shannon

Economic Stimulation: The History and Hope of Coffee in Development

Seth W. Shannon∗

I. INTRODUCTION......................................................................................... 170

II. BACKGROUND .......................................................................................... 172

A. Economics ......................................................................................... 172

B. History .............................................................................................. 173

1. International Coffee Agreements ................................................ 174

2. Coffee Retention Plan ................................................................... 177

C. The Current State of the Market ..................................................... 178

1. Structure ...................................................................................... 178

2. Labor Issues ................................................................................. 180

3. Producers’ Reactions to Market Conditions ............................... 180

4. Recent ICAs.................................................................................. 181

III. FAIR TRADE .............................................................................................. 183

A. Origins and Growth ......................................................................... 183

B. Purpose and Goals ........................................................................... 184

C. Criticisms and Obstacles ................................................................. 186

IV. U.S. GOVERNMENTAL RESPONSE ............................................................ 188

V. ORGANIZATIONAL SUGGESTIONS ............................................................. 189

A. The Market as the Background of Suggestions .............................. 189

B. Suggestions for the ICO ................................................................... 190

C. Suggestions for Fair Trade .............................................................. 191

VI. MAXIMIZING THE POTENTIAL OF COFFEE ................................................ 192

A. Traditional Uses .............................................................................. 192

B. New Uses .......................................................................................... 194

C. Producer Diversification .................................................................. 195

VII. CONCLUSION ............................................................................................ 196

∗ J.D. Candidate, The University of Iowa College of Law, May 2009.

170 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 I believe humans get a lot done, not because we’re smart, but because we have

thumbs so we can make coffee.1

I. INTRODUCTION

Coffee is a relatively simple product by U.S. standards. It is served in every restaurant and kept on hand in most households.2 However, while coffee is relatively cheap, available, and convenient, it is also highly valuable. The number and frequency of people insisting on a cup of coffee in the morning or relying on Starbucks to get them through the day is evidence of coffee’s worth. Yet, coffee is valuable in a much more substantial way. Farmers in the poorest parts of the world—Africa, Latin America, and Southeast Asia—depend on coffee for their livelihood.3 At least twenty-five million families in these areas depend on the coffee industry to survive.4 Additionally, coffee is the second most profitable5 and internationally traded6 commodity behind oil. This unique relationship between the size of the coffee industry and the fact that some of the world’s poorest populations work in that industry makes it a valuable tool for economic development. Another critical factor in coffee’s role in economic development is that the world’s wealthiest nations, specifically Japan, the European Union, and the United States, consume most of the world’s coffee.7 The United States alone consumes 20 percent of the world’s coffee.8

1 E-mail from Adele Shannon to author (July 6, 2008, 02:46:00 CST) (on file with author) (citing Flash Rosenberg). 2 Seinfeld: The Library (NBC television broadcast Feb. 22, 2008), available at http://www. stanthecaddy.com/sounds-mr-bookman-discuss.html. As the Seinfeld character Lt. Bookman said, “Who doesn’t have instant coffee? . . . You buy a jar of Folger’s Crystals, you put it in the cupboard, and you forget about it. Then later when you need it, it’s there.” Id. 3 Grace H. Brown, Note, Making Coffee Good to the Last Drop: Laying the Foundation for Sustainability in the International Coffee Trade, 16 GEO. INT’L ENVTL. L. REV. 247, 249 (2004). 4 INT’L COFFEE ORG., INTERNATIONAL COFFEE ORGANIZATION: CHANNELING INTERNATIONAL COOPERATION 1 (2007), http://dev.ico.org/documents/benefitse.pdf [hereinafter INTERNATIONAL COOPERATION]. 5 Brown, supra note 3, at 249. 6 Amelia M. DeAngelis, Note, Coffee, Mexico’s Other Bean: An Examination of the Globalization of the Coffee Industry, Its Impact on Mexican Villages, and the Possibility of Surviving the Grind, 3 WASH. U. GLOBAL STUD. L. REV. 887, 888 (2004). 7 INTERNATIONAL COOPERATION, supra note 4. Despite the consistent pattern of producing countries generally being poor and consuming countries generally being rich, there is no suggestion of any causal relationship between these factors. 8 DANIEL JAFFEE, BREWING JUSTICE: FAIR TRADE COFFEE, SUSTAINABILITY, AND SURVIVAL 15 (2007).

Examining the coffee market thus provides an extremely relevant opportunity to bring meaningful development to some of the world’s neediest communities.

Winter 2009] ECONOMIC STIMULATION OF COFFEE IN DEVELOPMENT 171

Due to the size of the coffee industry in the producing countries,9 it is able to develop those economies through its significant use of labor, attraction of foreign investment, development of infrastructure, and encouragement of general industrial growth.10 Development of these countries also would bring benefits beyond those their individual economies experienced. As these economies develop, they would be able to buy more U.S. exports.11 Additionally, citizens would be less likely to resort to terrorism and drugs.12 Immigration would be likely to stabilize.13 The significant role the coffee industry played in bringing about the abolition of slavery in Brazil demonstrated its social usefulness.14

9 While the people on the first link of the coffee chain are more technically “farmers,” they are typically called “producers” to distinguish between producing and consuming countries. There are, however, several kinds of “production” throughout the chain. See generally id. 10 PAULO PAIVA, VICE PRES. FOR PLANNING & ADMIN., INTER-AM. DEV. BANK, ECONOMIC AND SOCIAL DEVELOPMENT IN LATIN AMERICA: THE ROLE OF COFFEE 3 (May 18, 2000), available at http://www.ico.org/event_pdfs/paiva.pdf (citing WERNER BAER, THE BRAZILIAN ECONOMY, GROWTH AND DEVELOPMENT (1983)). 11 The Coffee Crisis in the Western Hemisphere: Hearing Before the Subcomm. on the W. Hemisphere of the House Comm. on Int’l Relations, 107th Cong. 4 (2002) (statement of The Hon. Sam Farr, a Rep. in Cong. from the State of Cal.) [hereinafter Coffee Crisis]. 12 Id. at 63 (statement of Gabriel Silva, General Manager of the Nat’l Fed’n of Coffee Growers of Colom.). 13 Id. 14 PAIVA, supra note 10, at 3. For more information on coffee and slavery in Brazil, see generally MARK PENDERGRAST, UNCOMMON GROUNDS: THE HISTORY OF COFFEE AND HOW IT TRANSFORMED OUR WORLD (1999).

This Note will analyze the situation of the coffee industry relating to economic development and, based on that analysis, make suggestions for how relevant parties can better utilize coffee to promote economic development. An examination of the state of the coffee industry is complex, beginning with the economics unique to coffee. This Note will also discuss the relevant history of the coffee industry, specifically relating to the International Coffee Agreements. This history has brought about the current market as well as the burdens it places on producers. The presence of the Fair Trade movement highlights the need for action regarding the coffee market. Furthermore, the Fair Trade movement is relevant to an analysis of coffee and economic development. This Note will explore the significance of the Fair Trade movement in this context. This Note will then address how the United States has responded to the challenges of the coffee market. Finally, this Note will offer suggestions, based on this background, of how to use coffee as an economic stimulant.

172 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169

II. BACKGROUND

A. Economics

Understanding the economic characteristics of coffee is essential to comprehend its use in development. The way that farmers grow coffee is intertwined with the economic characteristics. The coffee tree bears coffee berries perennially but does not begin producing for three or four years after planting and is not fully productive until five or six years later.15 Thus, the expense of clearing land and planting trees, which takes at least three years to provide a return, prevents farmers from capitalizing on high coffee prices in the short term.16 When coffee prices rise enough that farmers believe planting more trees is worthwhile, the intended result of more coffee being produced is not immediately apparent. By the time the farmers are able to produce more coffee, the price may have dropped.17 This production lag creates a significant dependency on stockpiling.18 These characteristics of the coffee tree also create barriers to exiting the market because the minimal benefit derived from continued harvesting is typically greater than the cost of uprooting the trees and finding another livelihood.19

Therefore, the elasticity of the supply of coffee is low, meaning the production does not significantly change even if the market price changes.

