Barbados decides to lower applied tariff on cement: A good or bad thing?
Barbados’ Minister of Industry & Commerce, the Hon. Donville Inniss, recently announced that the country’s applied import tariff on hydraulic cement which stood at 60% would be lowered to as low as 5%. One of the instruments of trade and development policy, an ad valorem import tariff is a duty levied on the value of an imported good calculated as a fixed percentage of the good’s value, including cost, freight and insurance.
Import tariffs are an important source of central government revenue. In 2014 Barbados netted BDS $223m (USD $111.5m) in import duties according to Central Bank of Barbados reports. High tariffs are also used for public policy reasons to discourage and limit the use and entry of foreign goods deemed to be harmful to public health.
As a tool of trade and development policy, they are also often used to protect infant industries or those industries deemed to be of vital national importance for food security or otherwise from competition from imported like foreign goods. In many cases the foreign goods may be cheaper and thus more attractive to local consumers due to the foreign manufacturers’ more favourable economies of scale and lower input costs. By making the “like” imported good more expensive than the local counterpart as a result of the tariff, consumer demand for the imported good is dampened and the local good becomes the more price competitive. This helps to ensure a measure of protection for local production and jobs in that industry.
The high tariff on imported cement was a policy designated three decades ago to offer protection to the island’s only cement manufacturer, Arawak Cement Ltd, which is now a subsidiary of pan-Caribbean cement manufacturer, Trinidad & Tobago based, Trinidad Cement Ltd (TCL).
Japan for instance imposes an over 700% tariff on imported rice to protect its vitally important rice industry. Import tariffs are levied by all governments. Those countries which are members of the World Trade Organisation (WTO) set a ceiling rate for each tariff line in their schedule of concessions. These ceiling rates are known as bound rates. Applied rates refer to the rates of duty actually charged, whether MFN or non-MFN, and unlike bound rates may be changed unilaterally by the state.
Like many developing countries, Barbados’ applied tariffs are usually much lower than its bound rates. This is not always the case though as data taken from the WTO Tariff Download Facility showed Barbados had a bound rate of 70% for all major HS tariff lines concerning cement, including portland, hydraulic lime and aluminous. Although high bound rates relative to applied rates do impact on predictability for those seeking to export to a country, they do help the country retain a certain measure of fiscal and regulatory policy space such as to limit the entry of goods deemed to be harmful to public health or to temporarily offer greater scope of protection to an industry.
The rationale behind the Government’s decision to lower the tariff on imported cement from 60% is to promote efficiencies in Arawak and allow consumers a better price for cement. High tariffs often cause market distortions, allowing local firms to become complacent and inefficient, resulting in higher prices, lower quality products and lack of options for the consumer. It is one of the reasons why in the case of infant industries, high tariffs are usually lowered once it is deemed that the industry is competitive enough to withstand competition from “like” outside goods.
Indeed, the issue of regional protection for TCL by way of a common external tariff of 15% for non Caricom originating cement had been a contentious one in the Caribbean Community due to complaints about cement shortages and quality issues, spawning the first two cases before the Caribbean Court of Justice’s original jurisdiction (TCL v CARICOM in 2009 and TCL, TCL Guyana v Guyana in 2010). The genesis revolved around Guyana’s unilateral suspension of the CARICOM common external tariff for cement without first seeking the approval of the Council for Trade and Economic Development (COTED) as per Article 83(1) of the Revised Treaty of Chaguaramas. A more recent case was brought by TCL against the CARICOM Competition Commission in TCL v Competition Commission in 2012 which was dismissed.
With regard to the present issue in Barbados, the lowering of the cement tariff is advantageous on the whole. Local construction companies have been lobbying the Government for years to lower the tariff due to the high costs of locally produced cement. As cement is a necessary input for construction from homes to hotels to luxury marinas, high cement costs increase construction costs which of course are a determining factor for developers when conducting their cost-benefit analysis.
Construction costs in Barbados are already relatively high. Such a situation is not ideal for a country where economic recovery has been anaemic (real GDP growth up to September this year has been a paltry 0.3% y-o-y despite record tourist arrivals), where construction is a major driver of output (construction contributes on average 5.7% to GDP, according to Central Bank of Barbados), and where construction, along with tourism, is expected to assist in economic recovery. There is also the hope that the increased competition will help Arawak further step up its game.
A potential downside to the lowering of the tariff, however, is that despite on going restructuring efforts, the inflow of cheaper foreign cement (cheaper often due to lower manufacturing and labour costs) could make Arawak unable to compete price wise, which could result in the further loss of jobs and closure if it is unable to compete, and with it a further decline in local manufacturing output. However, should this threaten to occur, Arawak naturally could make a case to the Government to slightly raise the applied tariff. All in all, I believe the lowering of the applied tariff for imported cement will redound to the benefit of the country.
In his Hoyos File this week, veteran journalist and publisher of the Broad Street Journal, Patrick Hoyos, whose articles I absolutely enjoy, wrote as per usual an interesting and insightful article about the issue of the lowering of the cement tariff, couching it in a wider discussion and critique of Barbados’ tariff policy. Click here to have a read!
Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. Please note that the views expressed in this article are solely hers. You can also read more of her commentaries and follow her on Twitter @LicyLaw.