Export taxes in times of trade surpluses

Abstract

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.