The Sunday News
Dr Bongani Ngwenya
Preamble:
OVER the past few weeks, newspapers had been awash with news that the Government was in the process of evaluating what would work better for the country between tariff increases and import restrictions.
May I quickly mention that both policies do not have any net economic benefit to an economy such as ours, neither are they sustainable in the long run. However, in my opinion, tariff increases may be a better or lesser evil, especially if targeted at certain import products.
What are tariffs?
Tariffs are a tax imposed on imported goods and services. Naturally, tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers. A specific tariff may be levied as a fixed fee based on the type of item or good or an ad-valorem tariff may be levied based on the item’s value (eg, 62 percent of the imported car’s value). Tariffs provide additional revenue for Governments and domestic producers at the expense of consumers and foreign producers.
In other words, tariffs are one of several tools available to shape regional and international trade policies. Governments may impose tariffs to raise revenue or to protect domestic industries from foreign competition, since consumers will generally purchase foreign-produced goods when they are cheaper. While unlike import ban, consumers are not legally prohibited from purchasing foreign-produced goods, tariffs make those goods more expensive, which gives consumers an incentive to buy domestically produced goods that seem competitively priced or less expensive by comparison. Tariffs can make domestic industries less efficient, since they are not subjected to global competition. Tariffs can also lead to trade wars as exporting countries reciprocate with their own tariffs on imported goods. Groups such as the World Trade Organisation exist to combat the use of egregious tariffs for example.
Governments typically use one of the following justifications for economically implementing tariffs:
To protect domestic jobs — If consumers buy less-expensive foreign goods, workers who produce those goods domestically might lose their jobs.
To protect infant industries —If a country wants to develop its own industry producing a particular good, it will use tariffs to make it more expensive for consumers to purchase the foreign version of that good. The hope is that they will buy the domestic version instead and help that industry grow.
To retaliate against a trading partner — If one country doesn’t play by the trade rules both countries previously agreed on, the country that feels jilted might impose tariffs on its partner’s goods as a punishment. The higher price caused by the tariff should cause import purchases to fall.
To protect consumers — If a Government thinks a foreign good might be harmful, it might implement a tariff to discourage consumers from buying it.
In economic theory, tariffs are viewed as a primary element in international trade with the function of the tariff being to influence the flow of trade by lowering or raising the price of targeted goods to create what amounts to an artificial competitive advantage.
When tariffs are viewed and used in this fashion, they are addressing the country’s and the competitors’ respective economic health in terms of maximising or minimising revenue flow rather than in terms of the ability to generate and maintain a competitive advantage which is the source of the revenue.
As a result, the impact of the tariffs on the economic health of the country are at best minimal but often are counter-productive.
Imports restrictions:
Imports restriction has a potential double-edged impact on Zimbabwe. First and foremost, the revenues that used to be collected from customs and duties with respect to the imports will be reduced. Secondly, import restriction is against the spirit of economic integration. Right now, Zimbabwe is seen as working against the rest of the Sadc economic region — that is, by violating the Sadc protocol of free movements of goods, services, capital and labour.
The argument given for imports restrictions is protection of the local or domestic producer, and that the measure is temporary and partial. In my opinion there is no justification for import restriction or ban, until such a time our local industry has revived and improved its capacity to locally produce and be able to meet domestic demand for goods.
The challenge is that Zimbabwe’s trading partners in the Sadc region, who are also bound by the same Sadc protocol, may not see the justification by Zimbabwe of “banning” some imports in the pretext of protecting its local industry. As a result, the policy has a potential of leaving Zimbabwe isolated from the Sadc. The Sadc protocol, in fact advocates for member states to reduce tariffs and non-tariffs to allow free movement of goods within the region. Zimbabwe’s action is tantamount to a blockage of trade, and other regional member states may retaliate.
Zimbabwe imports about 35,8 percent from South Africa, which amounts to an average 2,6 percent of South Africa’s total exports. At the same time Zimbabwe exports an average of 77,8 percent to South Africa, which makes South Africa Zimbabwe’s largest trading partner in the Sadc region. Zimbabwe stands to benefit more than South Africa.
There has been too much cry that our market is flooded by cheaper import goods. It is only efficient production systems that renders import goods cheaper than locally produced goods, especially in own current situation. Zimbabwe cannot be competitive in the Sadc region and the rest of the world with inefficient production systems. Efficient production takes much more than just producing large quantities of goods in an economy to be able to meet local demand. Without economies of scale accruing to the domestic producers there will always be a problem for local products to compete with import products.
We need to sort out our production system in the economy — in fact the economy as a production system is in shambles.
In conclusion, as the Government is trying to weigh the merits of the two evils, that is, tariff increases and import restriction or ban, my take on the argument is that, tariff increases on selected import goods may be a better evil than the ban/restrictions on imports.
However, we need to appreciate that the conditions for either policy is the capacity and ability of the local industry to produce the targeted goods for either tariffs increase or import restriction. If that condition cannot be met, then that defines a serious structural problem. Notwithstanding, the importance of the highlighted issues, it is my conviction that tariff increases would make some sense in our situation — at least there are revenues to gain than in the restriction of imports, and risk of punitive retaliatory measures taken by Zimbabwe’s regional trading partners.
Dr Bongani Ngwenya is a Bulawayo-based economist and senior lecturer at Solusi University’s Post Graduate School of Business. mailto:[email protected]/ [email protected]
