Tariffs, not a revenue raising device - Economist | Sunday Observer

Tariffs, not a revenue raising device - Economist

The dwindling of Sri Lanka’s exports as a share of the Gross Domestic Product (GDP) since the year 2000, is due to the imposition of a large number of tariffs on imported goods, while not realising that there is a positive correlation between exports and imports, says a top Harvard Economist.Delivering a lecture on ‘Path to Prosperity: Protectionism or Free Trade?’ organised by the Advocata Institute in Colombo,

 Prof. Robert Lawrence argued that tariffs is a wrong way to raise revenue as import taxes ultimately tax exports and hence taxes, should in turn, be broadbased.

“When Sri Lanka increased trade protection, the country’s imports as well as exports went down simultaneously. There could be some case for infant industry protection, but it should be the exception and not the norm,” said Lawrence, who is the Faculty Chair of the Practice of Trade Policy program at Harvard University’s Kennedy School.Acknowledging the International Monetary Fund’s support to reform the island’s tax system, as a step in the right direction, the learned professor advocated that Sri Lanka needs more income taxes and even explore property taxes, but should not use tariffs as a primary revenue raising device.

“One of the ideas we would like to promote is that Sri Lanka needs tariff reforms, by moving to lower and a simple tariff structure. We are not saying you should move there overnight, but you should have a long-run agenda to move in there gradually.“You might be surprised, but flat tariff rates get you more money than very high tariff rates that cuts off the import lines,” said Professor Lawrence who currently serves as Faculty Chair of The Practice of Trade Policy executive program at Harvard Kennedy School.

Drawing on examples of success stories on trade from India, China, Vietnam and Taiwan, which followed such a policy, the Professor espoused that Sri Lanka has to simplify taxes because there is no rationale for the large number of tariffs. However, he said that companies could be provided tariff protection on the basis of exceptional circumstances where there is credible argument for protection.“Personally, I would not be averse to saying 90% of the tariffs should be in the simple schedule and there maybe some exceptions for firms that might have an adjustment difficulty and for those who have a long-run growth potential.

“But there needs to be a credible argument made, that if you have opportunities in the domestic market, ultimately you could reach economies of scale that would make you globally competitive,” Professor Lawrence pointed out.According to the Advocata Institute, Sri Lanka’s effective rate of protection is now at the same level it was in the 1980s, reversing almost two decades of liberalisation. The Fraser Institute which measures and ranks openness of trade among countries, ranks Sri Lanka 135 out of 159 countries, mainly due to complex procedures and high ‘para tariffs’.

Professor Lawrence is an Albert L. Williams Professor of International Trade and Investment, a Senior Fellow at the Peterson Institute for International Economics, and a Research Associate at the National Bureau of Economic Research.

In the United States, he has served on the advisory boards of the Congressional Budget Office, the Overseas Development Council, and the Presidential Commission on United States-Pacific Trade and Investment Policy.