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Sri Lanka to re-impose export tax on spices, denying farmers freedom

ECONOMYNEXT – Sri Lanka will re-impose a tax on exports of raw spices, a top official said, removing a significant trade freedom proposed in the 2016 budget and denying farmers the chance for an international price for their output.

Since an individual government cannot push up the international price of a competitively traded commodity through its coercive power by a tax, the farm gate price of an agricultural product will necessarily be reduced by the amount of the tax.

An export may not harm farmers for some time only if the export country has strong market power accounting for a large share of the market.

However over time the export cess or tax can also reduce the global market share as farmers in other countries, who gets the higher international price and more profits, expand their market share and farmers in the export taxed country move to businesses that are more profitable and are not taxed.
"With the initiative of the state minister [of international trade] and the honourable minister we have discouraged the cess being removed," Export Development Board Chairperson Indira Malwatte told reporters.

"Because the idea of the cess is that it should be ploughed back to the industry. For example the spices, in cinnamon there so much more value addition that can be sent from the country."

"So is pepper, nutmeg, cloves.

"We are discouraging the export of spices in the raw form and getting them to invest in improving their productivity and going into more value added product like essential oils."

Reporters pointed out that farmers are not responsible for what happens higher up the value chain and they should not be penalized for engaging in an honest legal business of growing plants.

Producing ready-to-use packaged products, perfume, or medicine out of spices, or even engaging in international trade is someone else’s business and speciality.

The business of the farmer is to farm, and he has a right to the correct international price if Sri Lanka is a free country, freedom advocates say regardless of what other people should and should not do.





State Minister for International Trade Sujeewa Senasinghe said the point that farmers are dis-advantaged by an export tax has been brought out in a discussion and he was mindful of the concern.

But the idea of ‘forcing’ value added production through a coercive tax had won.

"There was a debatable thing whether you should have a cess on raw materials or not but we are very decided that nothing should be sent out of the country without value addition," Malwatte said.

"We have an issue of land. The land mass is such that we cannot just expand our farms.  So we have to increase productivity."

She said the cess money will be used by the EDB to help farmers as well.

Malwatte however said a removal of an export cess will not benefit farmers but only intermediate traders, who will not pass it down to farmers.

An export tax will give an effective ‘subsidy’ to a so-called value added producer, in the form of the lost international market price to the farmer, which he can arbitrage.

While some exporters will continue to compete in international markets by purchasing the spice at a price reduced by the export tax and meet the international price after pushing the tax to the farmers, others may try to arbitrage the tax by selling packed products.

The farmers will only get the international price and nothing more after the bureaucrats are satisfied that enough ‘value addition’ is done by those engaging international trade, may be several years down the line.

Within that time some farmers may move to other areas, but may will simply be victims of a state intervention and suffer the loss as they have no political clout or economics knowledge to convince interventionist decision makers.

Freedom advocates say is not correct to penalize hard working farmers who make a product that meets international quality standards because other interventionists in government are giving subsidies to encourage farmers who make products that do not meet international quality or price, such as rice.

The rubber export tax for example forces farmers to accept a lower than international price, but if they grow oil palm instead, an international price plus an import tax is provided.

A government’s coercive taxes are effective within the domestic geographical area where they can corner and trap the consumers through it coercive power, but not in foreign countries where they have no control over consumers.

That is why an export tax will reduce the farmgate price, but an import tax can raise it, until alternatives are found.

By arbitraging the import tax farmers can make large profits out of palm oil instead of producing rubber which is taxed at export. Many plantations companies are moving into palm oil and uprooting rubber.

Plantations companies did not ask for the tax, but it was brought to support coconut farmers, who are politically savvy unlike the hard working and more efficient spice farmers.

Coconut farms are also owned by people who are engaged in other professions, and are more educated and articulate. (Colombo/Dec17/2015)

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