Will the recently adopted common external tariff boost local production?
- Written by Justine Luwedde
In May 2022, the East African Community (EAC) partner states adopted a 35 percent levy as the common tax to be levied on select commodities imported from outside the bloc.
The commodities in this tariff bracket include; dairy and meat products, cereals, cotton and textiles, iron and steel, edible oils among others. The tariff will take effect on July 1, 2022.
The justification for the new tariff line is to promote locally manufactured goods, value addition and industrialization, and ultimately create more employment opportunities in the region. Despite the prospective gains, it is not clear whether the local manufacturers are capable of adjusting production in the short term to meet the possible increase in domestic demand.
Already, official data shows that Uganda’s demand for edible oils stood at 120,000 tonnes, yet the domestic production was at 40,000 tonnes. This indicates that the country does not have sufficient capacity to produce and satisfy the local demand for some of the aforesaid products. Uganda Investment Authority has indicated that the country needs more investors in this area to boost local capacity.
The EAC also faces a big challenge of unreliable supply of inputs. Most critical inputs for manufacturing are sourced outside the region. Uganda imports about $319 million worth of crude palm oil - a key ingredient in the manufacture of soap, cosmetics and animal feed, among others.
About $168.43 million worth of palm oil is imported from Indonesia and $94.6 million from Kenya. This shows that the country imports from outside the region and this is likely to make it more expensive or harder to access these raw materials.
The Economic Policy Research Centre, a thinktank, has found that import tariffs may not create significant changes in the import value, especially for a small economy like Uganda but, rather, a loss in welfare. This is because the tariffs increase the price of imported inputs and in turn increase the price of locally produced goods.
Nonetheless, the EAC member states agreed that the application of the revised CET should be flexible to accommodate commodities which have been most affected by the recent global challenges. This gives the partner states time to effect the tariff based on their trade priorities.
A case to consider is the Russia-Ukraine war which has disrupted global trade. The two countries are major sources of Uganda’s cereal imports such as, wheat which has become part of the local diet in the recent past. In 2020 for instance, Russia’s wheat exports to Uganda were nearly $50 million and about $17 million from Ukraine.
Given the current interruption in global supply chains, effecting the import tariff on these commodities would further increase their prices, which also has implications on food security. In the short-run government needs to maintain the tariff status quo to give room to the producers and consumers to seek out alternatives such as; inputs for production (for producers) and diet substitutes (for consumers).
In sum, whilst imposing import tariffs maybe a good measure to stimulate domestic production, they are not sufficient on their own. The government needs to address the production and supply constraints of manufacturers such as high electricity tariffs especially the SMEs as they constitute a lion’s share of the manufacturing sector.
The author is a research analyst at EPRC, Makerere University