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Export taxes in times of trade surpluses

  • Howell H. Zee

This paper studies the comparative effects between an exchange rate appreciation and the introduction of an export tax as alternative policy responses to address trade surplus concerns in a country with a fixed exchange rate regime facing a downward-sloping world demand curve for its exports. It is found that an exchange rate appreciation would not alter the nature of the long-run equilibrium, and would thus be welfare-neutral. The appreciation would merely supplant foreign reserve accumulation as the mechanism that transits an economy from the short- to long-run equilibria, resulting in a lower long-run stock of foreign reserves. By comparison, an export tax would raise the export price in foreign-currency terms. Provided that the tax revenue is transferred back to consumers in a non-distorting manner, the welfare consequence of the tax would depend largely on the elasticity of the world demand for the country's exports. If the demand is inelastic, both national welfare and the stock of foreign reserves would necessarily rise in the long run as much of the tax burden would be shifted forward to foreign consumers. If the demand is elastic, the change to national welfare would depend on the relative magnitudes of a number of parameters, including most notably the import content of exports.

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Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 16 (2007)
Issue (Month): 2 ()
Pages: 137-157

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Handle: RePEc:taf:jitecd:v:16:y:2007:i:2:p:137-157
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  1. Rodrik, Dani, 1989. "Optimal trade taxes for a large country with non-atomistic firms," Journal of International Economics, Elsevier, vol. 26(1-2), pages 157-167, February.
  2. Panagariya, Arvind & Schiff, Maurice, 1994. "Can revenue maximizing export taxes yield higher welfare than welfare maximizing export taxes?," Economics Letters, Elsevier, vol. 45(1), pages 79-84, May.
  3. Yilmaz, Kamil, 1999. "Optimal export taxes in a multicountry framework," Journal of Development Economics, Elsevier, vol. 60(2), pages 439-465, December.
  4. Harry G. Johnson & Mel Krauss, 1970. "Border Taxes, Border Tax Adjustments, Comparative Advantage, and the Balance of Payments," Canadian Journal of Economics, Canadian Economics Association, vol. 3(4), pages 595-602, November.
  5. Jagdish Bhagwati & Arvind Panagariya & T. N. Srinivasan, 1998. "Lectures on International Trade, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522470, June.
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