility to protect human rights in business enterprises. Most of the work done by the UN to ensure that these rights are recognised and upheld around the world is conducted by the International Labour Organization (ILO).
Established in 1919, the ILO is dedicated to improving the standards of living of workers throughout the world. Its focus for the past 100 years has been to address issues such as excessive working hours, unemployment, minimum age, and work for women. Fair Trade seeks to ensure that the ethical standards for employment conditions articulated by the UN and the ILO are the minimum working conditions of all participants in the production of food and consumer goods. It is in this frame that the term ‘ethical’ is used in this book.
7.3 Empire, colonialism and capitalism: a toxic soup for Fair Trade
The power imbalance between developed and developing countries is not easily explained, but can be readily classified along economic lines. When a country has been ravaged by war, famine, or drought, or its resources exploited and depleted without the fruits of those resources benefiting the country’s citizens, then hardship and insecurity will set in. These vulnerable populations are easy to exploit: their needs are basic and immediate. Meanwhile, the business models of corporate companies and large organisations in developed countries reward those who can make a profit. Profits are needed to satisfy shareholders and the rewards to senior executives of multinationals who return large annual profits for the organisations run to the millions. This business model incentivises the pressure that companies put on producers and service providers to agree to rock-bottom prices. Whether they are buying coffee beans from Nigeria or having their shoes manufactured in Vietnam, businesses are often focused on delivering higher returns to wealthy owners, top executives, and shareholders, while failing to ensure equitable distribution of profits along the supply chain. Indeed, the relationship between suppliers and the businesses that manage distribution and marketing is a tenuous one. Fair Trade is sometimes criticised for unjustly serving the rich [275], whereas others argue that fair markets can benefit everyone [276].
In January 2017, it was reported by the World Economic Forum (WEF) that rising inequality and social polarisation pose two of the biggest risks to the global economy in 2017 [277]. Oxfam said the world’s poorest 50% owned the same in assets as the US$426 billion owned by the eight wealthiest people [278]. This group of eight is headed by Bill Gates, Amancio Ortega (the founder of the Spanish fashion chain Zara), and Warren Buffett, the renowned investor and chief executive of Berkshire Hathaway. The others are Carlos Slim Helú (the Mexican telecoms tycoon), Jeff Bezos (the founder of Amazon), Mark Zuckerberg (the founder of Facebook), Larry Ellison (chief executive of US tech firm Oracle), and Michael Bloomberg (a former mayor of New York and founder and owner of the Bloomberg news and financial information service).
In 2015, Oxfam said that the world’s 62 richest billionaires were as wealthy as half the world’s population. However, the number dropped to eight in 2017 because new information shows that poverty in China and India is worse than previously thought, making the bottom 50% even worse-off and widening the gap between rich and poor. Meanwhile, the WEF reported that, according to its research, median income fell by an average of 2.4% between 2008 and 2013 across 26 advanced nations. The vast majority of people in the bottom half of the world’s population were facing a daily struggle to survive, with 70% of them living in low-income countries [279]. This yawning gap between rich and poor people is a cause of disharmony within and between nation states and economies [280].
7.4 Where does Fair Trade fit into this picture?
In a freer market, all markets would be driven by supply and demand. Every producer of any commodity would be rewarded equally for their skill and labour, no matter where they are based in the world. However, this is not the case. There are a number of forces at play that prevent open and free markets of this type. The controllers of these forces are nation states. Typically protectionist, they can control production, supply, demand, and consumption price by operating at both ends of the process, by directly taxing or subsidising goods and services, by regulating the use of goods and services, and by structuring domestic markets [281]. However, there is a tension between the notion of a ‘freer’ market and that of ‘fairer’ markets. Economic fairness may not necessarily be achieved by removing all the protectionist behaviour that dominates the world marketplace.
Coffee, sugar, cocoa, and other food products dominate the Fair Trade market. Fair Trade coffee, the largest selling certified product, accounts for over 3% of the total retail market for coffee and for close to 20% of the market for specialty coffees, the fastest growing segment of the US coffee market [282].
