Tariff reductions have repeatedly failed to bring about the development and industrialisation that developing countries need. Salah El-Amrousi argues that we should learn from experience The recent tariff reduction was simply another step down Egypt's path towards freeing its trade with the rest of the world and unleashing domestic market forces. It seems irrelevant that this path has repeatedly failed, both at home and abroad, to bring about the development and industrialisation that developing countries want and need. The tariff reduction went below the minimum 60 per cent level Egypt had promised the World Trade Organisation (WTO). Tariffs were brought down to 40 per cent in one fell swoop. Contrary to common perception, implementing WTO rules does not mean the elimination of all tariff protection. The WTO allows each nation the right to determine a maximum tariff level that suits its purposes. What the WTO is dead set against is quantitative protection; namely, protection via quota systems. Our neo-liberals are selling us the tariff reduction as if it was some sort of a consumer bonus. The tariffs, they claim, will make goods, whether foreign- or local-made, available to consumers at the lowest price and highest quality. The tariff reduction policy is an abandonment of protectionism. This much has to be clear from the outset, for it is a fact that local industry cannot survive without a measure of protectionism, however temporary. The propagandists, however, tried to have their cake and eat it. They would have us think that the new policy will benefit both consumers and industrialists. The reductions, we are told, are useful in other ways, such as the elimination of so-called distortions in tariff bands. The Egyptian media discourse focusses on simple cause-effect formulas. The reduction of tariffs on consumer goods will reduce prices, which is good for the consumer. And the reduction of tariffs on capital and intermediary goods will reduce costs, boost profits, and perhaps even lead to a price reduction on the final product, which is also good for the consumer, we're told. The government is hoping that industrial activity will flourish in a way that would offset the loss in customs revenues (LE3 billion) -- via increased taxation on a larger volume of economic activity. Portrayed as such, the tariff reduction is a magic wand that will make all our economic problems go away. But will it? First of all, what I wish to state right away is that the bulk of Egypt's industrial structure is made up of consumer goods factories that will not be able to withstand unmatched competition. Thus while the propagandists ignore the fact that the tariff reduction places local products in an unfair competition, we may well be headed for a slump in local industry. According to the most recent report by the Central Accounting Agency, public and public/business sector companies had LE17.5 billion in inventory in 2002. Since inventory builds up when you are outmatched by the competition, the new tariff system will leave these companies worse off. But the excessive inventory phenomenon is not just a public sector problem. Private textile and garment factories, for instance, are in the same boat. To be fair, one must admit that low quality, lack of standardisation, and outdated equipment also contribute to excessive inventory problems. They are also related to our endemic trade and payments deficits. Some people will argue that the exposure of local industry to global competition will be more beneficial than lethal, that it will provide local industry with a much-needed incentive to catch up to international standards. Others will say that our industry has been protected for long enough, and that we cannot go on protecting failure forever. I will discuss these two arguments further down. Secondly, the government's media discourse overlooks the fact that the tariff reduction may not be passed on to the consumer, due to the monopolistic structure of the Egyptian market. Imported tea provides a precedent. Egypt abolished all taxes on tea when it joined the COMESA. That represented a potential gain of LE300 million for consumers. But all that money went straight into the pockets of tea importers. For consumers, the price of tea did not go down; it actually went up -- partly because of the devaluation of the pound. Thirdly, the propagandists overlook the fact that any favourable impact on the prices of consumer, intermediate, and capital goods -- thanks to the tariff reduction -- could easily be wiped away by the next currency devaluation. A 10 per cent devaluation has the same impact on the economy as a 10 per cent tariff hike, with the only difference being that the monetary gain from the devaluation goes to holders of foreign currency, whereas the gain from a tariff increase goes to the government. In fact, the exchange rate's relative stability of late is closely linked to the successive decline of various types of imports. According to an August 2004 foreign trade report, imports have declined steadily since 1998. Imports in 2003 stood at one- third less than their level in 1999. The decline was steepest in intermediary and capital goods, which dropped by 40 per cent and 54 per