Around 90% of imported goods now come into Australia tariff-free, with cars, furniture and knitted goods among the remaining 10% of goods on which tariffs apply.
The federal government currently collects around $1.5 billion from tariffs, or just 0.3% of its total tax take, and the amount that it collects will fall further as new free trade agreements (FTAs) are implemented.
As part of a report released today regarding assistance to business, the Productivity Commission (PC) has estimated the decline in revenue from tariffs as a result of additional FTAs being put in place will see the cost of collecting tariffs on remaining goods increase to $4.81 for every dollar of tariff revenue raised.
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The PC has, therefore, called for these ‘nuisance tariffs’ to be abolished.
Below is the Executive Summary:
This report argues that the costs of the Australian tariff system arise mainly from its complexity. In Australia’s low tariff-rate environment, the costs of the tariffs arise primarily from the complexity of the system rather than from distortions to the economy.
Simplifying the tariff system will lead to cost savings for businesses that will eventually flow through lower prices to Australian consumers. The main savings are likely to be achieved by reducing the costs associated with concessions and preferences — or by simplifying the entire tariff system. Some savings are also likely to arise from trade facilitation initiatives, such as the Simplifying Trade System initiative already underway.
Tariffs are only applied to a small number of imports with nearly 90 per cent of imports entering Australia duty-free. A tariff of 5 per cent is paid on about 10 per cent of imports, raising about $1.5 billion in revenue (this represents about 0.3 per cent of revenues collected by the Australian Government).
The Government incurs costs to administer the tariff system. Those that could be estimated amount to between $11 million and $20 million. To the extent that agencies use cost recovery mechanisms, the costs are borne by businesses, and eventually, consumers — otherwise, administrative costs are borne by taxpayers.
Now that they are so small, both in level and coverage, tariffs protect very few Australian producers. Distortions from reallocating labour and capital toward relatively inefficient businesses are much smaller compared to when tariffs were more prevalent: some tariffs are applied to imports that do not compete with domestic products, the tariff rate is low (five per cent), and tariffs are applied to a small number of imports.
The main effect of the current tariff system is to increase the cost of inputs to businesses that use imports and eventually increase consumer prices. Aside from the cost of the tariff itself, there are costs to businesses from complying with the system, such as identifying whether they qualify for any concessions or for a preference under a preferential trade agreement. In accessing a preference, businesses incur an average cost of 0.9–2.8 per cent of the value of the imports to which the preference was applied in order to avoid paying the tariff of five per cent of the value of imports. This includes the costs to foreign exporters of meeting the local content requirements necessary to qualify for the preference, which are largely passed through to Australian businesses and consumers. In some cases, businesses do not access a preference either because they are unaware of its existence or because the cost of accessing it is too high.
When applied to imports that do not compete with domestic producers, taxes on imports can be an efficient source of revenue compared to other sources of revenue — they are administratively easy to collect and result in small economy wide distortions if the tariff rate is low. But the costs of collecting tariffs is also a function of the complexity of the system, which affects administrative and compliance costs. The costs of the system are estimated to be in the order of $0.59 to$ 1.57 per dollar of revenue raised (table 1).
The cost to revenue ratio increases as costs increase and as revenues decrease. As the number of concessions and the number of PTAs increase, the costs of the system increase and the amount of revenue decreases, making each dollar collected more expensive to collect. The implementation of agreements with the UK, India and the EU could reduce revenues from $1.5 billion currently to $579–664 million, raising system costs to $1.41–4.81 per dollar of revenue collected (figure 1).
Australia has already lowered or eliminated tariffs with its various free trade agreement partners, which has created efficiency distortions via trade diversion (i.e. when trade is diverted from a more efficient exporter towards a less efficient one). Removing tariffs on remaining goods for all trade partners would eliminate these distortions. It would also eliminate compliance and administrative costs for businesses and government, improving overall efficiency.
Given Australia no longer has a domestic car industry, and the costs of tariff collection outweighs the revenue gains, there is no longer a sound justification for maintaining these ‘nuisance’ tariffs.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also Chief Economist and co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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