- In theory, trade liberalisation fosters economic growth by promoting competition, increasing access to international markets, and driving innovation
- Vietnam’s coffee production and exports skyrocketed as a result of trade liberalisation and the “Doi Moi” economic reforms in 1986
- However, the benefits of trade liberalisation are not equally distributed – and small-scale farmers often lose out
SMALLHOLDER FARMERS encounter many obstacles when it comes to selling their coffee. Logically, removing barriers to trade should make the process easier, and even incentivise more farmers to produce more coffee. But is the reality really that simple?
The general argument in favour of trade liberalisation is that it opens up an economy to the global market in a number of ways. Firstly, international buyers not only represent a larger market, but also a more competitive one. This should mean that farmers are more easily able to sell their coffee for better prices. It also means that a country’s coffee sector will become more attractive to foreign and domestic investment.
An example of this can be seen in Vietnam, where the coffee sector shifted away from being largely centralised and state-controlled in the 1980s. Alongside policies pushing to liberalise trade, public and private sector investment has helped to create a more competitive coffee sector. Today, Vietnam is the world’s second-largest coffee producer – famed for its productivity.
But how exactly does trade liberalisation mobilise the market? And are there any pitfalls to avoid?
Liberalisation & the coffee industry
In a non-liberal trade environment, there are typically only a handful of buyers who often have exclusive rights to purchase coffee – and the state enforces certain regulations to ensure coffee travels through these sanctioned channels. These regulations vary heavily from country to country, but they may take the form of price controls, restrictions on volume, licensing, marketing, and so on.
For example, Kenya’s coffee sector historically operated with a centralised system designed to control and regulate the production and sale of coffee. Prices for coffee were generally set by the government or the Coffee Board, rather than by market forces. This system typically did not reflect global coffee pricing, often leading to lower incomes for farmers.
The government and the Board also controlled export licences, often limiting who could sell coffee internationally to a few government-approved firms. This created an oligopoly where a few companies controlled the majority of coffee exports. Other mandatory steps in the supply chain – such as the involvement of “marketing agents” – have similarly been criticised for limiting farmers’ potential earnings. Reforms in previous years sought to address this situation – liberalising the country’s coffee industry – but there is still more work to be done.
Ultimately, trade liberalisation must be complemented with some level of intervention at a policy level. Similarly important is the presence of a strong coffee association – best exemplified by the FNC in Colombia and BSCA and ABIC in Brazil. Altogether, this can then form a framework which supports coffee farmers, co-operatives, and exporters to benefit from more liberal trade.
In other words, it can’t be as simple as dropping trade barriers, taking a laissez-faire approach, and expecting a country’s economy to self-regulate. These policies must be nurtured and incorporated into a system that supports everyone in the industry.
So what does trade liberalisation do?
Implementing more liberal trade policies does two fundamental things. Firstly, it reduces the restrictions on the sale of coffee. By moving away from the mechanisms that see coffee exchanges and large government bodies such as the Coffee Board setting prices, market forces play a greater role and reward farmers based on a global economic standard – in other words, the C price.
Secondly, it increases the pool of buyers by improving access to international markets. This could mean not having a list of government-approved buyers, for instance.
Trade liberalisation also often means creating incentives to encourage more international trade. For example, reducing tariffs makes a country’s coffee exports more competitive on the global market.
However, while this all broadly points towards a more productive coffee industry with a higher value of exports, the internal systems for getting coffee to market are too intricate to unpick with sweeping liberal trade policies. Simply put, farmers must still battle local bureaucracy to sell their coffee, and many smallholders still lack the resources to benefit from more direct routes to market anyhow.
As such, while trade liberalisation is a start, it’s not everything. Farmers need support beyond a more liberal trade environment.
It can be particularly difficult in regions like Kenya where the majority of coffee farmers are rural smallholders without any meaningful producer network support or transport infrastructure. In contrast, larger farms have a natural advantage in that they often do have access to the resources needed to benefit from more buyers on the international market.
“When trade is more liberal, a great deal of care needs to be taken to ensure the participation of local SMEs and businesses and smallholder farmers,” says coffee economist Dagmawi Iyasu. “Otherwise, in the long term, there is minimal value. There is a need to develop an ecosystem that can support farmers and local businesses to add value and retail coffee for both local consumption and export.”
“In an ideal world, trade liberalisation should be designed to protect the overall economic stability of a country, agricultural sector, coffee sector, and communities,” says Mani Keleher, head of operations at Tatama Coffee. “The reality is closer to supporting the interests of particular sectors or groups.”
At the same time, there is an argument that trade liberalisation can result in a race to the bottom in terms of labour and general social standards as countries compete to attract foreign investment. This can manifest at a local policy level, or labour standards at farm level as companies/producers attempt to become more efficient, cost-effective, and ultimately attractive to international buyers. One estimate suggests that 30 million jobs could be lost in developing countries as a result of trade liberalisation and related factors.
Ultimately, without additional support, trade liberalisation may not have the intended effect on improving smallholders’ livelihoods.
Not a complete solution
Trade is by its very nature a two-way street. Farmers may not benefit from reduced domestic trade barriers if the higher prices they can charge on the international market are offset by restrictions imposed by consuming countries – for example, considering incoming EU deforestation laws that will increase farmers’ production costs.
“Trade liberalisation needs to be bidirectional,” says Dagmawi. “Currently, in many cases, the barriers are placed on farmers and businesses from producing countries by consuming countries. A good example is certification requirements including the recent EU regulations, which will likely increase the cost of doing business for small farmers and businesses.”
Furthermore, a study in Ethiopia highlights the fact that a government that liberalised trade cannot necessarily bank on higher export earnings, especially if it relies on a commodity as volatile as coffee.
This goes to show that trade liberalisation is ultimately not a one-size-fits-all solution for “struggling” coffee origins. Individual countries will have individual conditions that will require a tailored response – this may mean, for example, other changes at policy level to support small-scale farmers, ensure a level of inclusivity, and keep the whole system moving equitably.
While liberalising trade can in many cases mobilise a country’s coffee sector, it is often the starting point rather than a complete solution. As with many other areas of the coffee industry, first and foremost, it’s key to recognise that a complex problem requires a complex answer.
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