cent respectively when compared to 1999. But the decline didn't result from our success at making substitutes for imports, but because the local economy, and the manufacturing sector, had shrunk. Imports of consumer goods, particularly the non- durable type (in demand by average consumers), were 30 per cent lower in 2003 than in 1999. The drop in imports matched the decline in the value of the national currency. As the customs reduction is expected to increase imports once again, the pressure on the pound is likely to increase. Another round of devaluation would hike up prices, which would instigate another round of recess. Fourthly, the state media discourse overlooks a particular aspect of the government's policy -- interest rates. On new loans they average 17-18 per cent, and may reach 20 per cent in certain cases. Such high interest levels conflict with the stimulating effect of tariff reductions. A potential devaluation of the pound will have a long-term recessional effect on the economy. But high interest rates have an immediate recessional impact. Let's look at our manufacturing sector's investment needs. The textiles industry alone needs about LE100 billion ($16 billion) to renovate its machinery. That industry stands to gain no more than 10-20 per cent of the presumed LE3 billion savings off tariff payments. But remember, anywhere between 70 and 100 per cent of textile and garment machinery is over 25 years old and due for replacement. Minister Rashid Mohamed Rashid has already listened to textile and garment manufacturers complaining about the interest rates. His response was firm. His ministry, he said, had no intention of subsidising interest rates ( Al-Ahram, 5 August 2004). Realistically, can the textile and garment industry compete using old machinery? Can they compete when they have to borrow at 20 per cent (whereas interest rates in most other countries don't exceed two or three per cent)? This is a catastrophe waiting to happen, and it is not confined to the textile sector. The manufacturing industry's main problem is its excessive reliance on the outside world for importing intermediate and capital goods (these goods, by the way, constitute two-thirds of our imports and are mainly to blame for the trade deficit). A recent Cabinet Information Centre study entitled "Manufacturing Industry Competitiveness, April 2003" notes the grave consequences of over-reliance on the outside world, which makes local industry's costs susceptible to as much as a 36 to 46 per cent fluctuation at any given time as a result of changes happening abroad. What happens if local industrialists are unable to raise their local prices to reflect the change in the cost of their inputs? What happens when they cannot borrow at reasonable rates to improve their machinery and performance? They have to fold. The proper solution for over-reliance on the outside world is for our industry to go the extra mile for local manufacturing: to branch out into intermediary and capital goods. Tariff reductions are mere palliatives -- they cannot help an industry hamstrung by high interest rates and threatened by a wobbly currency. This brings me back to the claim that we have protected our industry for too long, and that it is time to let the chips fall where they may. My argument is that the problem was never about one industry, but about the industrial structure -- which needs more interdependence as a whole. Currently, every industry is an island in and of itself, linked more with the outside world than with other local ventures. We need more horizontal links to keep our industrial scene dynamic, and to benefit from local talent and creativity. Some people claim that lower customs entice industry to perform better. This claim is unscientific, if not outright ideological. There are only two scenarios under which lower tariffs can stimulate industry. One is when the national economy has enough foreign currency to buy the latest machinery and technology -- which is not true in our case, given our endemic balance of payments deficit. The other is when the economy has all brands of industry in action, consumer as well as intermediate and capital. If we don't have such a multi-faceted manufacturing structure in place, we'll have to create it, and we can only do this via (temporary) tariff protection. There are types of local industry that do not deserve any protection whatsoever, such as the assembly factories specialised in durable consumer goods. These factories benefit from tremendous customs protection -- over 100 per cent before the recent tariff reductions -- and make more money than drug traffickers. And yet these industries have no right to claim protection, unless they have plans to branch out into making intermediary goods. The customs duty on durable consumer goods remains high, at 40 per cent, whereas semi-durable consumer goods face a tariff of up to 32 per cent. Meanwhile, non-durable consumer goods -- the bulk of our industrial structure -- are protected by a 22 per cent tariff. These manufacturers must deal with high interest rates and a wobbly currency situation, and they need new machinery as well. It is that aspect of industry that we need to protect from unfair competition.
