Structural Impediments and How They Harm Development

Recently in the news there is a huge spotlight on the “trade war” between Trump and the Chinese communist government. The back and forth “slapping” of tariffs is the grist of many a business headlines. Tariffs for people are very simple to understand because they emulate what we experience in our daily lives when we pay a sales tax. We know that if we pay $1 + a 5% sales tax (GST, VAT,….) then we will finally pay $1.05.

We can see clear favouritism when a country charges a tariff far above the taxes levied on domestic producers. Developing countries also use tariffs to get revenues and protect home industries from competition.

There are much more problematic less transparent hindrances to development though and these are structural impediments to trade. Here are some examples.

The “special” permit for importers. This method sees a country allow only a few or perhaps only one buyer in their country for particular commodities. This allows for all sorts of “fees” to be gotten by “connected” individuals who can ensure a sale due to a “special” relationship.

Special requirements said to guarantee “quality” of imported goods can be particularly disastrous to trade when the quality agency is not transparent. So this is very similarly used by “connected” people for getting rich. Also the requirements could simply be onerous.

A particularly hideous method is where customs officers levy tariffs on goods by using unknown market evaluations instead of the values listed on the invoices. An example may be on one day a television set with an invoice value of $200 is evaluated as $3,000 on one day and $200 on the next. When there are no clear reasons for the differences and no ways to get explanations or transparency – the business simply shuts down altogether. 

The use of tariffs to protect a home industry from competition is at least transparent. Hidden and unknown costs simply kills trade altogether and generally enriches only a few who are connected. If International trade is to continue to enrich the world using the proven benefits of comparative advantage, then societies need to at the very least eliminate these hidden hurdles. The developing nations stand to gain the most if this can be done.

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