Of tariffs and the consumer
Friday, 5 June 2009
Zaidi Sattar
In a market economic system it is the consumer who is said to have the last word in the marketplace. Producers and sellers submit to the consumer's wishes expressed in terms of buying power and choice of what and how much to buy or not to buy. In developed country markets, you will find a multiplicity of laws governing producer and seller behaviour. Not so for consumers who have a wide degree of freedom on what their consumption pattern should be. Market prices, determined by the largely unbridled forces of demand and supply, signal consumer spending patterns and volumes to which producers and retailers respond. It is demand that creates supply; not the other way round. Consumer is really king in the marketplace, in letter and spirit. Consumer spending, at two-thirds of gross domestic product (GDP), drives the economy of the USA, and most developed economies.
Now, come to Bangladesh. While liberalisation of the import regime over the past two decades has given more choice to the consumer, they continue to pay prices for consumer goods that are well above international prices - and they accept it, almost without complaint. Consider a hypothetical situation where tariffs on all consumer goods imports into Bangladesh are set to zero. That would mean consumers would be buying all goods at international prices, plus transportation cost. Imposition of tariffs at our border ports (sea or land) have the effect of raising the price of the imported good as well as that of their domestic substitutes. At the ports, importers of these consumer goods pay duties and get the release of their consignments. But who pays these tariffs at the end? The consumer, of course.
Take the case of tariffs on intermediates and raw materials. Producers who
use imported inputs to produce final consumer goods initially pay the duties at the ports. Once the final products leave the factory gates, market prices of those products reflect all the tariffs and import taxes that were slapped on the inputs. Who pays those tariffs in the end? The hapless consumer, no doubt.
I leave exports out of this because there are no tariffs on inputs used in export products, as they are either imported under bonded system (e.g. RMG or leather footwear) or import taxes are reimbursed in full to producers under the duty drawback system - in principle, though, in practice, there is never a full and swift reimbursement.
Let us focus, for a moment, on the countless products that we buy at the groceries, shops and stores. Just about everything has high tariffs on them. A quick survey of the list of imported products with the highest tariffs shows that almost all of them have domestic production - import substitutes. The highest customs duty is supposed to be 25%. But on top of that there is a supplementary duty (SD) of 20% on about 900 tariff lines (i.e. 15% of all importable commodities identified in the Harmonized System of custom codes). Since SD is applied on tariff-inclusive value of imports, the 20% SD is effectively 25%. So the top rate for all consumer goods is actually 50%, not 25%. I exclude here the instances where SD is 60%, 100% and above, applied on imports of expensive cars, alcoholic beverages, and cigarettes (the sin tax).
While these tariffs generate revenue for the government they also serve to protect the domestic producer of import substitutes. At times, these two objectives are at cross-purposes. Higher the tariff, greater the protection. But as higher tariffs keep out competing imports, customs revenue falls. I hope National Board of Revenue (NBR) has a clear idea of when tariffs are imposed for protection, and when for revenue. Though Bangladesh Tariff Commission (BTC) really has the mandate to consider tariffs for protection purposes, BTC has yielded this prerogative to NBR a long time ago. I honestly find it amusing when tax officials talk of giving protection to one industry or the other when they are not officially mandated to do so.
A tariff helps to raise the domestic price of the product over the international price by at least the amount of the tariff. As such it is a tax on the consumer and a subsidy to the producer. It is a subsidy in the sense that without it the producer would have to sell at the international price, which is lower. Who pays this tax or subsidy? The consumer. In the process, two things are happening. First, there is a significant transfer of resources from consumers to producers as long as the protective tariffs last. Second, the higher tariff-ridden prices restrain imports and limit the consumers' choice. These two costs are borne by the consumer ostensibly on the ground that producers create jobs and eventually they will become internationally competitive and will not need tariff protection. Question is how long will that take. The period seems to be never ending.
When it comes to tariffs, the consumer seems to have no voice. Now, there is a lot of stakeholder consultations pre- and post-budget organised by the chambers who represent producer and business interests. In these consultations, and round the year, chamber representatives put forth various proposals for tariff adjustments, understandably, to raise their profitability which can happen if output tariffs are raised or input tariffs are cut. In the past five years, input tariffs have been cut such that they now range from 3.0% to 12% -- all benefiting producers. But nobody, not even the Consumer Association of Bangladesh (CAB), has raised the issue of how long should consumers continue to be taxed to protect producers.
