Does Fair Trade Hinder Competition ?

In France, the Conseil de la concurrence (Competition Commission)[1] considers that Fair Trade does not necessarily contravene competition rules, but makes several recommendations on how product certification schemes should be organised.

(Excerpts from press release of 27 March 2006)

The existence of minimum purchase pricing grids does not, in the current state of affairs, create any restrictions on competition which could be forbidden by French or European law.
For the Conseil de la Concurrence, whilst the Fair Trade sector requires its adherents to respect, where appropriate, standardised purchasing conditions with producers in developing countries, the object and effects of these agreements, in the current state of development and organisation of the Fair Trade sector, are mainly applied overseas and therefore fall outside the jurisdiction of European and French rules on competition.

The Conseil de la Concurrence also points out that further down the economic chain (at the transformation and marketing stages), Fair Trade players remain free to act so as to preserve competition and leave the range of possible retail prices open, even though the raw material price is more or less the same for all operators.

In this respect, the Conseil de la Concurrence noted that the cost of raw materials purchased from producers only represented a fairly small proportion of the total cost of the finished product – 20% of the retail purchase price of coffee, but under 10% for bananas, tea or fruit juice.

The situation could change if the market share of Fair Trade products were to develop significantly, or if the pricing methods after purchasing from producers were to change. If this were the case, the Conseil de la Concurrence would have to look at whether an exemption would be possible under French or European law. The Conseil de la Concurrence examined certain elements, which could be brought forward in the future.

Fair Trade is a response to a deliberate approach by consumers to promote its values: reliable certification systems are therefore essential.

The Conseil de la Concurrence has noted that Fair Trade products are generally 5 to 15% more expensive than comparable, traditional products, but that this price difference is not affecting their progress. This shows that there is a demand for such values among consumers in industrialised countries.

However, consumers, who are unable to check the effective actions made by the various players who claim to partake in Fair Trade, must have access to reliable certification systems, which appear as a “service”, guaranteeing that the product was actually produced and purchased from the producer in conditions respecting certain social or environmental values.

At present, the emergence of new operators, retail distributors of Fair Trade products and certification systems promoted by different branches within the sector, as well as the existence of related concepts which consumers sometimes have trouble differentiating, do not guarantee sufficient transparency within the programme. The Conseil de la Concurrence qualifies as legitimate the action taken by public authorities to regulate the organisation of the sector, initiated by the adoption of a legislative measure to define Fair Trade and which states that agencies engaging in the certification process in this area must be recognised by a commission (Article 60 of the law dated 2 August 2005).

The Conseil de la Concurrence recommends public authorities to check that Fair Trade certification systems operate in a competitive way.

The Conseil de la Concurrence pointed out, however, that these conditions, providing for the organisation of this certification activity, are the ones at risk of restricting competition, with a more direct impact on French territory, than potential agreements affecting purchases from producers.

Such restrictions could not only affect Fair Trade agencies themselves, as “certifying” bodies, by reducing or eliminating competition between them, whereas at present they are independently offering different “certification products”, but also affect retailers, by reducing their ability to sell products bought through Fair Trade schemes, but which have been marketed using different procedures.

The Conseil de la Concurrence therefore stated that the commission provided for in Article 60 of the law dated 2 August 2005 should operate within a context which would allow both the attribution of loyalty guarantees for operators claiming to follow Fair Trade programmes, and the preservation of sufficient competition within the sector. In this respect, the Conseil expressed reservations, regarding a situation which could lead to one predominant reference emerging.

[1] Opinion 06-A-07 dated 22 March 2006 relating to the examination, in terms of competition law, of the operating conditions of the Fair Trade sector in France