20 In the countries that depend on coffee and where most of the growing is done on small farms, the supply of coffee is particularly inelastic; that is, production is particularly likely to remain steady even if the price change is substantial.21

At the same time, consumers, particularly American consumers, are reluctant to change their coffee consumption habits even if the price changes.

22 However, consumers are isolated from severe price drops, and the cost of a pound of beans is relatively constant compared to the cost at which coffee is produced and traded.23

15 J. DE GRAAFF, THE ECONOMICS OF COFFEE 58 (1986). 16 Matthew J. Foli, International Coffee Agreements and the Elusive Goal of Price Stability, 4 MINN. J. GLOBAL TRADE 79, 83 (1995). 17 DE GRAAFF, supra note 15, at 258. 18 Id. 19 PAUL STREETEN & DIANE ELSON, DIVERSIFICATION AND DEVELOPMENT: THE CASE OF COFFEE 16 (1971). 20 Brown, supra note 3, at 250. 21 Id. 22 Foli, supra note 16, at 84. 23 Brown, supra note 3, at 250.

This problem of price variability has intensified today as new producers enter the market and increase the supply. Despite the influx of gourmet coffee and coffee shops, the short-term demand


for coffee over the past thirty years has decreased.24 Therefore, without a comparable growth in demand,25 the increase in supply has resulted in a drop in price for the producers.26 In 1962, the per capita consumption in the United States was 3.12 cups a day, but it dropped to 1.87 cups in 1993.27 The rate of consumption continued to drop to 1.18 cups per day by 2003.28

Coffee, much like other agricultural products, cannot react to price fluctuations in the short term.

29 When prices decrease, producers often do not reduce production because of the fixed and variable costs associated with doing so.30 Even if there is a dramatic drop in prices relative to the cost of production, producers are unlikely to reduce production.31 Producers can increase production and take advantage of long periods of high prices, but to capitalize on immediate price increases, they must rely on previously accumulated stockpiles.32

B. History

The history of the coffee market greatly influenced its current structure as well. After World War II, African and Latin American countries other than Brazil increased production, and the demand for coffee increased in Europe.33 Producers responded by increasing the supply of coffee.34 The governments of producing countries attempted to protect themselves from price declines due to oversupply by limiting their exports, but this resulted in massive stockpiles.35

24 Foli, supra note 16, at 84 (citing FOREIGN AGRIC. SERV., U.S. DEP’T OF AGRIC., NO. 2–93, WORLD COFFEE SITUATION 14 (1993)). 25 PAIVA, supra note 10, at 8. 26 Id. 27 Id. at n.30. 28 See World Res. Inst., Earthtrends: The Environmental Information Portal, http://earthtrends. wri.org/searchable_db/index.php?theme=8 (select “Agricultural Production: Coffee, total production” from menu, then select “World” from menu, then select “2002-2003 from menu) (last visited Feb. 12, 2009) (per capita consumption is 4.2 kilograms per year). See also Coffeeresearch.org, Coffee Brewing, http://www.coffeeresearch.org/coffee/brewing.htm (last visited Feb. 12, 2009) (in brewing coffee, there are fifty-five grams of coffee per liter). 29 Foli, supra note 16, at 81. 30 Id. at 81–82. 31 Id. at 82 (citing Richard Bilder, The International Coffee Agreement: A Case History in Negotiation, 28 LAW & CONTEMP. PROB. 328, 331 (1963)). 32 Id. at 82–83. 33 DE GRAAFF, supra note 15, at 63–64. 34 Id. at 64. 35 Id.


1. International Coffee Agreements

The continued rise in demand and low elasticity in the coffee trade eventually resulted in increased supply and a drop in price.36 Producing countries sought an agreement with the consuming countries to stabilize prices.37 The United States initially rejected any agreement that would establish prices because it would be contrary to free market ideology.38 However, the United States eventually consented when it seemed that Latin American countries might resort to communism if the market continued to treat them unfavorably.39 Importers also feared that economic disruption would lead to difficulties in obtaining an adequate supply.40 These factors led to the creation of the International Coffee Agreement (ICA). The goal of the ICA was to avoid extreme price and supply fluctuations.41 The primary method of trying to reach these goals was through export regulations.42

Beginning in 1962, the original ICA had a duration of five years.

43 The

1962 ICA established six objectives: (1) to create “a reasonable balance” for supply and demand in order to provide an “adequate” supply to consumers and a market for producers “at equitable prices”; (2) “to alleviate the serious hardship” to both producers and consumers that resulted from extreme price fluctuations; (3) to help the development of countries “thereby helping to bring about fair wages, higher living standards, and better working conditions”; (4) to maintain prices and increase consumption to increase the purchasing power of producing nations; (5) to encourage coffee consumption; and finally, (6) to generally “further international co-operation in connexion [sic] with world coffee problems.”44

To meet these objectives, the 1962 ICA set export quotas to ensure that prices would not drop below the 1962 price.

45 These quotas were based on the producing country’s historical share of world exports.46

36 Brown, supra note 3, at 250. 37 Id. 38 Id. at 250–51. 39 Id. 40 Foli, supra note 16, at 86 (citing Nat’l Coffee Ass’n of U.S., NCA Special Bulletin, No. 259 at 124–27 (1992)). 41 Id. at 84. 42 M.TH.A. PIETERSE & H.J. SILVIS, THE WORLD COFFEE MARKET AND THE INTERNATIONAL COFFEE AGREEMENT 47 (1988). 43 International Coffee Agreement 1962, Dec. 20, 1963, 14 U.S.T. 633, 647 U.N.T.S. 3 [hereinafter ICA 1962]. 44 Id. at art. 1. 45 Id. at art. 27(2). 46 Id. at art. 28(1).

Countries with low


per capita consumption and considerable potential for expansion were exempted from limitations.47

The ICA created the International Coffee Organization (ICO) to administer and supervise the agreement.

48 The ICO is the “highest authority” and includes all signatories of the ICA.49 The ICA gave both exporting and importing members equal power within the ICO by assigning each group 1000 votes.50 The ICA distributed votes to individual countries according to the proportional export or import volume of coffee of each participating country.51 The basic structure of the ICO has remained consistent throughout the subsequent ICAs.52

This original ICA suffered from several serious shortfalls. First, while it required exported coffee to have a Certificate of Origin to control the quotas, it technically did not require the certificate to be valid, so exporting countries simply used invalid certificates to nullify the quotas.

53 Second, the ICA encouraged growth in consumption by excluding countries with low consumption rates from the quota requirements.54 However, producers would simply ship coffee to these exempted countries and then redirect it to nonexempt, traditional consuming countries, thereby bypassing the quota limitations.55 Third, in line with the importers’ desires, the quotas kept prices below the designated level, but because there were no controls on production, coffee stockpiles increased from 6.5 million bags in the mid-1950s to 83 million bags in 1966.56

The members of the ICO renewed the ICA in 1968.

57 While the objectives

of the renewed ICA remained the same,58

47 Id. at art. 40, Annex B. 48 ICA 1962, supra note 43, at art. 7(1). 49 Id. at art. 8. 50 Id. at art. 12. 51 Id. 52 See International Coffee Agreement 2007, Chapter IV, Oct. 16, 2007, available at http://dev.ico. org/documents/icc98-6e.pdf [hereinafter ICA 2007]. 53 RICHARD L. LUCIER, THE INTERNATIONAL POLITICAL ECONOMY OF COFFEE: FROM JUAN VALDEZ TO YANK’S DINER 129 (1988). 54 PIETERSE & SILVIS, supra note 42, at 64. Japan, now one of the biggest consuming nations, was on this exempted list. ICA 1962, supra note 44, at art. 40, Annex B. 55 PIETERSE & SILVIS, supra note 42, at 64. 56 Foli, supra note 16, at 88 (citing JAMES MWANDHA ET AL., COFFEE: INTERNATIONAL COMMODITY AGREEMENTS 114 (1985)). In the coffee trade, a bag of coffee weighs sixty kilograms, or about 132 pounds. Shruti Date Singh, Coffee Falls on Forecast Showers May Help Brazil Crop, BLOOMBERG, Nov. 2, 2007, http://www.commoditylog.com/2007/11/05/robusta-coffee-futures-may-decline/. 57 International Coffee Agreement 1968, July 10, 1968, 19 U.S.T. 6333, 647 U.N.T.S. 38. 58 Id. at art. 1.

the ICO slightly altered the means

176 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 to achieve them. The 1968 ICA instituted the indicator price mechanism, whereby if the world price rose above a predetermined ceiling price, the ICA would increase quotas, and if world prices fell below a specified floor price, the ICA would decrease quotas.59

This ICA was in effect from 1968 until 1972.