While chamber groups are organised and wield great influence on policy, consumers - the much larger group - are not organised, and have little influence on tariff policy. It is time someone spoke out for the consumer. (Dr. Zaidi Sattar is Chairman, Policy Research Institute of Bangladesh. Research support was provided by PRI's Ziaul Ahsan. The writer can be reached at e-mail: zaidisattar@gmail.com)
In a market economic system it is the consumer who is said to have the last word in the marketplace. Producers and sellers submit to the consumer's wishes expressed in terms of buying power and choice of what and how much to buy or not to buy. In developed country markets, you will find a multiplicity of laws governing producer and seller behaviour. Not so for consumers who have a wide degree of freedom on what their consumption pattern should be. Market prices, determined by the largely unbridled forces of demand and supply, signal consumer spending patterns and volumes to which producers and retailers respond. It is demand that creates supply; not the other way round. Consumer is really king in the marketplace, in letter and spirit. Consumer spending, at two-thirds of gross domestic product (GDP), drives the economy of the USA, and most developed economies.
Now, come to Bangladesh. While liberalisation of the import regime over the past two decades has given more choice to the consumer, they continue to pay prices for consumer goods that are well above international prices - and they accept it, almost without complaint. Consider a hypothetical situation where tariffs on all consumer goods imports into Bangladesh are set to zero. That would mean consumers would be buying all goods at international prices, plus transportation cost. Imposition of tariffs at our border ports (sea or land) have the effect of raising the price of the imported good as well as that of their domestic substitutes. At the ports, importers of these consumer goods pay duties and get the release of their consignments. But who pays these tariffs at the end? The consumer, of course.
Take the case of tariffs on intermediates and raw materials. Producers who
use imported inputs to produce final consumer goods initially pay the duties at the ports. Once the final products leave the factory gates, market prices of those products reflect all the tariffs and import taxes that were slapped on the inputs. Who pays those tariffs in the end? The hapless consumer, no doubt.
I leave exports out of this because there are no tariffs on inputs used in export products, as they are either imported under bonded system (e.g. RMG or leather footwear) or import taxes are reimbursed in full to producers under the duty drawback system - in principle, though, in practice, there is never a full and swift reimbursement.
Let us focus, for a moment, on the countless products that we buy at the groceries, shops and stores. Just about everything has high tariffs on them. A quick survey of the list of imported products with the highest tariffs shows that almost all of them have domestic production - import substitutes. The highest customs duty is supposed to be 25%. But on top of that there is a supplementary duty (SD) of 20% on about 900 tariff lines (i.e. 15% of all importable commodities identified in the Harmonized System of custom codes). Since SD is applied on tariff-inclusive value of imports, the 20% SD is effectively 25%. So the top rate for all consumer goods is actually 50%, not 25%. I exclude here the instances where SD is 60%, 100% and above, applied on imports of expensive cars, alcoholic beverages, and cigarettes (the sin tax).
While these tariffs generate revenue for the government they also serve to protect the domestic producer of import substitutes. At times, these two objectives are at cross-purposes. Higher the tariff, greater the protection. But as higher tariffs keep out competing imports, customs revenue falls. I hope National Board of Revenue (NBR) has a clear idea of when tariffs are imposed for protection, and when for revenue. Though Bangladesh Tariff Commission (BTC) really has the mandate to consider tariffs for protection purposes, BTC has yielded this prerogative to NBR a long time ago. I honestly find it amusing when tax officials talk of giving protection to one industry or the other when they are not officially mandated to do so.
A tariff helps to raise the domestic price of the product over the international price by at least the amount of the tariff. As such it is a tax on the consumer and a subsidy to the producer. It is a subsidy in the sense that without it the producer would have to sell at the international price, which is lower. Who pays this tax or subsidy? The consumer. In the process, two things are happening. First, there is a significant transfer of resources from consumers to producers as long as the protective tariffs last. Second, the higher tariff-ridden prices restrain imports and limit the consumers' choice. These two costs are borne by the consumer ostensibly on the ground that producers create jobs and eventually they will become internationally competitive and will not need tariff protection. Question is how long will that take. The period seems to be never ending.
When it comes to tariffs, the consumer seems to have no voice. Now, there is a lot of stakeholder consultations pre- and post-budget organised by the chambers who represent producer and business interests. In these consultations, and round the year, chamber representatives put forth various proposals for tariff adjustments, understandably, to raise their profitability which can happen if output tariffs are raised or input tariffs are cut. In the past five years, input tariffs have been cut such that they now range from 3.0% to 12% -- all benefiting producers. But nobody, not even the Consumer Association of Bangladesh (CAB), has raised the issue of how long should consumers continue to be taxed to protect producers.
While chamber groups are organised and wield great influence on policy, consumers - the much larger group - are not organised, and have little influence on tariff policy. It is time someone spoke out for the consumer. (Dr. Zaidi Sattar is Chairman, Policy Research Institute of Bangladesh. Research support was provided by PRI's Ziaul Ahsan. The writer can be reached at e-mail: zaidisattar@gmail.com)