1 The economics of export taxation: a theoretical and CGE-approach contribution ntoine Bouet 1 and David Laborde 2 bstract: Even if export taxes are frequently used, they have not been the main concerns for trade negotiators and academic researchers contrarily to tariffs. This paper aims at providing the rationales for the use of export taxes that are not obvious considering mercantilist driven trade policies. We summarize the effects of export taxes using both a partial and a general equilibrium theoretical model. Finally, we illustrate the costs of a lack of cooperation and regulation (binding process) of such a policy in time of crisis using a global computable general equilibrium model illustration, mimicking the mechanisms that have appeared during the recent food price surge. 1. INTRODUCTION 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 are used to implement import taxes and export subsidies. Export taxes and export restrictions, however, are two policy instruments that appear much more difficult to understand. Export restrictions are a common practice. For instance, some developing countries implemented export taxes and export restrictions during the recent food crisis ( ).Table.1 in annex points out some of these measures. ll of them are imposed on agricultural and food commodities, and in particular on cereals. 1 NTOINE BOUET, International Food Policy Research Institute (IFPRI) and Centre d nalyse Théorique et de Traitement des données économiques/université de Pau 2 DVID LBORDE, International Food Policy Research Institute (IFPRI)
2 Beyond crisis period, export restrictions are, in fact, trade measures that are permanently adopted by countries throughout the world. few years before the food crisis, Piermartini (2004) noted that approximately one third of 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 Philippines on copra and coconut oil, by Indonesia on palm oil, and by the European Union on wheat. Table.2 in annex gives examples of current export taxes in place. Economic analysis provides several rational justifications of using these instruments: (i) Terms of trade justification. This is perhaps the most important justification. By restricting its exports, a country which supplies a significant share of the world market in a commodity can raise its world price. This implies an improvement of its terms of trade. The reasoning behind 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 decrease significantly the demand for a commodity that it imports, and therefore lead to a decrease of its world price, which is again an improvement of terms of trade. (ii) Food security and net domestic consumers (final consumption price). By creating a wedge between the world price and the domestic price, government lowers the latter by reorienting domestic supply towards 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 considers cooking oil as an essential commodity. This rationale has often been used during the food crisis of by governments to justify the implementation of export taxes and other forms of export restrictions.
3 (iii) Intermediate consumption price. Export taxes on primary commodities (especially unprocessed) work as an indirect subsidy to higher value-added manufacturing or processing industries by lowering domestic price of inputs compared to their world non distorted price (same mechanism than for ii). This justification follows a reasoning that is similar to the theory of effective protection. For example, in Indonesia an export tax on lumber has implied a development of the domestic wood processing industry, which has been judged as excessive for environmental reasons since it contributed to the depletion of forests (World Bank, 1998). In 1988, Pakistan imposed an export tax on raw cotton, in order to stimulate the development of the yarn cotton industry. nd finally, we can also note the export taxes on palm oil in order to support the development of biodiesel industry in Malaysia. (iv) Public receipts. Export taxes provide revenues to developing countries with limited capacity to rely on domestic taxation. This is a second-best argument as in order to remedy a lack of public revenue, the imposition of taxes domestic demand characterized by low inelasticity is a first-best policy. (v) Income redistribution. Like import tariffs, export taxes are measures that imply redistribution of income at the detrimental of domestic producers of the commodity taxed and at the benefits of domestic consumers and public revenues. (vi) 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.
