It makes political sense to use export taxes as a form of a domestic subsidy for basic necessities, and from a macro economic
point of view, it a good way to express the political desire as well.

A negative is this will give domestic producers an incentive to ‘cheat’ to avoid the tax. Enforcement costs depend on they type of borders, etc.

It also puts downward pressure on the currency, though very modestly in this case, as it now takes more fx to buy the same products.

China – Passing higher food prices to Asia

Barclays Capital Research
by Wai Ho Leong

Tax on food grain exports comes shortly after subsidies removed.

In a further attempt to rein in food price inflation, China will introduce a one-year tax on grain exports beginning in January 2008. This will require exporters of 57 types of food grains to pay temporary taxes of 5-25%. Exporters of wheat, rye, barley and oats will be required to pay a 20% tax, while exporters of corn, rice and soy beans will have to pay 5%. Soaring food prices (+18% Y/Y in November), which have a 33% weight in the CPI, drove inflation to an 11-year high of 6.9% in November. The tax applies only to basic food grains. Other agricultural and processed products are not included, reflecting the government’s continued emphasis on promoting higher-value-added agricultural exports.

This latest administrative measure comes less than two weeks after China scrapped a 13% rebate on 84 types of exported food grains on 18 December. Prices have been rising, even though government reserves of corn and wheat were opened up earlier this year to meet domestic demand. The administrative measures taken in China will compound these pressures further, particularly in North Asian countries.

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