Farm Ireland

Friday 26 May 2017

Economic view: Fair-trade reach must extend beyond developing nations

European Agriculture Commissioner Phil Hogan.
European Agriculture Commissioner Phil Hogan.

Alan Renwick

Supermarket giants are spending a lot of money trying to convince us that "being big is not so bad after all", but it seems that their message is failing to reach the European Commission.

The President of the Commission declared in September that something must be done "to break the retail oligopolies" whilst Phil Hogan, the Agriculture Commissioner, is on record as saying that he wants 2016 to be the "year of action" for EU institutions in dealing with imbalances of power in the supply chain. The view that something must be done resonates strongly with small suppliers in general and farmers in particular.

However, the obvious questions are where is the evidence that the structure of the retail market is a problem in itself and even if it is, will efforts to "break oligopolies" make things better or actually worse for consumers and suppliers?

In simple terms one of the key issues is that the existence of a few large players in the retail sector may lead to so-called Unfair Trading Practices (UTPs) which are largely defined as contrary to fair trading.

Last year the EU published a comprehensive report on these practices and it did highlight that their existence may lead to real economic costs to society because they can lead to underinvestment by suppliers.

However, analysis in the report also highlights the difficulty of assuming a simple causal relationship between retail concentration and the abuse of power. For example, Italy has a relatively low level of concentration in the food retail sector, some of the most extensive legislation against unfair practices, yet businesses feel among the least protected in the EU by current legislation.

In contrast, Denmark has the highest levels of concentration in the retail sector, relatively little legislation against UTPs, yet a much greater proportion of business felt that they were protected; however, a lot of supermarkets in Denmark are co-operatively owned.

If there is firm evidence of the existence of UTPs in our food supply chains, and these are shown to lead to economic costs, two main options to address the imbalances in power are often proposed. Either we intervene to physicially change the structure of the market or we accept that the structure exists and regulate the relationships within the supply chain.

Given the difficulties of changing the structure of the industry, it is perhaps not surprising that much of the effort within the EU has focused on trying to regulate the relationships within the supply chain. For example, last year in Ireland the Competition and Consumer Protection Act (CCPA) was passed and this had a focus on regulating practices within the chain. However, as shown by our Italian example above, legislation in itself does not solve the problem, and with Ireland, the CCPA has been criticised for effectively being toothless.

If changing market structures or increased legislation do not seem to be the answer, then the question is how do we tackle the problem?

The Commission has been vocal in its support for the Supply Chain Initiative, where companies sign up to principles on fair-trading practices.

Of course, we may be sceptical of voluntary initiatives as they are largely efforts to stave off the threat of increased regulation.

After I last wrote about this issue, a colleague at UCD suggested that an increased focus on pressing supermarkets to live up to their Corporate Social Responsibility statements may be fruitful, particularly concerning fair-trading relationships.

Change may occur if supermarkets can see real value in having supply chain relationships that are ethical not just in developing countries but also within countries like Ireland as well. Then being big might not be so bad after all.

Alan Renwick is Professor of Agriculture and Food Economics at UCD

Indo Farming