4 It appears that countries have a relatively large freedom in the implementation of such taxes. The reason behind this is the fact that the World Trade Organization (WTO) does not prohibit export taxes and other forms of export restrictions. In addition, this form of trade policy does not receive a great attention from the public or the academic establishment. This paper provides a theoretical and an empirical background contributing to a better understanding of export taxes. Sections II and III provide an analytical framework that can help understand these trade policies better: while section II uses a partial equilibrium framework, section III uses a general equilibrium one. In section IV we use the MIRGE model in order to illustrate the potential impact of world price shocks and how countries may react using either increased export taxes and/or reduced import taxes emphasizing the effects of non cooperative trade policies in this context. Section V concludes. 2. THE ECONOMICS OF EXPORT TXTION: PRTIL EQUILIBRIUM NLYSIS The objective of this section is to provide a simple theoretical framework that enables understanding the effects of export restrictions. Figure 1 depicts the impacts of an export restriction imposed by a small country (on the left side) and by a big country (on the right side). The difference between restrictions in a small and in a big country consists in the impact of a variation in net supply (exports) upon world prices. change in a small country s exports does not lead to a variation of world prices as this country is supposed to be too small to have an influence on world markets. On the contrary, when a large country modifies its net supply (level of its exports) on the world markets, it is sufficiently large to exert an influence on world prices. <Figure 1 included here>
5 Consider first the case of a small country imposing an export tax. Initial domestic price is p 0 while initial world price is 0. t these initial prices domestic demand is d 0 and is less than domestic supply being x 0, the difference being exported on the world market. s these exports are taxed, at initial prices domestic producers prefer offering their supply on local market (untaxed) than on world markets (taxed). On the domestic market supply is increased reducing domestic price until p 0 (1+t) = 0, while world price is, by definition unchanged. t this level of prices domestic producers are indifferent between selling their products on local markets and exporting them. Domestic consumers are benefiting from this policy as they consume more (d 1 >d 0 ) at a lower price (p 1 <p 0 ). Their surplus is increased by the yellow area denoted as a. Domestic producers are hurt by this policy as they produce and sell less (x 1 <x 0 ) at a lower price (p 1 <p 0 ). Their surplus is reduced by (a+b+c+d). Finally, the export tax increases public revenues by the blue area, denoted c as post-tax level of exports are the difference between x 1 and d 1 and as the unit tax is ( 0 -p 1 ). s a consequence, policymakers should not implement such a policy if we suppose that $1 of consumers surplus has the same value as $1 of producers surplus and $1 of public revenue: indeed, a tax policy is detrimental to a small country as the loss of producers surplus (a+b+c+d) is larger than the gain in consumers surplus (a) and in public revenues (c). ll these effects sum up in a loss of domestic welfare measured by red areas (b+d) which are equivalent to the Haberger triangles (deadweight losses) in the theory of protectionism. But, it is noteworthy that this policy has distributional effects and should be considered by policymakers. For instance if policy makers have a food security objective which implies a
6 decrease of domestic price, tax exports are efficient in the sense that they augment domestic consumption and reduce local consumer price. They increase the surplus of food consumers that is overweighed in the government function in this case. consumption subsidy will be a first order instrument (more efficient) but it will have a cost for the government. Similarly, if we assume that government have difficulties to raise taxes on other products and/or source of income (e.g. tax on firm profits), the shadow price of export tax will be superior to one. 3 Both arguments explain why $1 of increase in the surplus (a+ c) will be more important for the government than $1 of inefficiency losses (b+d). The case of a large country differs in the sense that world price is affected by the export tax. The reason being that a large country is assumed to export a significant share of world exports such that if these exports are reduced, world exports are significantly reduced and world price is increased. Consumers and producers surpluses are identically affected, but public revenues are augmented by (c+e) as the world price is raised up to 1 : post-tax level of exports are still the difference between x 1 and d 1, but the unit tax is now ( 1 -p 1 ). This is all the more important as the implementation of this policy can lead to an augmentation of domestic welfare if the green area denoted by e is larger than the sum of the red areas (b+d). While (b+d) represent welfare losses coming from these new distortions, e represents an improvement in national terms of trade. Final exports (x 1 -d 1 ) are sold at 1 and not 0, the difference ( 1-0 ) representing a gain in terms of trade for each unit exported. Simultaneously the same political economy elements are still in play as domestic consumers and public budget is favored while domestic producers are hurt by this decision. 3 It has also been argued than export tax on commodities (cocoa, oil) have been administrated in a very occult way in several developing countries (e.g. Cote d Ivoire) and has fostered corruption, this resource being last monitored than other taxes paid by local customers/constituencies.
