Implicit and often explicit in fair trade is a criticism of the current organization of international trade as being "unfair". Fair trade advocates often justify the need for fair trade by mentioning the microeconomic market failures of our system and the current commodity crisis and its impact on developing country producers.

Free trade and market failures

All FINE members and fair trade federations support in theory the principles of unhindered free trade. However, as Alex Nicholls, social entrepreneurship professor at Oxford University, points out, the "key conditions on which classical and neo-liberal trade theories are based are notably absent in rural agricultural societies in many developing countries."[2] Perfect market information, perfect access to markets and credit, and the ability to switch production techniques and outputs in response to market information are fundamental assumptions which "are fallacious in the context of agricultural producers and workers in developing countries".[3]

The absence of these microeconomic conditions can nullify or even reverse the potential gains to producers from trade. While Nicholls agrees that the win-win situation for all actors involved may be broadly correct in some markets, nevertheless, "within developing countries market conditions are not such that producers can unambiguously be declared to be better off through trade."[4] These market failures severely question the ability of trade to lift them out of poverty.

Fair trade is seen as an attempt to address these market failures by providing producers a stable price for their crop, business support, access to premium Northern markets and better general trading conditions.

The commodity crisis

Fair trade advocates also often point out that unregulated competition in global commodity markets ever since the 1970s and 1980s has encouraged a price "race to the bottom". During the 1970-2000 period, prices for many of the main agricultural exports of developing countries, such as sugar, cotton, cocoa and coffee, fell by 30 to 60 percent.[5] According to the European Commission, "the abandonment of international intervention policies at the end of the 1980s and the commodity market reforms of the 1990s in the developing countries left the commodity sectors, and in particular small producers, largely to themselves in their struggle with the demands of the markets��. Today, "producers... live an unpredictable existence because the prices for a wide range of commodities are very volatile and in addition follow a declining long-term trend��.[6] The total loss for developing countries due to falling commodity prices has been estimated by the Food and Agricultural Organisation (FAO) to total almost $250 billion during the 1980-2002 period.[7]

Millions of poor farmers are dependent on commodities and on the price they receive for their harvest. In about 50 developing countries, three or less primary commodity exports constitute the bulk of export revenue.

Many farmers, often without other means of subsistence, are obliged to produce more and more, no matter how low the prices are. Research has shown that those who suffer most from declines in commodity prices are the rural poor - i.e. the majority of people living in developing countries. Basic agriculture employs over 50% of the people in developing countries, and accounts for 33% of their GDP.[8]

Fair trade supporters believe current market prices do not properly reflect the true costs associated with production; they believe only a well-managed stable minimum price system can cover environmental and social production costs.