60 The market was without

an agreement between 1972 and 1975, during which time prices remained stable.61 However, the favorable market conditions did not last. In 1975, a major frost struck Brazil and wreaked havoc on producers, causing market prices to rise 500 percent from 1975 to 1977.62

These conditions brought the parties back to the bargaining table. They renewed the ICA in 1976 and added new provisions.

63 The export quotas were established as 70 percent fixed and 30 percent variable.64 The ICA determined the variable portion of each country’s quota based on the amount of coffee it produced in comparison to other producers.65 This variable portion was an incentive to increase production, particularly for smaller producers. The indicator price mechanism instituted in the 1972 ICA was also reinstated.66

The ICO renewed the ICA again in 1983 with essentially the same provisions.

67 Although these provisions had been in effect for thirteen years, the ICO did not renew the 1983 ICA when it expired in 1989.68 A principal reason for this development was that the variable quota created an overly powerful incentive for continued production as surplus stocks grew and had to be sold at discounted prices to non-member countries.69 Another major problem was that the ICO failed to enforce the stipulated penalties for noncompliance.70

59 Id. at arts. 33, 35. 60 LUCIER, supra note 53, at 148. 61 Foli, supra note 16, at 90. 62 Id. 63 International Coffee Agreement 1976, Sept. 21, 1976, 28 U.S.T. 6401, 1024 U.N.T.S. 22 [hereinafter ICA 1976]. 64 Id. at art. 35. 65 Id. 66 Id. 67 Foli, supra note 16, at 91. 68 Id. at 93. 69 Id. at 92 (citing RANDAL G. STEWART, COFFEE: THE POLITICAL ECONOMY OF EXPORT INDUSTRY IN PAPUA NEW GUINEA 262 (1992)). 70 Id. (citing ED&F MAN COFFEE LTD., THE INTERNATIONAL COFFEE AGREEMENT: THE LAST CHANCE! 11 (1991)).

Additionally, the demand for gourmet coffee increased


during the 1980s.71 While this increased demand should have been a blessing for producers, the fixed quotas worked to prevent producers from meeting the new demand.72 Because climate and altitude determine the type of bean grown, generally all of the beans grown within a country are similar.73 The fixed quotas did not allow those countries experiencing an increase in demand for their type of bean to meet that demand. Importers thus claimed that they adequately could not satisfy the gourmet demand and lobbied to prevent renewal of the Agreement.74 Finally, because the spread of communism to Latin America was less threatening, the United States considered using coffee as a reward for cooperative governments, which would have been difficult under the ICA structure.75 Because the quota structure encouraged stockpiling, when the ICA expired in 1989, producers flooded the market.76

As it turned out, the factors that led to the demise of the ICA in 1989 were not strong enough to completely abolish it. Participating countries signed a new ICA in 1994, though they had no intention of regulating prices.

77 Instead, they only offered an opportunity for discussion between parties and encouraged education in coffee.78

2. Coffee Retention Plan

In 1993, producing nations banded together in attempt to control the production part of the market in the absence of an ICA.79

71 Id. (citing Mark Robichaux, Boom in Fancy Coffee Pits Big Marketers, Little Firms, WALL ST. J., Nov. 6, 1989, at B1). 72 PIETERSE & SILVIS, supra note 42, at 94. 73 While an elite connoisseur might require greater specificity, coffee beans are generally categorized as either arabica or robusta. Robusta are slightly harsher and usually end up in soluble form, while arabicas are used for quality cups of coffee. Ethel A. Starbird, The Bonanza Bean: Coffee, NAT’L GEOGRAPHIC, Mar. 1981, available at http://www.nationalgeographic.com/ coffee/article1.html. Arabicas also require more stringent growing conditions such as rich soil, reliable rainfall, and an altitude between 3000 and 6000 feet. Id. About 70 percent of the world’s coffee production is arabica. Int’l Coffee Ass’n, Botanical Aspects, http://www.ico.org/bo tanical.asp (last visited Feb. 12, 2009). Arabica coffee is produced in Latin America, Central America, East Africa, India, and Indonesia. Id. Robusta is found in West and Central Africa, Southeast Asia, and Brazil. Id. 74 Foli, supra note 16, at 93. 75 JAFFEE, supra note 8, at 42. 76 Foli, supra note 16, at 93 (citing DONNA U. VOGT, U.S. CONG. RES. SERV., INTERNATIONAL COFFEE AGREEMENT: A STATUS REPORT 3 (No. 90–159, 1990)). 77 Int’l Coffee Org., History, http://www.ico.org/history.asp (last visited Aug. 27, 2008) [hereinafter History]. 78 Id. 79 Foli, supra note 16, at 95.

This cooperation resulted in the Coffee Retention Plan. Their goal was to lower exports by

178 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 requiring producing countries to store a percentage of their product.80 A price indicator determined such percentage; when the market surpassed the designated price, surpluses were released.81 The Coffee Retention Plan required a valid Certificate of Origin for coffee to be exported.82 It also established a system to severely punish cheating.83

Initially, the Coffee Retention Plan succeeded in raising prices and reducing stockpiles.

84 However, members failed to comply with it and suspended it in 2001.85 The plan lacked a sufficient number of producing countries to succeed.86 Member states found themselves at a disadvantage when Vietnam, who was not a member to the Plan, began increasing its production. Over the first four months of 2001, Vietnam exported 33 percent more than it had during the same period in the previous year.87 The price of coffee dropped 20 percent during this same time.88

C. The Current State of the Market

These factors—the nature of coffee production, the identities of the producing countries and the consuming countries, and the past effects on the market—have created the current conditions of the market, which in turn, will determine how interested parties should act in the future.

1. Structure

The coffee market is like a pyramid with many producers at the bottom and fewer intermediaries, exporters, and processors who hold the power at the top.89 The first intermediaries between farmers and consumers are “coyotes” who collect coffee from several producers and sell it to exporters.90

80 Id. (citing 1993 Coffee Retention Plan arts. 8–14). 81 Id. (citing 1993 Coffee Retention Plan art. 16). 82 Id. at 97 (citing 1993 Coffee Retention Plan art. 22). 83 Id. (citing 1993 Coffee Retention Plan arts. 27–32). 84 Foli, supra note 16, at 98. 85 Adrienne Roberts, Commodities & Agriculture: Coffee Retention Plan Suspended by ACPC, FIN. TIMES, Sept. 26, 2001, at 36. 86 The Coffee Retention Plan was signed by twenty-eight countries. Foli, supra note 16, at 80. The ICO, on the other hand, includes forty-five producing countries. Int’l Coffee Org., Members of the International Coffee Agreement 2001, http://www.ico.org/listmembers.asp (last visited Feb. 12, 2009). 87 World Coffee Retention Package No Longer Operational, VIETNAM INV. REV., May 21, 2001, at 4. 88 Id. 89 PAIVA, supra note 10, at 9. 90 Brown, supra note 3, at 254.

