Export subsidies, as well as tariffs, are generally discouraged under WTO rules. They have been a major issue of contention among industrial trading nations, and the intent of international negotiations has been to reduce them over time. Nevertheless, in view of the above-mentioned bias against exports in the WTO regime, and their importance for developing countries, it is worth considering measures that would encourage them in the context of sound economic policy. Many countries have adopted a form of export incentives, through tax exemptions and drawbacks of duties paid on imported inputs.
25. Referring to the process of converting quantitative trade restrictions into tariffs, the FAO has noted that 'the reform process often resulted in levels of protection (at least potentially) above even the high levels that had been in effect in the mid-1980s' (FAO, The State of Food and Agriculture 1995, Food and Agriculture Organization of the United Nations, Rome, 1995, p. 248).
In developing-country agriculture, export products frequently are more labor-intensive than import substitutes, and therefore the bias against exports is especially prejudicial to prospects for raising rural employment and reducing rural poverty. If tariffs and export incentives were to be approximately equalized, normally the revenues from the tariffs would be more than sufficient to cover the support to exports for the reason mentioned above.
A principal problem with existing measures of export support is that they don't reach the majority of farmers. Most poor farmers don't use significant quantities of imported inputs and therefore cannot perceive benefits from duty drawbacks. Equally, most farmers do not earn (or report) enough income to pay taxes and therefore tax exemptions are not relevant for them. Typically, export incentives are applied at the level of the exporter, and if they reach farmers at all they are considerably diluted. Thus, implementation deficiencies have become a principal obstacle to an effective program of export incentives. For these reasons, in the design of policy it is important to give consideration to the administrative mechanics of an export subsidy, especially for products that are processed before being exported.
Some of the relevant factors can be illustrated by an example. Through a producers' association, coffee growers could be given coupons with X monetary units per kilo of coffee, coupons that would have no value unless they were sold to an exporter. For an exporter, the same coupon would be worth more, say X(1 + s). The value of s might range from, say, 0.20 to 0.50, or more if the exporter also were to process the coffee. The exporter would buy coupons only for the quantity that could be sold on international markets. Then the exporter, in turn, could exchange the coupons for cash in a bank upon presentation of the export receipt documentation. The exporter would receive the higher value, retaining a net incentive of sX units per kilo after paying X per kilo to the growers.
This kind of mechanism would be self-enforcing because even if coffee growers were given an excessive amount of coupons, exporters would purchase only the number of coupons that corresponded to the volume of their exports. Each coupon or voucher would have three segments, one of which would remain with the farmer, one of which would be retained by the exporter, and one of which would be given to the bank at the time of redemption of the coupon. The banks would be required to remit their coupon stubs and export documentation to a governmental authority for monitoring purposes.
This simplified illustration would apply if the exporter were the coffee roaster. The scheme could be modified to allow for intermediaries who did the roasting but did not export themselves. Then, in gross value, the coupon could be worth X to farmers, X(1 + s) to roasters, and X(1 + s) (1 + t) to exporters. One of the necessary conditions for the successful operation of this kind of scheme would be the existence of a strong producers' association. It would be expected to help design, implement and monitor the program.
The point of this brief illustration is to focus attention on the need for adequate mechanisms for providing incentives to agricultural exports from developing countries, which seem to be the orphan of international trade negotiations. Eventually, it may be possible to reduce both tariffs and export subsidies to insignificant levels in all countries, but that prospect is for the very long run. In the meantime, attention to the development of viable mechanisms for export incentives is required.
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