David Cox | Case for tariff reform in the Commonwealth Caribbean

Ever since the US Government announced that it would raise tariffs on imports earlier this year, a global debate was reignited on the role tariffs play in a country’s economic policy.

If nothing else, this debate has provided Commonwealth Caribbean countries, including Jamaica, an opportunity to reflect on our historical record on tariffs and to consider the direction we should be heading on the issue, in the future.

A brief review of that history reveals that, since independence, most Caribbean countries have been avid “tariff-enthusiasts,” whose dogged, even radical commitment to high tariffs, has defined Caribbean economic policy for over 75 years. That this tariff policy has generally been implemented in an uncritical, unspecific, and un-strategic fashion, only compounds an already intractable problem.

To better understand this unflattering record, it is best to understand tariffs from the perspective of regional Governments. Some years ago, while I was still a trade lawyer and had not pivoted to telecoms, I represented my country in trade negotiations between the European Union (EU) and CARIFORUM (CARICOM plus the Dominican Republic), over the Economic Partnership Agreement, or EPA. The agreement had been pushed by the EU as a way of getting around restrictive WTO rules, that limited preferential treatment to many of Europe’s former colonies, and was welcomed by the region as a “last resort” to save exports to the UK and the EU.

During the negotiations, it became clear that the Caribbean’s objective was to keep their tariffs as high as possible, while securing lower tariffs on exports from the region to the EU. The justifications were simple. The Caribbean, we argued, was highly dependent on the revenues raised from tariffs, to pay for Government services and to pay international debt. We could no more forgo the revenues associated with our tariffs, than someone with type 2 diabetes, could forgo injections of insulin. It would be ruinous. We needed the money. High tariffs were essential to our survival.

TOO ‘TARIFFIED’ TO FAIL

This wasn’t merely a negotiating tactic. For Governments of the region, keeping tariffs high was non-negotiable. We were too “tariffied” to fail, one might say.

But while the Caribbean has been working hard to maintain high tariffs on almost all imported goods since independence, the rest of the world has been cutting tariffs, since the mid-1950s, or at least until recent events in the US. These high tariffs were bequeathed to the region by Great Britain, which in the pre-independence era, fought tooth and nail to maintain protective tariffs on imports, as a means of protecting domestic industry and production in Britain and its colonies. This aggressively protective approach was perfectly replicated in British colonies like Jamaica, and strictly enforced. Ironically, since shedding its colonies, Britain has done as the rest of the world has done, and gradually reduced tariffs, while the Caribbean has fought strenuously to keep them high.

The impact of this has been that Caribbean citizens have historically had to pay through the nose, for basic goods which they had no choice, but to import. This is even though such tariffs - typically well over 50 per cent of the value of the “landed cost” of most goods – have not resulted in the emergence of any domestic industry or manufacturing or production to speak of.

In short, we are taxing Caribbean populations mercilessly, for having to import products they can’t even buy at home.

Unfortunately, high tariffs produce bizarre economic outcomes and social consequences. Given the environmental impacts of cars, the implications for road construction and maintenance, and the impact of importation on foreign exchange reserves, it is probably true that charging high tariffs on cars, makes good economic sense and also good public policy. After all, most Caribbean countries can’t afford all the roads required for the cars we import, or to pay for the detrimental health or environmental consequences they cause. The unrestricted importation of large quantities of cars, also stresses our banking system and exacerbates our trade imbalances with other countries. So it makes perfect economic sense to charge high tariffs on cars.

COUNTERPRODUCTIVE

But imposing high tariffs on auto parts, is completely counterproductive. The more difficult it is to maintain a car, the more likely people are, to replace their cars, faster. Good public policy probably means, it is smarter to charge lower taxes on the importation of car parts, so that most people can keep their cars, for longer. Yet every time a customs officer in a CARICOM country sees “auto parts” on a bill of lading, he or she develops an administrative erection.

There are thousands of other examples of the way our uncritical approach to tariffs is hurting us. We charge huge tariffs on appliances, but don’t produce any in the Caribbean. Since tariffs are high, the quality of appliances most people can afford to buy or import, is poor. The result is that, across the Caribbean, people are forced every year to spend thousands of dollars to purchase poor quality appliances that simply don’t last. The consequence is national landfills from Jamaica to Guyana, overrun with electronic waste, and a vicious cycle of poor people having to repurchase substandard products they have no choice but to own. Meanwhile, Caribbean governments are running around in a positive frenzy, claiming to be concerned about climate change.

These are just some examples of the many distorting effects that tariffs can have. There are probably too many to list, but they reveal a simple truth that, as taxes go, tariffs aren’t the smartest kind, because they are effectively anti-poor, and worse, high tariffs, probably promote poverty.

To be blunt then, governments of the region are unknowingly waging a kind of economic warfare on their own citizens, on a blind and reflexive, but unproven belief, that they couldn’t raise the same amounts of revenue with lower tariffs on many goods, or in other words, they wouldn’t raise the same revenue if more people could afford the goods.

And yet, if there is any redeeming aspect to this policy, it is probably only that we have never argued that our approach to tariffs was about bringing manufacturing to the region.

Indeed, if we have learned anything, it is that no amount of tariffs can force the development of local manufacturing, where the economic conditions aren’t favourable for it. The Caribbean experience is proof to the world, that high or protective tariffs, are simply insufficient on their own, to encourage the emergence of indigenous production, in the absence of other, critical, essential conditions, such as a huge critical mass of very cheap labour, and a large supply of cheap raw materials. These two conditions simply don’t exist in the region, with our many island nations, and relatively small populations per country, and limited supply of cheap raw materials. In the Caribbean, our competitive advantages lie elsewhere.

In light of this, it might be time to consider whether urgent reform of our current approach to tariffs is necessary. In the end, high tariffs are purely about our desperation to feed the Treasury, even if we hurt our own people in the process.

David Cox is a lawyer and chartered director, and former Chairman of the Board of the Caribbean Association of National Telecommunications Operators (CANTO). Send feedback to danthony_cox@yahoo.com