Thoughts on export taxes and the WTO [updated]

oatsandsugar —  April 4, 2012 — Leave a comment

Barriers to trade are quite intricately managed by the WTO.  Classic trade barriers – as tariffs and quotas – are managed by the classic instrument of the GATT (’47, then ’95).  Subsequently, second stage trade barriers – technical barriers to trade and sanitary barriers to trade – are managed by the TBT and SPS agreements.  The importing country (at the expense of the exporting country’s competitiveness) implements classic and second-stage trade barriers.

Fosters Export lager Post Card

Arguably the most famous (or infamous) Australian export

Export Taxes

However, third type of barrier to trade has recently gained much international attention, it involves many larger primary-industry clients, as well as industrial companies with production in developing economies.  I am talking about export taxes: where a country charges a company (on top of the usual taxes applied to the industry) a tax for removing resources from the country (or for other exports).  This barrier is unique, because it does not involve the importing country whatsoever, the tax is applied at the exporting country’s border.

Whilst this type of barrier to trade has recently become news-worthy, it is not a new one: the earliest example of Australian export taxes that I could find was a New South Wales duty on gold exports dating as far back as the mid 1800’s (An Act for granting a Duty upon Gold, 1857).  The difference has been that recently it is becoming an increasingly harmful to world trade, since other barriers to trade are becoming more regulated, and less burdensome, and international foreign direct investment, with the view to export, is becoming more widespread..  As Miles Kahler described: “the decades long process of lowering trade barriers resembles the draining of a lake that reveals mountain peaks formerly concealed” – whilst he was discussing the emergence of Technical Barriers to Trade as a problem to be addressed by the WTO, the same analogy could be used to describe export taxes, which have not yet been addressed.

Historically, it was used for the same reason it is today, and this reason differentiates it from other barriers to trade: not to protect domestic industry from external competition; nor is it used to maintain price stability within the economy.  It is a unique trade barrier, since it reduces the implementing country’s efficiency in comparison to the world market.  However, it is often only implemented in a country where production is so much more efficient than the world market that the export will still be competitive even with the tax.

The Economics of Export Taxes

Export taxes erode a country’s relative advantage.  For example, if a country has an advantage in primary resources or cheap labour, an export tax will reduce this advantage, whilst, ideally, maintaining at least some of it.  To put it into an example, say the “world price” on coal was $10/tonne, and Australia was able to produce coal at $7/tonne: an effective export tax would tax the product at $1-$2, creating revenue for the government whilst still maintaining the profitability of the export.

This has several effects: firstly, the country is able to reserve some of the profits from their relative advantage to allocate to infrastructure or other industries, diversifying as insurance; secondly, they are able to insure against the depletion of their relative advantage, for example by redistributing mining profits to other sectors; third, they are able to create a “two price” product.  This is, again, best described through an example.  Say that China is able to produce a widget for 10c.  By applying at 50% export tax, the exported price is 15c, but the domestic price remains at 10c. This allows the government to shift a tax burden from the domestic market to the external market, maintaining revenue whilst encouraging domestic consumption by keeping prices low.

Export taxes and the WTO

The issues of regulating export taxes are clear.  Firstly, since an export tax does not cut the abilities of other nations to compete, it might not fall within the WTO’s mandate of increasing the efficiency of the international market.  Secondly, there would only be a large change to world prices if the exporting nation had near monopolistic control over the resource to be taxed.  Thirdly, an imposition might go further than is acceptable into undermining the sovereignty of a nation – this would be the first time the WTO regulates a country’s right to tax within its own borders.

There have been some indications that export taxes have hit the WTO agenda, with preliminary discussions occurring in the Doha Round of Negotiations, although the issue has not captured the interest of members in a round of negotiations so full of critical issues.  Further, even if export taxes were to be regulated, the Doha Round does not seem to be coming to a close, and any agreement made would probably have a generous implementation period – we are looking at 10-20 years until such regulation would come to effect.

However, given the drama in the international diplomatic scene arising from fears about Chinese export taxes, and proposed export taxes in mineral rich countries such as Australia (although a super-profit tax gained traction over an export tax), some nations have entered into unilateral bindings over their own export taxes, to increase the confidence of countries engaging in foreign direct investment.

This unilateral agreement to bind oneself, however, is uncommon.  Since most export taxes occur in countries yet to accede to the WTO, the organisation has used the negotiations surrounding the accession of these nations to push the limitation of export taxes. China, Mongolia, Saudi Arabia and others have bound themselves within their accession agreements, showing that diplomatic negotiations may be an effective tool in limiting the friction on global markets caused by export taxes.  However, this could only possibly be used for newly acceding countries.  A more comprehensive multilateral treaty, or regional negotiations would be required to reduce export taxes in other countries (like European countries, who have used export taxes to externalise price risks).

Conclusion

Export taxes are not effectively regulated, and are increasingly becoming a barrier to trade.  However, their effects on the world economy are much more limited than the effects of tariffs or other, more conventional international trade barriers.  Further, unlike more conventional trade barriers, they are more easily justified: a country maintaining its relative advantage without affecting the competitiveness of external producers and whilst increasing revenue.  However, they increase the risk to companies investing in a country: without stability in export taxes (as well as other taxes) the profitability of their projects cannot be effectively projected.  Thus, binding a country’s export duties will increase confidence in the international market, stabilising prices and increasing foreign direct investment.  A multilateral system for export tax binding has not yet been negotiated, but, perhaps now is the time to put in on the international agenda.

[Update] One more thing

One more thing I had been thinking about is with regards to the environment.  Many export taxes are placed on resources, especially energy-producing primary resources.  By artificially inflating the export price of these goods, they also artificially lower domestic prices, as it becomes more cost-effective to sell within the economy.  Thus, whilst use of the goods may decrease overseas (depending, of course, on price elasticity), often the goods become extremely overused within the domestic economy.  A relevant example, here, is, again, the Gulf states.  Because of export taxes, the domestic cost of fuel is extremely low compared to world standards.  This causes extreme overuse of petrol within those countries.  Thus, there is an environmental perspective to the export taxes issue as well.

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oatsandsugar

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LLM candidate at Cornell Tech. Consultant for King & Wood Mallesons and Project Evangelist for Legalese.

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