Tuesday, April 1, 2008

Export Taxes and Hunger

Last week I lectured on trade policy to my undergrads. I mentioned that the United States Constitution prohibits Export Taxes, and I got a predictable response. "Why would a government want to tax exports?" one clever student asked. I used it (as was my intention) to explain the concept of Lerner Symmetry, which basically illustrates that in terms of relative prices, output and welfare, an export duty is equivalent to an import tariff in the way it affects (damages) an economy. The basic idea is that both of these instruments limit trade and so it doesn't matter which end you limit it from: coming or going. A tariff de facto restricts exports as well as imports. I then gave a couple of examples of how countries use export taxes to advantages in a similar way to tariffs: for example, when the US threatened tariffs if Canada didn't limit soft lumber exports, the Canadians brilliantly achieved the limitation with a tax on exports. The net result was the same as if the US had imposed the tariff, except the Canadian government got the tax revenue instead of Uncle Sam.

The more real answer is that once a politician gets something in his (her) head that something is a good idea for accomplishing some political end, there's virtually no stopping him. No matter how noble the cause, politics can be pretty nasty about finding a way to blunder it, but it's not always their own fault. Developing countries have been applying duties for some time now on food exports, with the goal of retaining greater quantities of food for a hungry domestic population. The issue was discussed in this week's Economist. But the question is: "Does this do the job?" In short, yes, if Lerner symmetry holds theoretically. The whole point behind these policies, and behind the principle of Lerner Symmetry is that the change will not impact the world price much. In effect, in order for producers to continue exporting with the duty, the world price must be able to cover the domestic costs (domestic market price) plus the tax (otherwise, continue supplying the domestic market to avoid the tax). So, whereas taxes on imports increase the domestic price of imports, taxes on exports decrease the domestic price of the exported good. It is exactly this that policymakers rely upon when they impose such a "recipe for trouble" on the economy. Sure the adverse effects outweigh the good they do, but the duties do make food cheaper. And, conveniently for a eggheaded economist like me, they illustrate and rely upon a theorem that seems counterintuitive at first blush.

Basically, the policies boil down to a second-best solution: they do the job, but of all the options that could do it, trade taxes are among the worst. Better would be to subsidize consumption directly, perhaps by taxing non-food goods and transferring the revenues to poorer households in the form of in-kind transfers. The reason the duties are laid on, the Economist correctly points out, is political expedience, but I think that this keen observation oversimplifies the issue. Many countries have extreme difficulties collecting taxes other than those from trade, and many solutions that would be best solved by direct subsidies are often more than inexpedient; they're infeasible. In nerdy terms, there's an important political constraint that the writers at the Economist isn't taking into account. Then again who am I but a bookish economist who only knows abstract inapplicable theories?

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