Skewed Tariff Policy

Sri Lanka’s tariff policy appears to be skewed. On the one hand it has high tariffs to protect the low value local confectionery industry, but on the other hand it reduced the tariffs on imported electronic goods last year, forcing Singer, a multinational company which manufactures high valued electronic goods such as washing machines and fridges, to close its high value television (TV) manufacturing plant (see The Sunday Leader of April 10, 2011) due to the company’s inability to compete with imported TVs, made cheap by the recent tariff reduction in the import of such goods.
This is a Government which prides in the slogan, “be Lankan, buy Lankan,” but if its lopsided tariff policies lead to the closure of high value added manufacturing plants, then it needs to look anew at its tariff policies.
To avoid such distortions which may also deepen socio-economic imbalances in a poor country such as ours further, the Government when formulating its tariff policy should also take the industry into its confidence before making any changes to the island’s tariff structure.
Closure of high technological related factories not only leads to the loss of employment, but also makes waste the talent of skilled personnel, money spent in the training of such and investments made in those projects and last but certainly not the least, is certainly not a step towards industrialisation.
There is a Trade and Tariff Cluster attached to the Finance Ministry comprising public and private sector personnel. Were their views first taken into account before the Government decided on reducing the tariffs on imported TVs to the detriment of the local industry? If not why? Is that Cluster well represented by industry? And last, but certainly not the least, is consumer interest also taken in to account by the authorities before formulating the country’s tariff policy?
Whilst acknowledging the fact that the Government cannot please all the people all the time, if, however, it has a proper system on board in formulating its tariff policies where all stakeholders are first consulted, it may then be in a position to better work out a scheme, which at least is satisfactory despite its imperfections due to its democratic modus operandi; thereby avoiding the possible loss of employment due to the closure of manufacturing plants unable to compete with cheap imports due to ad hoc tariff changes.
Budget 2011 has made a commitment to improve the country’s “research and development” (R&D) skills. But if technology manufacturing plants set-up by reputed companies such as Singer’s is forced to close down due to the state’s skewed tariff policies, then such proclamations like promoting the island’s R&D regime sounds hollow and are relegated to mere political slogans only.
The tradeoff between import liberalization vis-à-vis protection of local industries is an issue that is however not easy for governments to tackle.
The complaint made against the liberalization of the economy in 1977 was that it led to the closure of several local industries which were unable to compete with cheap imported goods.
Sri Lanka’s protectionist regime which began in 1956 came to an end with the advent of the open economy in 1977.
During Sri Lanka’s 21 year experiment with protectionism, ie from 1956 to 1977, many local industries thrived. That was also the era that saw the establishment of government sponsored industries built with the assistance of the then Soviet Union, some of which were the now defunct State Tyre and Steel Corporations, to name but a few.
However, from the consumer’s point of view, protectionism, more often than not, led to the availability of shoddy goods only, giving the consumer no choice, due to the absence of an alternative.
At times this type of protectionism also posed a threat to life and limb. There was that instance prior to 1977, of low quality boxes of matches being produced locally, which when lit, the flaming powder used to “jump” out of the matchstick like a mini fireball, landing on one’s person and burning the shirt one wore. That industry died a natural death with the advent of the open economy, beaten not by cheap imports, but by superior technological transfer that led to the production of the more efficient wax matches.
Howbeit, the lead story on these pages in our last week’s edition, carried an article quoting Singer Chairman Hemaka Amarasuriya urging the Government to strike a balance between cheap imports made possible by tariff reductions, which threaten the existence of local industries.
His specific reference was in regard to the manufacture of high value electronic goods, in particular washing machines, refrigerators and TV sets which the company has embarked upon, but being forced to close down its TV manufacturing plant after the Government reduced import duties on TVs last year, thus making Singer’s TV manufacturing plant uneconomical and uncompetitive against imports of the same.
In a similar situation, when the island opened up its economy in 1977, that sounded the death knell to the country’s fledgling electronic industry, the manufacture of transistor radios in particular, as those couldn’t compete with imports.
Amarasuriya’s sentiments were echoed by no lesser person than Kishu Gomes, Managing Director, Chevron Lubricants Lanka plc, another multinational company which manufactures and supplies lubricants to both the local and foreign markets (see The Sunday Leader issue of March 20, 2011).
His complaint was that the Government’s skewed tariff policy of allowing independent power producers to procure imported lubricants at discounted duties worked towards the disadvantage of local manufacturers such as themselves, which he said was also a disincentive for them to expand their manufacturing operations.
A company such as Singer, over the years, has improved on the quality of the products which it manufactures. It’s, undoubtedly, the recognition of this quality among other things that has made it to be acclaimed the number one people’s brand in the field of industry and commerce year in year out by the masses themselves.
But when their manufacturing arms are forced to close down causing a loss in employment due to their inability to compete with imported products made cheap by the lowering of tariff barriers, then it may be judicious for the Government to have a re-look at its import tariff policy.
However, such things may be easier said than done, with the Government having to strike a right balance between consumer interest and manufacturer interest. Perhaps the same yardstick which the Government applies to agriculture; ie the local farmer’s interest vis-à-vis the consumer’s interest, in the backdrop of the availability of cheap agriculture imports; may be applied as a start to arrive at a workable compromise to protect Sri Lanka’s manufacturing sector, while at the same time ensuring that consumer interest too is protected?