Analyze and evaluate the impact of any major protectionist measure undertaken by the country allocated to you. (Bangladesh)

Analyze and evaluate the impact of any major protectionist measure undertaken by the country allocated to you.

Divy Dangi

Bangladesh

Trade Protectionism is a policy imposed by the government to reduce the quantity or value of imports entering a country or increasing the exports of a country. There are three basic forms of protectionism: Tariff, Quotas and Subsidies. These policies restrict the foreign imports and encourage domestic production. This in turn creates a favorable balance of payments, prevents trade imbalance, corrects the exchange rate of an economy’s currency and much more. However, these policies are not always beneficial. Recently, Bangladesh has used one such protectionism policy.

Recently, on August 30^th 2015, Bangladesh imposed protectionist measures on Sugar imports. Bangladesh raised custom duties, i.e. tariffs, on raw and refined sugar.[1] Tariffs are indirect taxes imposed upon imported goods and services. The cost of raw sugar imports increased from 2000 taka to 7000 taka and the cost of refined sugar increased from 4500 taka to 10500 taka.[2] There has been an increase in the cost of raw and refined sugar by 250% and 133% respectively. This increase in costs in the domestic market had many consequences.

The first reason the tariff was imposed upon the imports was to protect the domestic firms. Since domestic firms are not as efficient as the foreign firms in the production of sugar, their costs are higher. These higher costs reduce their competitiveness. Hence, the increase in tariff increases the cost of imports, and this increases the competitiveness of the domestically produced goods. Hence, increasing the cost of imported sugars to 7000 and 15000 taka, made it unviable for the domestic consumers to consume imported sugars and therefore they turned to domestically produced sugars, which are cheaper. Here, the domestic firms are protected even though they are inefficient.

The second reason the government increases the tariff is to increase the government revenue. For a country like Bangladesh that has a budget deficit of 0.36% of the GDP, as an average from 1994-2014, the government requires funds[3]. A major source of the government income is tariff. Thus the government increased the tariff on sugars to increase their revenue and reduce their budget deficit.

An increase in the tariff on sugars has different consequences on the different stakeholders. The increases tariff on sugar resulted in a decrease in imports from Brazil, India and Thailand, due to their reduced competitiveness. Additionally, this has increased the quantity supplied by the domestic producers in Bangladesh. This will help companies like the Bangladesh Sugar and Food Industries Corp to reduce their excess supply. Their stockpiles of excess sugars will reduce and hence the producer’s costs will reduce.

Next, increased tariffs are harmful to the domestic consumers in Bangladesh. In a country where the GDP per capita is only $958, increase in cost of sugars will be detrimental[4]. Sugar is something that is used in ones every day life. Now the consumers will have to pay higher prices for a lower quantity of the sugar. This will have a negative effect on the consumers’ disposable income.

On the other hand, the domestic producers are benefitted. Since the imports have reduced, competitiveness of the domestically produced goods increased. Also, they can increase their prices, due to the increase in cost of imported goods. Thus, they get a higher revenue. Since the domestic supply increase, the domestic employment also booms. This reduces unemployment in the country and increases the standard of living of the domestic workers in Bangladesh.

Additionally, the government also gains from the increased tariffs. The increase in the price of the sugars is a result of the tariff the foreign producers have to pay to the government for their imports. This tariff is added to the government as revenue. Thus, tariffs positively effect the government budget.

However, even though the domestic producers and the government benefit, the income equality in Bangladesh will worsen. Since the tariff is a fixed value on sugars, the tariff is a regressive tax. This means that the tax has a greater burden on the consumers with a lower income than consumers with a higher income. Hence, the income equality, in a developing country like Bangladesh, worsens.  

Also, the increased tariffs promote inefficient production of goods by domestic producers. It leads to x-inefficiency in the Bangladeshi producers. Since, the competition has reduced, the domestic producers have resorted to inefficient production methods. They do not try to increase their efficiency as the government protects their goods and services.

In summary, using the graph above, we can see that the domestic production has increased from Q₁ to Q₂. The imports have reduced drastically from Q₁Q₄ to Q₂Q₃. We see that the domestic supply has increased. This has benefitted the domestic producers and employees. However, the cost of the products have increased from P_w to P_w+t. This is harmful for the consumers. Also the government benefits as revenue is created using tariffs. Lastly the society as a whole loses as there is welfare loss and global misallocation of resources.

Bangladesh, due to increased protection, will benefit in the short run. Protectionism has protected its domestic firms that are integral to its economy. It has reduced imports and protected its balance of payments. Also reduced imports have helped the correction of the Bangladeshi taka. However, in the long run, the inefficient production of the domestic firms will create a lot of welfare loss for society. Also countries like India, Brazil and Thailand may retaliate. Tariffs also result in a global misallocation of resources, thus creating welfare loss.

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[1] http://en.prothom-alo.com/economy/news/77181/Bangladesh-raises-duty-on-sugar-imports

[2] http://en.prothom-alo.com/economy/news/77181/Bangladesh-raises-duty-on-sugar-imports

[3] http://www.tradingeconomics.com/bangladesh/government-budget

[4]https://www.google.co.in/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_pcap_cd&idim=country:BGD:IND:PAK&hl=en&dl=en