The Costs of Fair Trade Textile Certification. A Global Value Chain Perspective

Transcription

1 A Global Value Chain Perspective The Costs of Fair Trade Textile Certification A Global Value Chain Perspective by Hannes Grassegger, MA in Economics, University of Zürich, Switzerland presentation for the conference on Social Labelling in the Global Fashion Industry Newcastle, September 2010

2 A Global Value Chain Perspective Structure of the Presentation I. Introduction II. Clothing and Textiles Industry Structure III. Global Value Chain Analysis IV. Conclusions V. Acknowledgements VI. Literature

3 Introduction

4 I. Introduction Background Mid 1990s: Criticism of working conditions in the apparel industry Early 2000s: Rise of Ethical Fashion Fair Trade (FT), widely known through food, high turnover Challenge: How to bring FT into complex production systems Masters thesis: formal explanation of FT textiles certification costs Methodology: Literature and press review; Interviews

5 I. Introduction Definition Fair Trade Textile Certification: Set of social AND environmental process AND product standards. Contractually agreed between producer and third party. Third party auditing mechanisms to ensure compliance. Related to consumer products or producers in a visible way. Social standards: minimum 4 (8) ILO Core Norms. Ecological standards: diverse, specific. Value Chain Coverage (Exclusive FT chain)

6 I. Introduction Aim of FT: improving conditions of participating workers and producers Example FINE Fair Trade Definition: Fair Trade is a trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers especially in the South...

7 I. Introduction FT textile certification is at an infant stage E.g. Fairtrade seed cotton introduced to Europe in 2004 E.g. Fairtrade Labeling (FLO, Max Havelaar), Ökotex 100, WRAP Demands traceabilityplus: Value chain approach Test case for FT expansion on complex products Question: What does it cost to take part?

8 I. Introduction Research Question: Modelling costs of FT standards in clothing Pollin et al. (2002) calculated the retail price increase sufficient to cover the "costs of substantially raising wages and/or improving working conditions for production level workers in the apparel industry" (compliance costs) Aggregated industry data from US/Mexican producers of men's shirts Doubled wages at the shipping stage of either production level workers only or including supervisory staff Estimated retail price increase (2002, p. 5): 2% 6%

9 I. Introduction Reality Check Actual retail price increases (2008, March 2010): still 160% to 360% (white man's TShirt, e.g. FLO certified : 22,46 US$ vs. 8,64 US$ at C&A) No monopoly rents: Availability, competition Market prices reflects marginal costs for producers What exactly are those costs?

10 Clothing and Textiles Industry Structure

11 II. Clothing and Textiles Industry Structure Premises for Pollin et al.: 1) Zero cost of execution for imposing higher wages (ie. better working conditions) 2) Fully vertically integrated clothing production unit => Contrary to reality (see e.g. Cammett 2006, Nordas 2004)

12 II. Clothing and Textiles Industry Structure Real clothing production system: Production process: multistage, sequential, disintegrated, standardized, globalized. Interdependent, lead time minimizing production system Clothing production stages (Gereffi et al. 2003): Raw Materials, Components (Textiles), Production (Clothing), Export, Marketing. Each stage separable, undertaken by a plethora of legally independent, profit maximizing enterprises Discretion over producers' true social and environmental behaviour

13 II. Clothing and Textiles Industry Structure Products: Nonhomogenous, (partly) Nonrecurrent, seasonal products (increase in frequency) Quality and leadtime more important than price

14 II. Clothing and Textiles Industry Structure Getting producer information is costly Transaction costs important for value chain configuration Incentives for producers to cheat over ethical product properties (FT) ethical behaviour has to be controlled for (FT fees for audit)

15 Global Value Chain Analysis

16 III. Global Value Chain Analysis FT clothing certification along the value chain changes complex production processes with several independent intermediaries => Standard economics: simple buyerseller game => Different approach needed for analyzing ceteris paribus effects of FT

17 III. Global Value Chain Analysis Global Value Chain Model (Gereffi et al. 1994/2005) Framework shows the flows of intermediary goods; services and information in order to provide a certain product Draws relation between optimal (transaction cost minimizing) value chain structures and given product properties GVC offers insights about value chain related costeffects of FT certification

18 III. Global Value Chain Analysis GVC depicts actors and the linkages between them within production networks (value chains) as a sequence/network of nodes and linkages

19 III. Global Value Chain Analysis Nodes capture processing of goods or information. Comprise one value added step, one activity that is exercised. Separable processes, either technologically or socially (Hopkins et al. 1994). Linkages capture the exchange relation between nodes. Flows of (intermediary) goods, services and information.

20 III. Global Value Chain Analysis The character of transaction, the information exchange between production stages and nodes relates to the product

21 III. Global Value Chain Analysis Four key contractual product parameters of the transaction (Humphrey et al. 2001): 1) Product definition: What is to be produced (FT!) 2) Process definition: How is it to be produced (FT!) 3) Time of production or delivery (FT!) 4) Amount of production or/(and) product price (FT!)

