Table of Contents

  • At their meeting in October 1981, Commonwealth Heads of Government noted that unstable prices and declining terms of trade were having an adverse effect on the economies of primary product exporting developing countries, and they asked the Secretariat to give priority, inter alia, to studying measures to improve the commodity export earnings of these countries. This study is part of the Secretariat's response to that request. It investigates the economic feasibility of groups of developing countries acting in concert to levy uniform export taxes on selected primary products with the aim of raising the prices of these products and thus helping to improve the terms of trade of the producing countries concerned.

  • The purpose of this study is to examine the feasibility of groups of developing countries acting in concert to impose ad valorem taxes on their exports of primary products, with the aim of increasing their net earnings in real terms by improving their terms of trade. Under certain circumstances, such a course of action could increase the welfare not only of developing countries but also of the world. The study also attempts to examine the implications for domestic processing of primary products and incomes stabilization of introducing such a policy.

  • A case for an export tax policy can be made using the concept of optimum tariff and this is shown in section (a) below. It can also be argued that for activities which generate economic rent (as described in paragraph 2.9 below) because of market imperfections and differential resource endowments, a larger share of these rents can be retained in the producing countries through the levy of export taxes. The latter approach is discussed in section (b).

  • We now turn to practical experience. Most export taxes have been based implicitly on one or other of the arguments set out above. There are, however, other reasons which apply in particular to individual countries acting in isolation.

  • To the extent that developing countries remain the major suppliers, they have an incentive as well as an opportunity to exercise market leverage and gain economic advantage through cartel action and, in particular, through export taxation. The dependence of the developed market economy countries on the developing countries for supplies of primary products, including minerals, is highlighted by the fact that as a proportion of their apparent consumption, imports of primary products from developing countries were 20 per cent as against 3 per cent in the case of manufactures. Imports of fuel (coal, petroleum and gas) from the developing countries in 1979/80 constituted on average 51 per cent of apparent consumption in the developed countries (ranging from 77 per cent in Japan to 20 per cent in the US); those of other minerals averaged 25 per cent (ranging from 37 per cent in Japan to 14- per cent in the US).

  • The results of the two models suggest that governments of developing countries producing at least eight primary products -coffee, cocoa, tea, bananas, bauxite, copper, tin and tropical timber (not used in the modified model) - could benefit by simultaneously levying a tax on the export of the product concerned. In the case of cotton, palm oil, rubber and sugar, the optimal rate seems to be low, while five others - phosphate rock, iron ore, manganese ore, nickel and zinc - are not suitable for such an arrangement.