The global welfare benefits of slashing the export tax

September 10, 2013 Rebecca Sullivan

Taxes were on the minds of many as politicians descended upon St. Petersburg for the G20 summit last week, with financial transaction taxes, tax havens, and illicit financial flows featuring prominently on global agendas.

In the realm of export taxes, which are taxes levied on goods sold abroad, recent IFPRIresearch suggests the abolition of those taxes could be a windfall for the global economy, resulting in a net gain in global real income to the tune of US $133 billion per year by 2020 as well as a nearly 3 percent increase in world trade volume. In that case, why are export taxes still being levied?

Export taxes are popular in developing countries because they can lead to improvements in terms of trade, an increase in government revenues, and enhanced food security in the short term—encouraging food producers to sell domestically instead of exporting, which increases local food supply, and reduces prices for the consumer. Export taxes can also spur a drop in the price of inputs for processed goods because the tax dissuades the export of raw materials, which then supports domestic industry.

But in a recent discussion paper that modeled what would happen if all export taxes levied by World Trade Organization (WTO) and non-WTO countries were removed between 2010 and 2015, IFPRI researchers David LabordeCarmen Estrades, and Antoine Bouёt found that export taxes distorted the global economy and that removing them could produce gains for both developing and developed countries alike.

However, determining winners and losers in a world without export taxes is not a cut and dry exercise. The degree of a country’s market power plays a large role: Does country A hold a large enough share of the market to affect prices of a given good, which could then impact their terms of trade? Elasticity of demand is also an important consideration: How rigidly tied are consumers to a given good? Are domestically produced substitutes or substitutes that could be purchased from another country available? Is the country a net producer or consumer of a given good? For example, oil exporters would experience real income loss with the abolition of export taxes, while energy importers would benefit due to the drop in international oil and gas prices.

Ultimately, the researchers concluded that the welfare-enhancing impacts of abolishing export taxes overshadowed the negative. And global policymakers should take note: nixing these taxes produces “gains equal to two-thirds of those associated with the complete elimination of import duties and more than the expected gains of [proposed reforms of] the Doha Round.” Developing and emerging economies stand to win and medium and small food-importing countries would also benefit by doing away with export taxes, particularly from the standpoint of food security, said researchers.

As world leaders discussed global tax regulation reforms on Friday, here’s hoping they will act upon their commitments to “open trade and investment, expanding markets, and resisting protectionism in all its forms.”

Related materials