Rationalising tariff structure

To be fair, there has been a lot of progress in rationalization of the tariff structure in Bangladesh, since the early 1990s, such as (a) reducing the number of tariff slabs from 23 in fiscal year (FY) 92 to five in FY15, (b) moving towards uniformity in tariffs by reducing multiplicity of rates within each HS4 heading (which cover harmonized system or HS, codes of similar products), (c) removing tariff anomalies where input tariffs exceeded output tariffs in specific sectors, (d) reducing prohibitively high rates of customer duty (CD) which hurt exports and domestic production alike.
In essence, there has been progress in bringing some order out of chaos in the structure of tariffs. But the task remains incomplete and there has been more than an occasional tendency for slippage from the reform path.
One glaring anomaly is the rate of tariff escalation in our tariff structure. Tariff escalation is described as imposing higher rates for higher stage of processing. While input rates are bunched together (Table 3) in a range of 1.0-10%, output rates (on finished consumer goods) start at 25% with generous supplements of regulatory duty (RD) and supplementary duty (SD), resulting in a top nominal protection rate (NPR) of 87%.

In the case of top NPR rates, the top customer duty (CD) rate of 25% is illusory, as all can see. In a comparison

of comparator countries and regions (Table 4), we find Bangladesh to have the highest rate of tariff escalation, indicated by the tariff escalation ratio (TER).
What is not known is how and when the decision was made to formulate such a high rate of escalation between input and output tariffs. It can only be surmised that the pressure for protection from import substituting industries has led to such an extreme outcome!
In a comparison of tariff escalation indicator (i.e. TER), the research studies by Policy Research Institute (PRI) found no developing country or region with such high escalation ratio. India, which caps all manufacturing tariffs at 10% (with few exception) has TER of only 1.51, with input and output tariffs closely bunched together. That is because India has a wide base of intermediate goods production, something Bangladesh does not have. That brings us to the next issue of tariff rationalization.
RATIONALIZING CONSUMER AND INTERMEDIATE GOODS TARIFFS: Whereas trade in intermediate goods is the fastest growing component of international trade, all protection incentives in the country seem to be focused on finished consumer goods leading to an anti-intermediate goods bias, thus impeding the growth of backward linkages in the economy. Share of intermediate goods in our export basket is barely 2.0%.
A rebalancing issue revolves around the support for domestic production of intermediate goods. For instance, chemical and steel industries, and machinery parts (light engineering sector) are strong candidates for expansion in a rapidly industrializing economy. Intermediate goods industry represents backward linkage for the entire economy including all the sub-sectors: agriculture, manufacturing, and services.
Bangladesh has a small but growing intermediate goods industry which up until now has had little support from the tariff structure. They also fall within the small and medium enterprise (SME) sector which has now been identified for promotion through greater access to credit facilities. Over the years, tariff on intermediate goods have been rationalized (assigned general rate of 10%) and reduced. This class of imports has the highest share in total imports and also yields the highest share of customs revenue.
It would be tough to argue that, in a rebalancing scheme that throws some weight on supporting intermediate goods industry, the rate of 10% should be moved up a notch. Yet, time bound protection of certain intermediate products could be selectively given protective rates equivalent to the top rate for consumer goods.
In the interim, there are two options for tariff on intermediate goods: (a) to leave them at the current rate of 10%, i.e. not reducing this any further; and (b) to reduce them gradually and only in tandem with reduction of the top rate of 25%, as and when that happens.
What becomes clear from the preceding analysis is that rationalization of tariffs is an essential component of rationalization of the protection regime. In an earlier economic analysis as mentioned before, this writer had made the case that high protection contains an inherent anti-export bias, particularly for non-RMG exports that are not exposed to the free trade regime given to RMG. It is safe to argue that the currently high protective tariff structure also yields sub-optimal revenue from customs, as some of the high tariffs (e.g. on biscuits) act as de facto ban on imports.
Given the comfortable level of foreign exchange reserves, there is an opportunity to launch a phase of gradual tariff liberalization that can begin with consumer goods subject to the top NPR rate. It leaves little to the imagination that scaling down some of these rates would actually yield higher revenues with modestly higher import penetration without a dent in our balance of payments. If anything, it could take some appreciation pressure off from the exchange rate while giving Bangladesh Bank some breathing space in monetary management.
In concluding, one cannot but say emphatically enough that if the goal of NBR is to rationalize the tariff structure, it must approach the entire tariff structure holistically and embrace certain cardinal principles of simplicity and transparency, such as having a uniform rate within each HS 4-digit heading, because under each heading the codes represent similar products or minimal change in processing. Deviation from these principles should be made only in exceptional circumstances when the case for revenue, protection or national interest is strong and convincing. Adhering to such principles can eliminate the pressure of lobbying by interest groups to eke out tariff benefits to serve narrow private ends.
Dr. Zaidi Sattar is Chairman, Policy Research Institute of Bangladesh and Anchor of The Financial Express (FE)-PRI Economic Analysis Unit.
He can be reached at [email protected]