Egypt's widespread nuisance tariffs damage its economy and should be abolished, writes Arne Klau* As Egypt is progressively moving towards a free society, with all its characteristics, it is time to have a closer look at its institutions, their objectives and efficiency. Do they fit in a free society? Do taxpayers get something out of their money? Are rules transparent and set in a manner not to put undue burden on citizens and companies? In fact, these are the questions that all institutions and regulations should now be confronted with. One area where Egypt's institutional and regulatory performance can definitely improve is its trade policy. In a highly integrated economic world, trade policy plays an increasingly important role for a country's standard of living and the well-being of its citizens. Therefore, government interventions, even when minor or possibly well-intended, like low tariffs, can do harm to a society and reduce its welfare. Tariffs are taxes levied on imports. They can perform two basic functions: an income function, that is generating fiscal revenue, and a protection function, that is shielding domestic producers from imports which are perceived as being "too cheap", "harmful", or "unfair". While most tariffs, indeed, perform at least one of these two functions, this is not the case for so-called nuisance tariffs: these are tariffs set so low that it normally costs the government more to collect them than the revenue they generate. For companies, in particular small ones, paperwork generated by nuisance tariffs is often more irritating than the payment of the customs tariff itself. While there is no generally agreed definition, tariffs would generally be recognised as rates of more than zero to up to two or three per cent. In Egypt, over 22 per cent of all tariff lines carry such a nuisance tariff. If goods subject to a five per cent tariff are also included, this share increases to a hefty 49.5 per cent. In other words, under Egypt's current trade regime, nearly half of all goods are subject to a tariff which hardly has any effect other than creating administrative work for government officials and shoe leather cost for companies. Note that this concerns imports from countries with which Egypt does not have a free-trade agreement, such as China, the United States or Japan. Still, Egypt's share of nuisance tariffs is much higher than in neighbouring or comparable countries. In Turkey, the share is six per cent, while in Jordan it is zero. A closer look at Egypt's tariff schedule reveals that goods affected by nuisance tariffs include not only many types of machinery and tools, but also numerous consumption goods of particular importance to the poor such as flour, wheat, rice, lentils and beans. To make one thing clear, what Egypt is doing in this field is legally waterproof and perfectly in line with its international obligations, notably under the World Trade Organisation (WTO). The point is rather something else; with its abundance of nuisance tariffs, Egypt is harming itself considerably. Their abolition would increase Egypt's share of duty-free rates substantially and give visibility to trade reforms, also in view of the fact that the share of duty-free tariff lines is frequently taken as an indicator for the openness of a trade regime (such as the World Economic Forum's ranking of trade regimes). Consumers would benefit through lower prices, although admittedly the price effect will be limited. Egyptian companies would enjoy less red tape and are more likely to be more integrated into the global production chain. Moreover, the abolition is likely to reduce customs clearance times considerably. Clearance times in Egypt are lengthy and constitute a problem, in particular for smaller companies. Last but not least, the workload of the Customs Authority could be substantially reduced while fiscal income would hardly be touched. Thus, nuisance tariffs hamper trade without any significant benefit. They create more damage in Egypt where they are more widespread than in other countries. Their abolition could be a first step of a comprehensive trade policy reform. If economic reformers look for some low-hanging grapes to start with, here is their chance. * The writer is adjunct professor of economics at the American University in Cairo.