However, it is Fair Trade in the diamond market that has a special grip on the imagination of consumers. This is probably because the consumption of coffee, sugar, and chocolate is not quite as decadent as the west’s attachment to diamonds.
Every day in a number of African countries, diggers and other workers in diamond mines face dangerous and harsh working conditions. Many of the world’s diamonds are mined using practices that exploit workers, children, and communities. A million diamond diggers in Africa earn less than a dollar a day. Miners are dying in accidents, child labour is widespread, and corrupt leaders are depriving diamond mining communities of funds badly needed for economic development. Too often, the world’s diamond mines produce not only diamonds, but also civil wars, violence, worker exploitation, environmental degradation, and suffering. The Central African Republic, Zimbabwe, Angola, and the Côte d’Ivoire all produce diamonds that are precious, beautiful, and lucrative. However, the market for these highly sought-after stones fuels civil war and violence, which is why diamonds from these regions are often called blood (or conflict) diamonds.
Amnesty International reports that 3.7 million people have lost their lives in the exploitation of and conflict over diamonds [283]. The industry is worth billions of dollars and yet most diamond production and trade is in the hands of warlords and rebels, who profit from the sale of diamonds, at the expense of the impoverished communities supporting the mining process.
7.5 Fair Trade as an expression of social conscience
Fair Trade is a key tool in the development of sustainable economies, businesses, and communities. It is a way of doing business that enables long-term partnerships and equitable relationships [284].
The Fair Trade movement has been gaining momentum over the past few years and there is now an expectation among consumers (particularly in developed countries) that there should be a choice of products produced under Fair Trade conditions. The driver for consumers is that they do care about ethics and are prepared to pay extra for a cup of coffee in order to support these ideals. It is an expression of social conscience. In a survey of 808 Belgian respondents, the actual willingness to pay for Fair Trade coffee was measured. It was found that the average price premium that the consumers were willing to pay for a Fairtrade label was 10%. Of the sample 10% were prepared to pay the current price premium of 27% in Belgium [285].
In general, the ethical consumer feels responsible towards society and expresses these feelings by means of his or her purchasing behaviour. Ethical consumption falls into two broad types of behaviour: the choice of certain products because they are produced ethically; and the boycotting of products that are produced unethically. The ethical issues that are taken into consideration when making these choices include: human rights, labour conditions, animal well-being, environment, and distribution of wealth (particularly in war zones and in times of conflict, including those related to blood diamonds). For example, consumers might refuse to buy any products that they know are made by children [286]. Boycott campaigns against companies that exploit child labour or distribute their substandard products to poor people are among the most-cited examples of this type of expression of ethical consumption [287].
There are three main problems arising in trade that can lead to inequity and financial distress. First, it is important to ensure that producers of all types of goods are paid a fair price for their skills, resources, and time, in a timely manner. Second, the conditions of all workers in the production process need to meet the ILO’s minimum standards. Third, consumers need to be able to trust that the products they purchase meet these standards and that the money they pay to purchase the product is going to reward or benefit those who contributed to its production or creation.
In the commodities market, Fair Trade price is the minimum price that importers must pay to producers of some agricultural products such as coffee and bananas. It is the ‘floor’ price that must be paid irrespective of the market price.
When the market price of a commodity is higher than this minimum price, the buyer must pay the former. But if the market price falls below the Fair Trade price, the producer must be paid at least a price equal to the Fair Trade price.
Fair Trade price acts as a security net that reduces the market risks of farmers and attempts to improve their living conditions. The Fair Trade price policy comes under the Fair Trade standards, which stipulate that it is unfair to pay the market price to the producers in developing countries if the price is too low to survive and does not provide them at least the cost of production.
As long as the trade price is above the Fair Trade price, it allows traders and producers to negotiate higher prices depending on the quality and other attributes. Fair Trade price focuses, in particular, on goods or products that are normally imported from developing countries, including products such as coffee, handicrafts, cocoa, bananas, sugar, tea, wine, fresh fruit, chocolates, and flowers [288].
