This piece is excerpted from Antoine Bouët and David Laborde Debucquet's IFPRI Discussion Paper Economics of Export Taxation in a Context of Food Crisis: A Theoretical and CGE Approach Contribution (June 2010).
The nature of the world trading system is deeply mercantilist. Consequently, policy decisions are usually aimed at increasing exports and/or decreasing imports, and governments frequently implement import taxes and export subsidies. Export taxes and export restrictions, however, are policy instruments that appear much more difficult to understand than import tariffs.
Nevertheless, export restrictions are a common practice. For instance, some developing countries implemented export taxes and export restrictions during the recent food crisis (2006–2008): Bangladesh, Brazil, Cambodia, China, Egypt, India, Madagascar, Nepal, Thailand, and Vietnam on rice, and Argentina, India, Kazakhstan, Nepal, and Pakistan on wheat (see Table A.1 in Appendix).
Beyond crisis periods, export restrictions are, in fact, trade measures that are permanently adopted by countries throughout the world. In 2004 Piermartini noted that approximately one-third of World Trade Organization (WTO) members impose export duties. She gave the examples of export taxes implemented by Indonesia on palm oil; by Madagascar on vanilla, coffee, pepper, and cloves; by Pakistan on raw cotton; by the Philippines on copra and coconut oil; by Indonesia on palm oil; and by the European Union on wheat (see Table A.2 in appendix).
Economic analysis provides several rational justifications for using these instruments:
1. Terms-of-trade justification. This is perhaps the most important justification. By restricting its exports, a country that supplies a significant share of the world market in a commodity can raise the world price of that commodity. This implies an improvement in that country’s terms of trade. The reasoning behind this argument is very similar to the optimum tariff argument (Bickerdike 1906; Johnson 1953), which states that by implementing a tariff on its imports, a “large” country can significantly decrease the demand for a commodity that it imports; this therefore leads to a decrease in the commodity’s world price, which is again an improvement in the terms of trade. Rodrik (1989) derives an optimal tax structure, with taxes differentiated by domestic exporting firms, and shows that it depends on foreign demand elasticity and the size distribution of firms. Eaton and Grossman (1986) study the use of export taxes but focus on the profit-shifting argument and less on the terms-of-trade argument.
2. Food security and final consumption price. By creating a wedge between the world price and the domestic price, a government can lower the latter by reorienting domestic supply toward the domestic market. Piermartini (2004) provides the example of the Indonesian government imposing export taxes on palm oil products, including crude and palm cooking oil, in 1994, as it considered cooking oil an “essential” commodity. This rationale was often used during the food crisis of 2006–2008 by governments to justify the implementation of export taxes and other forms of export restrictions.
3. Intermediate consumption price. Export taxes on primary commodities (especially unprocessed ones) work as an indirect subsidy to higher-value-added manufacturing or processing industries by lowering the domestic price of inputs compared to their world—nondistorted—price. While the previous justification addresses the use of export taxes to lower price for final consumption, this one is concerned with decreasing prices for intermediate consumption. This justification follows a reasoning that is similar to the theory of effective protection and is noted by Corden (1971). For example, in 1988, Pakistan imposed an export tax on raw cotton in order to stimulate the development of the yarn cotton industry. Export taxes on palm oil are imposed in Indonesia and Malaysia in order to support the development of downstream industry (biodiesel and cooking oil; see Amiruddin 2003).
4. Public receipts. Export taxes provide revenues to developing countries with limited capacity to rely on domestic taxation. This is a second-best argument because in order to raise a given amount of revenue, the imposition of lump-sum taxes is a first-best policy (Ramsey 1927; Diamond 1975). Deardorff and Rajaraman (2005) demonstrate under a simple partial equilibrium model, then under general equilibrium, that for a country exporting a (primary) product under monopsony’s power, the best available policy may be to tax exports so as to extract some of the profits of the monopsonist; doing so worsens the distortion but increases domestic public receipts to the detriment of monopsony’s rents.
5. Income redistribution. Like import tariffs, export taxes are measures that imply redistribution of income to the detriment of domestic producers of the commodity taxed and to the benefit of domestic consumers and public revenues.
