The BC Geoduck Industry and International Taxation

Written By: Jamie Cook and Wei Cui
Posted on August 23, 2019

Geoduck (pronounced “gooey-duck”, xiangbabang in Chinese) is a large mud-burrowing bivalve mollusk, harvested on the west coast of North America. In recent decades, British Columbia has positioned itself as a leading producer of geoduck, which has been a boon to the province’s economy: the BC geoduck industry is estimated to generate $50 million annually. Despite being a leading producer of geoduck, however, the delicacy is consumed relatively little in BC. Rather, the vast majority (approximately 90%) of BC’s geoduck is exported to Asia, and in particular, China, where it is prized as a delicacy.

Unlike other seafood industries, BC’s geoduck fishery is relatively young. Until recent years, geoduck was a fairly inexpensive seafood. Several decades ago, geoduck sold for approximately C$0.20 per pound, and was “ground like hamburger for cheap chowder or cut into strips to deep fry.” Prices increased substantially since 1990, and today geoduck is one of the most valued seafoods in the world. BC harvesters can fetch $20 per pound for the clam, and that same pound can then be sold for upwards of six times that amount once shipped to Asia.

Those familiar with the industry routinely point to the growth of China’s middle class, and a corresponding abundance of disposable income, as the primary explanation for the growth of the demand for geoduck. Geoduck is considered a luxury in greater China and often consumed in top-tier restaurants and hotels. Improved transportation technologies and the globalization of trade allowed BC-based harvesters to unlock this lucrative foreign market. Live geoduck can be shipped from BC to Asia overnight.

However, there continues to be a wide margin between prices fetched by BC geoduck harvesters and the seafood’s final value upon importation into Asian markets. This is because the BC industry faces increased competition from harvesters in Washington State, which also exports the vast majority of its harvested geoduck to Asian markets. Historically, Vancouver was a key distribution hub for both Canadian and American geoduck: more than 90% of Washington State’s geoduck passed through Vancouver prior to being exported to Asia (Shamshak & King 2015). However, as Washington State’s own geoduck fisheries continued to grow, more direct exports links were established between harvesters there and buyers in Asia, and the share of American geoduck exported through BC steadily declined.

What does this all have to do with international taxation? Well, the rise of (and the uncertainties faced by) the BC geoduck industry encapsulate a core idea heatedly being debated by governments and multinational companies (MNC) around the world today. Governments increasingly claim that they should be able to tax MNCs on the value created in their countries, even if the MNCs do not conduct physical operations in their countries. The French government, for example, claims that it should be able to tax Facebook for French users’ participation on social media platform, even if Facebook makes money by selling advertisements to businesses outside of France. MNCs counter that “where value is added” is a confused idea that only serves to disguise government attempts at revenue grab. Who is right? Can one give sense to the concept of “value creation”?

Suppose we ask, “Where is value created in the geoduck industry?” One intuitive answer is that the geoduck is harvested in BC, so value is created here in Canada. This intuition resonates with how we talk about other natural resources like oil and gas. The world has a large demand for natural gas, and BC is among only a limited number of places in the world that can produce natural gas economically. We have a rare supply of what everyone wants, so we are where value is created. But what if our goods are in demand only in a few other places in the world? That is the case for geoduck. If it weren’t for the taste of the Chinese middle class, geoduck may still be selling 20 cents a pound.  One might say that the bulk of geoduck’s value is added at the final step of a globe-spanning supply chain.

This phenomenon of value being driven by the consumer demand side of the market is not unique to geoduck. For another example, Mercedes cars are just regular cars in Germany, but in the United States Mercedes is a luxury brand and therefore can fetch higher prices. Increasingly, governments are asserting that consumers in their countries are crucial for MNCs’ profitability and therefore they, and not just the countries where consumption goods and services are produced, should be able to tax MNC profits. By this logic, the Chinese government should be able to tax the profit of BC geoduck producers.

Not surprisingly, many remain unconvinced by such claims. Looking again at the example of the geoduck industry: while China is one of the few places in the world where geoduck is in high demand, BC is also one of the few places in the world where geoduck is economically harvested. At the least, value is created in both places (i.e. both the consumer and producer sides). In such a case, it seems wrong for one country to assert that value is created only in itself. The “place of value creation” idea may still seem murky.

One way of giving more content to that idea is to explore a concept in economics called “market structure”. There seem to be a couple of reasons why BC geoduck producers cannot capture more of the profit generated by geoduck consumption. The first is competition in production: if BC harvesters asked for too high a price for their geoduck, distributors in China may go to harvesters in Washington State instead. The second is that geoduck cannot be inventoried—Chinese consumers prefer to receive geoduck live and fresh. Therefore any excess supply can quickly drive down prices received by exporters. This suggests that geoduck’s Asian distributors, who ought to be much better than Canadian harvesters at monitoring geoduck demand, may always have an upper hand at negotiating prices. In other words, these facts about competition and how market participants negotiate underlie patterns in how value is distributed across difference places. If the “place of value creation” is really to guide the design of international taxation, international tax rules would have to pay more attention to issues of market structure.