Why is tariff cut still not being used as a tool to check inflation?

A product imported at $100 was valued at Tk8,650 in the local market last year, which would now be at least Tk10,800 as per the latest exchange rate.

This amounts to a 25% rise in the price of imported goods due to the depreciation of the taka against the dollar alone in the last year. And a 25% currency depreciation is equivalent to a 25% increase in the tariff rate on all imports, meaning that the revenue authority is getting this additional customs duty simply on the assessed value of the import bills inflated by currency depreciation.

This leaves room for the government to slash duties at the import level, which would have taken a slice from the National Board of Revenue's additional incomes but could have taken some heat out of the consumer market.

This is what economist Dr Zaidi Sattar believes.

"The rise in import price due to depreciation has fuelled domestic inflation which is stubbornly holding at around 9%. A downward shock to inflation could be brought about by a downward tariff adjustment. Any downward tariff adjustment would partly neutralise the price or inflationary impact of depreciation – swiftly and sharply," he says as he analyses the impact of steep fall in the value of taka against the dollar since August last year.

Bangladesh's average inflation remained close to 10% for months now.

The consumer price index further soared to 9.9% in August on the back of 13-year food inflation while global food prices are at two-year lows now.

Inflation continues

Though non-food inflation significantly slowed, a broader basket of goods and services marked an upward trend, contributing to the rise in inflation.

While major economies, including neighbouring India and even Sri Lanka, succeeded in taming inflation mainly by restricting flow of money into the economy, Bangladesh could not rein in the spiralling prices of almost everything – imported or locally produced.

Economists identify cheap credit, market manipulation by vested interests, and weak market monitoring as among the reasons for food inflation soaring to 12.54% in August.

The last time Bangladesh witnessed food inflation higher than August was in FY2010-11 when it reached 14.11%.

Bangladesh did not use interest rate hikes as a tool to control the money supply to contain inflation, said economist Dr Fahmida Khatun to The Business Standard.

Tariff cuts can be very useful

Bangladesh did not even try another vital tool – tariff cut – which could be very useful in these trying times for consumers without harming much on NBR's incomes, economist Dr Zaidi Sattar pointed out.

"If 3% regulatory duty was withdrawn at import levels, the inflation would have dropped by 1%," said Dr Sattar, chairman of research organisation Policy Research Institute (PRI).

When prices of imported goods become higher in the domestic market, locally produced goods also become pricier, he said, explaining why monthly inflation surged from 6.2% level in April 2022 to 9.9% in August this year.

Given the rise in assessed value of imported goods only because of currency depreciation, the NBR has the scope to cut 5% to 10% of import tariffs, which would definitely have impacted the consumer market, he observed.

The revenue authority rather raised the assessed value of imported spices and dry foods – graded as luxury items – in line with the increased import bills caused mainly by pricier dollars, traders in Chattogram's commodity wholesale market allege. Some of the items saw their assessed value go up to 189% to 933% in August, which turned the spice and dry food market volatile last month. Again in just one month, the customs authorities proposed further upward revision of the assessed value of nine products, resulting in a fresh wave of price hike of imported spices and dry foods, said Zunayedul Haq, owner of a trading house in Chattogram.

Bangladesh's overall tariffs are higher than the World Trade Organisation's binding rates and the revenue authority could make best use of the last year's market volatility to reduce the tariffs, Dr Zaidi Sattar said.

"Since import revenue earnings grew at least 25% without any extra efforts, they could forego at least 10% of it, which could come as a great relief for consumers," the senior economist said as he believed that a cut in tariffs would force traders to lower prices as seen in cases of slashing supplementary duty in selected consumer items time and again.

This creates psychological pressure and breaks the traders' cartel, he added.

Traders claimed that occasional reduction or withdrawal of import duties on essential items like rice, edible oil, onion and sugar have had a direct impact on the retail market, helping to keep retail prices somewhat in check. Sometimes, even an announcement allowing import works to slow the price hike, they said.

Even amid the import drought, the NBR saw a 14% growth in import revenue in the first month of the current fiscal year.

"The good growth in revenue collection amid economic slowdown indicates that the tax burden on people has increased," former NBR chairman Dr Muhammad Abdul Mazid told TBS earlier.

High import tariffs, though in place to help local industries and businesses, are now widely being viewed as a regressive tax even in the USA from consumers' point of view.

American businesses even called for an end to the high tariff regime to protect US consumers who experienced the worst price inflation in four decades.

"Families across the country are feeling the hit to their pocketbooks. Recession fears are growing. There's no panacea for these woes, but tariff relief could provide quick and meaningful help for American families and businesses. Cutting tariffs is something the Biden administration can do today," Suzanne P Clark, president and CEO of the US Chamber of Commerce wrote in an article.

Tariff hurts the poor

The US International Trade Commission finds tariffs as a "regressive income tax" which fall disproportionately on the poor.

Tariff war with China and hiking tariffs on certain European products helped the US government nearly triple its tariff revenue last year to $100 billion in five years and these tariffs, according to a New York Federal Reserve study, are almost entirely paid by American firms and consumers. Tariffs cost the average American household over $1,200 in 2020 alone, Congressional Budget Office estimates.

"First in line to benefit from a substantial tariff cut would be American families. Faced with soaring costs for necessities, tariffs add insult to injury," the chamber leader writes in an article that appeared in Barron's.

However, opposite views are also there. Eliminating tariffs would not significantly reduce inflation, it would rather undermine US steel and aluminium industries, a post by Adam S Hersh of the Economic Policy Institute says in reaction to a reported move of the Biden administration to remove some of Trump-era tariffs on imports from China and EU.

But Suzanne Clark stands firm on tariff relief's role in fighting inflation, providing relief to families struggling with high prices and shoring up the competitiveness of US manufacturers.

Such tariff cuts would also help Bangladesh's consumers hard-pressed by an unbridled hike in prices of almost everything. The NBR saw some growth in revenue income driven by higher import prices, which ultimately added to the cost paid by consumers.

Though tightening the money supply to reduce demand is a much-used monetary tool to ease inflation, there are trade policy tools in use in a situation of high inflation like the one the world is having now.

To protect local industries, countries sometimes put high tariff walls which keep domestic prices artificially high and make consumers pay higher.

There are supply-side policies as well which include tax breaks, infrastructural and logistics support for businesses, labour productivity and healthcare – which require long-term investments to deliver positive results in a longer period of time. Despite massive hikes in energy prices, the government has not been able to ensure businesses in Bangladesh uninterrupted supply of gas, while transportation logistics need a lot of improvements to help businesses benefit.

Tariff cuts can be an immediate response

At a time when people are struggling to survive amid surging cost of living mainly because of external shocks such as global commodity market volatility, supply chain disruption, and violent movements in exchange rates, tariff cuts can be an immediate response. A smaller tariff could lead to a fall in import prices of food items, finished consumer goods as well as raw materials or parts for industries – ultimately benefiting consumers in general.

Many economies, including the US and EU, reined in soaring inflation by contractionary policy – hiking interest rates to curb cash flow, a similar approach along with import curbs would also help Bangladesh to lower inflation. "Such a monetary approach may reduce inflation hardly by 1 percentage point in a year or so and bring it to the level of 7%-8%. If we want to see inflation dropping at a faster pace, tariff cut remains the only option at hand, which our authorities have not tried yet," Dr Zaidi Sattar said.