7.7 Setting standards and certification
So far, the main tools for supporting Fair Trade are setting standards and certification. Fair Trade benefits small-scale farmers and workers by facilitating links to international markets through the development of supply chains. Small-scale farmers and workers are among the most marginalised groups globally and through Fair Trade they can lift themselves out of poverty to maintain their successful livelihoods. Some products, such as coffee, cocoa, and cotton, can be certified by Fair Trade only if they come from small-scale farmer organisations. By working through democratic organisations of small-scale farmers, it can offer rural communities the stability of income, which enables them to plan for the future and invest in developing their organisation.
For some products such as bananas and tea Fair Trade can certify plantations (companies that employ large numbers of workers on large areas of land called estates). Standards for large-scale production differ from those for small-scale farmer organisations by focusing on the protection of workers’ basic rights: keeping them safe and healthy, allowing them freedom of association and collective bargaining, preventing discrimination, and ensuring no bonded or illegal child labour is present. Fair Trade standards also require employers to pay wages that progress towards living wage benchmarks.
A number of organisations have established themselves for the sole purpose of supporting and promoting fair trade. FINE is a consortium of four Fair Trade networks: FLO (Fairtrade Labelling Organisation); International Fair Trade Association (which is now the World Fair Trade Organisation); the Network of European Worldshops; and the European Fair Trade Association. The aim of FINE is to enable these networks and their members to cooperate on:
• the development of harmonised core standards and guidelines for fair trade;
• harmonisation, and increase in the quality and efficiency of Fair Trade monitoring systems; and
• advocacy and campaigning work, harmonisation of their information and communication systems.
FINE members have agreed on a strategic intent that stipulates their aims:
• Deliberately to work with marginalised producers and workers in order to help them move from a position of vulnerability to security and economic self-sufficiency;
• To empower producers and workers as stakeholders in their own organisations;
• Actively to play a wider role in the global arena to achieve greater equity in international trade.
The Fairtrade Labelling Organisation International (FLO) monitors the Fair Trade floor price and changes it from time to time in light of the average cost of production, working conditions, and other economic factors. Products sold at Fair Trade prices must follow the standards outlined by the FLO certification process and are generally sold at higher prices. They also contain Fairtrade labels, indicating that the products were produced and traded in agreement with these standards.
Despite its best intentions and many supporters, Fair Trade saw UK consumption of its certified products drop 4% in 2014 [289]. This was its first fall in sales since inception in 2004. So, what is going on? Analysts point to two reasons for this decline: the increasing popularity of cheap supermarkets, which do not participate in the Fair Trade market; and the rise of ethical labelling. The ethical labelling movement is directly in competition with Fair Trade and it has caused some damage to the Fair Trade brand. Ethical labelling aims to create more choice in the market for consumers about the way that produce is grown and shipped to the marketplace. With Fair Trade labels, the most recognised in the ethical consumer market, it is hard to imagine a movement that would attempt to undermine its foothold. However, there is criticism of Fair Trade that is fuelling a new ethical labelling movement. Some recent audits of ‘Fair Trade’ certified producers conducted by third parties have revealed instances of uneven distribution of higher wages and better working conditions. Some argue the Fair Trade products are not always the best quality, which suggests that certification is not being awarded on merit [289].
7.8 What’s so unfair about Fair Trade?
The effect of the disparity between rich and poor nations is that, although most developed countries have ended their colonial control over developing countries, they continue to exert economic pressure on and influence the domestic policies of the poorer countries with which they trade. Herein lies the rub. Fair Trade is regarded as another controlling mechanism (albeit well intentioned) and has been described as a kind of neo-imperialism [290]. The counterpoint to the terms and conditions imposed by Fair Trade advocates and certifiers is the notion that there needs to be more transparency, to ensure that the intended beneficiaries of the Fair Trade arrangement are being rewarded for their role in production or delivery of goods and services from developing and poor countries to the wealthy consumers in the west.
