Introduction CET Import Substitution Supply-side

Which trade policy instruments can Uganda useto increase growth?

John Spray

University of Cambridge

September 14, 2017

Introduction CET Import Substitution Supply-side

Introduction

I Common External Tariff

I Import Substitution

I Supply-Side Constraints

I Lessons from research - Frazer (2017), Shepherd (2016), Spray(2017), Spray and Wolf (2017), Argent (2014), Frazer (2012)

Introduction CET Import Substitution Supply-side

CET - context

I Goal: encourage production in higher value-added industries

1. Protection for manufacturing firms of finished products (25%)2. Limited protection on goods that have undergone some

processing (10%)3. Extreme protection for specified industries on the SI list

(25+%)

I Challenges

1. Impact on competitiveness of landlocked vs. coastal countries2. Misclassification of intermediate goods3. Sensitive items list

Introduction CET Import Substitution Supply-side

Challenge 1: high trade costs lower competitiveness oflandlocked vs. coastal countries

Example: Kraft paper

I World price in Mombasa =$0.5/kg

I + CET 25% - $0.125/kg

+ trade cost (MBA-KLA)30% - $0.15/kg

+ trade cost (KLA-MBA)30% - $0.15/kg

World Price + import tariff+ transport cost

Landlocked

Introduction CET Import Substitution Supply-side

Challenge 1: high trade costs lower competitiveness oflandlocked vs. coastal countries

Example: Kraft paper

I World price in Mombasa =$0.5/kg

I + CET 25% - $0.125/kg

I + trade cost (MBA-KLA)30% - $0.15/kg

+ trade cost (KLA-MBA)30% - $0.15/kg

World Price + import tariff+ transport cost

Landlocked

Introduction CET Import Substitution Supply-side

Challenge 1: high trade costs lower competitiveness oflandlocked vs. coastal countries

Example: Kraft paper

I World price in Mombasa =$0.5/kg

I + CET 25% - $0.125/kg

I + trade cost (MBA-KLA)30% - $0.15/kg

I + trade cost (KLA-MBA)30% - $0.15/kg

I Kraft paper price =World Price + import tariff+ transport cost

Landlocked

Introduction CET Import Substitution Supply-side

Challenge 2: Misclassification of intermediate goods lowersmanufacturing firm competitiveness

I CET classifies goods as finished - 25%, semi finished - 10%and raw materials - 0%

I Roughly 600 product lines classified in the CET as consumergoods are in fact intermediary inputs

I Example: kraft paper

Introduction CET Import Substitution Supply-side

Challenge 3: Sensitive items list and other exemptionscreate frictions

ForI Increase protection for

Ugandan products

I Food securityI Some industries have grown

I building materialsI agricultural productsI detergents

Against

I Higher prices for consumerson staples (Maize (50%),Sugar (100%))

I Average poor person’sincome declined by 3.8%

I Twelve years since inception- limited success

I Other successful customsunions have used few

source: Frazer (2012, 2017)

Introduction CET Import Substitution Supply-side

CET - summary

I May not be optimal but a good starting point

I Appeal for lower tariffs for landlocked countries until transportcosts can be lowered

I Reclassification of intermediary goods tariff lines

I Serious review of SI lists and other exemptions

Introduction CET Import Substitution Supply-side

Import Substitution - context

I Goal: encourage greater Ugandan participation in thedomestic economy

1. BUBU focus on procurement2. Local Content Policy mandate to purchase goods domestically

I Challenges

1. Imports are crucial to Ugandan economy and competitiveness2. Success stories from around the world suggest importance of

focusing on export oriented growth

Introduction CET Import Substitution Supply-side

Challenge 1: Imports are crucial to Ugandan economy andcompetitiveness

Uganda Imports (2015)

Source: Atlas of Economic Complexity

I All sectors useimportedinputs

I Importsincrease firmefficiency(Frazer, 2016)

I Imports arevital forexporters, whodriveproductivity(Spray, 2017)

Introduction CET Import Substitution Supply-side

Challenge 2: import substitution has a questionable history

1. Enforcement of strict local purchase rules for some firmsI “x% of certain goods must be purchased from domestic firms”

I “x% value-added must be within the country”I Examples: Latin American car industries, easy to circumvent

2. Export restrictionsI export taxI export value-added on raw materialsI examples: Pakistan cotton

3. Beggar my neighbour competitionI Regional tit-for-tat protectionist policiesI examples: Tanzania trucking levy

Introduction CET Import Substitution Supply-side

Import Substitution

I Appealing but not without serious risks

I Maybe worth considering targeting constraints to sectors ascomplementary policy

Introduction CET Import Substitution Supply-side

Supply-side Constraints

I Goal: reduce barriers to growth by focusing on bindingconstraints to firms

1. Government has managed to lower trade costs2. National export strategy targets standards

I Challenges

1. Trade costs are still too high2. Firms suffer from information problems3. Firms cannot get access to standards certification

Introduction CET Import Substitution Supply-side

Challenge 1: Trade costs are still too high, when they fallexports grow

23

25

27

29

31

33

Tim

e

5000

10000

15000

20000

25000

export

s

2008q3 2010q1 2011q3 2013q1 2014q3yq

Export volumes rise as transport time fall

Introduction CET Import Substitution Supply-side

Challenge 2: firms have a lack of information aboutsuppliers and buyers

I Search frictions constrain firm size and lowers efficiency(Eaton et al. 2016)

I Unlike other countries, firms do not have access to databaseof suppliers

Introduction CET Import Substitution Supply-side

Challenge 2: firms have a lack of information aboutsuppliers and buyers

Introduction CET Import Substitution Supply-side

Challenge 2: firms have a lack of information aboutsuppliers and buyers

Introduction CET Import Substitution Supply-side

Challenge 2: firms have a lack of information aboutsuppliers and buyers

Introduction CET Import Substitution Supply-side

Challenge 2: firms have a lack of information aboutsuppliers and buyers

Introduction CET Import Substitution Supply-side

Challenge 3: firms cannot access standards certification

I Economic research shows raising quality is key to firm success(Verhoogen, 2008; Kugler and Verhoogen, 2009; Bai, 2016)

I If customers cannot assess quality then they will assume allfirms are average

I Allow firms to distinguish themselves from their competitorsI Made in Uganda brandI Subsidise certification and certification labs

Introduction CET Import Substitution Supply-side

Conclusions

CET

I Medium growthpotential

I Push for lowertariffs forlandlockedcountries

I Reclassifyintermediaryinput goods

I Restrict use of SIlists

Import Substitution

I Risky growthpotential

I targetconstraints e.g.information,finance, etc.

Supply-side

I High growthpotential

I Lower trade costs

I Create supplierdatabase

I Subsidisestandards andregulations

Introduction CET Import Substitution Supply-side

Conclusions

CET

I Medium growthpotential

I Push for lowertariffs forlandlockedcountries

I Reclassifyintermediaryinput goods

I Restrict use of SIlists

Import Substitution

I Risky growthpotential

I targetconstraints e.g.information,finance, etc.

Supply-side

I High growthpotential

I Lower trade costs

I Create supplierdatabase

I Subsidisestandards andregulations

Introduction CET Import Substitution Supply-side

Conclusions

CET

I Medium growthpotential

I Push for lowertariffs forlandlockedcountries

I Reclassifyintermediaryinput goods

I Restrict use of SIlists

Import Substitution

I Risky growthpotential

I targetconstraints e.g.information,finance, etc.

Supply-side

I High growthpotential

I Lower trade costs

I Create supplierdatabase

I Subsidisestandards andregulations