Developing countries that seek to increase their export earnings often justifiably complain that trade barriers applied by rich countries make it difficult for them to achieve their goal. Yet developing countries’ own pattern of import protection may retard their export performance. A new IMF Working Paper finds that a country’s import tariff structure acts as a tax on its export sector and thus frustrates the goal of raising export earnings. Reducing import restrictions is an export-promotion strategy that developing countries can pursue independently of the policy stance of rich countries.
Why should developing countries reexamine their import protection policies? A country’s tariffs on imports discourage exports in three main ways. First, tariffs raise the domestic price of imports relative to exports—or, equivalently, they lower the domestic price of exports relative to imports. Thus, tariffs raise the output of the import sectors receiving protection, but do so at the expense of lower production of exports. An import tariff and an export tax have symmetrical effects on domestic relative prices; it is possible to find an export tax rate that would produce the same relative prices as those that would result from a tariff on imports.
By causing the price of tradables relative to that of nontradables to decline, tariffs reduce the country’s international competitiveness.
Second, tariffs on imports discourage all types of exports— not just those from a single sector—because they cause a country’s real exchange rate to appreciate. Tariffs tend to raise the prices of nontradable goods and services relative to the international prices of imports and exports and there-fore provide an incentive to shift production toward non-tradables and away from tradables. By causing the price of tradables relative to that of nontradables to decline, tariffs reduce the country’s international competitiveness. The real exchange rate appreciation that results from a rise in import tariffs affects all exportables in an economy and could reduce exports.
Third, tariffs and other import barriers discourage a country’s exports by raising the price of imported intermediate inputs used by exporters. At a given price of exports, the higher input costs resulting from import barriers reduce the output of exportables, because the barriers result in negative effective protection—the nominal rate of protection on output adjusted for the rate of protection applied to intermediate inputs. The World Bank has estimated effective rates of protection, or cost penalties, on exports resulting from import tariffs in four countries (Brazil, China, India, and Malawi) for 1986 and 1997. The estimates show that reductions in import tariffs in each of these countries have lessened the bias against exports.
How large is the anti-export bias?
Using an economic model that represents the channels through which import tariffs affect exports, export-tax equivalents of import tariffs were computed for 26 mostly low-income developing countries. The results show that a country’s tariff structure can produce a significant implicit tax on exports. In the countries studied, import tariffs are equivalent to a 12.5 percent tax on exports, on average; seven countries have export-tax equivalents in excess of 16 percent; and four have export-tax equivalents higher than 25 percent.
To compensate for the bias against exports introduced by import tariffs, some countries use a duty-drawback system, whereby exporters receive a rebate for the tariffs they pay on imported intermediate inputs. But such a scheme does not fully remove the antiexport bias, because it does not reverse or offset the reduction caused by the import tariffs in the domestic relative price of exports. Furthermore, a drawback scheme can be costly to administer.
Tariff cuts to boost exports
A more effective way to reduce export disincentives is through tariff reductions, which would encourage the expansion of exports by reducing the cost of imported intermediate inputs to exporters and by raising the price of exports relative to those of both imports and nontraded goods. The effect of tariff reductions on export incentives depends on how the reductions are structured. The table shows how export incentives would be affected in three hypothetical tariff-cutting cases. In general, the results show that the deeper the tariff cuts, the larger the reduction in export disincentives.
- Scenario 1 (column 2) assumes that a country’s higher tariff rate is reduced by a larger percentage than its lower tariff rate; the result is that export disincentives, as measured by the uniform export tax equivalent, decline by the largest amount compared with the initial situation.
- In scenario 2 (column 3), the assumed tariff reductions are smaller; the result is that export disincentives decline compared with the initial situation, but by less than they do under scenario 1.
- Scenario 3 (column 4) assumes that the lower but not the higher tariff is reduced; here, export disincentives in general are reduced, but in six countries the uniform export-tax equivalent increases because the reduction in the lower tariff reduces output in the affected sector and releases resources for use in other sectors. Some of these resources are absorbed by producers in the higher-tariff sector—raising the cost of the tariff in that sector. Scenario 3 illustrates the idea that exempting certain sectors from tariff reductions, particularly sectors in which tariffs are high, can be detrimental.
In general, the most effective of the three tariff-cutting formulas for reducing export disincentives is the one in which import tariffs are reduced by the largest percentage and in which higher tariffs are reduced by more than lower tariffs. At the Doha ministerial meeting in Hong Kong SAR in December 2005, countries decided to adopt a “Swiss formula” for some types of tariff reductions—in which higher tariffs are reduced by a larger percentage than lower tariffs. This represents a real achievement of the Doha Round.
Import tariffs are not the only factors discouraging exports. Many developing countries maintain a wide range of nontariff barriers to imports, such as quantitative restrictions and import licensing schemes. Other, nontrade disincentives include high port charges and internal transport costs, cumbersome customs practices, and regulation, all of which also discourage exports. Like tariffs, nontariff barriers raise the price of imports and thus discourage the production of exports by drawing resources away from the export sector. The impact of nontariff barriers and informal barriers is difficult to measure, but if it were taken into account, the bias against exports would likely appear larger than shown in the table.
Lower import protection would improve a country’s ability to export.
|Export-tax equivalents of tariff barriers (in percent)|
|Initial level||Scenario 1||Scenario 2||Scenario 3|
Designing a tariff-reducing strategy
Import protection creates disincentives that hinder a country’s ability to export. A country cannot simultaneously protect its import-competing sectors and promote its export sectors—these policies work at cross-purposes. Reducing import barriers such as tariffs would serve as an export promotion strategy by lessening the implicit tax the barriers impose on exports.
How countries reduce import tariffs has important implications for export incentives and well-being. Though reducing import tariffs will generally improve export incentives, tariff-reduction schemes that exempt high-tariff or sensitive sectors could actually leave countries worse off. Reducing all tariffs, and reducing high tariffs more than low ones, would be the best tariff-cutting strategy to improve export incentives and real income in developing countries.
IMF Research Department
This article is based on IMF Working Paper No. 06/20, “Does Import Protection Discourage Exports?” by Stephen Tokarick. Copies are avail-able for $15.00 each from IMF Publication Services. Please see page 160 for ordering details. The full text is also available on the IMF’s website (www.imf.org).