Duty drawbacks key to growth

Gift Mugano Business Correspondent

DUTY drawback schemes are used to provide exporters of manufactured goods with imported inputs at world prices and thus increasing their profitability, while maintaining the protection of domestic industries that compete with imports. The choice of export drawbacks is reinforced by international regulations, such as GATT that rule out the use of direct export subsidies, but allows the use of drawbacks.
Duties are initially paid as goods land. Refunds are provided upon shipment of export goods, which include dutiable components.
The duty drawback system, however, has a number of shortcomings which include loss of government revenue, creation of fertile ground for corruption, costly to administer and in most cases drawbacks fails to offset non-tariff barriers against imported inputs.
Nevertheless, notwithstanding this controversy, a number of countries which implemented the duty drawback system have witnessed remarkable growth in exports.
China has recorded spectacular economic growth rates in the last quarter century because of economic reforms. This export growth is believed to be behind China’s rapid economic growth.
The duty drawback, which is redemption of duty paid on imported inputs used in the production of exports, enables producers to have export competitiveness.
Tariff on inputs acts like a tax on exports because tariffs on imported inputs raise the cost of export production, thereby damaging the competitiveness of the export sector.
Many countries have tried to eliminate this source of the tax on exports by instituting duty drawback schemes, which aim at providing exporters with access to imported inputs at world prices.
Duty drawbacks instituted are expected to lower the cost of imported inputs and, consequently, to increase the exporting firms’ competitiveness.
The duty drawback systems are also justified in the sense that they tend to correct the anti-trade bias imposed by high tariff levels.
Unlike developed countries whose import tariffs rates are very low, developing countries faces steep import duties hence makes use of duty drawback to promote export. A number of countries in Latin American countries have some type of drawback schemes. Dominican Republic has a simplified drawback scheme for non-traditional exports: the refund is made immediately, and no documentation of the use of imported inputs is required.
The Colombian government provides a full set of exemptions related to duties. These are contained in the “Special Imports/Export Programme” (which enables producers to ask for duty exemption on inputs used into production of exported goods) and in the “Temporary Imports for Re-Exporting Unaltered Products” scheme (which allows firms to import products duty-free provided that they are re-exported in the country of origin of the imported goods).
Interestingly, there is also a sub-set of incentives conditioned on the fulfilment of some requirements related to export performance. For instance, the “Permanent Customs Users” is a programme that allows business providers to obtain duty drawbacks if their operations exceed US$6 million during the previous year.
The Colombian drawback mechanism, “Plan Vallejo”, is important for export growth in Colombian exporters. The effects of the duty drawback schemes implemented in Chile starting from the 1980s have been positive!
For a long period, Chile has used two different programs. The first was a standard scheme under which duties were rebated ex-post.
The second, which has been in place since 1985, was dedicated to small non-traditional exporter, it was a simplified drawback system under which exporters received a cash subsidy on the export values instead of one on the value of the imported inputs.
While there are no empirical studies on the causal effects of such measures on domestic economic performance, the volume of export and the number of exporters after its introduction grew rapidly.
One of the reasons why the simplified scheme is considered more effective is that it did not require costly bureaucratic procedures to be implemented which is a clear advantage for small new-exporters.
Also Chile had a similar simplified drawback scheme. This country had, however, abandoned it because it did not comply with the WTO rules.
In Mexico, firms have been largely using both temporary admission and duty drawback schemes. The ALTEX programme that facilitates export and import formalities for firms whose exports over total sales ratio is above 40 percent has been particularly effective.
One important feature of this scheme is that instead of refunding the paid duties ex-post, firms are exempted from paying duties in the first place.
In this way, the mechanism has the additional advantage of reducing firms’ working capital needs. This is considered one of the reasons for Mexican export success in the 1990s.
In Africa, a number of African countries make use of duty drawback schemes. However, in most cases they have not worked efficiently and their effects have been negligible. The main forces behind their failures has been corruption and bureaucracy! In some notable exceptions, very few countries registered significant success.
Malawi is one of the few countries that effectively used duty drawback schemes on the import of raw materials used into production and of transport vehicles is exempted from customs duties.
The horticultural sector enjoys exemption from customs duty for all imported inputs. This measure is expected to contribute to the increase in exports of a sector which is considered strategic for the national economy.
Senegal effectively applies duty drawback schemes on new-coming firms are given exemption from customs duties (for three years) and all firms are exempted from duties on imported raw materials thereby enhancing their competitiveness.
Kenya employs a duty drawback scheme which is part of the country’s set of measures for export promotion. In particular, the scheme allows the remissions of customs duties on capital goods and raw materials if used in exported products.
Zimbabwe also used duty drawback with marginal success for the same reasons highlighted above. Notwithstanding this, Zimbabwe reintroduced and strengthened the duty drawback system in 2011 in its National Trade Policy.
Like other countries, that allows the rebate of duty on imported inputs used to produce exportable goods, it provides that the relevant products should be exported within a reasonable period of time (such as one year) after payment of duty.
The objective of duty drawbacks is to help exporters overcome the tariff cost disadvantage and stimulate exports. However, the implementation of such trade policy instrument is still to come.
One then questions the relevance of announcing such good policy initiative and going to sleep on it! As the country is crafting measures to resuscitate the economy duty drawback schemes must be one of them. Lessons can be drawn from other countries’ experiences discussed above!

  • Gift Mugano is an author and expert in International Economics and Development in Africa, PhD finalist (Economics) and a lecturer of International Trade and Finance at Nelson Mandela Metropolitan University. He is based in Port Elizabeth, South Africa. Email: [email protected]
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