An Example of the Successful Use of Export Taxes and Its Value for North-South Trade Negotiations

A recurring problem in the discussion on North-South trade relations is identifying good examples that show how controversial – trade-distorting – policy instruments are successfully used to promote economic development. The search is not a purely academic exercise as the case studies can be used to legitimise and defend policy tools in trade negotiations aimed at outlawing or restricting their domestic application. Export duties, i.e., taxes imposed upon the export of raw materials, are one of these instruments and the Economic Partnership Agreements (EPAs) between the European Union and developing countries are one attempt at circumscribing their use.

Because export taxes can be used to ensure a price advantage to domestic industries and therefore skew international competition – a good example are Chinese duties on the export of rare earth minerals – or enrich a small authoritarian elite, their use is actively discouraged by many industrialised countries. However, export taxes can also incentivise producers/exporters to process raw materials domestically into higher-value goods or components (that can be exported without additional charges). If used correctly, export taxes can thus promote the economic development and industrialisation of developing countries. Existing WTO rules do not discipline Members’ application of export taxes and only few countries have agreed to binding constraints on the use of export taxes during their WTO accession.

The EPAs between the EU and regional groups made up of African, Carribean and Pacific countries would limit the ability of governments to use export taxes considerably. For example, Article 13.1 of the EPA between the EU and the Economic Community of West African States (ECOWAS) declares: “No new duties or taxes on exports or charges with equivalent effect shall be introduced, nor shall those currently applied in trade between the Parties be increased from the date of entry into force of this Agreement.” According to Article 13.3, African members can impose export charges only “in exceptional circumstances, on a temporary basis and after consulting the European Union Party […] and with equivalent effect” of existing export charges.

But can export taxes be effective in promoting economic development? And if so, are there good examples that should discourage us from restricting their use? A brief look at the development of the Ethiopian leather industry suggests some benefits from the use of export taxes:

In February 2008, Ethiopia introduced a 150 percent tax on the export of raw and semi-processed animal hides and skins. This was meant as an instrument to encourage industries engaged in the preparation of raw hides and skins for export to shift to more advanced processing stages. Consequently, exports in raw hides and skins dropped significantly in 2009 and remained low, but exports in processed goods (“tanned or crust hides and skins”) almost doubled until 2011. In 2012, the Ethiopian government added a further 150 percent tax on the export of crust leather, i.e., leather that has been tanned, dyed and dried, but not finished. Again, this resulted in a signficant drop in exports of the affected products and the transformation of the leather industry to perform more advanced tasks in country.

The figure below summarises this development. It is based on data collected by the International Trade Centre for product group 41 (raw & semi-raw leather) and product group 42 (manufactured leather products). In Figure 1, I aggregate the different product types into four categories: (i) “raw hides” describes the most basic products, i.e., raw hides and skins (HS 4-digit: 4101-4103); (ii) “tanned hides” constitutes tanned or crust hides and skins” (HS 4-digit: 4104-4106); (iii) “prepared leather” represents more advanced leather processing (HS 4-digit: 4107-4113); and (iv) “manufactured leather products” are all finished leather products in product group 42.

Figure 1 – Ethiopian leather exports to all trade partners

EthiopiaExportsToWorld

Source: own calculation based on ITC data

Overall, the most drastic changes in the distribution of exports seem to occur in close temporal connection with the introduction of export taxes, as indicated by the two dashed vertical lines. The quick second transformation of exports in tanned hides to prepared leather from 2011 to 2012 suggests that the creation of this tax was better communicated and affected industries anticipated the costs. In addition, the adoption of this final processing step might have been much less demanding than the initial transformation. In parallel, exports in manufactured (finished) leather products started to increase from 2011. The same effects are visible in the trade relationship with the EU, see Figure 2.

These findings suggest that export taxes were used effectively to transform the Ethiopian leather sector from an industry focused on the preparation of raw skins to more advanced processing stages, while increasing the overall value of exports and encouraging the production of finished products. Of course, it is likely that other factors such as the growth in external demand, foreign investment and other policy interventions affected the transformation. The magnitude of the effects and temporal connection nevertheless suggest a considerable (positive) effect of the exports taxes on the economic development of the Ethiopian leather industry.

Trade agreements that are too restrictive of this and similar policy instruments might thus undermine national development strategies in the long run. Thus, it will be crucial for all members to the EPAs, the EU and its partners, to actively use review clauses such as Article 13.4 of the ECOWAS-EPA, which allow for regular reality-checks and revisions to the agreements “taking full account of their impact on the development and diversification of the economy of the West Africa Party” or other developing partners.

Figure 2 – Ethiopian leather exports to the European Union

EthiopiaExportsToEU

Source: own calculation based on ITC data

A brief addition:

Below I complement my assessment of the impact of export taxes on Ethiopian leather exports by also including exports of shoes with a leather component. These products are included in product category 64 (footwear), so I select all shoes with some leather content based on the HS 6-digit level. (This equals all product lines in category 6403, as well as line 640420 and 640510.)

I find that exports of leather shoes broadly mirror the growth rate in exports of other more advanced leather products. Ethiopian exports in shoes with leather content consequently increased specifically between 2011 and 2013, i.e., the time period where the government introduced export taxes on processed leather. This correlation, which also can be observed for the exports of other finished leather products, suggests that export taxes may have encouraged the domestic production of more advanced leather products.

Figure 3 – Ethiopian leather exports to all trade partners (incl. leather shoes)

EthiopiaExportsToWorldwithShoes

Source: own calculation based on ITC data

Ethiopia also recovered from the slight decrease in the exports of leather shoes after 2013 in 2016, when exports more than doubled to about $39 million.

Advertisements
An Example of the Successful Use of Export Taxes and Its Value for North-South Trade Negotiations