Archive 2005

  • 20.12.2005

    Evaluating the Ukrainian Oilseed Export Tax


    Sunflower seed (sunseed) is a crop for which Ukraine definitely has a comparative advantage. Over the last decade Ukraine has accounted for 10-16% of the total world production of sunseed and for 5-39% of the total world trade in this product. Sunseed is also the basis for the country's vegetable oil industry, which had a market share of about 16% on the world sunflower oil (sunoil) market in 1999-2000. Of course, while producers are interested in higher domestic sunseed prices, sunoil producers (crushers) prefer lower prices and sufficient supply of cheap raw materials. As a consequence, it is no wonder that Ukrainian policy makers have repeatedly been confronted with the issue of export taxes for oilseeds. In October 1999, a 23% export tax was introduced. In July 2001 this tax was cut to 17%. A further cut has been proposed, but this proposal has encountered fierce resistance from the sunseed crushing lobby, which has proposed the introduction of a production subsidy for farmers instead that would compensate for the losses caused by depressed domestic prices for sunseed.

    Even though export taxes have not become a major issue in trade negotiations and have not explicitly ruled out by the WTO (OECD 2003), they are more widely used than might be expected, particularly by countries exporting primary commodities. About one-third of all WTO members imposed export taxes (PIERMARTINI 2004). In particular, the following characteristics can be found among users of export taxes: They are often used by low and medium income countries with a high dependence on a single commodity for GDP and export earnings. Export taxation is further encouraged in the presence of weak domestic taxation systems, but also by high world market shares of the country, the latter offering terms-of-trade gains when export supply is restricted by export taxation. Finally, the presence of an underdeveloped or inefficient processing sector is often used as a justification to impose taxes on the exports of raw materials in the tradition of the infant industry argument. To some degree the oilseed export tax imposed by Ukraine can be explained by all of the above aspects and is therefore typical to a certain extent, which, however, does not mean that it is economically justified.

    The aim of this paper is to give an overview on recent developments in the sunseed sector in Ukraine, investigating the degree of 'optimality' of the current export tax rate, and then empirically analyse policy options regarding the export tax. Our analysis employs the recently developed partial equilibrium 'Regionalised Agriculture Sector Model for Ukraine' (RASMU). Our main findings are:

    • the export tax currently used for oilseeds in Ukraine is probably twice as high as the theoretically optimal value,
    • the low 'optimal' tax rate derived in our analysis suggests a marginal overall welfare gain from the tax, rendering it effectively idle,
    • a compensatory production subsidy for sunseed producers, as recently proposed, would compensate them for the losses they incur as a result of the export tax, but at a considerable cost.

    It would also perpetuate the rents received by sunseed crushers.

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