7 Finally, it is important to note that if we consider the case of an export tax on a primary commodity used as intermediate consumption in a manufactured good, it implies that the export tax decreases the domestic price of the intermediate good under the world price and increases the unit value added in the manufacturing sector. This kind of degressive export tax structure (greater than 0 on raw commodity; 0 or close to 0 on transformed good) exists in China and South-East sia countries. It results in the expansion of production volume of the manufactured sector at the detrimental of the raw commodity in the country which implements it. 3. THE ECONOMICS OF EXPORT TXTION: GENERL EQUILIBRIUM NLYSIS The objective of this section is to provide a more complete theoretical framework in order to understand the effects of export taxation in general equilibrium. We develop a general model of international trade between three countries, two big and one small. The purpose is to understand that as far as food crisis is concerned, there is a distinction to be made between (i) large foodexporting countries that can increase world prices of the commodity that they export while decreasing the domestic price of this commodity, (ii) large food-importing countries that can also have an impact on world prices and accept a deterioration of their terms of trade in order to decrease domestic price of agricultural commodity, (iii) and small countries that cannot affect world prices, but are hurt by beggar-thy-neighbor policies of big countries being either foodexporting or food-importing. We consider a model of international trade between three countries: two are big (called RG and ) meaning that they are price-makers on the world market, the third one (called BGD) being small meaning that it is a price-taker. They produce and trade two commodities, the agricultural
8 one () and the industrial one (I). RG has a comparative advantage in and exports the agricultural good while it imports the industrial one. On the other hand, and BGD have a comparative advantage in and export the industrial good while they import the agricultural good. country s welfare function is denoted as Ui, local demand of country i for good k is D k i, i = RG, BGD, ; k =, I. Let us call: X k i, i = RG, BGD,, k =, I, the production of good k in country i. k is the nominal world price of good k, p k i is the nominal local price of good k in country i. is the relative price of good on world market in terms of industrial good, pi within country i. y i is the real income in country i, while Y i is the nominal income in country i. Let us assume that: i) Technology is given by well-behaved production functions, ii) iii) Competition is perfect in each country on both product and factor markets, Welfare only depends on local consumption of both goods: U i = U i D i, D i I with: U i D i k > 0, i, k. (1) iv) Government selects either an import tariff/subsidy or an export tax/subsidy in order to maximize national welfare function, v) Trade is balanced in each country: X i I D i I = π. D i X i (2) Both sides are positive for i=, BGD; negative for i=rg. vi) vii) There is no transportation cost, The tariff/export tax revenue is redistributed to local consumers by an efficient mean.
9 We first derive analytically the effects of an import tariff in countries and BGD and of an export tax in country RG. The reasons why we select these instruments will be apparent later on. We then determine the optimal policy for each country and conclude. Let us first consider the traditional case for the impact of a tariff on import demand. In the case of, the demand for imports is: M I = D p, y X X 1/p (3) Total differentiation brings: dm = D p p, y dp + D Y 2 p, y dy 1/p dx dxi I dx dp d 1/p (4) We call: σ c = p M D p p, y ; c is the compensated relative price elasticity of demand for D agricultural imports in ; m = p y p, y ; m is the marginal propensity to demand agricultural goods in ; e = 1 p EI I dx ; e is relative price elasticity of supply for industrial exports in ; d 1/p Let us find an expression of dy. If V = V p, Y is maximum utility that can be attained by when domestic price is p and nominal income is Y, Roy s theorem gives: V p,y D = p V p,y V p = V Y (5) Y Therefore:
10 dy = dv V y = dy D. dp I = dx + p. dx + X. dp + d πtm D. dp Since perfect competition ensures that the economy is located on the production possibilities I frontier: dx + p. dx = 0, we have dy = M. dp + M d p π + πtdm = M. dπ + πtdm (6) Equation (6) states that in this international trade model, a country s real income is affected either by a change in world prices (d <0 means that the world price for the agricultural good decreases; this is the good that imports) or a variation in quantities traded (real income increases when trade increases, other things being equal). Integrating equation (6) and the previous definitions inside (4), we obtain: dm M = σ C. dp p m dπ e dp d (7) 1+t π 1+t p Where d = 1 mt 1 + t. Therefore when imposing a tariff, four mechanisms are at play: - Through C, a substitution effect on domestic consumption; under constant real income a tariff increase leads to an agricultural domestic price increase, which reduces domestic consumption of the agricultural good in favor of other goods. - Through e, a substitution effect on domestic production; under constant real income a tariff increase leads to an agricultural domestic price increase which expands domestic production of the agricultural good to the detriment of other goods.
