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  • QA 198
    Question:
    Does the imposition of an export tax affect CIF or FOB prices? What about already existing contracts?
    Background:
    We read that a West African exporting country is with immediate effect doubling the export tax on the CIF value of coffee and cocoa shipments. In your view, what will be the impact on prices and, more importantly, on already existing contracts?
    Asked by:
    Financial sector - France
    Answer:

    Imposition of an export tax, usually, results in price falls for producers. New export taxes do not alter already existing contracts. *

    Contractual aspects

    Both the European Contract for Coffee (ECC) and the Green Coffee Association of New York (GCA) contracts state clearly that all taxes and duties, including any changes therein, applied by the country of shipment are for account of the shipper irrespective of when these are imposed. Taxes and duties in the country of destination are for account of the buyer, also including any changes therein. The great majority of the international trade in coffee is based on one of these standard contracts - see Chapter 4 of the Guide for a full review. Therefore, unless a buyer had previously agreed to accept possible increases in export duty after conclusion of the contract, there is no obligation on him to compensate the exporter.

    Price aspects

    Unless a commodity is in such short supply that sellers can raise prices almost at will, the end result of increased export taxes is lower prices at the farm gate. This is because roasters price all coffee 'landed roasting plant'. If the asking price for an average coffee rises above that of comparable coffees from elsewhere then either that asking price must come down or, the roaster buys a substitute. Higher landed prices for a single origin (due to increased costs rather than because the market generally has gone up) in the end translate back to lower farm gate prices. In extreme cases higher export taxes may result in lower production and exports…

    Comment

    Of course an individual buyer may give consideration to assisting an affected exporter. For example if the goods in question are of great importance to him whereas without some assistance the exporter may be unable to fulfil the contract. Much depends on the relationship between the two parties. But there is no doubt that imposition of increased export taxes 'with immediate effect' can cause grave harm to exporters locked into already existing contracts. Contractually speaking, they mostly have no means of obtaining redress from anyone.

    And, if export taxes are decided upon then they should be carefully structured to avoid unforeseen consequences. Imposing a flat ad valorem or percentage export tax tends to penalise the producer of better quality who, usually, should obtain a better price! Of course higher prices for all coffee may attract (higher) export taxes. Indeed, but such taxes should be structured in such a way that they encourage producers of better quality. By way of example, levying a fixed amount per tonne rather than using a percentage formula that automatically penalises those earning premiums. Or, base the tax on an average or median grade of coffee, thus ensuring high-grade exports pay proportionally less (and low-grades more). Nevertheless, there is also the argument that a straight percentage tax is fair in that it treats everyone equally. In the end therefore a balance has to be struck depending on Government's priorities and reasons for imposing a tax in the first place.

    In any event our preferred way of handling this kind of issue would be to consult with industry stakeholders on both the design and implementation of the tax, and to keep it under constant review to ensure it is not in fact destroying the industry. For example when prices fall again…

    * The Q&A service on this website only deals with coffee and this answer therefore refers to coffee only.

    Posted 15 August 2008.

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