The economic impact of export controls : an application to Mongolian cashmere and Romanian wood products

Countries sometimes use export controls on raw materials to encourage domestic processing. The motivation is usually to assure raw materials at low prices for domestic industries, although exports are sometimes controlled in an attempt to increase export earnings (by promoting exports of higher value-added processed goods rather than raw materials). The problem is, export controls hurt raw material producers and cause economic distortions that result in net losses to the country. The impact of raw material export controls on total export earnings is ambiguous: the decline in raw material export when production is discouraged by lower prices may outweigh the effect of increased exports of processed goods. The author develops a simple partial equilibrium model of export controls on raw material to investigate the impact of export restrictions and to estimate the potential magnitude of the transfers between groups and the net costs of the export-control regimes. The author's estimates of the magnitude of transfers and costs of export controls on raw cashmere (in Mongolia) and wood production (in Romania) indicate that the transfers and costs may be substantial. The author finds that (under reasonable assumptions about elasticities of supply) export controls can transfer significant profits from the raw materials producers to the processing industries, causing significant net losses to the economy and a substantial net decrease in export earnings. Quantitative export controls will be even more distortive if processing industries have any monopsony (single-buyers) power. This is quite likely in developing countries with small industrial bases - or in economies in transition, where central planning has left a legacy of very large firms in highly concentrated industries. With monopsony power in the processing industry, both output and exports of final products can be reduced by quantitative export controls on raw material inputs. The quantitative control bestows effective monopsony power on the processing firm and encourages it to exploit this monopsony power by reducing output. If the raw materials could be freely exported, processors would not be able to effectively exercise monopsony power.