Effect of Trade Taxes on Forestry and Agriculture
Attributes
Medium: Land
Country: Malaysia
Analytical Framework(s): Other
Study Date: 2000
Publication Date: 2001
Major Result(s)
Study Note: In Southeast Asia and other tropical areas, the most important cause of tropical deforestation is the conversion of forests for agricultural use. Tropical forestry helps to hasten the process of land conversion by providing access into the forests. The practice of logging itself, with its destructive timber extraction techniques and regenerative investments, also contributes to the overall rate of deforestation. Whether a piece of forestland will be used in forestry or converted for agricultural use depends on which land use option yields the greatest net returns. However, since government policies distort the relative returns between different land use options, they can lead to varying forestland alterations. Misguided government policies have often been blamed for hastening deforestation in the tropics. Although the adverse effects may be obvious for policies such as subsidies for timber mills and for conversion of forestland for agricultural use, it is less obvious why certain macro policies, such as trade restrictions, should have a negative effect on forest resources more often than they protect them. Since there are many trade policy distortions in the economy that affect both the returns and relative returns across land-based sectors, it is useful to examine together some of these distortions and their implications for forestland use. In this paper, an applied general equilibrium model is used to examine the effect of a simultaneous reduction in trade taxes in selected forest sectors and the agricultural sector. A general equilibrium model is useful for capturing inter-sectoral interactions such as these. The focus of this study is on Southeast-Asian exporters, namely Malaysia and Indonesia, and the wood sectors analysed are the log, sawnwood and plywood sectors, which are amongst the most important in these countries.
Study Details
Summary: An applied general equilibrium model of the global trade in forest products has been used to assess the impact of tariff and export tax reductions on forestry, the wood processing sector and the agricultural sector. The focus of this study is on Malaysia and Indonesia and the implications for their forest resources. Three key results have emerged: firstly, trade liberalisation does not necessarily lead to increased log production since the real producer's price does not always rise. Secondly, the Uruguay Round tariff changes may make forestry a less-attractive form of land use when compared with agriculture. Thirdly, the proliferation of log export barriers amongst tropical countries has a cartel-like effect; thus elimination of such barriers may be detrimental to tropical exporters.
Site Characteristics: Although many countries are involved in the international trade of forest products, the majority of imports and exports can be attributed to only a few countries. In 1996, five countries accounted for 53.6% of the world exports of forest products; while on the import side, five countries accounted for 49.2%. The USA and Japan alone were responsible for almost 30% of the world's total forest products imports. On the whole, the developed countries dominate the overall trade in forest products. This is particularly true for trade in pulp, paper/ packaging, and paper/paperboard. Malaysia is the largest exporter of tropical logs, but it ranks third in terms of exports of all logs, after the USA and Russia. Malaysia also dominates the exports of tropical sawnwood (3.7 million m3 exported in 1996), making it the fifth-largest exporter of all sawnwood. Indonesia has been a key exporter of tropical sawnwood, but its exports declined between 1995 and 1996 to 440,000 m3 due to high export levies. The only wood export category that is dominated by developing countries is plywood: Indonesia alone accounts for 46% of world exports, while Malaysia and Brazil account for a further 17% and 4% respectively. Since Malaysia and Indonesia play a major role in the trade of logs, sawnwood and plywood, this model will concentrate on these forest sectors only. In addition, although Malaysia and other Southeast-Asian countries are becoming significant exporters of furniture products, this sector will not be examined in this paper because the data is neither routinely provided by the FAO, nor is it reliable for these products as yet.
Comments: The author noted that in progressing towards trade liberalisation of the forest products and agricultural sectors, mixed effects on the forest rent and timber production in different regions can be detected. Therefore, a reduction in trade barriers does not always lead to increased log production as feared by some non-governmental organisations. Amongst other things, the direction of change in log production depends on the general equilibrium effects on world log prices and factor prices.