Due to their isolation and lack of resources, the farmers have little idea how much of their coffee eventually is sold for and are at the mercy of the coyotes,


who dictate the price of coffee at this level.91 As the coffee passes from the farmer through middlemen before reaching the consumers, the parties involved have varying levels of bargaining power; the gap is especially evident at the lowest level as coyotes generally have better access to information than producers.92 No matter what consumers are willing to pay, or how much of a profit each supplier demands, the price fluctuations that would otherwise be created by varying supply and demand can be adjusted at the farmer-to-coyote level to maintain the disparity. Thus, each link in the chain can be relatively certain of its profit, except for the farmer.93 However, middlemen seem to be necessary in some capacity, as they perform valuable functions such as providing credit, buyers, and transportation.94

Everyone in the coffee industry appears to envy everyone else. Growers object to the brokers making a commission just by picking up the phone to sell their beans to exporters. The brokers think the exporters have it made, but exporters feel at the mercy of importers, who sell to rich Americans. Importers, caught in savage price swings, feel pinched with a tiny profit margin, but they think the roasters make millions. Roasters see retailers doubling the price of their roasted beans, while coffee bars convert the beans to expensive beverages. Yet the coffeehouse owner is working fifteen-hour days, six days a week, fighting the health inspector and the Starbucks that just opened down the street.

One author describes the tension between the value of middlemen and the frustration it causes in the following way:

95

Coffee prices are highly volatile, with prices dropping below forty-five cents.

96

91 Id. 92 Id. This is not to say that coyotes are enjoying large profits or even that they make their money easily. Farmers generally have no one else to sell to, whereas coyotes have better bargaining positions than farmers. Therefore, when the market drops, the burden is passed all the way down the chain. JAFFEE, supra note 8, at 75–78. 93 Id. 94 INTER-AM. DEV. BANK, U.S. AGENCY FOR INT’L DEV., & THE WORLD BANK, MANAGING THE COMPETITIVE TRANSITION OF THE COFFEE SECTOR IN CENTRAL AMERICA 10 (2002) reprinted in Coffee Crisis, supra note 11 [hereinafter TRANSITION]. 95 PENDERGRAST, supra note 14, at 404 n.5. 96 TRANSITION, supra note 94, at 1.

When the price paid to producers drops, the price to consumers does not drop because the cost of the actual commodity is a very small portion of

180 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 the total cost of the cup, bag, or can.97 Most of the extra cost comes from the transaction costs of middlemen and export processes.98

2. Labor Issues

Aside from the wages paid to farmers, the coffee industry has the ability to affect citizens of developing countries through the size and conditions of the employment it offers. In producing countries, governments tend to provide loan assistance to medium and large-scale farmers.99 The laborers do not benefit necessarily from such assistance, even though they often produce coffee on their own small plots of land.100 Thus, when producers are adversely affected by something unforeseen like a frost, it affects small producers in its primary effect on the coffee trees, but also secondarily as large producers lay off some of their laborers.101

3. Producers’ Reactions to Market Conditions

Difficult market conditions have forced farmers to react. Some have abandoned their farms to find other work.102 Some farmers, or their teenage sons, leave their farms and families to seek work in the United States.103 In the Chiapas region of Mexico alone, 2000 families leave each month to look for work in northern Mexico or the United States.104 At least 25,000 acres have been abandoned in both El Salvador and Honduras.105

97 Coffee Crisis, supra note 11, at 54 (statement of Adolfo Franco, Ass’t Adm’r for Latin Am. & the Caribbean, U.S. Agency for Int’l Dev.). 98 Id. at 55. A hypothetical breakdown of the price structure of coffee is as follows: the farmer is paid USD 1.30 for a pound of beans [this would be a Fair Trade price]; freight, storage, and handling costs eleven cents; 18 percent of the weight is lost during roasting, adding thirty-one cents; fuel for roasting costs twelve cents; packaging costs twenty-five cents; additional shipping costs thirty cents; USD 2.15 is needed to cover the overhead for the roaster and distributor; twenty-four cents is added for profit. PENDERGRAST, supra note 14, at 403–04. It thus costs USD 4.78 to deliver a pound of roasted coffee to a specialty retailer. Id. at 404. The rest of the price covers the cost and profit for the retailer. Id. If the beans are sold to a coffee shop, the proprietor may get forty cups of coffee from a pound, which equals USD 40 to USD 80 per pound in beverage form, minus the costs. Id. 99 TRANSITION, supra note 94, at 26. 100 Id. 101 Id. 102 Elizabeth Neuffer, The Shadows of Globalization: The Coffee Connection: Thousands of Miles from Boston Breakfast Tables and Fast-Food Restaurants, at the End of a Global Trade Network, Guatemala’s Farmers Are Barely Scraping By, B. GLOBE, July 19, 2001, at A1. 103 DeAngelis, supra note 6, at 899–900. 104 JAFFEE, supra note 8, at 47. 105 Id.

Violence often results, either as a reaction against governmental regulations or due to


extreme poverty and crime.106 Often, impoverished farmers will switch from producing coffee to producing drugs.107

4. Recent ICAs

The ICO was alive during this period, but it had become relatively inactive. A mostly administrative ICA entered into force in 2001;108 however, the 2007 ICA superseded it.109 This most recent ICA is significantly different than previous versions. Member countries agreed on new objectives for the 2007 ICA. These included: (1) promoting international cooperation regarding coffee issues; (2) offering a forum for consultation between governments, and with the private sector, about coffee issues; (3) encouraging sustainable production; (4) creating a forum to consider the structure of the market; (5) promoting trade of coffee; (6) gathering and sharing coffee-focused research; (7) promoting the consumption of coffee; (8) developing a financial project to benefit the world coffee economy; (9) promoting coffee quality; (10) encouraging food safety measures; (11) promoting programs that would transfer technology within the coffee sector; (12) “encouraging members to develop and implement strategies to enhance the capacity of local communities and small-scale farmers to benefit from coffee production, which can contribute to poverty alleviation;” and (13) disseminating financial information that could assist coffee producers.110 The 2007 ICA will be in force for ten years.111

The 2007 ICA contains no provisions regarding price regulation, and much of its purpose is simply to promote the coffee industry.

112

106 DeAngelis, supra note 6, at 900. 107 JAFFEE, supra note 8, at 47. 108 See International Coffee Agreement 2001, Sept. 2000, available at http://www.ico.org/docu ments/agreeme.pdf (last visited Feb. 12, 2009) [hereinafter ICA 2001]. 109 In order to enter into force, the 2007 ICA required that countries holding two-thirds of exporters’ votes and countries holding two-thirds of importers’ votes ratify it. ICA 2007, supra note 52, at art. 42; see supra note 50–52 and accompanying text for a description of the ICO voting structure. Countries had until August 31, 2008 to sign the Agreement and until September 30, 2008 to deposit an instrument of ratification. ICA 2007, supra note 52, at art. 40. As of September 5, 2008, countries representing more than two-thirds of the votes of importing members had signed and deposited an instrument of ratification. STATUS OF THE INTERNATIONAL COFFEE AGREEMENT 2007 AS OF SEPTEMBER 5, 2008, at 4, available at http://www.ico.org/ documents/icc101-3e.pdf. Countries representing over 80 percent of the votes of exporting members have signed the agreement, but only countries representing about 20 percent have deposited an instrument of ratification. Id. The United States signed the agreement and deposited an instrument of ratification. Id. at 6. 110 ICA 2007, supra note 52, at art. 1. 111 Id. at art. 48. 112 See id. at art. 1.

The 2007 ICO members recognize that coffee has the potential to be a valuable tool in the eradication of poverty, but it hesitates to take any dramatic steps towards using that potential. For instance, the ICA states: “[m]embers shall give

182 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 consideration to improving the standard of living and working conditions of populations engaged in the coffee sector.”113

The 2007 ICA does include some substantive sections. For example, it binds members “to seek ways and means by which the obstacles to increased trade and consumption [of coffee] . . . may be progressively reduced.”

However, the 2007 ICA does not offer specific steps to materialize the proposed improvement.

114 At the same time, while “[m]embers recognize” the corresponding benefits “both to exporting and importing members,”115 there is nothing specific put in place and any promotional activities “may be financed by voluntary contributions.”116

The ICA created several forums to foster the dialogue on coffee and economic development. One of these is the Private Sector Consultative Board, consisting of representatives of the private sector of both importing and exporting countries.

