Editor's note: Keun Lee, a former vice chair of the National Economic Advisory Council for the President of South Korea and a former president of the International Schumpeter Society, is a professor of economics at Seoul National University, the winner of the 2014 Schumpeter Prize, and the author of China's Technological Leapfrogging and Economic Catch-up: A Schumpeterian Perspective (Oxford University Press, 2022). The article reflects the author's opinions and not necessarily the views of CGTN.

Coffee prices have soared in recent years, owing to unfavorable weather conditions and supply shortages in major producing countries like Brazil, India and Vietnam. But even if consumers are paying more for their daily cup, coffee farmers are seeing little of the gain, because they lack sufficient bargaining power.

Since the 1950s, coffee has been among the world's most-traded commodities – at one point, it ranked second, behind only oil – and many governments regard it as a strategic good. But not all coffee trade is created equal.

Countries in the Global South export low-value-added unprocessed coffee – raw beans and dried and seedless coffee – with Brazil, Columbia, Vietnam, Indonesia and Ethiopia controlling a combined market share of about 70 percent. Countries in the Global North dominate exports of higher value-added processed coffee – such as roasted beans and instant coffee – with Switzerland, Germany, Italy, France and the Netherlands accounting for 70 percent of the market. Moreover, the coffee sector is dominated by just three developed-country firms – Nestle, Starbucks and JDE Peet – which together account for 77.7 percent of the total revenues of the sector's 10 biggest players.

Prices of processed coffee dwarf those of unprocessed coffee: $14.30 per kilogram on average versus just $2.40. In fact, coffee producers in the Global South claim a small and declining share of the market's value. Whereas in 1992, producer-country exports captured one-third of the value of the coffee market, by 2002, they captured less than 10 percent. Coffee farmers themselves get 1 percent or less of the final retail price of a cup of coffee, and about 6 percent of the price charged for a package of coffee sold to consumers in the Global North.

The obvious solution would be for coffee producers in the Global South to develop processing capabilities, in order to increase their exports' value-added. But there are formidable barriers to progress on this front, beginning with the high tariffs developed countries impose on processed-coffee imports – 7.5-9 percent in the European Union, 10-15 percent in the United States, and 20 percent in Japan. Unprocessed coffee is not subject to tariffs.

While developing economies also impose tariffs, they tend to be more symmetric across processed and unprocessed coffee. In Brazil, for example, both types of imports are subject to a 10-percent tariff. So, while developed-country-led multilateral banks and research organizations advise developing countries to increase their exports' value-added, developed countries' trade policies are discouraging them from doing so.

With developed-country governments apparently unwilling to change their tariff regimes, developing-country governments must rely on financial incentives to counteract them. For example, they can subsidize processed-coffee exports, and impose export tariffs on unprocessed coffee. Malaysia did something similar with palm oil: After the United Kingdom imposed high tariffs on processed palm-oil imports, Malaysia lowered taxes on processed palm oil and introduced an export tax on crude palm-oil exports.

Would-be exporters of processed coffee in the Global South also face non-tariff or technical barriers, such as sanitary and phytosanitary rules. These are, of course, entirely justifiable. Overcoming them will require the Southern exporters to invest in building technological capabilities and developing planting and processing approaches that meet international safety, environmental and social standards.

Exporters in the Global South could even go so far as to produce and export branded coffees that are sold directly to consumers in the North. Branding and marketing is, after all, the highest value-added segment. The problem is that entry barriers in consumer markets are very high, and it takes considerable resources – and a significant risk appetite – to build up a new brand.

One way firms could circumvent some of these barriers would be to acquire existing brands. This is another lesson from Malaysia, which executed a hostile takeover of British palm oil firms in the London Stock Exchange. In fact, this kind of international acquisition has served as a useful catch-up strategy for a number of latecomers.

Producers in the Global South have another option: they can create an OPEC-style coffee "cartel," which would have far more bargaining power on prices and tariffs vis-a-vis the Global North. While this solution may appear radical, it is feasible, given that the Global South's top 10 coffee producers command nearly 90 percent of the market. It is also justifiable, as the supply-side oligopoly that a cartel represents would be intended specifically to confront an existing demand-side (roaster) oligopoly.

First, however, the coffee sector in the Global South would have to be consolidated, with small firms being combined through mergers and acquisitions. The new large companies could work together with public research institutions to upgrade the quality of the coffee being exported and to change the value distribution. For example, the Federacion Nacional de Cafeteros de Colombia could work with the Colombian freeze-dried coffee producer Buencafe. The Malaysian Palm Oil Board could serve as a model here.

Of course, asymmetries in the global coffee market could be addressed in multilateral fora, such as the United Nations or the G20. But as long as developed countries actively impede their developing-country counterparts' ability to make money from the coffee they produce, Southern producers have little choice but to take matters into their own hands. Tariffs and subsidies, hostile takeovers, and even the formation of a coffee cartel should all be on the table.

Copyright: Project Syndicate, 2023.

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