6. Stabilization of domestic prices. In order to stabilize domestic prices for export producers, some developing countries use variable tax rates. Piermartini (2004) provides the example of Papua New Guinea, which established an export tax / subsidy rate for cocoa, coffee, copra, and palm oil equal to one-half the difference between the reference price—calculated as the average of the world price in the previous 10 years—and the actual price for the year.
It appears that countries have a relatively large degree of freedom in the implementation of such taxes, as the WTO does not prohibit export taxes and other forms of export restrictions. More precisely, as stated by Crosby (2008), “general WTO rules do not discipline Members’ application of export taxes,” but “they can agree—and several recently acceded countries, including China, have agreed—to legally binding commitments in this regard.” In addition, the Uruguay Round Agreement on Agriculture stipulates that when implementing a new export restriction, a WTO member must (i) consider the implications of these policies on food security in importing countries, (ii) give notice to the Committee on Agriculture, and (iii) consult with WTO members that have an interest. This agreement does not institute any penalty for countries ignoring the rules. Finally, this form of trade policy does not receive a great deal of attention from the public or the academic establishment.
As a consequence, export taxes are attractive trade policy instruments. However, this paper draws attention to one key element of the implementation of export taxes: these are typically beggar-thy-neighbor policies that deteriorate the terms of trade and real incomes of trading partners. This often leads to retaliation by partners whose terms of trade have been negatively affected by initial export taxes.
We showed in this paper that these trading partners can react by either reducing import tariffs or augmenting export taxes, depending on their status as either net importers or exporters of the commodity. The 2006–2008 Food Crisis clearly illustrates the point about retaliation and counter-retaliation in response to either reduced import duties or augmented export taxes. Several policy conclusions are worthwhile. First, this process implies the implementation of a non-cooperative policy equilibrium that worsens world welfare and calls for international cooperation. Second, although large countries can implement beggar-thy-neighbor policies that increase national welfare at the expense of trading partners, small countries do not have this option and changes in their own policies neither improve their welfare nor harm their partners’ situation. Finally, there is a key asymmetry between net exporters and net importers of an agricultural commodity in a situation of food crisis, as net exporters can benefit from increases in world prices while net importers are hurt and have no capacity to retaliate efficiently.
Today, the European Union and the United States are wondering whether certain Chinese export taxes are WTO consistent and whether they can bring the case to the WTO dispute settlement body (see Crosby 2008). In 2008 China raised export taxes on some metal resource products such as parts of steel products, metal ore sand, and ferro-alloys. The objective of this policy is to reorient the supply of these goods on the domestic market in order to decrease the price of intermediate goods for domestic manufacturing sectors.
In these conditions it is understandable that the European Union has just proposed to discipline such practices. While this proposal has been well received by countries such as Canada, the United States, Switzerland, and Korea, it has been highly criticized by some developing countries such as Argentina (which also confirms what was expected from our analytical framework), Malaysia, Indonesia, Brazil, Pakistan, Cuba, India, and Venezuela, with Argentina leading the opposition to this proposal. The reasons advanced by this group of countries is that “export taxes are a right and a legitimate tool for developing countries; they help increase fiscal revenue and stabilize prices; there is no legal basis for a negotiation; there is no explicit mandate for a change in WTO rules on this issue” (Raja 2006). It is noteworthy that the European Union makes a distinction between trade-distorting taxes and “legitimate” export taxes like those applied in the context of balance-of-payments imbalances. The European Union proposes a full prohibition of trade-distorting export taxes. The European Union and the United States frequently implement bans of export taxes in bilateral agreements that they negotiate.
The European Union has been very active in demanding under the Doha Development Agenda substantive commitments by all WTO members to eliminate or reduce export taxes. Our paper shows that export taxes and import tariffs exhibit strong similarities or can even be equivalent in terms of their impact on domestic and foreign welfare. Bringing some penalties into the WTO context in the area of export taxes may be justified, as these penalties exist in the domain of import tariffs. Moreover, another justification is the consideration of net food-importing small countries that can be strongly harmed in the event of a food crisis and by the escalation of export taxes throughout the world, and that do not have many policy instruments with which to address this kind of issue. Export taxes and export restrictions could clearly become a new and major bone of contention between high-income countries and agrifood-exporting middle-income countries in trade negotiations.