Of course, members did not need to sign a multi-national agreement to use their own money to promote the coffee market.

117 Thus, the ICO is not simply comprised of government officials debating on related policy issues; instead, private parties who will be directly affected by any enacted policies also take part in the dialogue.118

Additionally, the ICA created a Consultative Forum on Coffee Sector Finance “to facilitate consultations on topics related to finance and risk management in the coffee sector, with a particular emphasis on the needs of small- and medium-scale producers and local communities in coffee producing areas.”

119 The Forum will include representatives of member countries, intergovernmental organizations, financial institutions, relevant private parties, non-governmental organizations, interested non-member countries, and experts.120 While the substance of the Forum’s discussions seems to be similar to past discussions within the ICO, the impetus for the Forum’s creation appears to come from a desire to ensure that the ICO’s actions are appropriate. The ICA is taking another positive step in promoting studies, surveys, and reports “concerning relevant aspects of the coffee sector.”121

113 Id. at art. 37. 114 Id. at art. 24. 115 ICA 2007, supra note 52, at art. 25. 116 Id. 117 Id. at art. 29. 118 Id. 119 Id. at art. 31. 120 ICA 2007, supra note 52, at art. 31. 121 Id. at art. 34.

In this case, the breadth of the provision may be useful, for it could relate to the research and advancement of many useful aspects of coffee growth, trade, and use.


III. FAIR TRADE

A consideration of the use of coffee for development purposes requires a discussion of Fair Trade. While the ICAs and Coffee Retention Plan represent governmental involvement in the economy to achieve an equitable market, Fair Trade represents a more grassroots movement in which individuals collectively work to positively affect the market. Thus, examining this end of the spectrum is necessary to fully understand the role of coffee in development.122

A. Origins and Growth

Coffee and Fair Trade seem inherently linked to many consumers, even though many kinds of goods are also part of the Fair Trade market. The reason for the strong connection between coffee and Fair Trade probably stems from the fact that consumers can more readily differentiate between brands and origins of coffee than with other products, such as bananas, which have few distinguishing characteristics. Thus, consumers can make a connection between the Central American farmer with a small plot of land and their own consumption with relative facility. Consequently, a consumer can feel like he or she can make a positive impact on the market with a relatively minor purchase.123

Part of the movement toward Fair Trade started with religious organizations forming partnerships with poor communities to start a market for the goods those communities produced.

124 The first Fair Trade organizations began in the middle of the twentieth century.125 The first notable Fair Trade organization dealing specifically with coffee in the United States was Equal Exchange formed in 1986.126

In Equal Exchange’s short life since inception, the growth of Fair Trade coffee has been remarkable. Retail sales went from less than 50 million USD in 2000 to almost 500 million USD in 2005.

127

122 A discussion of Fair Trade would not be complete without looking at environmental factors. However, as this is one of many factors within the development discussion and also a very intricate factor, it is beyond the scope of this Note. For an examination of the environmental issues within Fair Trade, see JAFFEE, supra note 8, at 133–64 (2007). See also Brown, supra note 3. It is worth mentioning that in the coffee market, an “organic” label refers to the way the product was cultivated, while a “Fair Trade” label refers to the economic condition and treatment of the producer and laborers. Andrew Downie, Fair Trade in Bloom, N.Y. TIMES, Oct. 2, 2007, at C1. 123 JAFFEE, supra note 8, at 14. 124 Id. at 12. 125 Alicia Morris Groos, International Trade and Development: Exploring the Impact of Fair Trade Organizations in the Global Economy and the Law, 34 TEX. INT’L L.J. 379, 391 (1999). 126 Id. at 407.

Equal Exchange alone doubled

127 TRANSFAIR USA, FAST FACTS: FAIR TRADE CERTIFIED SPECIALTY COFFEE 1, http://www.trans fairusa.org/pdfs/fastfacts_coffee.pdf (last visited Feb. 12, 2009).

184 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 its sales in two years from 10 million USD in 2003 to approximately 20 million USD in 2005.128

The growth of Fair Trade coffee is not captured by dollar figures alone. In 2004, only 12 percent of Americans were aware of Fair Trade certification.

129 That number grew to 27 percent in 2006.130 As Jonathon Atwood, Director of Commodity Sustainability for Kraft, said, “Our strong impression is that consumers want to know more about their coffee—where it’s from and under what conditions it has been produced. They also like the idea that they are personally making a difference.”131

Furthermore, Fair Trade does not necessarily create a niche market of trendy coffee shops. Kraft Foods bought five million pounds of Rainforest Alliance Fair Trade coffee in 2004, thirteen million in 2005, and twenty million in 2006.

132 Additionally, McDonalds announced it would sell Fair Trade coffee in 650 of its U.S. restaurants.133

While the growth of Fair Trade has been substantial, there is room to expand. Eight times more Fair Trade coffee was sold in 2006 than in 2001; however, this was only 3.3 percent of the market.

134 Kraft’s increasing purchases of Fair Trade coffee still represent only 2 percent of its total coffee purchased.135 Thus, the Fair Trade coffee market, while growing, still remains small.136

B. Purpose and Goals

Generally speaking, the goal of Fair Trade is to change the way consumers in the developed world conduct trade with producers from the developing world by focusing on the welfare of the producer.137 The International Fair Trade Association, which includes organizations from seventy countries, states that Fair Trade demonstrates “concern for the social, economic, and environmental well-being of marginalized small producers without maximizing profit at their expense.”138

128 Id. 129 Downie, supra note 122. 130 Id. 131 Hal Weitzman, Coffee with a Conscientious Kick, FIN. TIMES, Aug. 16, 2006, at 8. 132 Id. Kraft was “on track for more than twenty million pounds” at the time of the article. Id. 133 Id. 134 Downie, supra note 122. 135 Weitzman, supra note 131, at 8. 136 Fair Trade coffee covers 20 percent of the market in Europe. Id. 137 Groos, supra note 125, at 380. 138 Downie, supra note 122.

Fair Trade Organizations (FTOs) seek to allow developing/producing countries to have


greater control in the trade process and at the same time be able to work with developed/consuming countries. FTOs also aim to eliminate instances in which producers are excluded from the financial benefits of trade and to promote economic self-sufficiency on the part of the producers.139 In addition, FTOs advocate for national governments and international organizations to enact more pro-producer policies.140 Because of the importance of exports to the economies of developing nations, FTOs intend this strategy to substantially impact the country’s whole economy.141

FTOs accomplish their goals by working to create a free trade market and educating consumers about the practices of producers and traders in the hope that consumers will sustain that market by purchasing the Fair Trade goods.

142 This free trade market allows producers to sell their coffee at higher prices—for roughly 1.26 USD per pound—while most producers throughout the world receive only about fifty cents per pound for their goods.143

Fair Trade also has a significant and direct effect on the lives of farmers. Fair Trade certification requires much more work than conventional production because FTOs require farmers to be part of a co-op, and co-ops require members to invest heavily on labor to support their operations.

144 This work may pay off, as co-ops may harvest 500 kilograms of coffee per hectare, while the output from conventional producers may only be 320 kilograms.145

Co-ops can offer numerous other benefits. They maximize economies of scale by allowing farmers to work together and share resources.

146 They also decrease the need for intermediary agents, resulting in producers receiving greater profits.147 Producers can also utilize co-ops by stockpiling coffee in good years to offset the reduced production in a subsequent bad year.148

Fair Trade also improves farmers’ lives through the social premium it adds to the coffee’s price. This money, typically five cents per pound, is given to co-ops to establish schools and clean water projects.

149

139 Groos, supra note 125, at 381. 140 Id. at 387. 141 Id. at 381. 142 Id. at 388. 143 TRANSFAIR USA, supra note 127, at 1. 144 JAFFEE, supra note 8, at 89. 145 Id. at 103. This is due primarily to organic production methods. Id. 146 PAIVA, supra note 10, at 10. 147 Id. 148 See id. at 11. 149 See Downie, supra note 122.

