Tariffs and the Price of Coffee

I wrote an article earlier called Inflation, Debt, and the Price of Coffee, using coffee to illustrate the impact of inflation. So what do the Liberation Day tariffs have to do with the price of coffee?

Most coffee used in the United States is imported. Hawaii produces less than one-tenth of one percent of the world’s coffee, and the rest of the United States is mostly unsuitable for growing coffee. One of the reasons for the new tariffs is to encourage production in the United States of the protected item, but with coffee, that isn’t possible.

The United States imports about $1B of coffee every year from many countries. And there are new tariffs on anything imported from them:

• Brazil: 10%

• Vietnam: 46%

• Colombia: 10%

• Indonesia: 32%

• Ethiopia: 10%

• Uganda: 10%

• India: 26%

• Honduras: 10%

• Peru: 10%

• Mexico: 25%

Coffee used to be duty-free, an exception to tariffs. So the tariffs are a brand new cost, and they are complicated because they vary depending on which country the coffee comes from.

Tariffs are paid by the “importer”. In the case of coffee, the importer is any business that imports the beans. That might be the owner of the local coffee shop. If the owner has been buying coffee from different countries, which many shops do, they will have to pay different tariffs based on the coffee’s source.

The importer is the one that writes the check for the tariffs, but the real question is who is going to bear the penalty of the new cost?

The cost might be borne by the exporter. The exporter could cut the price they sell beans for to offset some or all of the tariff. If they do that, prices would stay the same to the local coffee shop. But the exporter most likely would offset that lower price by reducing the price they pay to the farmers that grow the coffee. Coffee is often grown in very poor areas. In many cases coffee farmers already operate on very thin margins. In this example, the farmer would bear the cost.

The cost could be borne by the importer. The coffee shop owner could pay the new tariff and just eat that cost. They will make less money or try to make the shortage up somewhere else.

Or the coffee shop owner could decide they can’t afford to absorb the tariff cost and pass it on to their patrons as a higher price for a cup of coffee.

That’s a really simple example. Things are much more complicated than that. Coffee is a commodity. There is a world market for coffee, and a world price that can fluctuate wildly for lots of reasons other than tariffs. Arabica coffee prices surged by 13% in December, a 60% year-over-year increase, according to the World Bank. Coffee futures have been high since 2011 due to bad weather in Brazil and Colombia.

Tariffs could have unexpected impacts on world coffee prices. If American consumers have to pay more for coffee , and start buying less after tariffs trickle through the system, there would be less demand in the world market, which might push world prices down. Coffee producers could go out of business if prices go down, pushing prices back up.

It’s also more complicated for the coffee shop owner. The price may go up for the coffee, but other tariffs mean other prices may be going up too, the coffee bags, the roasting equipment, pretty much everything. Maybe the owner could absorb the coffee price increase but not all the other increases. The coffee shop owner might even go out of business.

We generally think of inflation as the cost that consumers pay. So will the tariffs cause inflation? It’s possible somebody else will absorb the cost, but it certainly looks likely that the end result of tariffs will be a higher price for a cup of coffee.