Trade Policy Note Final-rev08 - Development

across the board tariff bindings. For a number of relatively advanced developing
countries in Asia for example, the level of bindings on industrial products is around
60 percent of tariff lines. In Africa there is no set pattern. Almost one third of African
countries have bound less than 10 percent of their industrial tariff schedules, while
another third have bound over 90 per cent. Over 85 percent of Latin American
countries have bound over 90 per cent. 16 Flexibility is also provided by the levels of
tariffs, as many countries have bound their tariff at relatively high rates and maintain
an applied tariff at much lower levels. These high tariff bindings generally cover all
industrial products, without much variation among sectors. Tariff policy is also
restrained by FTAs that eliminate tariff flexibility among partners , and can drastically
affect the scope for industrial tariff policy.
Box 7: The Fiscal Implications of Trade Liberalization
Trade liberalization over the past 20 years has indeed primarily taken the form of reductions
in tariffs levied on imports in the context of bi- or multilateral agreements. Yet, customs
duties continue to represent a significant share of fiscal revenue in most developing regions –
and in particular in the least developed countries and small island countries, where reliance on
trade taxes may exceed 25 per cent. The net revenue-impact of trade liberalization, which has
received much attention in the literature*, depends on assumptions that make it theoretically
ambiguous. It has been argued that in addition to the marginal (assumed to be positive) effect
of trade liberalization on growth, the introduction of consumption-based taxes –and of a
Value Added Tax more specifically- would offset the short term negative impacts on
government revenues.
Yet, empirical results suggest that such has not been the case, in particular for countries that
rely most on trade taxes: for every dollar lost in tariffs, poor and middle-income countries
have at best been able to recover 30 cents from other sources. 17 Even more troubling is the
fact that these countries are those where government revenues as a share of GDP are already
among the lowest for a variety of structural reasons – urbanization rates, population density,
dependency ratio- and economic reasons, and where public investments are much needed to
reduce poverty and achieve the MDGs. Explanations for the inability of poorer countries to
make up for the loss in tariffs revenues include the institutional and administrative challenges
posed by the introduction of VAT in economies where a sizeable share of transactions occurs
in the informal sector, and where central and local tax authorities lack the technical capacities
required to collect taxes, prevent leakages and tax evasion and implement necessary controls.
Further, it has been argued 18 that a revenue-neutral reform of tariffs and VAT rates could be
welfare-reducing in the context of highly informal economies where the increased reliance on
VAT will exacerbate the distortions between the formal and informal sectors. It is clear,
therefore, that trade liberalization has far-reaching fiscal and institutional implications and
calls for the design of comprehensive technical assistance and capacity building programs
that should be a priority of aid-for-trade initiatives (see Section III).
* Sources: Dollar, David and Aart Kraay ‘Trade, Growth and Poverty’ World Bank Working Paper
2615, 2001; Greenaway, David, Wyn Morgan and Peter Wright, “Trade Liberalization and Growth in
Developing Countries”, Journal of Development Economics, Vol. 67, 2002; and Rodriguez, Francisco
and Dani Rodrik, “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross National
Evidence”, NBER Working Paper 7081, 1999.
16 See Bacchetta, Marc and Bijit Bora, Industrial Tariffs and the Doha Development Agenda, WTO
discussion paper (Geneva: 2003), http://www.wto.org/English/res_e/booksp_e/discussion_papers_e.pdf
17 Baunsgaard, Thomas and Michael Keen, “Tax Revenue and (or?) Trade Liberalization”, IMF
Working Paper WP/05/112, June 2005.
18 St iglitz, Joseph and M. Shahe Emran, “Price Neutral Tax reform With an Informal Economy”,
Econometric Society, 2004 North American Summer Meetings 493.
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