IFPRI Research Blog

Differential export taxes along the oilseeds value chain

December 9, 2015
by Antoine Bouët and David Laborde

The following post, written by Antoine Bouët and David Laborde from IFPRI’s Markets, Trade, and Institutions Division, is part of an ongoing series of researcher-authored blog stories highlighting ongoing research at IFPRI.

Export taxes are a commonly enacted policy worldwide. Export taxes are often applied as a food security policy, as the main effect of these taxes is to decrease the domestic price of a good. Other justifications include terms-of-trade improvement, public revenue increases, and a response to tariff escalation in developed countries.

Tariff escalation, defined as a situation in which import duties increase as a product becomes more processed, results in higher “effective protection” for the final production stage of a value chain. When applied in developed countries, this policy favors processing industries within those countries and increases incentives for developing countries to only export unprocessed primary commodities. As a response, some developing countries apply decreasing export tax rates along their production value chains to promote domestic processing. This tax system is sometimes referred to as Differential Export Taxes (DET).

We commonly observe tariff escalation by the European Union (EU) and the United States (US) along the oilseeds value chain, which is characterized by several important stages of transformation: seeds, oils, and meals from crushed seeds, and biodiesel from oils. Examples of countries responding with DETs for oilseeds include Argentina (soybeans) and Indonesia (palm oil).

In a recent paper, we tested these observations using a calibrated, partial equilibrium model of the oilseeds value chain. The model we designed incorporates 10 countries/regions (Argentina, Brazil, Canada, China, EU, India, Indonesia, Malaysia, Ukraine, and the US), three production stages (the production of seeds, the production of meals and oils, and the production of biodiesel), and four types of seeds (soybeans, sunflower seeds, palm nuts, and rapeseeds). This model is the first ever to evaluate how DET affects a value chain. The model includes export taxes; for example, Argentina imposed a 35 percent export tax on soybeans, a 32 percent rate on soybean byproducts (soy oil and soy meals), and a much lower rate (20 percent) on soy biodiesel. In contrast, the EU and the US apply import tariffs on vegetable oil but do not apply tariffs on oilseeds. The model can be used to perform policy experiments as taxes on various stages of production are reduced or eliminated.

Consider first a scenario in which all export taxes in Argentina and Indonesia are eliminated. The tax removal raises domestic prices and reduces the international price of raw products. International seed prices of palm nuts and soybeans fall the most because they face higher initial export taxes. In Argentina, the elimination of all export taxes increased production of soybeans by 8.9 percent, and sunflower seeds by 4.0 percent. As export taxes are also levied on oils and meals, the domestic prices of processed goods increase, raising the crush margin and promoting higher production (a direct DET effect). On the other hand, the elimination of export taxes on soybeans promotes raw commodity exports of and reduces local production of downstream products (oils and meals), as production costs rise and the effect on the crush margin is negative (an indirect DET effect). In Argentina, the direct effect dominates, so the production of soy oils increases by 4.1 percent.

Second, consider a case in which only export taxes on seeds are removed. The domestic price increases significantly; in Argentina, the domestic price of soybeans increases by 26.0 percent. This policy increases the cost of production all along the value chain: the domestic price of soy oils and biofuels increase by 1.1 percent and 0.4 percent, respectively.

Third, if the removal of export taxes only concerns the intermediate stage of production in Argentina, the direct effect is a 30.1 percent increase in the domestic price of soy oils. Such a policy also has both upward and downward effects on prices along the value chain. The upward effect is an augmentation of the production of soy oils, which implies increased soybean demand, and an increase in domestic price (+0.9 percent). The downward effect occurs through an augmentation of the production cost for the biofuels industry (+0.9 percent). However these effects are comparatively small. The DET in Argentina has a slightly positive impact on the local production of biodiesel. Removing the DET decreases biodiesel production by only 0.4 percent in Argentina.

Finally, simulating only the removal of the export tax on biodiesel in Argentina, we observe a 9.6 percent increase in local biodiesel production. On the other hand, if export taxes are removed only on soy oils in Argentina, the production of biofuels is significantly reduced, by 16.4 percent. Similarly, reductions are observed at higher production stages (i.e., the impact that removing the export tax on soybeans has on the production of soy oils and meals). Thus, while the claim that DETs in agricultural commodity-exporting developing countries are implemented to support those countries’ processing industries is valid, a positive export tax on products in the final processing stage does not promote production in the final stage.

What are the effects of these policies on farmers, the crushing industry, the biofuels industry, livestock producers, and final consumers in Argentina? As expected, the elimination of DETs in Argentina and Indonesia benefits Argentina’s producers at the first production stages (seeds and crushing), while public revenues, households, and producers in the final production stage (biofuels) are hurt. The removal of export taxes at only one stage of production positively affects that specific stage, as well as upstream stages thanks to an expansion of input demand. Conversely, downstream producers are hurt, through an increase in the cost of inputs. For example, removing export taxes on oils and meals increases the surplus of both the crushing industry and farmers, but hurts the biofuels industry, and final consumers.

Adding all of the surplus variations allows us to estimate the countrywide impacts of various scenarios. Removing the DET in Argentina has an overall negative impact for the economy: the benefits for farmers and the crushing sector are smaller than the losses of public revenues and the losses among consumers, the livestock sector, and the biofuels industry.

In countries like Argentina or Indonesia, therefore, a DET is a proper response to tariff escalation since it allows a production augmentation at the final stages of the value chain (biodiesel). As implemented in Argentina, however, DETs do not support the production of vegetable oils. Moreover, the production of biodiesel in Argentina would benefit from the only removal of export tax at this stage of the value chain while keeping constant export taxes at upstream stages of production. We therefore conclude that DET, at least as it is implemented in Argentina, not only augments the production of processed oilseed goods but also serves the objective of generating public revenue.