Economic effects of export restrictions

The economic effects of export restrictions are relatively well understood. Bouet and Laborde (2010) argue that export taxes and import tariffs exhibit strong similarities, and are even equivalent in terms of their impact on (domestic and foreign) welfare.

For the importing country the direct effect of an export tax is an increase of the import price and, depending on the price elasticity of imports, a decrease of the import volume for a given product. Export quotas or bans indirectly increase import prices through a reduction of world supply. These effects are especially strong if the exporting country taking the measure is a large supplier of the world market. Faced with this situation, importing countries will typically try to switch to other available sources of supply. Substitutes, however, can be costly or even unfeasible in the short-term, depending on the product concerned.

Concomitantly, by imposing export restrictions, the exporting country diverts supply of the raw materials from the global market to its domestic market. This diversion lowers domestic prices and so provides a cost advantage to local downstream industries, while at the same time penalising local producers of raw materials. In the absence of market failures, the net effect on the country’s welfare is unambiguously negative. The only instance where the exporting country can hope to reap net welfare gains from an export tax or quota is if it has such a large share of the world market that it can improve its terms of trade by influencing world price unilaterally. This case is not purely theoretical because, for certain agricultural and mineral commodities, some producer countries may indeed possess substantial power over prices due to their important world market share. Being dependent on their exports, importing countries then have no choice but to pay a higher price for the product given a duty or quota, thus incurring a welfare loss. It can be shown that while the exporting country may gain, on balance its policy still means a net loss of welfare to the world (OECD, 2010a; Bouet and Laborde, 2010).

If a raw material is in some sense critical for the industrial sector of importing countries then imports are insensitive to price changes, at least in the short run. If the inelastic demand is met from a dominant supplier, such as is the case for a range of critical metals and minerals, an export tax may not lead to significant diversion to the domestic market. As importing countries have no alternative supplier, the main effect will be an increase of world prices, while demand continues to be driven by the volume of production of the processing industry in the importing country. In such a situation, the distributional effects prevail, as a larger share of economic rents accrue to the exporting country’s government. In contrast to a tax, a quantitative restriction on exports of the critical raw material could be successful in diverting supplies to the domestic market.

In the long term, lower revenues in the primary commodity sector of the exporting country may have the effect of discouraging investment and production, and thus stifle the country’s ability to exploit its “natural” comparative advantage. For non-renewable raw materials, such as minerals, substantial and consistent investment is crucial for managing exploration and exploitation of reserves in a manner that ensures steady supply of the resource for foreign sales or domestic use over the long term and a sustainable source of income for the country in question. The imposition of export restrictions can dampen this investment.

The development of downstream industries depends not only on the availability of cheap raw materials inputs. Other factors, such as infrastructure and transport costs, the geographic location of major markets, energy costs, are other significant determinants of such industries. Indeed, the further one moves downstream in the production process from mining to mineral processing, the link between mineral endowment and output becomes weaker (Tilton, 1992). For high-value added downstream industries, such as high-tech alloys, the comparative advantage lies in highly skilled labour and infrastructure, and the specific raw material may represent only a small share of costs. In this case a lower, policy-driven input price may not have a large effect on developing the downstream industry. Complementary policies and institutions would be needed more to overcome those constraints to industrial developments than artificially cheap raw materials inputs (Rodrik, 2008).

The price gap created between the world and the domestic prices can have further effects. When this gap is sufficiently large there is a strong incentive for locals to engage in illegal trade so as to obtain the higher price prevailing abroad. To contain illegal selling the government may have to incur additional expenses, which tie up resources, and could potentially offset revenue generated through the imposition of the export tax, and which the economy could have usefully employed elsewhere.

Mutually spiralling export restrictions represent a real threat to global markets. If an exporting country moves to reduce exports, other competing supplier countries may in turn introduce export restrictions of their own for fear that their domestic processing industry will be disadvantaged vis-a-vis foreign competitors. This ‘bandwagon effect’ can severely disrupt global markets and will also backfire on the export restricting country. If prices of other major suppliers also rise foreign demand will have less scope to shift, resulting in a smaller diversion to local markets and a thus a smaller local cost advantage. Only by moving to raise export taxes even further could the exporting country now keep the domestic price below the world price, but this could encourage another round of restrictions.

The next section provides some examples of some of the adverse effects of export restrictions on world markets and on their limited effectiveness in achieving their stated objectives.

 
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