Nuisance tariffs

A nuisance is a minor inconvenience, an annoyance or, quite simply, a bother. A tariff, in the context of this column, is a rate of customs duty. So, what is a nuisance tariff? One would need to consult the World Trade Organisation (WTO) for the definition, which reads: “[This is a] tariff so low that it costs the government more to collect it than the revenue it generates. Sometimes, a tariff does not have any protective effect – some countries defend this as necessary in order to raise revenues.”

With respect to of the ‘protective effect’, the definition could be elaborated to include that “the tariff has no or a minimal protective effect”. And the definition could also conclude with “and should therefore be eliminated”.

As to how nuisance tariffs came into being, they quite simply resulted from various multilateral trade negotiation rounds that reduced the ‘General’, also known as the Most Favoured Nation, rates of customs duty to very low levels without eliminating the tariffs.

This begs the question as to what the defined rate of duty is for a nuisance tariff? Quite helpfully, “there is no agreed WTO definition”. The range seems to be anything up to and including 2% ad valorem, or 2.5% ad valorem. In studies undertaken by the International Bank for Reconstruction and Development, commonly known as the World Bank, the level is set at 5% ad valorem, the same as the United Nations Conference on Trade and Development’s level.

On March 11, the Australian government’s Treasury published a notice titled ‘Tariff Reform: Removal of Nuisance Tariffs’, in which it extends an invitation for comment on its proposed abolition of about 500 nuisance tariffs. It considers this move to be the biggest unilateral tariff reform in two decades to boost productivity, reduce compliance costs for businesses and ease the cost of living for Australian families by more than $120-million over the next four years.

The Australian Treasury continues that, from July 1, tariffs will be abolished on a range of imported goods, including household necessities such as toothbrushes, tools, fridges, dishwashers and clothing. An added consideration is that these tariffs serve no protective purpose, as they are imposed on goods that, more often than not, arrive under a concessional duty rate.

It is anticipated that the abolition of the duty rates will simplify the Australian customs tariff and remove compliance burdens for Australian firms. The latter is due to the fact that, after successive free-trade agreements, most goods are now imported duty free. As a consequence, firms spend time and money proving their imports are eligible for the tariff preferences and concessions. The removal of the duties is expected to not only lower the prices of the goods, but also eliminate processing costs and burdensome administration costs.

The notice followed the Australian government’s Productivity Commission research paper, ‘The Nuisance Cost of Tariffs’, of August 5, 2022, in which it argues that, in Australia’s low-tariff-rate environment, the costs of the tariffs arise primarily from the complexity of the tariff system rather than from distortions to the economy.

The research paper’s structure is as follows: Executive summary; What this study is about; Scope; Organisation of the report; Conduct of the study; The tariff system; Statutory tariffs, preferences and concessions; Using tariffs; Fiscal implications of tariffs; Revenue implications of Australia’s tariff policy; Administration costs; Economic implications of tariffs; Compliance costs of avoiding tariffs; Distortions and costs to the economy; Overall assessment of economic costs; Why the nuisance costs of tariffs matter; What do Australia’s tariffs cost?; Costs and revenues, now and in future; Consultation; Estimating administration costs; Estimating preferential trade agreement-related compliance costs; Abbreviations; Glossary; and References.

If you were wondering, the Southern African Customs Union (Sacu) has 31 nuisance tariffs (2.5%), all of which are for Mercosur, the Spanish abbreviation for the Southern Common Market, a South American trade bloc. The Mercosur secretariat might want to engage the Sacu secretariat to abolish these ‘nuisance tariffs’. As for the 5% ad valorem tariff, there are a considerable number of tariff lines, which should also be investigated as a matter of course.