To address the concerns that Fair Trade is failing to deliver on its promises, individual traders, retailers, and consumers are finding ways to connect with their producers so as to ensure that they are rewarded and to control the quality of the products being produced [289]. Consumers want to create a closer link with the producer. They want proof that what the label promises is being delivered. This calls for transparency and proof.
In addition to these strains on the Fair Trade brand, sceptics dismiss Fair Trade and other ethically labelled products as cheap public relations ploys by companies, and highlight the fact that such products currently account for a tiny share of retail sales [291].
7.9 How can the blockchain solve the problem?
Blockchains can transfer title and record permissions and activity logs in order to track the flow of goods and services between businesses and across borders. A fundamental advantage of this distributed system is that it resolves problems of disclosure and accountability between individuals and institutions whose interests are not necessarily aligned. Mutually important data can be updated in real time, removing the need for laborious, error-prone reconciliation with each other’s internal records. It gives each member of the network far greater and timelier visibility of the total activity.
Blockchains can gather information from the supply chain to share it with consumers at the point of sale. It can substantiate product claims with secure, real-time data about the origins of food and ingredients, as well as the time that perishables spend in transit or refrigeration. By digitising this information and making it available on machine-readable labels, consumers can discover more about the food they purchase.
In the USA, Walmart is exploring the use of blockchain technology to provide the retailer with a way to indelibly record a list of transactions indicating how meat has flowed through a commercial network, from producers to processors to distributors to grocers—and finally, to consumers. In October 2016, the Commonwealth Bank of Australia announced that it, Wells Fargo, and Brighann Cotton had successfully undertaken the first global trade transaction between two independent banks combining blockchain and smart contract technologies. The transaction involved a shipment of cotton from Texas, USA to Qingdao, China [292, 293]. The announcement concluded that, after the successful completion of this transaction, Commonwealth Bank and Wells Fargo would continue collaborating with trade finance clients, financial institutions, fintech companies, and other fintech consortia, as well as players in the insurance and shipping industries, to ensure that their clients benefit from the changes in technology across the global trade ecosystem.
7.10 Authenticating provenance
Provenance refers to the origins and earliest known history of something. It is important in the context of Fair Trade because some agricultural products and natural resources have particular inherent qualities or sensitivities based on where and how they were grown or extracted. Blockchain technology provides traceability for materials and products by recording key data about provenance in real time, and reporting it in a way that is transparent and auditable. Online tracking of ham, diamonds, wine, coffee beans, and fabric assures customers that claims made on packaging and in advertising can be substantiated and looked up, ideally via an App, in real time while the consumer buys the product.
The current method by which assertions of Fair Trade production are communicated to purchasers is labelling and certification. The problems associated with certification of Fair Trade are complex, and create a level of expense and audit that is time-consuming and susceptible to manipulation. However, blockchain can track these elements transparently and in real time.
In addition to big banks, credit card companies, and payments providers looking to bitcoin-like systems to exploit the possibilities presented by blockchain technology, governments and regulators have also noticed its potential to monitor transactions [294].
Despite the potential risks that accompany any innovation of code and expansion of the utility of blockchain technology, Lawrence Lessig, the Roy L. Furman Professor of Law at Harvard Law School, asserts that the technology is ‘the most important innovation in fundamental architecture since the tubes of the internets were first developed’ to potentially ‘bypass corruption, to bypass fraud, to improve efficiency, and to enhance freedom’ [295].
The use of smart contracts can play a significant role in achieving financial fairness in trade. Research indicates that farmers in developing countries often accept low prices and delayed payments for their goods [296, p. 155]. They can ensure the prompt payment of suppliers and distributors at the time of supply and distribution. The internal complex and conditional logic of a smart contract can manage the variable data as agreed by all users with respect to how much to pay, when, and to whom.