11 - Through m, the imposition of a tariff on imports of agricultural goods reduces the world price of this good as is a large country which implies that s terms of trade are improved. - Finally d is a Keynesian multiplier: an increase in real income increases demand for imports which in turn increases tariff receipts, which increases real income, and so on. Starting from free trade (t=0) this effect is nil. We turn now to the case of country RG. Its supply of agricultural exports is: E RG = X RG I X RG 1/p RG D RG p RG, y RG (8) Total differentiation brings: de RG = 1 dx RG p 2 I RG dx RG I dx RG d 1 p RG dp RG D RG p RG p RG, y RG dp RG + D RG p y RG, y RG dy RG (9) RG σ c RG = p RG E RG D RG p RG p RG, y RG is the compensated relative price elasticity of supply of agricultural exports in, m RG D = p RG RG y RG p RG, y RG is the marginal propensity to demand agricultural goods in RG and e RG = 1 p RG EI RG I dx RG d 1/p RG is relative price elasticity of supply of industrial goods in RG. Let us find an expression of dy RG. s for i=, V RG = V RG p RG, Y RG is indirect utility and Roy s theorem is: V RG p RG,Y RG D RG = p RG V RG p RG,Y RG V RG p = RG VRG YRG (10) Y RG
12 Therefore: dy RG = dv RG V RG Y RG = dy RG D RG. dp RG I = dx RG + p RG. dx RG + X RG. dp RG + d p RG t RG E RG D RG. dp RG Following similar manipulations we obtain: dy RG = E RG. dπ + p RG t RG de RG (11) Equation (11) is important as it states that country RG s real income is affected either by a change in world prices (terms of trade effect; d >0 means that agricultural good s world price increases; this is the good that RG exports) or a variation in quantities traded (real income increases when trade increases, other things being equal). The terms of trade effect is proportional to the amount of RG s agricultural exports. Integrating equation (6) and the previous definitions inside (4), we obtain: de RG E RG = σ C RG. dp RG p RG + m RG (1 + t RG ) dπ π + p RG. e RG dp RG p RG d RG (12) Where: d RG = 1 m RG t RG. Therefore when country RG imposes a tariff on its agricultural exports, four mechanisms are at play: - Through C RG, a substitution effect on domestic consumption; under constant real income, a tariff on agricultural exports leads to an agricultural domestic consumer price decrease which in turn augments the domestic consumption of the agricultural good: this is the food security effect.
13 - Through e RG, a substitution effect on domestic production; under constant real income, a tariff on agricultural exports leads to an agricultural domestic producer price decrease which decreases domestic production of the agricultural good: this is the anti-farmers effect. - Through m, the imposition of a tariff on RG exports of agricultural goods increases the world price of this good as RG is a big country which implies that RG s terms of trade are improved. - Finally d is a Keynesian multiplier: an increase in real income increases demand for imports which in turn increases tariff receipts, which increases real income, and so on. Starting from free trade (t=0) this effect is nil. s far as BGD is concerned, the problem is similar to as it has a comparative disadvantage in the production of agricultural good and it imports it. The only difference is that it is a small country such that a change in its real income expresses as: dy BGD = πt BGD dm BGD (13) If BGD country implements a tariff on its agricultural imports, it decreases its traded imports and real income is negatively affected. BGD s optimal response is: t BGD =0. The definition of and RG countries optimal responses is easy. s far as is concerned, its program consists in selecting a production structure and a world price that maximizes real income: Max I X (14),π U = U D I ; D = U X + M I I ; X E
14 Under: I E π = πm (15) I X = p X + constant (16) p = π(1 + t ) (17) This can be re-written as: Max I X,π U = U X I p + E I π (π) I ; X I E (π) (18) Solving (18) yields: t = 1 σ 1 (19) Where σ = π EI I E π > 0 is the reciprocal demand elasticity facing. It is a general equilibrium elasticity measuring how much the rest of the world is willing to trade agricultural goods against European industrial goods. In this elasticity substitution effects (both on consumption and production sides), real income effects and multiplier effects are embedded. 4 s far as RG is concerned the same approach gives: Max XRG,π U I RG = U RG D RG ; D RG = U RG X RG I + M RG ; X RG I E RG (20) Under: I M RG = πe RG π (21) I X RG = p RG X RG + constant (22) 4 We can easily derive an expression of the reciprocal demand elasticity and the parameters C, e, m and d defined previously.
