A Case For Higher Tariffs?

[Slaydadea]

A case for higher tariffs?

Posted on 12 February 2011. Tags: Electricity, Industry & Trade, Tariffs

Starting March 6, Iraq will begin imposing import tariffs ranging from zero to 80%. For many products, this will be a big increase. Up to now, importers have been subject to a uniform tariff of only 5%, which covered everything except food, medicine, books, clothing and products related to humanitarian assistance or Iraq’s reconstruction. (For more on the new tarrifs see:

http://www.iraq-businessnews.com/2011/02/08/iraqi-import-tariffs-rise-sharply-from-march/).

Believers in the free market, like the “neo-cons” who abolished the Saddam-era tariff regime back in 2003, will doubtless see this move as a step in the wrong direction. Higher tariffs, they will argue, protect inefficient state-owned industries, raise costs for consumers, and create opportunities for rent seeking. Rather than putting up barriers to trade, the Iraqi government should simply stand aside and allow market forces to work their magic.

These arguments are not without merit. It is certainly true that introducing a tariff in the otherwise ideal world of the economics textbook will result in a suboptimal outcome. But in an economy like Iraq’s, the textbook result doesn’t necessarily hold. There may actually be an argument for taxing imports if doing so helps to alleviate distortions elsewhere in the economy.

Consider, for example, what happens if an air conditioner tariff is introduced. Obviously consumers will have to pay more for air conditioners and will buy fewer of them—a suboptimal outcome if that’s all there is to the story. In the case of Iraq, however, people are already air conditioning their homes more than they optimally would because of subsidized electricity prices. As a result, power outages are more frequent and result in greater economic losses.

An air conditioner tariff would partially correct this distortion. And it would make economic sense if the benefits from the reduction in power outages outweighed the cost to consumers. If simply eliminating the subsidy is politically impossible, a tariff might be the next best thing.

I’m doubtful that such a case could be made for all, or even most, of next month’s tariff increases. In the absence of a product-by-product cost/benefit analysis, however, there’s really no way to be sure.