For example, in December 2016, Australian tech start-up AgriDigital successfully managed the world’s first settlement of an agricultural commodity on a blockchain. The cloud-based transaction platform allows grain growers, buyers, and bulk handlers to manage contracts, deliveries, invoices, payments, and inventory all in one place. The landmark transaction occurred after David Whillock, a grower from Whillock Pastoral, near Geurie, in New South Wales, delivered 23 metric tonnes of wheat to Dubbo-based Fletcher International Exports, which is run by meat industry disrupter Roger Fletcher.
To make the experiment work, AgriDigital played every role in the transaction—acting as operator, buyer, and regulator to create an example of the ecosystem that will occur in the future. The pilot system captured real-time data of a 23.46-metric tonne grain sale between grower Whillock Pastoral Co. Pty Ltd and buyer Fletcher International Exports. In this case, the blockchain system provided fast and secure payment for the grain on delivery. The AgriDigital smart contract autoexecuted the settlement by:
• valuing the delivery;
• verifying that the buyer had sufficient funds to pay the grower;
• securing the funds in the grower’s name;
• verifying the delivery; and
• transferring the title and, at the same time, creating a payment for the grower from the reserved funds.
Farmer and director of Whillock Pastoral Co. Pty Ltd, David Whillock, said the smart contract that managed this transaction would help him to maintain cash flow and manage his business more confidently. According to the team at AgriDigital, current payment terms for Australian grain growers range from two weeks to five weeks, so real-time payment will make a significant impact on a farmer’s financial stability and certainty. AgriDigital is now exploring the use of blockchain technology in Australian livestock, the Canadian grains industry, and ownership and provenance in Europe.
A key feature of blockchain is its auditability by all participants in a transaction, including counterparties, authorities, and regulators. In any deterministic system, it is possible to verify and audit the actions within the system as correct; indeed, the inputs and outputs of the system serve as a record of the various interactions (for example, automated bank transfers or ordering additional components in a stock control system). In traditional systems, the maintenance of all relevant data is expensive, impractical, or impossible. The inputs to a business system typically include various types of data coming from a wide variety of sources, and the auditing itself is technically challenging. Furthermore, auditing may require strong knowledge and assurance of operator identity, which can often be compromised or flawed in a system with many actors.
By design, a public blockchain is perfectly transparent to all members of that network. Each individual operation or interaction, such as the provision of a new employee or the recording of outgoing stock, is perfectly recorded and archived, while privacy is ensured due to the usage of tokenisation. Auditing becomes as simple as joining the blockchain network, because this allows users to see all past operations in order to build a correct model of the present.
The blockchain can work much like any data system. It takes inputs and carries out actions based on these inputs, changing the database in a manner perfectly determined according to its program. These steps are crucial in supply chains and for certification of Fair Trade.
Fair Trade is not just about farmers or producers. It is about making sure that the entire supply chain is sustainable. Frontline producers need to be paid enough to create a sustainable business. To deliver traceability, Fair Trade provides independent third-party certification to give a robust and transparent audit of the supply chain process from farmer to exporter or trader, through to manufacturer, and on to the consumer. Blockchain technology can ensure that tracking and payments are transparent, secure, and timely.
With so many components and players making up the supply chain between growers and consumers, it is important to ensure both fair distribution of wealth along this line and timely payment along the way. Until now, this has been very difficult because a price is often set at the end of the process, whereas the most financially vulnerable have done the hardest work and laid out the most risk at the start of the production line. Blockchain technology can improve the experience for all participants, including the end-consumer. It allows buyers and receivers to track the movement of goods and the exchanges made along the way. Meanwhile, information, including history, transport, events, and ownership, can be used to verify authenticity.
Fair Trade is not just about ensuring that consumers can trust the origins and quality of produce and products, and the back story of the human interaction with their production and supply; it is also about ensuring equal pay for equal work. Smart contracts can ensure the integrity of payment systems by reporting to the network that payment has been made and how much of the price paid went to the grower or worker responsible for its production. Equal pay for equal work is regarded by the UN as a human right. Fair Trade is one of the UN’s 17 Sustainable Development Goals. The blockchain’s capacity to audit and automate transactions can play a significant part in the achievement of this particular goal.