Rough trade ride into illusion

UNTIL not so long ago, countries used to impose high tariffs (import tax) on each other’s imported goods ( and, at least at that time to a much lesser extent, services). The motivation behind such tariff measures was more a “passive” one for developing countries and “active” one for developed countries. There used to be a clear development distinction between countries, with developed countries manufacturing most of the goods (and providing most of the services) for developing countries to acquire (and thus import).

Developing countries were mostly commodities- based economies, exporting the crude forms of agricultural and natural goods at relatively low prices to developed countries which then manufactured these goods into end products for reexport into the developing countries at much steeper value- added prices. Understandably the developing countries wanted to build up their own industry base, such that on the one hand they would not be subject to the vagaries of supply of end products as commanded by the developed countries, and on the other, more local jobs and high- value industrial skill sets could also be created. Or at least that was the original intension.

Thus, high tariffs were imposed by developing countries on imported goods (mostly end products) from developed countries. The idea was so that the domestic markets in the developing coun-

high-value goods from developed countries, but also the local manufacturers could take the opportunity to shore up their own production (which otherwise would be faced with stiff competition especially in price, as local production simply does not have the scale to offer comparable prices as imported goods), such that more and more users would switch to the local products. This is because the high tariffs would likely be

for the imported goods, and its local substitutes which hopefully are more affordable, would thus command a better stand in the market.

But experience in developing countries over the years has shown that although the idea behind such a high- tariff trade policy is sound in developmental economics context, its real- world application has been at best mixed in its results. For one, the so- called import substitution industries, from soaps to cars, have often morphed into hotbeds for crony capitalism in many developing countries. The high tariffs, instead of fostering healthy local market competition, have often been replaced by monopolies or oligarchy which went on to manufacture substandard or low- quality products which, though still cheaper than the imported goods, do not offer as much value for money. Consumers or end- users are often stuck with local substitute products that, at best, need frequent repairs and, at worst, are hazardous to their safety and health. The collusion between local big business and the government of the day in many of these developing countries many, of which are incidentally either authoritarian regimes at worst or struggling democracies at best, may be said to have subverted the original, positive intention of import substitution by means of imposition of high tariffs. At the end of the day, the authorities in these countries may enrich their coffers, but the average folks who are stuck with the poor local imitations are very much worse off. So much for passive high- tariff measures.

For developed countries, there is conversely this “superstition” about the glory of selling more goods (mostly manufactured ones, but commodities as well, as is the case with the United States, endowed as it is with bountiful agricultural products) and services ( thus exporting) to other countries than purchasing (thus importing) from the latter. The disputes surrounding “trade balances” thus become explosive issues. Developed countries want to make sure trade balances are positive in their favor (or exporting more than importing goods). They believe that only then would more jobs be created and retained in their respective countries, and industrial (or agricultural) productions could be revved up even higher, thus boosting their respective domestic economies. As “active” trade measures, they used to also impose high tariffs on each other’s imported goods, and sometimes even goods from developing countries, such that hopefully the target countries of such tariff measures would then be forced to buy more from the tariff- imposing countries in order

There are also at least two problems with this line of high-handed trade tac

- tries being hit with high tariffs may not simply acquiesce and buy more from the tariff imposer. Instead, they tend to hit out with retaliatory tariff measures which

imposer. And this tariff game could spin out of control into what is called a trade war, with escalating, mutually imposed tariffs that will hurt each other’s economy badly. Second, high tariffs will not immediately translate into local substitution, thus the end users in the tariff-imposing country would likely end up with having to pay higher prices for the same products than they are used to, which actually serves to dampen the vibrance of the domestic economic performance.

This is especially so in the context of globalized production chains. There are market reasons, good or bad, that dictate why certain goods are produced somewhere else. High-tech products are often produced in developed countries with the requisite skill sets and high investments into research and development necessary for such products. Laborintensive products are usually made in developing countries due to the lower wages and labor protection conditions. And environmentally hazardous products too are often made in developing countries with lax environmental protection standards. It is simply foolish for developed countries to try to do all sorts of manufacturing up and down the value chains. It goes against the essence of a free market economy.

As such, until such time when both developing and developed countries get rid of their illusion about the grandeurs and benefits of tariff imposition, we will still be in for a rough trade ride.