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Tariffs for Standards?

Hassan Zaman's picture

Bangladesh Duty- and quota-free access for exports to global markets is something developing country trade negotiators have demanded for years.  Few other “stroke-of-the-pen” measures could boost employment and reduce poverty in low income countries in such large numbers. For instance  if the US removed tariffs on Bangladeshi garments – which average around 13%, but for some items are as high as 33% – then exports to the US could rise by  $1.5 billion from the FY13 level of $5 billion, in turn generating employment for at least an additional half a million, primarily female, workers.[1]  Examples of other countries facing US tariffs include Cambodia (12.8% average tariff rate on its exports to the US), India (4.01%), Indonesia (5.73%), and Vietnam (7.41%). Progress in trade facilitation would likely have even greater pay-offs to growth and employment, but these require structural reforms and investments, while the decision to remove tariffs is a simpler, “stroke-of-the-pen” measure.

In practice, various domestic political considerations in OECD countries, primarily spurred by protectionist lobby groups, act as a barrier to duty-free or quota-free access. In addition, concerns about labor, safety, and environmental standards are often cited to justify trade barriers. Yet few are willing to pay for the factory upgrading or relocation that may be required to improve these standards. Bangladesh is a case in point. Following the tragic collapse in April 2013 of a building that hosted garments factories, leading to many lives being lost, two associations were formed, one largely representing European buyers and the other representing US buyers. These two groups were originally intended to conduct inspections of factories and help share the costs of improvements that need to be made, in the spirit that the problems the industry faced were the joint responsibility of both producers and buyers/retailers. However, while inspections are being carried out and suggestions for improvements being made, there is considerable doubt within the industry as to whether the buyers associations will ultimately share in the costs of paying for these improvements.

Let us assume that for various reasons the current level of tariffs and quotas are retained. With the tariff revenue generated from low-income country manufacturing exports, a new fund could be set up whose resources finance the improvement of working conditions in these countries. For instance  the $850 million or so of tariffs that US consumers pay on Bangladeshi exports, if it remains, could be placed by the US in a fund to finance factory upgrading and general improvement in working standards in Bangladesh. This “Tariffs for Standards” fund could be administered globally by a third party, such as the World Bank, collecting contributions not only from the US but from other OECD tariff-imposing countries.

This type of fund has been set up for different initiatives in the past. Fifteen years ago, developed countries and multilateral lending agencies contributed to a fund – the Heavily Indebted Poor Countries fund, or HIPC – managed by the World Bank, which reduced the external debt levels of highly indebted low-income countries if they implemented various poverty-reducing reforms. The issue of labor and factory standards is arguably now as important as debt relief was back then. The one key difference between HIPC and this “Tariffs for Standards” fund is that the proposed fund is intended to finance private entities, while HIPC reduced sovereign debt. There are precedents for this too, and therefore governance structures need to be fully in place to manage some sort of competitive challenge fund whereby individual companies could access the fund and implement worker safety and welfare improvements, which in turn can have demonstration effects to other entrepreneurs.

 
[1] These are based on updating the estimates as available in Razzaque, A. (2008) “Duty-free Access to the USA: Potential Effects on Bangladesh’s Apparel Exports”, Chapter 6 in Razzaque, A. and Raihan, S. (eds) Venturing into a Quota-free World: The Readymade Garment Industry, Pathak Shamabesh: Dhaka.

Comments

Submitted by Wahiduddin Mahmud on

Hassan, congratulations for coming up with an innovative idea – which is somewhat reminiscent of the Tobin Tax (proposed in a different context of global capital transfer, but similar in respect of serving more than one purpose). Your proposal has the merit of ease of implementation from the US side, particularly since it will not be opposed by the protectionist lobbies in the US because the trade barriers will be seen to remain intact. But, as you mention, administering the funds towards raising the labor and factory standards in the exporting countries may be problematic. Fund transfers to the owners of factories will involve problems of monitoring and moral hazard. Supporting the provision of some kind of public goods that contribute to raising the living standards of factory workers is another option, though fraught with the risks of public resource mismanagement. But more problematic is the implicit legitimization of using trade barriers as a means of improving labor standards (even if the tariff revenue is used for the benefit of workers in the exporting country!). As such, the proposal should be recognized as representing a pragmatic “second best”.

Submitted by Hassan on

You are absolutely correct Professor Mahmud that this is a second best solution. Ideally these trade barriers should be removed given the potential gains mentioned above, but we have seen how hard that is in practice for a number of reasons. Not that getting consensus behind this proposed tariffs for standards fund will be much easier!

Submitted by Shamarukh Mohiuddin on

Removing tariffs altogether may be a difficult goal but it is one worth striving for. And a goal that development organizations will get behind. I similarly feel that legitimization of trade barriers is problematic and efforts should be spent on fighting the current market distortions that these barriers create. As a matter of principle, the U.S. should remove tariffs on Bangladeshi exports especially since tariffs on apparel from LDCs and developing countries, e.g. African countries, Andean and Caribbean countries and various U.S. FTA partners have been removed for the sake of using trade as a tool for poverty reduction. Other parts of the developed world such as the E.U., Canada, Japan and Australia have also removed tariff barriers on apparel (even though rules of origin requirements present some non-tariff barriers). This is perhaps the direction to take for the U.S. However, if a Tariffs for Standards Fund is agreed upon, we should take a closer look at how such funds are being spent. Currently, the majority of funds are being spent to set up unions. Are unions the best way to promote labor standards in Bangladesh? Do workers feel unions are representing their interests? A Democracy International study shows that 87% of workers surveyed are not part of unions. Some key reasons given for not joining an union are "No time", "No idea about what unions do". Are there other ways to improve factory conditions in Bangladesh? These are important questions to ponder.

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