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Why is Trade So Often Unfair?

Our producers often lose out when they want to do business. They don’t get a fair chance to sell on the market, as the rules of trade are not rigged in their favour. There are, effectively, a handful of big businesses that set the market rules when it comes to buying and selling commodities processed by our partners. They consequently get far too low a price for their products.

The current system of international trade makes opportunities for partnerships with the south almost non-existent. At Oxfam, we are working towards a fair system of trade and would like to see you do the same. It is therefore vital that we determine what is wrong with the current system.

Monopoly

The first major sign of unfair trade is the excessive power wielded by the buyers, processors and distributors. On a healthy market, prices are set through healthy market competition. However when it comes to certain links in the supply chain from producer to consumer, competition is too low. Three quarters of the world’s food products are currently marketed by fewer than 500 companies. This power imbalance exerts a negative influence on regions of slow economic growth. The market's conditions and prices are dictated by its 500 biggest companies.They are therefore exploiting the small producers' lack of power, as the latter are unable to sell their coffee or rice to anyone else.

Trade can only be fair when it is regulated by the authorities.

Market Shortcomings

Many businesses therefore have the power to set for themselves the prices they pay producers for their products. However they do not of course take account of the costs incurred by farmers to produce these goods. What’s more, they can also use that power to determine the retail sales price (or the price at the next link in the supply chain, a food processing company for example) and therefore generate far higher profits than they might on a market with healthy competition.

The trend towards concentration is a classic failing of certain markets. Politicians are all too aware of this fact, but choose to turn a blind eye to it. According to Oxfam-Wereldwinkels, regulation is needed to enable the market to achieve its most vital aim: the creation of wealth for the greatest number of people.

Rules to Suit Wealthy Economies

Barriers to trade are the second-biggest structural cause of unfair trade. The European Union and the USA have set up a whole series of regulations which protect their economy whilst excluding producers in the south. In the best case scenario, they may act as suppliers of raw materials. Developing regions whose populations are dependent on agriculture therefore struggle to sell their products at all, or can only sell them at very low prices.

This kind of protectionism is built on the following practices:

  • import duties which inflate the cost of raw materials from the south, such as sugar and cotton, before they can even be sold on the European market;
  • tariff escalation: processed raw materials are taxed once more when imported back into the European Union, which is why there is no interest in importing them. Consequently, this hinders the development of any kind of processing industry in the south;
  • import quotas for certain products originating from the south, such as fruit;
  • (income) subsidies for European producers of goods which are subject to international competition, such as milk.

The Hidden Costs of Our Current Production Model

Even though it is obvious that current large-scale production processes have a considerable impact on the health and sustainability of our planet, these costs are in no way factored in. Ultimately this is skewing the market. Only by making prices reflect these costs can we hope to see production processes evolve towards more sustainable models. Farmers in the south, which are producing on a far smaller scale and have a far smaller environmental impact, might thereby gain a more equal trading status.

The Regulatory Role of the Authorities

It is clear that trade can only be fair when it is regulated by the authorities. Their job is to set the conditions under which trading relationships can be best maintained. To do so, they need to invest in public infrastructures, take action on abuses (whether fiscal, environmental or otherwise) and set up an international framework in which producers (and therefore individuals) get an opportunity to trade both fairly and soundly. Trade is in fact one of the drivers of change.

Consumers Pay Too High a Price

The current trade situation does not just stymie the potential of numerous developing regions, but society in this country pays a high price too. The prices which we pay for our products include for example monopoly rents. Moreover, with increased public expenditure (through subsidies), consumers end up paying twice, whereas they too have every right to fair pricing. Such measures therefore put European taxpayers and consumers at a disadvantage.