TradeVistas | export taxes have distorted Argentina's economy

Argentina Applies Over 500 Export Duties – How’s That Working Out?

 

Argentina is no stranger to economic crisis. Nearly 600 different export taxes aren’t helping.

 

Argentina is no stranger to economic crisis. Before the spread of the COVID-19 pandemic, Argentina was experiencing more than 50 percent annual inflation, among the highest in the world. The IMF recorded a 2.5 percent drop in Argentina’s GDP in 2018, which shrank another 2.2 percent in 2019, throwing some 40 percent of the population into poverty. With a debt-to-GDP ratio of almost 90 percent and facing economic contraction of as much as 5.7 percent this year, Argentina’s government stands at the brink of its ninth default on international loans.

How could it get worse?

Trade restrictions can reinforce poor economic outcomes. As reported to the OECD, Argentina introduced, increased or expanded 585 different export taxes between 2000 and 2012. Hitting its farmers hard, Argentina’s new government recently increased export taxes on agricultural commodities. Export taxes on soybeans, soy oil and soy meal increased from 25 to 33 percent, while the taxes on exporting corn and wheat were raised to 12 percent from around 7 percent.

Export taxes distort decisions about what and how much to produce, affecting the cost to produce and the price of the export. Whether the measure significantly affects the world supply and price of that commodity depends on the global market power of the exporting country. For example, Argentina is the world’s third largest supplier of corn and soybeans. To the extent that Argentina’s exports are deterred by the tax, supply in the domestic market could increase, driving prices for the commodity producer down but also creating an input subsidy for domestic producers that use that commodity. As a result of the distortive effect of export taxes on the price of traded goods, it is unsurprising that trade as a percentage of Argentina’s GDP is significantly lower than countries in its peer group of middle income countries.

Argentina 585 export taxes

So why have them?

It is more common for governments to restrict imports to try to protect domestic producers of goods that compete with imports. For example, restricting imports of bread might favor local bakers who could then sell their products at higher prices without fear of competition from foreign producers. Yet we know the cost of suppressing competition means consumers (companies and individuals) will pay higher prices.

In contrast, export duties are less common than import restrictions and have a different justification. Smaller, resource-limited countries sometimes apply export restrictions to a small number of products to ensure adequate domestic supplies or to lower domestic prices. As a major world exporter of agricultural products, Argentina’s export taxes are a way for the government to raise revenue and address its fiscal gap.

How’s it working?

Argentina requires export registrations and permits, while fully banning the export of certain commodities including scrap iron, steel, copper and aluminum. Export taxes vary but Decree 37/2019 issued in December 2019 sets a general rate at 12 percent, with exceptions. The incoming government has already adjusted the rates, increasing soybeans and soy products to 33 percent while reducing others such as rice from 12 to six percent, dry beans from nine to five percent. Others remained the same. Wheat, corn, sorghum, wine, fruits and vegetables are taxed at 12 percent, while beef and chicken at nine percent.

Heavy trade taxation has distorted and decreased the productivity of Argentina’s economy. Moreover, the duties create incentives for rent-seeking as businesses seek special exemptions or reductions in taxes. Special exemptions prop up businesses that may have otherwise failed, preventing workers and resources from moving to their highest-valued uses in the economy. Such outcomes follow the tenets of Adam Smith’s basic economic treatise, The Wealth of Nations: the result of price and trade intervention “can only be to force the trade of a country into a channel much less advantageous than that in which it would naturally run of its own accord.”

Argentina counter to WTO norms on export taxes

Argentina isn’t exempt from economic laws

Trade, Adam Smith went on to observe, is driven by “a propensity in human nature … to truck, barter, and exchange one thing for another.” Certainly, in Argentina this propensity is curtailed today by these restrictions that make it almost impossible for people to exchange goods and services abroad.

Economic laws are universal. Individuals in Argentina have the same creativity and entrepreneurial capacity as do people in other countries. An important way of helping to unleash that capacity would be for Argentina to remove all export and import duties without pitting sectors against one another.

In Argentina, policymakers believe that they can manage the economy better than the forces of market competition. But Argentina has spent more than a third of the last 70 years in recession. Global trade rules explicitly prohibit quantitative restrictions but permit export taxes under limited circumstances. Instead, Argentina uses them liberally and broadly. Eliminating them would enable free trade to spur economic growth.