Traditional trade policy is alive and kicking

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With the growing importance of global value chains as a conduit for trade integration, much of the recent empirical analysis and other literature has focused on the impacts of non-tariff barriers, behind-the-border measures, and other transaction costs. Traditional barriers, tariffs in particular, have generally been dismissed as less disruptive to trade and, therefore, have fallen out of the policy debate.

However, evidence is surfacing from developing countries that import taxes are on the rise, increasing protection, and their disruptive tendencies are often disguised. Along with the rising tendency to subsidize domestic industries, these additional taxes tend to further augment the inherent anti-export bias, which can be particularly detrimental to trade-led development strategies and policies in developing countries. 

Despite the advent of regional trading arrangements over the past two decades, more than 65 percent of world trade still occurs under the Most Favored Nation (MFN) regime.[1]  The reduction of MFN tariffs has virtually stalled since the early 2000s and may have even been reversed. According to Global Trade Alert analysis, tariff measures remain among the most frequent form of protectionist measures affecting vulnerable Least Developed and Sub-Saharan African countries—more than twice the incidence of non-tariff measures impacting these same countries.

More worrisome, a number of developing countries have resorted to the imposition of other import taxes without altering their MFN schedules and their exemptions to domestic oriented products. These import taxes come in many forms, including levies, surcharges, and fees imposed on imported goods for purposes of raising revenue or subsidizing exports. Imposed only on imports, in the absence of a domestic equivalent, these taxes have principally served to protect domestic industries, significantly increasing their nominal and effective protection. Moreover, the imposition of these para-tariffs and exemptions are often complex, constantly changing, and unpredictable, reducing transparency.

Evidence from South Asia demonstrates both the diversity and impact of these para-tariffs on overall levels of protection. In Bangladesh, these para-tariffs, in the form of supplementary and regulatory duties, average (un-weighted) 14.1 percent, on top of the average customs duty of 13.2 percent. In Sri Lanka, these additional duties have raised the un-weighted average from 10 % (customs duty) to around 27% (with para-tariffs). Regional or bilateral trade agreements, such as the Indo-Lanka Free Trade Agreement (FTA), have had little or no impact on the level of protection as they exclude many such protected industries through sensitive lists.

​Meanwhile, Pakistan continues to apply a complex mix of regulatory duties, special duties, and exemptions issued in Statutory Regulatory Orders. The number of regulatory duties has been recently reduced, though the use of MFN exemptions is more pervasive, covering 906 tariff lines on goods produced domestically, raising the effective rate of protection. These exemptions often benefit one or two large producers of each product, while smaller producers are excluded.

Anecdotal evidence elsewhere suggests that the prevalence of para-tariff is not a South Asian phenomenon. Almost all of the Middle East and North Africa and some Sub-Saharan African, East Asian, and Latin American countries also apply additional taxes (special import license fees or stamp taxes) at the border. In many cases, these additional taxes are directed at domestic sectors that already benefit from subsidies, tax breaks and other “murky” policies.

The inherent anti-export bias of protection runs counter to trade-led development, including the engagement of developing countries in global value chains, in favor of production for protected domestic markets. The diagnosis of trade costs has taken a dramatic leap forward in addressing the many complex barriers affecting developing countries’ exports and participation in global value chains. In the process, traditional trade policy has taken a back seat. Much greater scrutiny is warranted, not just behind the border, but also below the radar to identify and understand the impact of such policies on trade competitiveness and growth.
 
[1] Under the WTO agreements, countries cannot normally discriminate between their trading partners. The Most Favored National principle requires all WTO-member trading partners to the same trade terms.
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Sarath Rajapatirana
July 29, 2015

Excellent blog: Sri Lanka case is worse than Bangaldesh for two reasons. There is wide variance in protection ranging from nearly 900 per cent for some agricultural sector activities and huge subsidies to the same sector (quantified by Alberto Valdes few years ago). The other problem is the uncertain nature of the tariff regime. Tariffs are increased and reduced at will. Motor car tariffs have swung from very high tariffs to low (less than 100 per cent to help preferred importers ) back again to very high levels to accommodate domestic motor car assembly. Like you I worry about the changing agenda of researchers looking at trade facilitation, entering into many agreements with wide commitment to various exemptions that flouts the spirit of WTO law if not the actual law.

Julia Oliver
August 04, 2015

Hi Sarath,
Thank you for your comment. Below is a response from Nihal Pitigala.
Best,
The Trade Post Editors
Indeed, around 2005 Sri Lanka reverted back to greater protection after years of liberalization. In addition to the tariffs and subsidies that you have mentioned on agriculture, the additional para-tariffs add even further to both the level of protection and the degree of opacity. And Sri Lanka is not alone in these practices. 
 

Alice Johny
August 20, 2015

The general conclusion is that there are not major difficulties with the interventionist contentions of the new trade scholars, as they themselves perceive, pretty much as there are with such customary contentions for trade intercession as the terms-of-exchange case for protection. Notwithstanding, the new modern association way to deal with trade hypothesis has effectively given important bits of knowledge into trade conduct in universal markets and guarantees to give numerous more as more practical conduct models are created.

Julia Oliver
August 04, 2015

The comment below is from Sanjay Kathuria.
Sincerely,
The Trade Post Editors
Good points, Nihal. These are very important, and in fact, we are soon coming out with a new SARConnect Policy Note on exactly these points. These are non-transparent tariffs and make the determination of actual tariffs and overall protection very difficult.
 

Julia Oliver
September 09, 2015

Below is Nihal Pitigala's reply.Sincerely,The Trade Post Editors
I look forward to reading the Policy Note—the more light that is shed on this issue, the better.  

Manzoor Ahmad
August 02, 2015

Such issues need to be discussed seriously in the relevant country's Trade Policy Review or any other WTO body. Such unilateral measures also raise questions about their legalities for their FTA commitments. if the duties are not raised on FTA partners, then it gives additional benefit to the FTA partner. For example, Pakistan has not levied some of these duties on China. Thus it gave additional concession to China without having got anything in return. Any additional duties have to be notified to the WTO Secretariat but it is very rare that such notifications are made. It may be a good exercise for the WTO Secretariat to see which members have additional duties which are not a part of the schedules of market access commitments or were bound at zero.

Julia Oliver
September 09, 2015

Below is Nihal Pitigala's reply.Sincerely,The Trade Post Editors
Good point about the impact of such additional duties on trade preference margins.  So much falls under the radar without effective scrutiny with respect to their WTO and other trade commitments.