Do you like to drink coffee? Let’s look at a bit of practical economics together over a good cup of coffee.
I recently came across a comment about tariffs that there is no need to import coffee when our companies can produce it best. Produce can mean either growing it, refining it or even selling it well to the customer (nice packaging, story, service…).
While we import almost 3 million tons of green beans into the EU every year, we only import around 80,000 tons of roasted beans. The price of unroasted coffee on the exchange is usually between 40 and 120 CZK/kg (select unroasted coffee can be bought wholesale for around 250 CZK/kg, but prices can rise dramatically here). For the sake of completeness, I should mention that there are a total of 4 tariffs on coffee (2024):
- Unroasted caffeinated coffee (0%)
- Unroasted decaffeinated coffee (8.3%)
- Roasted caffeinated coffee (7.5%)
- Decaffeinated roasted coffee (9 %)
The pattern here is that the more human labor the product requires, the higher the rate. Since few coffee plants will thrive in the Czech Republic, there is no reason to clear levy tariffs on green coffee as there is simply no internal production, and such a tariff would not protect any domestic producers. The duty is, therefore, a tool to ‘protect’ domestic jobs, but at the expense of the consumer who pays a higher price.
The idea that appears frequently in society is to move production here and gain a kind of production autonomy. In the case of coffee, however, only self-sufficiency in roasting would be an option, which is not a sensible idea given the continued dependence on imports of green beans. So what about the ‘best coffee’ and self-sufficiency? Is there really no need to import coffee?
What Does Best Mean?
Best can mean many things, for example that the best-tasting coffee in the world comes from a Czech roaster. Such an assessment is highly subjective. One person’s coffee may not be another’s at all. But let’s assume that it really is the coffee that all people (or at least Czechs) like the most. Will this be enough to allow us to wave a magic wand and eliminate the import of roasted coffee? No way.
From a practical point of view, the roaster with the best coffee will have to deal with the problem of covering the entire production. As long as they are unable to cover the entire domestic demand, there is room on the market for other roasters, including foreign ones. The mere fact that a domestic roaster produces a coffee that everyone judges to be the best tasting is not sufficient to justify abandoning imports.
All Czech Roasters Are the Best
I will now shift the example to even more absurd values. Suppose there are multiple roasters in the Czech Republic, all of which roast coffee is the best-tasting coffee in the world for the domestic consumer. It is an absurd idea, but let’s explore it. Will it be enough to stop imports? No, it still will not be enough. The whole example is completely missing the selling price.
Whether a consumer buys a product depends not only on the characteristics of that product but also on the price at which it is sold on the market. For example, one of the best-tasting coffees, Jamaica Blue Mountain, is commonly found on the market with a price tag of over 3,000 CZK/kg. If Czech roasters roasted this coffee, it might provide a great tasting experience for the consumer, but at a price that most consumers will not accept.
What Is the Best Price?
For consumers, the best price would probably be zero, or generally low. In our absurd example, we already had roasters roasting the best-tasting coffee for all domestic consumers, and in quantities sufficient for the domestic market. But as long as they do not roast it at the absolute lowest price, it will not be obvious that a market built in this way will still perfectly crowd out foreign competition.
Now let us imagine that a foreign roaster comes to the market with a coffee which, although it will not be best-tasting (according to the above criteria), will be cheaper. How will consumers behave?
Some of them may abandon the imaginary highest-taste standard of domestic roasters and save money by buying inferior but cheaper foreign coffee. So there is still room in the market for imports. Let us consider that on the Czech market, there is still the legendary bad Standard coffee with a price tag of around 180 CZK/kg. The consumers’ behavior gives the market the impetus that they are not necessarily interested in the best-tasting coffee, but are interested in the best price/taste ratio, which is also highly subjective.
Best Taste and Best Price
In this article, I presented absurd situations that even so failed to be the ultimate “killer” imports. The last, most absurd situation will be the one in which the following applies simultaneously:
- All Czechs have the same taste preferences
- All Czech roasters produce coffee that tastes best to Czechs
- All Czech roasters sell coffee for 0 CZK/kg
Will this absurd trinity be enough to stop imports? I believe that even that will not be enough. Apart from taste and selling price, other aspects may also be reflected in the coffee sales that take place. For example, I may want to gift my loved ones with coffee that is interesting in other ways than just taste (and zero price). Thus, the decisive ratio will not only be the price/taste ratio, but many other characteristics will also enter into it, each of which may contribute to the result differently. While how the coffee is packaged may play a role for one, the whole story of the coffee will play a role for another.
In other words, consumers may have different preferences across different coffee characteristics, and these characteristics themselves may have different weights for them in the final decision.
We have seen today with ordinary coffee how complex market conditions can be. Such a market can hardly be managed in any way. Indeed, the preferences of its players are completely outside the scope of any complete analysis. If you are more interested in how the free market “discovers” and takes people’s preferences into account, I recommend reading the book Introduction to Austrian Economics by Steve Horwitz, which goes into this topic in depth in two hours of reading.
And if you are drinking coffee, enjoy your coffee.
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