Free Trade and Coffee

As I got up to brew coffee this morning, I got to thinking about one of my favorite catch-22s I like to use against opponents of free trade, proponents of “buy American” and other economically unenlightened folks.

So, to my friends out there drinking your coffee this morning, this economics lesson is for you.

On a side note, I still don’t forget the debate about “fair trade coffee” at SLU. How silly those times were. Fair trade coffee is also a farce, but I won’t get into that here. Read this excellent piece by Jacob Grier and make up your own mind on that matter.

First, let’s look at U.S. Coffee production. We’re the world’s third largest exporter, so I expect we produce a lot of coffee. I’ll compare us to Brazil.

Source: UN Food & Agriculture Organisation (FAO)

Wait, we produce no coffee? How is that? Well, the answer is not that we don’t produce any coffee, but rather that we don’t grow much. Let’s zoom in here.

How is it that a country as big and advanced as ours only produces 3,400 tonnes of coffee? Climate. Excel didn’t really show this because the graph had to reach so high for Brazil’s output there wasn’t any space for U.S. production because our output was so small. So, I made this one. You get the point, though. 3,400 tonnes in the U.S. compared to 2,790,858 tonnes in Brazil is pretty damn paltry.

Really, the only domestic place we can grow coffee well is in Hawaii, which isn’t that big and lacks arable land. Plus, coffee on Hawaii has to compete with sugar, coconuts and pineapples. Remember! Economics, basically, is the efficient allocation of scarce resources that have alternative uses, and land certainly has alternative uses.

WHERE COFFEE IS GROWN

Yes, the U.S. roasts and packages a lot of coffee. We do so because, on a per capita basis, we’re one of the largest consumers of coffee in the world, if not the largest (depends on who you ask.) Where do Peets, Starbucks, Seattle’s Best, Dunkin Donuts and other places get all of that coffee to roast, package, and sell?

They import it.

Oh golly! Imports! Be afraid of imports! Well, we don’t really have a choice in this, which really throws a wrench in things. First, “Buy American”, if applied to procurement contracts would require one of the following scenarios to be true.

  1. Government employees and the military go largely without coffee.
  2. Hawaii devotes 100% of its farm land solely to coffee.
  3. Coffee is grown in greenhouses in the continental U.S., tastes like crap, and costs a boatload of money.
  4. Coffee gets an exemption from “Buy American.”

Well, with the exception of #4, all of those scenarios suck. Nobody wants to go without coffee, Hawaiians would be angry if #2 were the case, and #3 pleases nobody (except maybe greenhouse growers).

So, “Buy American” doesn’t seem to jive with Coffee, and neither, really with protectionism. Protectionists have limited options if their coffee needs to be 100% American. 3,400 tonnes only goes so far, and because of its limited supply and fairly high demand, it tends to be pricey.

If “Buy American” and protectionism doesn’t really work out for coffee, could it be the case that it doesn’t work for other products? Of course. Remember that, since economics is the study of the efficient allocation of scarce resources that have alternative uses, we have to consider the macroeconomic effect of protectionism and “Buy American.”

Labor, land, machinery, investment, fertilizer and all the inputs necessary to make goods are all scarce and finite. Can we really afford to make everything we buy? Well, no. But the more we artificially try and force the U.S. economy to produce everything we consume, the poorer we become. Let’s go back to example #3.

If we had to domestically produce all of the coffee we consumed, the first problem with that is that because we lack the land to produce good coffee, the price of it would simply go through the roof. Millions of acres of land would have to be set aside for greenhouse construction, and this would be represented in the new price of coffee, which would be astronomical. Then, all of the labor, investment, fertilizer, power for the greenhouse lights would have to be taken away from other, more profitable ventures or they’d have to be created, which would drive up prices both for coffee and for the other products that share similar resources.

Why all of this? Because politicians want to satisfy some union or business constituency that cannot take competition. Obviously, I’ve gone back to the broad view, whether it be steel, tires, or t-shirts. There’s nothing wrong with importing things. However, there is something wrong with adding tariffs to imports because domestic producers cannot compete.

Remember, trade is typically between individuals, not countries. It’s not the U.S. buying tires, or coffee. It’s Chuck’s Tire Company making tires in Korea, China, or wherever, that Mr. Jones wants for his car. Adding a tariff to more efficiently produced (and cheaper) tires to make up for the inefficient production of a good is wrong, dare I say, immoral.

Just because Bob’s tire production in Elyria makes a more expensive tire than Chuck’s imported tires doesn’t give Bob the right to petition the government to add tariffs to Chuck’s “unfair” less expensive tires. But, this routinely happens, and the result is that Bob and the government steal from Mr. Jones with a tariff on his new tires. The government gets revenue it is not entitled to, and Bob’s tires are artificially affordable because of it. All the while, Mr. Jones is now poorer than he would be if the tariff didn’t exist.

Economics is the efficient allocation of scarce resources that have alternative uses. It’s best we understand that and move on, instead of trying to play God with the system and keep zombies that would otherwise fail in the market place.

(I purposefully left out the term “comparative advantage” from this post so it would be less dry and boring.)

Facebook Comments

comments

One Thought on “Free Trade and Coffee

  1. Pingback: Free Trade is Fair Trade | JimSwift.net

Post Navigation