Economists Do It With Models

Warning: “graphic” content…

Bookmark and Share
Fine, We Can Talk About Exports Too, Coffee Edition…

August 19th, 2016 · No Comments
Policy · Trade

So a little while ago I wrote about the efficiency of free trade where I went through a situation in which a country would want to start importing a good from abroad. At the end, I noted that an export situation is basically the same but with a role reversal for producers and consumers. Nonetheless, there is an objection of “yeah, but you didn’t consider exports” in the comments section…I was mainly trying to not be repetitive, but in retrospect I think I inadvertently did what so many economists (especially economics instructors, sorry about that) do- we focus on the effects of imports and then gloss over the effects of exports. This isn’t great for students etc., and it’s particularly problematic because people more generally focus on the impact of foreign competition for production much more than the impact of foreign competition for consumption. So I apologize, and I’m here to make up for my earlier oversight.

I think this bias occurs at least partly because it’s easier to find motivating examples/case studies/etc. that have to do with imported goods. (This doesn’t mean that imports are a bigger deal, just that, like I said, we tend to focus on them more, so…chicken and egg, you know?) But here’s one on a topic near and dear to my heart…and stomach, and brain probably:

Meet the Man Bringing Coffee Back to Colombia
by Ethan Fixell

Despite the country’s reputation for fantastic coffee, it’s nearly impossible to get a good cup of joe in Colombia. The second largest coffee exporter on earth sent $2.6 billion worth of beans to other countries around the world last year, forcing locals in most Colombian cities to brew imported beans from far-off places like Vietnam.

Source: www.tastingtable.com


Like before, I’m going to try to explain what’s going on here without using any graphs (even though I like them so much!). Say you’re a coffee grower in Colombia, and you live in a world where there is no trade among countries. Your only option, therefore, is to sell your coffee to people in Colombia, who might not have a lot of disposable income or might not like coffee that much or whatever. In this world, you sell your coffee (unroasted wholesale, to make the numbers make a little more realistic) for 25 cents per pound. (No, I don’t know why our Colombian transactions are denominated in USD, but let’s try to focus here.) The point is that Colombian roasters can buy your coffee pretty cheap, which is good since they can’t set too high a price for the finished product, what with Colombians not having a lot of cash and not liking coffee and whatnot.

Now let’s open up Colombia to some trade- you know, that thing that people have taken a sharp turn against for some reason:


If we’re honest with ourselves for a second, I think we can all agree that Americans have a (relatively) decent amount of disposable income and are pretty much welded (I was going to say wedded but I think the typo works better) to our coffee intake. This combination of factors leads to a higher willingness to pay for coffee, especially Colombian coffee, since we all bought into the coffee marketing of the 1980’s:

(No really, that ad is from 1983, and I have no idea why this marketing was so salient to my young self.)

As a result, let’s say that roasters in the US will pay $1 per pound for Colombian coffee. Also, let’s note that we drink a lot of coffee, so the US roasters are willing to buy as much as Colombia will sell us at that price. What are Colombian coffee growers going to do?

I feel like the article preview pretty much ruined the suspense here- if coffee growers can sell all they want to the US for $1, they aren’t going to sell to Colombia for less than $1, so the price to Colombian roasters goes from 25 cents to $1. Colombian roasters don’t buy as much Colombian coffee (demand curves do slope downward after all), and Colombian coffee drinkers get coffee imported from Vietnam rather than the stuff that it right around them. Weird, right? But is perfectly understandable from an economic standpoint.

In this scenario, Colombian coffee producers are better off because of trade and Colombian consumers are worse off. (Told you it was the reverse of the import situation.) Like with imports, trade is efficient since the producers win from trade more than consumers lose from trade. Why is this? Well, let’s think about this in a few consumer-group parts:

  • Those Colombian roasters who are still buying coffee at $1: They are 75 cents worse off, but the coffee producers are 75 cents better off, so there’s no net value change.
  • Those Colombian roasters who were willing to buy at 25 cents but not at $1: They are losing less than 75 cents in value (read, consumer surplus), since if this were not the case they would still be willing to buy at $1. (For example, if a roaster was willing to pay 60 cents, pricing him out of the market causes him to lose the 35 cents of value he had been getting at a price of 25 cents.) The coffee producers are better off by 75 cents since they are still able to sell the coffee at $1 to foreign consumers. This results in a net value increase.
  • Those foreign roasters who are willing to buy coffee at $1: Since the Colombian growers aren’t selling at a loss, this has to be a value increase.

This combination of no change, increase, increase has to result in an overall increase in value for Colombian society. (Like the basic import analysis, however, this doesn’t address distributional concerns regarding winners and losers.)

Not gonna lie- it’s pretty perplexing to me that this dynamic doesn’t seem to call for export restrictions nearly as much as the reverse situation results in calls for import restrictions. If I had to guess, I would hypothesize that people are more inclined to think about their welfare in terms of money coming in (i.e. the producer side) rather than in money going out (i.e. the consumer side). On the other hand, people complain way too much about inflation for this explanation to be entirely satisfying, so who knows. Maybe it has to do with the fact that producers tend to be more concentrated than consumers, and more protest happens when losers are more concentrated? In any case, it *is* sort of unfair to talk about the effects of imports without considering the effects of exports, or vice versa, if for no other reason it’s difficult to include a “we want to sell you stuff without restriction but we’re going to tax the stuff you try to send to us” clause in trade agreements nowadays.

Tags: Policy · Trade

0 responses so far ↓

  • There are no comments yet...Kick things off by filling out the form below.

Leave a Comment