Khemraj backs regional tariff on refined sugar, blasts local manufacturers for opposing
Economist Tarron Khemraj is in favour of enforcing a Common External Tariff (CET) on refined sugar imported into the Caribbean Community (CARICOM) and has rubbished arguments against the tax by local manufacturers.
“…the perceived negative impact of a CET is non-existent or very minor in the worst case…” he wrote in his column in the Sunday Stabroek yesterday. He also highlighted that the two local companies that utilise a significant amount of sweetener make “supernormal profits that no CET on processed sugar can shake.”
Last month, the Guyana Manufacturing and Services Association (GMSA) rejected a proposal floated to apply a 40 per cent CET to refined sugar entering CARICOM. In rejecting the proposal, the GMSA had warned that refined sugar-dependent companies could be forced to close and jobs could be lost. Among other things, the local manufacturers have also claimed that white sugar produced here could negatively impact the quality of their products.
The issue arose after the Guyana Sugar Corporation (GuySuCo), which is seeking to produce plantation white sugar, recently said that it and other sugar producers’ groups representing sugar producing countries in the region had discussed applying the 40 per cent CET now only applied for non-regional brown sugar entering the regional market, to all sugars, including white sugars.
In response to the GMSA, GuySuCo has said that its planned white sugar product will meet the standards required by the manufacturers. It also emphasised that its production of plantation white sugar will bring a host of benefits including that local manufacturers would benefit from a reliable supply and more ready access to white sugar and foreign exchange savings. It also highlighted that most of the white sugar that is deemed “refined sugar” imported extra-regionally from Guatemala and Colombia, and used by local and regional manufacturers, is actually plantation white.
Regional sugar producers have also underscored the threat facing the industry across the region and a report commissioned by the Sugar Association of the Caribbean in January 2019, said, “It is clear that a CET is required to sustain the sugar industry in the Caribbean. The current situation where the CET is applied to brown sugar only, has distorted the market encouraging end users to demand dutyfree refined sugar even if it is not strictly required for their product.”
The extensive tax evasion that occurs when importing sugar was also highlighted by the regional producers. Among the methods of CET avoidance mentioned were omitting words in the manifested descriptions of the material shipped, and simply noting it as “sugar” rather than “brown”, “raw” or “white” or more detailed descriptions. Some traders seeking to capture part of the value of the CET, also reportedly combine CARICOM origin sugars with imported sugar at an equivalent to 27 per cent CET on the full quality and then selling this to final buyers at the equivalent of 40 per cent CET.
Proponents
In his column yesterday, Khemraj observed that proponents of the tariff note that it will be beneficial to both GuySuCo and Belizean sugar manufacturers. He said that the GMSA’s disagreement appears to be based on arguments straight out of a second-year college course in international trade theory and rejected the argument that the quality of the locally made refined sugar would not be up to the standard of the imported ones.
“This is the first time I am ever hearing that the quality of Guyana’s sugar is not good. It must have been good for far-flung producers in south Florida, Mauritius, India and Malawi to use the term Demerara in their branding,” he wrote.
In relation to the GMSA’s argument that the tariff will increase the cost of production of manufacturers and cause them to lay off workers, he observed that these days, the job-loss argument is being made from all quarters, private and political. “However, the labour market statistics are still not good enough to capture the different dimensions of unemployment. But I guess using the term jobs make for reliable political rhetoric,” Khemraj wrote.
He noted that in principle, a tax on production will reduce business output and result in loss of employment to the extent that businesses cannot pass on the cost to the consumer in higher prices. “Being able to pass the cost on depends on whether the guava jelly is a strong substitute for the imported raspberry jam or the gooseberry jam for strawberry jam, and so on. More importantly, it also depends on whether jams, jellies and sweets form a large enough percentage of monthly income for people to care – I doubt it does. And the health-conscious folks might say the sweets are addictive – hence making demand less sensitive to a price increase,” the economist argued.
He said that more substantially, the non-sugar and non-rice manufacturing contribution to Guyana’s GDP in 2018 was just about 3 per cent. “An even smaller percentage includes the markets of soft drinks, sweets and jellies. Soft drink makers already import sweeteners that are derived from corn. Moreover, soft drinks
make up a relatively small percentage of the product output mix of the great Guyanese duopolies – Banks DIH Limited and Demerara Distillers Limited. With no credible threat of contestable entry, these duopolies make supernormal profits that no CET on processed sugar can shake. In other words, there will be no job losses,” he contended.
Thus, he said, the perceived negative impact of a CET is non-existent or very minor in the worst case.
Intertwined
Further, he highlighted the benefits associated with saving the sugar industry in Guyana. He observed that in Guyana, the sugar industry is intertwined with the ecological system in which at least 80 per cent of the population lives. This is not the case in Belize, Barbados or any other Caribbean country.
“This means that the state-owned sugar industry in Guyana provided a public good for which it was never paid. Prior to the formation of a government-owned sugar industry, drainage was treated as a private good provided by the plantation for the plantation in colonial times. This is why there are today back dams, side line dams and sea dams on the periphery of each plantation, as well as the accompanying canals and kokers. This system still survives in the modern coastal villages – at least in the ones where canals are not yet filled up to make more lands,” Khemraj wrote.
Over the years, he said, it was recognised that GuySuCo produced sugar, but it was never recognised the government corporation also produced drainage – a public good. This added an extra layer of cost for the corporation that provided significant societal benefits associated with not being flooded out, Khemraj wrote.
GuySuCo’s drainage also provided implicit spillover health benefits as the running canals prevented the build-up of stagnant waters. No one has quantified the spillover benefits of the financial cost GuySuCo bears for drainage, he observed.
“As we learned in economics, if an activity produces positive spillovers, we should subsidise its production. This is the case with primary and secondary education – hence we make them as cheap and free as possible. However, this principle was not applied to GuySuCo. Instead of receiving a Pigouvian subsidy for the positive societal spillovers from drainage and maintaining public play grounds, etc., a sugar tax was levied by the PNC on the industry from 1974. This obviously took away a lot of capital which the industry no longer had for diversifying before the replacement of Lome. Of course, Mr. (Bharrat) Jagdeo’s problematic industry policy made the situation worse,” he wrote.
He also highlighted that preserving the sugarcane growing heritage has other benefits while its absence could see more of a burden on government.
“Without GuySuCo, more drainage responsibility will be shifted to the local authorities, who already have slim taxing capacity. This means, ultimately, central government will have to take over the responsibility. The difference, however, is despite the high average cost of production – partly due to its drainage responsibility – GuySuCo generates gross revenues by selling private goods, such as bulk sugar and molasses, which it uses to subsidise its provision of the aforementioned public good. Central government can only provide the public good by first taxing the citizens, not through the generation of gross revenues. Therefore, allowing the industry to completely wither away will be a net welfare loss – even though there is a high average cost of producing sugar,” he said.
“The alternative, as many have recognised, is to keep diversifying the products that can come from sugarcane and even look for other possibilities – perhaps coconut plantations and antidesma. Finally, maintaining the polder system of canals, dams and kokers in pristine shape opens up the possibility for heritage-based tourism, bird watching and fresh-water fishing – all coupled with craft rums, craft cocktails and organic food,” he wrote.