Domestic Economy

Breaking Down Tariff Wall

Business & Markets Desk
Breaking Down Tariff Wall
Breaking Down Tariff Wall

When it comes to helping industries, governments resort to various methods to boost output in sectors they deem important.

The Iranian government is no exception. It has for long used subsidies, cheap credit, tariffs and import bans to supplant the weakness of Iranian companies.

These methods have achieved little in the past decades in Iran, mostly leading to a waste of public finances and corruption. The new administration is, nevertheless, raising tariff rates this year.

“By cutting down the number of categories of importable goods, the administration has actually broadened the categories to fit more goods in them. The import duties on some of these goods have been raised without reason,” said Mohammad Lahouti, president of Iran Export Confederation.

“Hiking tariff rates makes contraband a more viable option to normal imports.”

Iran’s borders run for 5,440 kilometers, not to mention lengthy maritime borders with the Caspian Sea, Persian Gulf and the Sea of Oman, where merchandise is smuggled from Persian Gulf littoral states, especially the United Arab Emirates.

It is nearly impossible to control all of Iran’s borders, so just a whiff of profits and smugglers are on their way. Caps on the amount of imports and high tariff rates make it more worthwhile to dip into the contraband business. There are enough unregistered ports to process all these goods coming in.

Other than long borders, inefficient tax regulations and audits of businesses ease smuggling.

“The reason behind increasing duties is the Ministry of Industries, Mining and Trade’s focus on industrial production, regardless of commerce and trade,” Lahouti said.

Hidden protectionism and industrial policy may boost specific industries or exports, but that does a country no good if other policies stifle private enterprise and cause underinvestment in human and physical capital, according to the Economist.

Rich countries are the worst culprits in protecting industries. Japan’s tariffs—778% on rice and 328% on sugar—aim to block trade completely, insulating its small and inefficient producers from competition.

The European Union’s common agricultural policy soaks up 40% of its budget.

  Protectionism on Decline

However, protectionism is on the decline. One reason for the decline in traditional protectionism is that countries hit by recession are able to let their exchange rates fall.

In the 1930s, countries on the gold standard did not have that option, so they resorted to tariffs to ward off imports.

The rules of World Trade Organization generally do not recognize undervalued currencies as an illegal subsidy. Currencies are considered part of a country’s monetary sovereignty.

Iran does not use currency depreciation, not unless it is forced to through lack of means. Many industries in Iran rely on importing their raw materials and some essential goods are imported. Weakening the rial would drive up their cost and gives rise to inflation.

A long-held belief in public and political circles sees currency depreciation as weakness, something no political party would like to be associated with. Oil is there to pay for the costs.

Iran has to reduce tariffs to join WTO. Many officials fear Iranian industries will perish in the face of global competition. Some economists say walls should be lowered gradually and certain policies should remain.

  Lessons to Learn

In crafting protectionist policies, Brazil has perfected the art. Last year, looking for a way to reduce car imports, it introduced a new program to encourage innovation, Inovar-Auto.

Designed to stay within WTO rules, this requires Brazilian car manufacturers (all foreign-owned) to invest in local innovation and engineering, and meet certain fuel-efficiency standards by 2017, or else face higher excise taxes and import tariffs on domestic sales. This has boosted domestic investment in engineering and fuel-saving technology.

China has long used compulsory joint ventures, technology transfer and access to cheap land and loans from state-owned banks to boost companies in strategic sectors.

Chinese companies, many using skills acquired as partners or subcontractors to western suppliers, along with subsidized land and credit, dominate the Chinese market and compete fiercely with the original western suppliers.

Iran can learn a lot from the world. Let’s hope the government picks its policies right.