TWN Info Service on WTO and Trade Issues (Sept09/16)
24 September 2009
Third World Network

The importance and benefits of export taxes
Published in SUNS #6777 dated 23 September 2009 

Geneva, 22 Sep (Sanya Reid Smith) -- The European Union has been attempting to discipline the use of export taxes and restrictions by developing countries in the negotiations on non-agricultural market access (NAMA) in the World Trade Organization, as well as in its Free Trade Agreements (FTAs), including the Economic Partnership Agreements (EPAs).

A recent paper entitled "Benefits of Export Taxes" by the Third World Network has however outlined the benefits that developing countries will lose if they agree to such limits on export taxes.

The paper comes just as the Negotiating Group on Non-Agricultural Market Access is expected to discuss the issue of Non-Tariff Barriers (NTBs) and other issues in the WTO on 23-25 September.

The EU has a proposal on NTBs in the NAMA Chair's text of December 2008 aimed at binding export taxes at a level to be negotiated.

The paper by Third World Network notes the reasons for the EU's insistence on these disciplines and provides case studies of the ways in which export taxes have been used by both developed and developing countries as a source of government revenues; to encourage value-added and infant industries; to attract foreign investment; for price stability; to improve terms of trade; to deal with currency devaluations and inflation; and as a method of addressing tariff escalation in importing countries.

The paper says that while developing countries are rich in raw materials, developed countries, such as the European Union, no longer have sufficient supplies of the raw materials they need for manufacturing.

To ensure that it can now access a cheap supply of raw materials from developing countries, the EU is therefore trying to discipline developing-country use of export taxes and restrictions at the WTO, and in its FTAs, including EPAs.

According to the paper, developing countries are rich in raw materials. For example, over 50% of major mineral reserves are located in countries with a per capita gross national income of $10 per day or less. This creates new opportunities for these resource-rich developing countries, particularly in Africa.

However, the paper adds, the EU does not have supplies of many of the raw materials that it needs and it no longer has colonies in Africa and Asia to extract raw materials and use preferential export taxes to secure their supply for European manufacturers.

Therefore, the EU is attempting to limit the ability of other countries to impose export taxes, restrictions and prohibitions.

The basis for this position is its Raw Materials Initiative, in which the EU is concerned that it is "highly dependent on imports of strategically important raw materials", and notes that "Securing reliable and undistorted access to raw materials is increasingly becoming an important factor for the EU's competitiveness".

The EU further notes that "Increasingly, many emerging economies are pursuing industrial strategies aimed at protecting their resource base to generate advantages for their downstream industries".

The TWN paper observes that one of the three pillars of the proposed EU raw materials strategy is to "ensure access to raw materials from international markets under the same conditions as other industrial competitors".

According to the European Union, "Access to primary and secondary raw materials should become a priority in EU trade and regulatory policy. Trade and regulatory policy can improve access to raw materials in the following ways: The EU should promote new rules and agreements on sustainable access to raw materials where necessary, and ensure compliance with international commitments at multilateral and at bilateral level, including WTO accession negotiations, Free Trade Agreements, regulatory dialogue and non-preferential agreements. In this context, the Commission will reinforce its work towards achieving stronger disciplines on export restrictions and improved regulation against subsidies at WTO level."

The TWN paper gives examples of the use of export taxes. For example, England applied export taxes and later export embargoes on raw wool from 1275 to 1660, which was a significant factor in the development of its domestic textile industry. In fact, experts consider export taxes to be the most important tool in industrial development while England was industrializing.

Similarly, Indonesia developed its plywood industry through export taxes on logs, and later a total ban on log exports. Initially, imported plywood was 20% cheaper than domestic plywood, but by using these and other supportive measures, Indonesia's share of plywood exports in the world market rose from 4% to 80%.

The paper also outlines similar measures taken by Canada to encourage local wood processing and the resulting number of jobs claimed to be created.

The paper goes on to highlight the use of export taxes as an important source of government revenue: for example, the Chilean Government levied an export duty on nitrate, which for a long time supplied about half of Chilean Government revenue.

Export taxes also occupied an important part of fiscal structure in some Latin American countries. For instance, in 1939, export taxes provided 16-19% of total tax receipts of the central governments of Guatemala, Haiti and Mexico.

The paper also notes that in a world in which tariff escalation can mean that the developed- country tariff on a fully processed foodstuff is twelve times higher than products in their first stage, it is not surprising that a paper published by the WTO Secretariat notes that an export tax on the unprocessed commodity, by reducing its domestic price, will favour the development of the local processing industry, thus offsetting the distortionary effect created by tariff escalation.

With respect to the ability of export taxes to combat commodity price instability, the TWN paper cites the example provided by the WTO Secretariat of Papua New Guinea's variable export taxes, which are high when export prices are high and vice versa.

The paper points out that there are also procedural benefits to using export taxes. World Bank staff members note that an export tax is relatively easy to administer, there is less uncertainty in its operation and it could potentially raise producing countries' welfare.

Additionally, "as compared with an income or profits tax, the export tax operates more quickly and more directly".

The paper also provides more detailed case studies on, for example, Russia's use of export taxes to raise government revenue and develop wood-processing industries; Mongolia's use of export taxes to develop its textile industry; and Mozambique's experience with the reduction of the export tax on cashew nuts.

In the context of the current economic crisis, when developing countries need additional revenue to fund social safety nets and stimulus and rescue packages, it is even more important that they retain the policy space to obtain revenue from export taxes, where possible.

Similarly, sharp fluctuations in commodity prices and drops in demand for developing-country exports have highlighted the need for developing countries to diversify exports and increase domestic value-added processing to provide employment.

The EU proposals to discipline export taxes at the WTO and in their FTA/EPA negotiations with approximately 123 developing countries threaten the ability of developing countries to address these urgent problems through the widely-used mechanism of export taxes.

(The full paper can be downloaded from: www. twnside. org. sg/title2/par/Export_Taxes. doc) +