Sunday, April 27, 2008

A Market Distortion Coming Home to Roost

I was a bit shocked to read this in the Times this morning:

Under longstanding trade agreements, fuel for international freight carried by sea and air is not taxed...
Under a little-known international treaty called the Convention on International Civil Aviation, signed in Chicago in 1944 to help the fledgling airline industry, fuel for international travel and transport of goods, including food, is exempt from taxes, unlike trucks, cars and buses. There is also no tax on fuel used by ocean freighters.
Since transport costs are a huge portion of the price of some goods (food in particular), this is a huge distortion, in effect a penalty against local production and a subsidy for a highly polluting activity.

With international food prices skyrocketing, it's the wrong time to try to start taxing fuel for international freight. But if it had been taxed before, many countries would have had stronger local food production and wouldn't find themselves as hard hit by the rise in international prices.

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