Monday, 14 March 2011

Export taxes? I wouldn't!

By Xavier Cirera

I just returned from Arusha, Tanzania, where I was giving some training on Trade Policy Analysis using Tradesift. This is a powerful software tool developed in a spinoff company, InterAnalysis, by our colleagues at the University of Sussex to support trade policy analysis and which complements the research work done within the university itself in CARIS. The training was hosted by TRAPCA the Trade Policy Centre in Africa, an institution which provides high quality postgraduate courses in trade policy analysis for African students.

It was encouraging to see the high level of analysis carried out by the participants and their commitment to trade policy, which will surely result in improved domestic trade policy strategies and increased ownership of their formulation. Participants were mainly from the East African Community (EAC) region, and we had the chance to discuss and analyse their main trade policy challenges:

• Regional integration
• Domestic policies
• Economic Partnerships Agreements with the EU.

One particular element that I found interesting was the relative preference that some participants still have for export taxes when trying to develop industries to process commodities, for example leather. While there is a clear need to increase producers’ value added and reduce price volatility, export taxes often depress domestic supply and farm gate prices. 

These taxes are easy to implement, which may explain why they are used so frequently.  But although the initial objective may be to increase producers’ livelihoods, the final outcome often has a perverse impact on income distribution affecting producers and poor households who are hit by lower prices and earnings. Export taxes are a clear example that trade instruments are often not the most effective measures to address agricultural and industrial policy objectives.

Export taxes also have an impact on food prices.  Although often neglected, when imposed on large exporters they reduce world supply, increasing world prices, and damaging net food importers.

As government objectives go, enhancing quality, productivity and processing of agricultural households and fostering domestic industries are fine. However, export taxes are by no means the way to achieve them.

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