15 π = p RG (1 + t RG ) (23) This can be re-written as: Max XRG,π U RG = U RG X RG E RG π ; p RG X RG + πe RG (π) (24) Solving (18) yields: t RG = 1 σ RG 1 (25) Where σ RG = π E RG E RG π > 0 is the reciprocal demand elasticity facing country RG. Under the conditions that RG and are large countries, these elasticities are greater than unity, and optimal taxes (on imports for, on exports for RG) are strictly positive. We see that the design of optimal export taxes requires the estimation of consumption, production and trade elasticities. For example Warr (2001) concludes that available econometric estimates for the world demand elasticity of rice facing Thailand imply optimal export taxes ranging from 25 to 100 per cent. This assessment may lead to false interpretation: Bautista (1996) gives the example of the Philippines government implementing an export tax on copra and coconut oil based on the principle that this country got a large share in the world market of these products and faced a negative elasticity in world export demand. In fact, this evaluation did not take into account the substitutability with other vegetable oil and the consecutive low share of Philippines in the world market: Philippines should have been treated as a small country. It is possible to show that under these assumptions: - Each time either or RG increases its tax (on imports for, on exports for RG), this move has a double effect. The first one is the terms of trade effect, which consists in
16 an improvement of terms of trade for the country which implements the tax increase and in deterioration for its partner. The second one is a traded volume effect which consists in a decrease of traded volume for both the country which implements the policy and its partner. - s any policy change in this context has these two effects, it is quite possible that at a stage a country decides to decrease its tax and accept a deterioration of its terms of trade while benefiting from an increase in trade volumes. - If the objective of a government is to decrease domestic price of the agricultural good, the policy to be implemented is a decrease of the import tax in and an increase of the export tax in RG, both policies having the effect of increasing the world price of the agricultural good, and therefore hurting the third country BGD of which optimal policy is always free trade, both in terms of welfare and of food security (low domestic price for agricultural goods). Therefore, we see the possibility of governments engaged in a trade war for food security purposes, through which they respond to increases in agricultural world prices by increasing export taxes in agriculture-exporting country and decreasing import taxes in agricultureimporting country. This is illustrated on Figure 2. <Figure 2 included here> The top part of Figure 2 illustrates the case of agriculture-importing country which has an objective of agricultural domestic price constant at p0. Initially the world price is at which leads this country to impose a tariff of tm on agricultural imports such that.(1+tm)=p 0 (this accounts for the impact of tm on ). If an increase in agricultural world price occurs, from to
17 , this country has to reduce its import tariff to tm such that '.(1+tm )=p0. It has to be noted that agriculture-importing country s real income is decreased from y 0 to y 1. The bottom of Figure 2 depicts the case of agriculture-exporting country which also has an objective of agricultural domestic price constant at p 0. Initially, the world price is at which leads this country to impose a tax of tx on agricultural exports such that.(1+tx)=p 0 (this accounts for the impact of tx on ). If an increase in agricultural world price occurs, from to, this country has to augment its export tax up to tx such that '.(1+tx )=p 0. While its two trading partners are hurt by this world price shock and policy reaction, it is noteworthy that the agriculture-exporting country s real income is increased from y 0 to y 1. The fact that the WTO law does not deal with the use of export taxes and bind import tariffs, is clearly a supportive factor of this sequence of policy options, which can hurt trade partners, in particular small countries. No option is available for small countries that are hurt by all these beggar-thy-neighbor policies. Finally, it has to be emphasized that if under free trade a country (either RG or in our example) has an interest in implementing an export tax or an import tariff in the sense that this decision increases its real income (or decrease agricultural domestic price), it does not mean that at the end of the process each country is better off, as compared to free trade. In particular, each country s real income can be reduced as compared to free trade: this is the classical prisoner s dilemma. Nonetheless, a country can win from a trade war, in the sense that its real income can be greater than initially. final look at the impact on poverty is worthwhile. It is well-known (McCulloch et al 2001) that trade policy operates on poverty through various channels, in particular through domestic consumption prices of traded goods, domestic activity and demand for unskilled labor, public revenues and transfers from governments to households, amongst others. Here, an export tax on
