Paper Concludes Tariffs are a Significant Tax on Economic Development
Washington, DC – The National Foreign Trade Council (NFTC) released today a background paper on the positive benefits of industrial tariff liberalization in spurring the global economy and eliminating a significant tax on development. The paper, authored by Dartmouth professor Matt Slaughter, examines the major concerns of developing countries that have been raised since the NFTC issued its March 2001 proposal calling for the gradual elimination of industrial tariffs as a centerpiece objective of the WTO Doha Development Agenda negotiations, combined with the elimination of major non-tariff measures.
“With the WTO Cancun Ministerial just weeks away, this new background paper provides further evidence of the major benefits to developing countries of multilateral tariff liberalization. The Doha Development Agenda offers a rare opportunity to gradually eliminate what is essentially a tax on development and reignite the global economy as an engine of growth and prosperity. The Cancun Ministerial should reinforce the importance of achieving an ambitious level of tariff liberalization for non-agricultural products as a chief outcome of the Doha Agenda,” according to Mary Irace, NFTC Vice President for Trade and Export Finance.
The study looks at the three most frequently cited concerns — potential government revenue loss, erosion of trade preferences, and competing without tariff protection — and offers factual evidence as to why such concerns are misplaced. The report finds that on balance developing countries stand to gain substantially, not lose, from tariff elimination. Some of the key findings include:
• The reduction and gradual elimination of tariffs would stimulate, rather than reduce, tariff and other revenue sources. It cited, for example, a study which found that a 1% increase in Chinese tariffs resulted in a 3% increase in tariff evasion — with even larger magnitudes at higher tariff rates.
• Comprehensive tariff reduction would have little impact on developing country exports to preference-granting countries. Any impact would be offset by the costs associated with GSP programs and the fact that preferences are already disappearing due to growing bilateral and regional free trade agreements. Moreover, preferences deter countries from pursuing beneficial market opening measures.
• So-called infant industry arguments harm, not help, industrial development, which is backed up by a wealth of evidence. Tariff and other trade liberalization measures provide access to new technology and needed foreign capital, among other important benefits.
“The primary objective of the paper is to examine the concerns raised by certain developing countries about tariff elimination and address misconceptions. It finds that lowering and eventually doing away with tariffs would open up markets further than ever before and provide substantial benefits to developed and developing nations. Developing countries would gain the most from gradually eliminating their own high tariffs, because tariffs deter developing country growth, as well as their ability to attract needed foreign direct investment and stimulate trade expansion with other developing countries. It is worth noting that 70 percent of developing country tariffs are paid to each other,” stated Irace.
The paper also cites three case studies of developing nations that have benefited from tariff liberalization and concludes that the benefits of liberalization far outweigh the potential costs. For example, Malaysia is found to be “widely regarded as one of the few developing countries that have been highly successful in raising their shares in world manufacturing exports and value added through participation in global production networks, such as those in electronics and computers.” Malaysia’s strength in the information and communication technology (ICT) industries is in large part due to the WTO’s 1997 Information Technology Agreement, which eliminated all ICT tariffs among all signatory countries, spurring competition and innovation.
For copies of the study, please go to http://www.nftc.org/default/trade/NFTC%20Tariff%20Paper%200803.pdf
The National Foreign Trade Council is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves 350 member companies through its offices in Washington and New York.