Higher imports taxation idea needs sober debate

The renewed push by manufacturers in Kenya for higher taxation of finished products imported into East African Community (EAC) bloc is a double-edged sword that requires sober reflections.

The Kenya Association of Manufacturers (KAM) says Kenya’s decision to apply a 30 percent Common External Tariff (CET) on imported finished products distorts the regional market because other partner of the EAC Customs Union such as Tanzania and Uganda had settled on 35 percent.

To that extent the lobby has a point because a lower CET on finished products comparative to Tanzania and Uganda technically means that such products are likely to be dumped into the Kenyan market despite its sufficient manufacturing capacity for items such as iron and steel products, wood products, textile products, paper and paperboard products, and vegetable oil.

In theory, when a higher tariff is imposed, the additional costs loaded upon the affected items discourage imports, which in turn sways the balance of trade.

Globally, tariff protection is a preferred policy response by countries seeking to protect infant domestic industries from international competition, providing them ample time to nurture and grow into competitive entities and safeguard jobs.

Tariffs are also popular in stances where a country is experiencing import surges from countries known to adopt unfair trade practices such as export rebates.

In the case of Kenya, the current CET structure is based on three bands which set a zero percent tariff on raw materials and capital goods, 10 percent on intermediate products and 25 percent on finished products.

KAM, however, said the three bands had failed to offer value to its members, hence the need for a fourth one that would ensure differentiation between unprocessed or raw materials, intermediate products manufactured locally, intermediate products not manufactured locally, and justifiable rates for finished products.

Although the industrialists have a point, they need to focus on a bigger picture of improving their competitiveness as a long-term solution.

Market protectionism has its limitations in that such measures preserve domestic production capacities only in the short run but obstruct the long-term apparition of efficiency of production and competitiveness in the international markets.