18 agricultural commodities should reduce demand for (agricultural) unskilled labor while decreasing domestic consumption prices of food. The first effect is negative on poverty, while the second one is positive. Warr (2001) undertakes a general analysis of export taxes in Thailand and shows that the factors earning effects (through demand for unskilled labor) are greater than expenditures effects (through domestic consumption price of rice). His conclusions on Philippines and coconut oil are similar (Warr, 2002). 4. N ILLUSTRTION OF THE DOPTION OF EXPORT TXES ON GRICULTURL COMMODITIES ND THEIR EFFECTS THROUGH THE MIRGE MODEL OF THE WORLD ECONOMY This study uses the MIRGE model of the world economy in order to assess economic consequences of various trade reforms. The MIRGE model is a multinational, multi-sector CGE model (see Bchir, Decreux, Guerin and Jean, 2002, Decreux and Valin, 2007). In this study, the MIRGE model is used under its static version, with a perfect competition hypothesis and without modeling foreign direct investment. We use perfect competition instead of imperfect competition because the latter framework necessitates supplementary data (number of firms, mark-up, and magnitude of scale economies) and for calibration purpose which are difficult to gather for many regions. Moreover, we focus on agriculture which is usually characterized by strong competition. The use of the static version is also justified by the fact that we are not interested in the dynamics of the reform, but only in the long term impact on world prices and various regions macroeconomic variables.
19 The first source of data is GTP7 (see Narayanan and Walmsley, 2008 for a full documentation), which provides world macroeconomic accounts and trade flows for the year The market access data comes from the MacMap-HS6 version 2.1 database (Boumelassa, Laborde and Mitaritonna., 2008), which measures protection in 2001 and includes all regional agreements and trade preferences existing to this date. The geographic decomposition is a key element of the methodological design of the study. On the basis of the GTP7 database, we select countries which are wheat net exporters and wheat net importers. Table 3 presents the geographic decomposition. <Table 3 included here> The sector decomposition focuses on agriculture and identifies 25 sectors, 13 of which are agricultural, (see Table 4). <Table 4 included here> We implement six scenarios (Table 5). The first one is called Base and represents a demand shock in the wheat sector. We assume that the demand from oil exporting countries increases such that the world price of wheat is augmented by about 10%. Similar results will be driven by alternative assumptions such as an increase demand of wheat for biofuel mandate (ethanol production in Europe) or increase demand from large sian countries (India, China). We have chosen to locate the demand increase in oil exporters countries due to the diversity of their suppliers and the desire to not blur the results for other important importing regions. We then endogenize export taxes in net exporters of wheat such that the real domestic price of wheat remains constant (scenario ET). The next scenario is an endogenization of import taxes (scenario IT) under the same objective in net exporting countries of wheat. s scenario IT
20 implies the adoption of import subsidies we implement another scenario where decreasing import taxes are limited by 0 (free trade): this scenario is called IT0. Finally, we study two scenarios which cumulate two political situations described earlier: endogenization of export taxes and of import taxes (called scenario ETIT), and endogenization of export taxes and of import taxes with decrease in import taxes limited by 0 (called scenario ETIT0). <Table 5 included here> Table 6 presents import taxes required in net importers of wheat to keep domestic price of wheat constant. We have not been successful yet in making the model come to a solution where export and import taxes are both endogenous: countries enter in a never-ending escalation of export taxes and import subsidies spiral since on the importing countries side, the government have no fiscal constraints and can finance the subsidies using a lump sum transfer from household This is why in the ETIT scenario we keep the import taxes reached in scenario IT: therefore in ETIT scenario import taxes are exogenous. Variations of import tariffs are substantial, in particular in Middle East and North frica, the European Union and the region Rest of Europe. The European Union is obliged to implement an import subsidy in order to keep domestic price of wheat constant. <Table 6 included here> Table 6 presents the augmentations of export taxes needed to keep the domestic price of wheat constant in next exporting countries under three scenarios. When only export taxes are implemented in net exporters of wheat, the changes of export taxes are systematically less than 6% while it is always more than 45% when import taxes are also implemented in net importers of wheat. This illustrates the interdependence of trade policies and how a process of retaliation and counter-retaliation can worsen the whole process of policy decision. If import subsidies are