While an agreement among producers establishing quotas would increase their market power,

186 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 they would have a difficult time enforcing quotas because of the financial incentive to break the agreement and produce above the quota.150

C. Criticisms and Obstacles

To strengthen enforcement, FTOs provide outside influence to maintain these agreements and offer higher prices as encouragement.

Fair Trade has created a structure that is subject to criticism. FTOs require farmers to be part of co-ops, and because of this, a family-owned farm would not qualify to participate in the Fair Trade, no matter how organic its beans or how well it treats its laborers.151 In Africa, many farms are based on tribal affiliations and are not necessarily democratic, as FTOs prescribe.152 They would not qualify for certification either.153 FTOs claim advantages from eliminating middlemen, but in these situations, a co-op would itself be the intermediary.154

Another structural criticism is in the name itself. The name “Fair Trade” suggests that every other kind of coffee is bad.

155 It seems inequitable for an organization to make this suggestion in the name of philanthropy when some of its requirements, which are not the only means of “Fair Trade,” preclude farmers who otherwise act “fairly.” Additionally, the idea that quality beans must come through Fair Trade channels is not accurate. Coffee retailers who desire quality products rarely purchase beans for less than the standard Fair Trade price.156 The volume of coffee that is not Fair Trade certified is also significant. Starbucks alone buys 2.2 percent of the world’s coffee, and the company’s rapid growth increases demand.157 FTOs criticize Starbucks for not buying more Fair Trade coffee; yet in 2004, its average purchase price was USD 1.20 per pound, almost exactly the Fair Trade price.158

Despite Fair Trade’s growth and its well-intended purposes, it still faces several obstacles. One such obstacle is the certification process of Fair Trade coffee. A Fair Trade certification does not identify the quality of coffee.

159

150 PAIVA, supra note 10, at 9. 151 Kerry Howley, Absolution in Your Cup, REASON, Mar. 2006, available at http://www.reason. com/news/show/33257.html. 152 Id. 153 Id. 154 Id. 155 Id. 156 Howley, supra note 151. 157 Id. 158 Id. 159 Id.

Thus, producers from countries with high quality coffee (such as Colombia, Ethiopia, and Guatemala) are paid barely more than producers in Brazil,


even though the higher quality products sell for much more.160 For the public education effort to be effective, consumers must be able to differentiate which coffee meets the standards they want to support with their purchase. However, the World Trade Organization (WTO) prohibits statutory labeling requirements of goods or differentiating goods based on how they are produced.161 Enforcement of such a rule could act as a serious deterrent to Fair Trade, which relies on market mechanisms for differentiating goods based on how they are produced. FTOs have sought to avoid this problem by claiming that voluntary labeling schemes do not constitute a violation of relevant international agreements.162 The WTO has been lenient on this practice as it encourages positive environmental and labor development without establishing binding regulations.163 Thus far, the FTOs have avoided this restriction; however, advocating for voluntary labeling could eventually be challenged as implicitly encouraging differentiation between products based on the means of production and thereby subject to the WTO controls.164

Another dilemma is that the labeling schemes are ineffective. Numerous kinds of similar labels exist within the Fair Trade realm, such as “Fair Trade,” “organic,” “shade-grown,” and “bird-friendly”; and this variety may actually work against the shared goal of these labels.

165 Generally, the consumers willing to pay for one of these labels to support its cause would be willing to pay for any of the other labels as well.166 The result is that consumer groups trying to advocate for these causes divide their economic “votes” between the various labels, and none of the different labels gain the demand and support needed to make a more significant change.167

A third obstacle is that a substantial surplus of coffee already exists. In 2002, the stockpile of coffee was about eighteen million bags.

168

160 Downie, supra note 122. 161 Groos, supra note 125, at 408. 162 Id. 163 Brown, supra note 3, at 260. 164 Groos, supra note 125, at 408. 165 Brown, supra note 3, at 262. 166 Id. 167 Id. 168 Coffee Crisis, supra note 11.

This constant oversupply buffers retailers from any supply problems and keeps prices low. A surplus is not inherently wrong; therefore, in guarding their profits, the retailers are not acting unethically. However, this practice may ultimately harm individual, impoverished farmers. These farmers do not have the resources to achieve their own individual surpluses, and once they plant the coffee trees, they have at least minimal incentive to continue to harvest and sell the beans. Additionally, because of the lag between a price increase and

188 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 the ability to produce more coffee, farmers cannot adequately respond to price fluctuations.

IV. U.S. GOVERNMENTAL RESPONSE

Thus far, the U.S. response to the problems related to the coffee market has been minimal. In 2002, a subcommittee of the House Committee on International Relations held a hearing on the “Coffee Crisis.”169 This led to Resolution 604 in which the House “sense[d]” that the United States should coordinate a global strategy “to address the short-term humanitarian needs and long-term rural development needs of countries adversely affected by the collapse of coffee price” and that the President should shore up the government’s response efforts.170 This resolution also “urge[d] private sector coffee buyers and roasters to work with the United States Government to find a solution to the crisis which will be economically, socially, and environmentally sustainable for all interested parties, and that will address the fundamental problem of oversupply in the world coffee market.”171 The Senate subsequently passed an identical resolution.172 In 2003, the House passed Resolution 349: Encouraging the Consumption of Fair Trade Certified Coffee.173 The resolution asked that the legislative and executive branches make Fair Trade coffee available at all events, and that the public, as well as state and local governments, should receive information about the importance of Fair Trade coffee.174

These actions demonstrate the fine line the government is attempting to walk. On one hand, the legislature is acknowledging that the conventional coffee market results in inequity to producers.

175 On the other hand, these resolutions produce minimal effects. Although the government is a major consumer of coffee,176

169 Id. 170 H.R. Res. 604, 107th Cong. (2002). 171 Id. 172 S. Res. 368, 107th Cong. (2002). 173 H.R. Res. 349, 108th Cong. (2003). 174 Id. 175 Introduction of a House Resolution Urging the Government to Purchase Fair Trade Coffee, 107th Cong. E 1283–34 (2002) (statement of Rep. Fortney Pete Stark). 176 “‘Money’, said the late Jesse Unruh, ‘is the mother’s milk of politics, but coffee has to run a strong second.’” Patt Morrison, Legislators Back on Job After Letting Hair Down, L.A. TIMES, Aug. 27, 2001, at 2.

it is doubtful that its commitment to curb inequity offered in these governmental measures would have a significant effect on producers. These policies suggest that the government favors a market-based solution and thus is committed to only playing the role of a responsible consumer.


These resolutions imply either a lack of confidence or a lack of knowledge about the rejuvenated ICO. During the years Congress held hearings and passed resolutions regarding the coffee crisis, it made no mention of the 2001 ICA,177 even though it had been drafted but not yet ratified by the United States. While the legislature could criticize the ICA for not addressing labor issues or assuring producers that they would receive a certain level of compensation, it made no mention of the ICO in any context. Thus, the United States appears ignorant of its own actions178

V. ORGANIZATIONAL SUGGESTIONS

by assenting to an ineffective agreement.

The background and present state of the coffee industry demonstrate the need for continued reflection and adjustment. This Note focuses on the two most significant factors in the coffee industry—governments acting through the ICO and free market forces in the form of FTOs. Individual countries or FTOs could attempt to implement changes for the sake of economic development. The size of the coffee industry, however, suggests that new implementations have the best chance at bringing about the most changes. This Note, therefore, will address the collection of countries making up the ICO and the FTOs as a group, even though these are comprised of individual actors. The next section will focus on how the ICO and FTOs can structure themselves to be more effective in encouraging developing economies. The way in which actors interact with the market significantly impacts these suggestions, and this section will discuss this background. After offering these ideas, this Note will further suggest actions the ICO and FTOs may take to use the coffee industry as an economic stimulant.

