Originally posted in The Business Standard on 4 September 2023
Are consumers paying the price of excessive protection of domestic industry?
The price of beef is Tk750-800 per kilogram in the retail market and according to the commerce ministry, the price will fall to Tk350 to 400 if we lift import restrictions. Then why don’t we import?
We produce 45 million pieces of eggs annually, yet a piece of egg costs Tk14-15 in the retail market. The price of beef is Tk750-800 per kilogram, despite Bangladesh producing more than its annual demand of 7.43 million tonnes.
Recently, a senior commerce ministry official suggested that if we imported beef from Argentina, the retail price of beef in the market would fall to Tk350 to 400 per kilogram. It was a veiled threat to local producers and businesses, implying that they were artificially keeping retail prices high, taking advantage of government policy to protect the local industry.
As a consumer paying Tk180 for a dozen eggs and Tk750-800 for a kilogram of beef, you might be wondering why we do not get imported beef or eggs in the market?
The answer is heavy tariffs. These tariffs were gradually imposed over the years to allow our local industry to develop the capacity to meet our local demand, besides making up for revenue shortfall. In FY 2022-23, the average import duty rate was 15.09%, while the average protective tariff rate rose to 30.58%. The World Trade Organisation recommends we bring the latter rate down to 25%.
We now take pride in the level of import substitution we have been able to achieve in almost every industry, where local producers meet the bulk of our demand not just for essential commodities, but a host of other consumer and luxury products.
But maybe it is time to ask at what cost? Who is bearing the economic burden of the numerous benefits provided to domestic industries, not just in the form of import restrictions, but also other favourable government policies such as resource allocation, loan facilities, tax holidays, etc?
Obviously, the local consumers.
The main argument for such protectionism is to support the infant industries. In theory, the industries with potential have to be identified and a timeline is set for how long it would require protection to reach maturity.
If an industry requires indefinite protection, it shouldn’t even be identified as a potential sector, say economists.
Dr Zahid Hussain, former lead economist of the World Bank’s Dhaka office, believes that there is no logic for permanent protection to promote domestic industrialisation. Although protection measures in Bangladesh are initiated to last a temporary period, they are generally extended.
“The problem here is that launching a protective measure somehow creates a vested interest group that profits from that support. And the group always resists the expiry of the protection [time limit],” he said.
Ignoring their resistance becomes difficult for the government if the group is closely connected to the policymakers.
“In that case, protection becomes a political issue instead of an economic incentive. Whatever it is, the burden entirely falls on the consumers,” Zahid said.
So how does this exactly work?
Take for example, eggs. Bangladesh sees the potential of its poultry industry to meet the demand of the domestic market. To support the infant industry, the government imposes tariffs on egg imports – making the imported egg costlier.
At the same time, poultry farmers are given duty concessions on importing poultry feed.
Thus, the domestic industry enjoys two types of protection: less competition with the import market and lower production cost. If the protection remains intact or keeps increasing for an indefinite period, local producers no longer have the incentive to rein in price, as there is no competition.
Ultimately, the end consumers have to bear the brunt.
Zahid added, “Profit from the high price that the consumers pay ultimately goes to the wallets of the industries’ which are already protected.”
Such protectionism appears to be everywhere. Economists point to the RMG industry and say local manufacturers are not very interested in widening export destinations with non-RMG products because of the ‘huge’ protections they already have. The international market of non-RMG products is too competitive and less protective.
“Because of protecting domestic industries for an indefinite period, an investment incentive disorder exists in Bangladesh,” said Zahid.
Then how can this profiteering be controlled to relieve the consumers? The market price of a product should be fixed on the basis of demand and supply. However, in Bangladesh, a few influential business operators, having a larger share of the market, artificially control the prices, which is contrary to the concept of competitiveness.
Describing the business community as “habitually profit-mongering, while some of them are abusers of domestic industry protectionism,” Bangladesh Competition Commission Member Md Hafizur Rahman suggests a combination of policy and institutional intervention.
“Institutions like the Competition Commission and Directorate of Consumer’s Rights Protection can check [what’s] making the market volatile. At the same time, the government can widen import facilities to increase supply of products,” Hafizur said.
Dr Zaidi Sattar, Chairman and Chief Executive of the Policy Research Institute of Bangladesh, suggests a thorough understanding of the market, which is a complex matter in terms of operation, and comprises a number of intermediaries like wholesalers, suppliers and retailers in between sellers and buyers.
“This complex market cannot be controlled, or the commodity prices cannot be kept under control only by imposing laws. Because this is an open market economy. The basic commodity price reduction policy requires ensuring enough supply of products in the market. If the supply is not ensured by internal sources, imports should be given priority to help balance the market,” said Zaidi.
However, there would be problems with tax exemptions on imports. In the 2022-23 fiscal, tax exemption alone jumped 18% to Tk61,032 crore. And NBR expects the amount to increase to Tk10,000 crore in the current financial year.
Over the past few years, there has been a lot of discussion on increasing the contribution of tax to GDP, but the opposite has been happening. In Bangladesh, the tax-to-GDP ratio was around 10% a decade ago. It came down to below 8% in FY22, according to the IMF. Finance Minister AHM Mustafa Kamal also acknowledged tax exemptions as the main obstacle to the ratio’s decline.
Dr Debapriya Bhattacharya, a Distinguished Fellow at the Centre for Policy Dialogue (CPD), thinks that any decision on import duty exemption should be based on how much tax exemption the government is planning to give and whether it can be tolerable or not.
“It is a question of data and empiricism.”
Replying to a question about how import (limited by tariff protection) could impact domestic industries and potentially provide relief to consumers as well, Debapriya said data deficiency is the major problem in finding the accurate answer.
“We don’t have proper production and consumption data, and also for that matter, how much import has been done formally and informally. If you don’t have a proper assessment of the market situation, how do you really devise trade policy or any other fiscal policy support?” asked Debapriya.
He further pointed to inadequate knowledge about how incentives given to the domestic industries are working.
“We know very well that there are abuses of policy support in the export industries. What about the domestic industries? We don’t have a clear idea.”
Debapriya also supports import if it is based on actual requirements. However, he said the recently initiated import decisions were delayed, because of slow policy response from the government – a result of a lack of coordination between the Commerce Ministry and other line ministries, for example, the industries and livestock.
“It is essentially a systematic problem of public policy management,” Debapriya said, adding that consumers finally bear the cost of failures in market management, even though there are regulatory measures and market incentives. At the same time, the government and entrepreneurs are affected as well by losing revenue, production and employment windows.
Amidst all this, one positive development is the government on 10 August published a gazette of the National Tariff Policy (NTP) that aims to ensure that Bangladeshi products can compete in the international market through a ‘trade neutral’ tariff.
Primarily, the trade neutral policy will guide the application of the tariffs, which are equally applied to imports and domestic production, while withdrawing protective tariffs (for example supplementary duties on imports) and duty concession (on importing some raw materials) in phases.