Export taxes

Export tariff

An export tax is the reverse tool of an export subsidy. When a country implements an export tax, producers shipping a product abroad have to pay a certain amount to the government. As usual, the tax can be ad-valorem or specific. If the country that imposes an export tax is large, it will influence the world price of the good. In particular, the world price would increase, which improves the country’s terms of trade. Therefore, an export tariff can improve Home welfare (provided the country is large enough).

Effects of an export tax

When an export tax is implemented, exporting goods abroad is less profitable: now exporters must pay the tax. Consequently, less products are shipped abroad, creating an excess supply. This non-shipped production is channelled towards local consumption, which increases the local supply and pushes the local price down. The decrease in the local price benefits the consumers, but hurts producers (less exports and lower internal prices). This can be illustrated grphically as follows: Export_Tax_1 As can be seen, after the introduction of the expor tax, world supply is reduced and a new equilibrium emerges. Now, foreign consumers pay the full new equilibrium price $P^\star_S$. Local exporters gain, however, $P^\star_S - \tau = P_S$. Finally, since in equilibrium an exporter is indifferent between selling goods abroad (and gaining $P_S$) or selling domestically, we obtain that local consumers pay also $P_S.$ Hence, at the new equilibrium:

  • The price received by exporters decreases
  • The price payed by local consumers decreases
  • Consequently, exports decrease
  • The price payed by foreign consumers increases
  • The government collects taxes. Graphically: Export_Tax_2 The total welfare change is given by comparing the net gains (brought about by government revenue, orange area) to welfare losses experienced by producers (blue area). Export_Tax_3

As with the case of an import tariff, we can show that, as long as a country can influence world prices, it is always optimal the implement an export tax.

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