A. The Market as the Background of Suggestions

Various approaches to resolving the coffee crisis suggest that there is a consistent commitment to avoiding market intervention and a tendency to use the market as the principal means of establishing equity. Congress primarily encourages Fair Trade coffee,179 which is a movement engendered by market pressure.180

177 None of the following even mention the 2001 ICA: Coffee Crisis, supra note 11; H.R. Res. 604, 107th Cong. (2002); S. Res. 368, 107th Cong. (2002); and H.R. Res. 349, 108th Cong. (2003). 178 At least in as much as Congress and the State Department can be assumed to act congruently. 179 See supra notes 170–75 and accompanying text. 180 See supra notes 138–51 and accompanying text.

The ICO is now committed to working within the market, rather than exerting outside pressure on it. These observations do not suggest that the use of the market is necessarily the best method of bringing relief; they do, however, suggest that such a use is more realistic and worthy of consideration.


A completely open market is unlikely to result in socially just outcomes to producers. The evidence for this comes from repeated attempts at establishing a workable ICA, the push for Fair Trade, and congressional notice of the poor conditions of producers. The resulting question is: What should be done within the market to relieve the rampant poverty of producing nations generally and coffee farmers in particular?

At this point, however, it is unreasonable to expect that the ICO and the Fair Trade movement will entirely abandon their efforts. Both are established and have gained a level of influence.181 Thus, prudence would advise the insightful use of both. Additionally, cooperation in the future seems easier and more likely as the 2007 ICA suggests that the ICO “establish and strengthen cooperative activities with appropriate non-governmental organizations having expertise in relevant aspects of the coffee sector and with other experts in coffee matters.”182

B. Suggestions for the ICO

The characteristics of the ICO best suited for the attack on poverty are its clear structure and order, and its ability to act as the voice of all the coffee industry participants. Its main weakness is that as an intergovernmental organization working within the market, its actions are often mere suggestions. It has limited power to punish a member who acts improperly and is thus less likely to meet its objectives.

One suggestion for improvement is for the ICO to implement a tariff on both exported and imported coffee. Member countries would tax all coffee— both at the time of import and export. The ICO could invest the tax revenues in coffee-producing communities in member countries most in need of welfare projects such as hospitals, schools, and infrastructure. The tariff would also work to support consumption within producing countries so as to avoid the tax. Additionally, it would eliminate the loophole of routing coffee through non-members to avoid the tax. If member countries tax coffee both when it is exported and when it is imported, there would be more of an incentive to sell to non-member countries and thereby increase consumption, as this would avoid the import tax and provide coffee supply at a lower cost to non-members. The ICO would distribute this revenue to ensure that all members would have input in the process.

While a tariff might work as a disincentive for an importing country to be a member to avoid the tax, leaving the ICO would prohibit the country from taking part in determining how the revenue is spent. Presumably, the United States and the European Union—who already provide significant aid to many

181 Critics could see the ICO, like many international organizations, as being insufficiently authoritative. However, as a cohesive collection that includes governmental representatives from the majority of both importing and exporting nations, it has the potential to be influential. 182 ICA 2007, supra note 52, at art. 16.


producing countries—would prefer to exert influence on how some of the tax revenues generated by these countries are used. Another disincentive for consuming countries to leave the ICO is that the producing countries might implement price-fixing policies.

With almost 100 million bags of coffee being exported each year,183

C. Suggestions for Fair Trade

the money these taxes raised would also allow the ICO to wield influence. Producing countries in compliance with the regulations who act responsibly with previous funds could be awarded with additional funds. Where necessary, the ICO could be more active in controlling the use of such funds. The use of the funds for education, health care, infrastructure, and etc., would make the coffee industry and the economy as a whole more efficient. This would eliminate the information and transportation issues hindering producers and would thereby create jobs and help producers diversify.

The Fair Trade movement, on the other hand, is limited by the fact that it is only a movement. It does not have a definite leadership structure in which policies can be discussed and implemented. Additionally, Fair Trade must deal with the fact that it seeks to better the lives of producers by eliminating the middleman while it essentially is a middleman. However, FTOs are relatively comprehensive and effective, for they deal with issues such as hired labor and education and their efforts have produced positive results.184

Of course, FTOs operate independently of the ICO and will need to have some incentives to implement these proposals. One possibility is for the ICO to create a certification process whereby FTOs, meeting certain requirements, could be in charge of ICO-dispersed funds. Another possibility is for

While an FTO taking the place of some other middleman may seem ironic, it is not necessarily undesirable. An FTO that provides a fair price and complete information to producers and consumers alike is more advantageous than the alternative. However, FTOs need to be more inclusive to have a greater impact. FTOs might accomplish this by relaxing policies such as the current co-op requirements. FTOs could also gain more power if they encourage diversification of both the uses of coffee and the work of producers. They could advance this objective by starting loan and financial support programs for producers who do in fact diversify. FTOs can also generate positive changes by advocating the health benefits of coffee, the use of coffee for other purposes, or alternative means of livelihood for coffee producers.

183 Exports by Exporting Countries to All Destinations, INT’L COFFEE ORG., June 2008, http://www.ico.org/prices/m1.htm. 184 See generally JAFFEE, supra note 8.

192 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 producing countries to allow FTOs who meet these requirements to have special privileges—such as tax breaks and government access.185

VI. MAXIMIZING THE POTENTIAL OF COFFEE

The strengths and weaknesses of the Fair Trade movement and the ICO indicate that they would be excellent complements of each other, and thus should collaborate extensively. One form of collaboration could be to give FTOs an advisory position within the ICO. Such an arrangement would provide a platform to allow for communication and coordination between the organizations with the FTOs acting as a neutral voice within the ICO. Also, both could take advantage of the combined economies of scale. Since each requires some kind of certification of exported coffee, presumably they could work together to have one comprehensive, quality certificate. It would be advantageous for the ICO and FTOs to work together for the benefit of impoverished farmers.

The purpose of these suggestions is to make those in the best positions to capitalize on coffee for the sake of development better able to do so. However, in order to be truly effective in their positions, these organizations must have goals and purposes to guide their actions. Thus, this Note offers several methods and courses of action the ICO and FTOs can take to make coffee a more effective means of developing economies.186

A. Traditional Uses

In order to use coffee to better the lives of producers, and ultimately consumers, the ICO and FTOs must change the market in three ways. First, they must encourage the traditional use of coffee. There is an established system for bringing coffee from trees in Bolivia to tables in Boston. Thus, it will be efficient to increase the coffee passing along this route. Second, concerned parties should develop alternative uses for coffee beans. Finally, producers must diversify their efforts and invest resources in other goods.

Basic economics suggests that increasing demand for coffee will affect producers’ two major concerns—price and oversupply. Basic marketing suggests one way to increase demand is to increase quality. Enhanced quality is beneficial because quality coffee demands a price premium, and

185 However, inasmuch as the purpose of Fair Trade is to implement change through the free market, creating government inducements is contrary to that purpose. One alternative is to leave Fair Trade results completely to the social consciousness of the market. Another possibility would be for a group to advocate for change with the FTOs, although it would be unclear where such a group would come from. 186 Most of these suggestions could be done either by organizing or working cooperatively with a government or some other interested organization. As this Note has focused on the ICO and FTOs, unless noted otherwise, the reader should assume the suggestion is being made for both to work in some joint, or agreeing, manner. However, many of the suggestions could be undertaken by numerous other organizations with the passion and ability to do so.


improvement in quality stimulates consumption.187

While the International Coffee Organization (ICO) and European countries require that ninety-five percent of coffee imports be coffee product (allowing only five percent to be non-coffee substances—black or sour beans, sticks, rocks, etc.) the United States has a guideline that requires only seventy-five percent of imports to be coffee products. That means twenty-five percent of the bags of coffee imported into the United States is made up of bad beans, sticks, and rocks.

Representative Farr has described the state of the quality of coffee:

188

Representative Farr’s suggestion to raise the purity requirements would result in both better quality coffee and a reduction in the coffee stockpiles.