21 forbidden (column ETIT0), which may be a more realistic case, the changes in export taxes are much less important but remain substantial, in particular as compared to the scenario ET. In this case the range of export is quite realistic too: from 19% to 50%. <Table 7 included here> Table 8 indicates how world prices of agricultural goods are affected in various scenarios. lmost all agricultural prices are positively affected by various shocks due to substitution effects on the demand and supply sides, but wheat is by far the most exposed commodity to world price shocks. While world price of wheat increases by 10.8% thanks to the demand shock, it increases by 16.8% when net exporters of wheat react by increasing export taxes. Therefore, this policy reaction is typically a beggar-thy-neighbor decision as it is a rational decision from the single country point of view, but it amplifies the negative aspect of the initial shock. The effects are even bigger when net importing countries implement reduction in import tariffs (27.3%). When import subsidies are forbidden, the impact of import taxes on world prices (12.6%) is much more comparable to the one of export taxes. Finally, the combination of increased export taxes in net wheat-exporters and reduced import taxes in net wheat-importers causes dramatic increase of this commodity s world price (41.1% when import subsidies can be implemented; 20.6% when they are not). <Table 8 included here> Figure 3 indicates how national real income of a few countries is affected by these various policy shocks. From the previous section, it was expected that net wheat-exporters welfare would be positively affected by the initial shock and their policy response (increased export taxes) while net wheat-importers welfare would be negatively affected. That is clearly confirmed by this modeling exercise: rgentina s welfare is significantly increased under all
22 shocks, in particular under the one which combines endogenous export taxes and endogenous import tariffs with allowed import subsidies. Canada, Ukraine, and ustralia are other beneficiaries. On the other side net wheat-importers are significantly hurt by these shocks in terms of real income. The case of rgentina also reveals how increased export taxes on primary commodity can be used in order to promote high value processed sectors buying this primary commodity as an intermediate good. When the demand shock augments the world price of wheat by about 10%, the rgentinean production of wheat is increased by 4.5% (in volume) while the one of the OtherFood, that includes milling industries and other flour related products, sector is reduced by 0.6%. Under the ET scenario where governments of net wheat-exporting countries increase their export taxes as a reaction to this world price shock, the production volume of wheat and Other food sectors are constant. n increased export tax on a primary commodity is clearly a way of promoting the production of sectors using this commodity as an intermediate consumption. 5. CONCLUDING REMRKS This paper provided an economic analysis of the use of export taxes and illustrated why they have been so popular during the food crisis. Several elements can justify the implementation of such trade practices: (i) export taxes can raise the world price of exports and therefore improve terms of trade; (ii) export taxes can reduce the domestic price of the taxed commodity and benefit final consumers of this commodity; this element is important when the commodity is an agricultural one and food security is at stake; (iii) export taxes can reduce the domestic price of the taxed commodity and benefit intermediate consumption of this commodity; this element is
23 important when the commodity is a primary one and expansion of the manufacturing sector that buys it is at stake; (iv) export taxes increase public revenue which is beneficial in a country where fiscal receipts on domestic base are small; (v) export taxes are means of redistributing income from domestic producers to domestic consumers and public sector. s a consequence export taxes are attractive trade policy instruments. This paper helps to focus on one key element of the implementation of export taxes; these are typically beggar-thyneighbor policies that deteriorate terms of trade and real incomes of trading partners. This leads to the consideration of 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 of either net importer or exporter of the commodity. The food crisis clearly illustrates the point about retaliation and counter-retaliation of either reduce import duties or augmented export taxes. Several policy conclusions are worthwhile: (i) first, this process implies the implementation of non-cooperative policy equilibrium which worsens world welfare and calls for an international cooperation; (ii) while large countries can implement beggar-thy-neighbor policies which increase national welfare at the expense of trading partners, small countries do not have this policy option and changes in their own policy neither improves their welfare nor hurts partners situation; (iii) 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 increase in world prices while net-importers are hurt and have no capacity to retaliate efficiently.
