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The average tariff rate in Iran is 28%, excluding other duties the government charges on imports to limit the flow of goods.
The average tariff rate in Iran is 28%, excluding other duties the government charges on imports to limit the flow of goods.

The Right and Wrong of Trade

The Cabinet mentions three reasons for the suspension of import tariffs: Protection of domestic manufacturing, preventing foreign trade from veering off-course and stopping the disruptive effect of these exemptions

The Right and Wrong of Trade

The Cabinet has suspended discounts on import tariffs for 69 goods. Fifty-one items on the list were suggested by the Ministry of Industries, Mines and Trade, while the remaining 18 were specified by the Ministry of Agriculture.

The Cabinet reportedly made the decision last Wednesday, Boursepress reported.

The goods mostly consist of foodstuff and appliances, Donya-e-Eqtesad daily quoted an unidentified source as saying.

According to Mojtaba Khosrowtaj, deputy minister of industries, mining and trade and the head of Trade Promotion Organization of Iran, the discounts were emplaced after the Iraq-imposed war on Iran ended in 1988 to help some war damaged ports–chief among them Abadan and Khoramshahr that were devastated by the Iraqi invasion – recover by directing business toward them.

“After the war, it was decided to reduce import tariffs by 10-20% in some ports to get the vacated ports going again and create jobs,” said Khosrowtaj.

  Two Wrongs Don’t Make A Right!

Now, these discounts are being suspended. The Cabinet mentioned three reasons for the suspension: protection of domestic manufacturing, preventing foreign trade from veering off-course and stopping the disruptive effect of these exemptions on the tariff regime. This is a right decision for the wrong reasons.

The Cabinet is correct in its recognition that explicit exemptions rarely, if ever, work. Much is wasted on verification of eligibility, usually based on unclear and debatable criteria. This ambiguity opens the way for corruption and rent.

A brief skim over Iran’s past economic history shows us as much.

As Donya-e-Eqtesad notes, the benefits of such exemptions mostly benefit businessmen and the end users while making life harder for domestic manufacturers.

“Their only effect on the target group (the local population) is that some businesses thrive due to the rise in exports,” the paper writes.

It seems like some people expected a mere tariff cut to revolutionize these battered ports and are disappointed they had the logical effect instead of the desired effect.

Tariffs do not do that. But they do disrupt free trade for the ease of mind of the domestic manufacturer and the pain of the consumer. They do snuff out competition. The average tariff rate in Iran is 28%. That average does not account for other duties the government charges on imports to limit the flow of goods.

However, it would be wrong to assume this does the manufacturers any good. This is because the government cancels out all the benefits of lower competition by anchoring rial’s exchange rate to the dollar.

Given Iran’s inflationary environment, that means strengthening the rial every year, which makes Iranian goods less and less competitive for export and less appealing compared to imports.

So in Iran’s economy, two wrongs do not make a right. You cannot fix the exchange rate and levy tariffs, duties, taxes and quotas to cancel out their effect. While removing exemptions and streamlining regulations are a welcome path the administration of President Hassan Rouhani is taking, it should go a step further and ease trade while leaving exchange rates to markets.

 

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