189 A rule lowering the acceptable ratio of foreign material and defective beans would benefit producers who work to ensure that consumers receive a high quality and pure product.190

Another suggestion would be to differentiate the coffee market. While coffee shops and grocery stores offer a selection of coffees from various countries, the differences in blends and quality could be better advertised. A differentiated market has consistently higher prices and less need for government support.

Importing countries, particularly the United States, would have to implement such a rule, or the ICO could mandate it.

191 If the major coffee retailers resisted imposing purity standards, governments or the ICO could require that the purity be noted on the package, allowing consumers to determine market standards. Differentiation would also foster healthy competition between countries.192 However, differentiating labels might not pass WTO requirements if they were based on how the coffee was produced.193

The ICO or FTOs could increase consumption by advocating coffee’s health benefits.

This problem could be avoided by educating the public about distinctions.

194 Studies have shown that coffee produces the following benefits: it wards off cancer;195

187 TRANSITION, supra note 94, at 4. 188 Coffee Crisis, supra note 11, at 5. The 2001 and 2007 ICAs tell members to “endeavor” to raise quality standards to 95 percent. ICA 2001, supra note 108, at art. 36; ICA 2007, supra note 52, at art. 27. 189 Coffee Crisis, supra note 11, at 5. 190 Id. (statement of Gabriel Silva, General Manager of the Nat’l Fed’n of Coffee Growers of Colom.). 191 TRANSITION, supra note 94, at 10. 192 Coffee blends are often designated by their country of origin. 193 See generally notes 158–61 and accompanying text. 194 PAIVA, supra note 10, at 10. 195 Nic Fleming, Coffee Reduces the Risk of Skin Cancer, DAILY TELEGRAPH, Nov. 9, 2007, at 10.

decreases the risk of death due to hepatitis

194 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 C;196 lowers the risk of gout, Parkinson’s and Alzheimer’s;197 and slows cognitive decline.198 An advertising program educating the public of these benefits would be one possible use of a tax the ICO imposed.199

While the coffee market in the United States may well be saturated,

200

consumption in producing countries is actually relatively low.201 Increasing consumption in exporting countries increases the overall demand, familiarizes the community with quality standards and encourages improvements in quality.202 Countries such as Russia and China also offer significant room for growth.203 The proposed tax structure could encourage this expansion.204

B. New Uses

It will come as no surprise to the java-fiend that the coffee bean has potential uses other than as a “cup of joe.” Research and development of these uses would provide a worthwhile jolt to the market. Alternate uses of coffee would provide a way to increase demand, decrease surplus, and allow farmers to retain their jobs. Some examples of ways to expand the applications of coffee include using it as fuel for brick-making furnaces205 or using waste from coffee production to grow shiitake mushrooms.206

Eco-tourism, especially related to shade-grown coffee, would be another use.

207

196 William B. Ershler, Coffee Consumption, Hepatitis C, and Liver Cancer Risk, CLINICAL ONCOLOGY ALERT, Sept. 1, 2007. 197 Erin Allday, Coffee’s Perk—It’s Healthy, S.F. CHRON., June 10, 2007, at A1. 198 Bernadine Healy, Sex and the Mind’s Decline, U.S. NEWS & WORLD REP., Aug. 19, 2007, available at http://health.usnews/com/usnews/health/articles–/070819/27healy.htm. See also Andrew Weil, Coffee: Can It Keep Your Brain in Shape?, YAHOO! HEALTH, May 2, 2008, http://health.yahoo.com/experts/weilhealthyliving/2952/coffee-can-it-keep-your-brain-in-shape/ (last visited Aug. 27, 2008). For more examples of the health benefits of coffee, though perhaps from a biased source, see Positively Coffee, INT’L COFFEE ORG., http://www.positivelycoffee.org/ (last visited Aug. 27, 2008). For a rebuttal of beliefs concerning the negative impact of coffee, see Jane E. Brody, Sorting Out Coffee’s Contradictions, N.Y. TIMES, Aug. 5, 2008, at F7. 199 See supra Part V.B. 200 But see supra notes 27–28 (explaining that U.S. coffee consumption has decreased). 201 TRANSITION, supra note 94, at 12. 202 Id. 203 INTERNATIONAL COOPERATION, supra note 4, at 2. 204 See supra Part V.B. 205 Coffee Crisis, supra note 11, at 90 (statement of Ted Lingle, Exec. Dir. of the Specialty Coffee Ass’n of Am.). 206 Carmenza Jaramillo Lopez & Nelson Rodriguez Valencia, Cultivation of Shiitake in Coffee Waste, ZERI, May 14, 2004, available at http://www.scizerinm.org/mushrooms.html. 207 TRANSITION, supra note 94, at 11.

The conditions required to grow organic coffee would be ideal for


tourists.208 Producers work in some of the most beautiful places on earth, with volcanoes as a backdrop, and temperatures continuously between seventy and eighty degrees.209

C. Producer Diversification

Taking advantage of these unique features of the coffee production to attract tourists would sustain the local farmers and bring capital to the whole community. Programs encouraging these uses are ideal candidates for loans or grants from the ICO, with encouragement from FTOs.

Another possible goal to work toward is producer diversification. Most developing countries have a large number of unskilled laborers. This large supply of unskilled labor keeps wages low.210 These countries are in significant need of skill development, which also increases market diversification.211 One possible means of altering these circumstances would be to offer medium and large-scale producers incentives such as price insurance if they provide some form of unemployment insurance to laborers.212

U.S. agriculture policy has created barriers to diversification. World future prices of sugar, for instance, are six cents per pound, but U.S. quotas and price supports raise the U.S. price to twenty cents per pound.

If more profitable options are available for the farmers, they would be able to improve their financial situations, and the supply of coffee would also drop, helping to eliminate surpluses and boost prices.

213 Meanwhile, Latin American countries could produce sugar for ten cents per pound, a price too expensive for the world market, but still cheaper than U.S. costs.214 Similarly, the U.S. government guarantees domestic cotton producers seventy cents per pound, while the world price is forty cents per pound.215 The guaranteed cotton price keeps U.S. farmers in the market, despite their lack of comparative advantage. As a result, Latin America produces less than 10 percent of what it did twenty years ago.216

The ICO could play an important role by using the tax structure to encourage consuming countries to ease tariffs on other products that producing countries could use for diversification. For example, the ICO could

208 Id. 209 PENDERGRAST, supra note 14, at xvi. 210 TRANSITION, supra note 94, at 27. 211 Id. 212 Id. 213 Coffee Crisis, supra note 11, at 83 (statement of Robert Nelson, Pres. & CEO of the Nat’l Coffee Ass’n of the U.S.A.). 214 Id. 215 Id. 216 Id.

196 TRANSNATIONAL LAW & CONTEMPORARY PROBLEMS [Vol. 18:169 lower the tax on coffee imported to the United States if the United States agrees to lower its cotton and sugar tariffs. This system would encourage more free market policies. Such a system would also allow the United States to continue to protect cotton and sugar farmers if it so desires. However, U.S. consumers would bear the burden of paying a higher coffee tax and the impoverished coffee farmers would benefit. When considering the aforementioned proposal, it is also important to think about keeping the ICO out of political matters not directly related to coffee. Involvement in such matters could weaken the ICO’s efficiency and effectiveness.

VII. CONCLUSION

The characteristics of the coffee industry relevant to a discussion of its development are numerous and intricate. However, such discussion has practical value. Most of the world’s richest countries are on one side of the market, while many of the world’s poorest countries are on the other side. Coffee offers a remarkable opportunity to bring development to countries in great need of it. Now is an opportune time to have a discussion on these issues, as the ICO is an active international organization, serving a vast community of coffee producers, retailers, and consumers with the opportunity to be at the forefront of progress in the coffee industry. Furthermore, Fair Trade in the coffee industry is significant, yet small enough to be adaptable for future developments. This Note has offered the background and some suggestions for this discussion, which presumably will take place over a good cup of coffee.

shannon

Documents

transnational

coffee retention

fair trade

latin american

international

international

free trade

fair trade