24 In these conditions it is understandable that the European Union has just proposed to discipline such practices. 5 While this proposal has been well received by countries like Canada, the US, Switzerland, and Korea, it has been highly criticized by some developing countries like rgentina (which also confirms what was expected from our analytical framework), Malaysia, Indonesia, Brazil, Pakistan, Cuba, India, and Venezuela, with rgentina 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 (Clash in NM talks on proposed export-tax rules, Geneva, 1 June 2006, by Kanaga Raja (SUNS). 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 Balanceof-Payments imbalances. The proposes a full prohibition of trade-distorting export taxes. The and the US frequently implement bans of export taxes in bilateral agreements that they negotiate. The has been very active by demanding under the Doha Development genda substantive commitments by all WTO members to eliminate or reduce export taxes. Today, the and the US are wondering if certain Chinese export taxes are WTO-consistent and if they can bring the case to the WTO dispute settlement body (see Crosby, 2008). In 2008 China has raised export taxes on some metal resources products such as parts of steel products, metal ore sand, ferroalloy. The objective of this policy is to re-orientate the supply of these goods on the domestic market in order to decrease the price of intermediate goods for domestic manufacturing sectors. 5 The EC's proposal is available on WTO website (TN/M/W/11/add. 6).
25 Export taxes and export restrictions could clearly become a new and major bone of contention between high-income countries and agrofood exporting middle-income countries. 6. REFERENCES Bautista R. M. (1996), "Export Tax as Income Stabiliser under lternative Policy Regimes: The Case of Philippine Copra" in de Dios E. and Fabella R.V. (eds) "Choice, Growth and Development: Emerging and Enduring Issues" Quezon City: University of Philippine Press. Bchir, H.; Decreux, Y.; Guerin, J.-L. & Jean, S. (2002), 'MIRGE, a Computable General Equilibrium Model for Trade Policy nalysis', CEPII research center, Working Papers, Unlisted, CEPII Working Paper, --.
26 Boumellassa, H., L. D. & Mitaritonna, C. (2009), ' consistent picture of the protection across the world in 2004: McMapHS6 version 2', IFPRI Discussion Paper. McCulloch, N.; Winters, L. & Cirera, X. (2001), Trade Liberalization and Poverty: Handbook, Centre for Economic Policy research. Rodick, D. (1989), "Optimal Trade Taxes for a Large Country with Non-atomistic Firms", Journal of International Economics, 26:157:67. Warr P.G. (2001), "Welfare Effects of an Export Tax: Thailand's Rice Premium", merican Journal of gricultural Economics, 83(4): Warr P. (2002), "Export Taxes and Income Distribution: The Philippine Coconut Levy" Weltwirtschaftliches rchiv, 138(3): World Bank (1998), Indonesia, Strengthening Forest Conservation, Washington, D.C.
27 Tables and Figures Figure 1: partial equilibrium analysis of an export tax
28 price target Figure 2: general equilibrium analysis of export tax and import tax under domestic
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