22 III. Global Value Chain Analysis Governance Structure: Exchange within different overall structural alternatives, i.e. market, hybrid forms or hierarchies (Williamson 1979) Gereffi et al. (2005): Five forms, depending on the values of three variables expressing two types of transaction costs, those described by Williamson (e.g. 1973) those created by value chain activities coordination, called mundane transaction costs (Figure 2)

23 III. Global Value Chain Analysis

24 III. Global Value Chain Analysis Complexity of information and knowledge transfer required to sustain a particular transaction...with respect to product and process specifications. Codifiability extent to which this information and knowledge can be codified and therefore transmitted efficiently and without transaction specific investment between the parties of the transaction. Capability of actual and potential suppliers in relation to the requirements of the transaction. (Gereffi et al. 2005) => Dynamic perspective on FT effects by shifting values of the determinants

25 III. Global Value Chain Analysis How Fair Trade standards influence the efficient governance structure Expressed in costs of market use

26 III. Global Value Chain Analysis Given governance structure: Modular (Gereffi et al. 2005)

27 III. Global Value Chain Analysis Two effects of introducing Fair Trade in textile value chains: A) FT: puts new requirements on suppliers, lowers capabilities in relation to new product parameters (see Opal et al. 2006) Complexity, Codifiability remain high Shift towards less market based, closer captive governance (Figure 1) Result: Higher costs of market use for producers (Figure 3, right side)

28 III. Global Value Chain Analysis B) High Complexity, Codifiability but low Capability Exclusion of suppliers from the value chain Closer (captive) cooperation: less market agents Changing competitive situation Changing intra chain prices for intermediary goods

29 Conclusions

30 IV. Conclusions Costs of introducing Fair Trade to clothing value chains can not be estimated correctly without taking account of the given global value chain structure and governance Compliance costs as calculated by Pollin et al. are not the sole additional costs for Fair Trade certification of clothing. Modelling is possible.

31 IV. Conclusions (Additional) costs for Fair Trade certification: i) Fees (against cheating) ii) Rising Costs of Market Use iii) Changing Intra Chain Prices

32 IV. Conclusions Value Chain Effects: Changing Costs of Market Use (higher) plus changing intra chain prices

33 Appendix

34 V. Acknowledgements Thank You! And you: Prof. Markus Huppenbauer, University of Zürich, Applied Ethics Dr. Adrian Müller, University of Zürich, Sozialökonomisches Institut Mark Starmanns, PhD, University of Zürich, Geographisches Institut Prof. Doug Miller, Northumbria University, Chair of Ethical Fashion NADEL, Eidgenössisch Technische Hochschule (ETH) Zürich SAGW, Schweizerische Akademie für Geistes und Sozialwissenschaften

35 VI. Literature Cammett, M. (2006): Development and the Changing Dynamics of Global Production: Global Value Chains and Local Clusters in Apparel Manufacturing, in: Competition & Change, Vol. 10, No. 1, pp Gereffi, G./Humphrey, J./Sturgeon, T. (2005): The Governance of Global Value Chains, in: Review of International Political Economy, Vol. 12, No. 1, pp Gereffi, G./Memedovic, O. (2003): The Global Apparel Value Chain: What Prospects for Upgrading by Developing Countries, Vienna. Gereffi, G./ Korzeniewicz, M./Korzeniewicz, R. P. (1994): Introduction: Global Commodity Chains, in: Gereffi, G./Korzeniewicz, M. (Eds): Commodity Chains and Global Capitalism, Westport, pp Grassegger, H. (2008): Certificates for the Textile Industry A Global Value Chain Perspective on the Costs of Fair Trade Certification. University of Zürich, Masters Thesis, (not published).

36 VI. Literature Grassegger, H. (2008): Moral als Ware. Eine Branchenlebenszyklusanalyse des Ethical Fashion Sektors. Semesterarbeit, University of Zürich, (not published). Hopkins, T. K./Wallerstein, I. (1994): Commodity Chains: Construct and Research, in: Gereffi, G./Korzeniewicz, M. (Eds): Commodity Chains and Global Capitalism, Westport, pp Humphrey, J./Schmitz, H. (2001): Governance in Global Value Chains, in: IDS Bulletin (2001): The Value of Value Chains: Spreading The Gains From Globalisation, Vol. 32, No. 3, pp Nordas, H. K. (2004): The Global Textile and Clothing Industry Post the Agreement on Textiles and Clothing. Accessed via: November 17th, 2008.

37 VI. Literature Opal, C. /Quigley, M. (2006): Fair Trade Garment Standards: Feasibility Study. Accessed via: /certification/newproduct_garments.php, October 21 st, Pollin, R./Burns, J./Heintz, J. (2002): Global Apparel Production and Sweatshop Labor: Can Rising Retail Prices Finance Living Wages?, in: Cambridge Journal of Economics, (accepted), pp Accessed via: October 1 st, Starmanns, M. (2007): Fairness im Globalen Wertschöpfungsketten durch GovernanceNetzwerke?, in: Wuppertal Institut zur Globalisierung: Berichte aus dem Promotionskolleg, pp. 1 37, accessed via: November 11 th, 2008.

38 VI. Literature Williamson, O. E. (1979): The Governance of Contractual Relations, in: Journal of Law and Economics, Vol. 22, No. 2, pp Williamson, O. E. (1973): Markets and Hierarchies: Some Elementary Considerations, in: The American Economic Review, Vol. 63, No. 2, pp