Earl M. BartleyTHE CONTINUING brouhaha over the proposed 50 per cent tariff on imported cement highlights the challenges in balancing protection and competition in advancing the process of economic development.
Development theory and trade theory are seemingly at odds on the benefits and drawbacks of protection and competition as policy options. In development theory, protection is thought of as desirable to help "infant" industries to establish themselves and in some instances, to help mature ones needing 'temporary' protection from imports to restore their competitiveness.
Competition is the key device in a market economy that is supposed to hone and guide the emergent industries into high output efficiency. But the challenge becomes when and by how much to reduce the protection, and what extent of competition to allow against domestic producers.
In international trade theory, a small developing country like Jamaica that is a price-taker on the international market and has no influence over supply, always loses consumer satisfaction by the imposition of a tariff. But industrialisation has never occurred anywhere without some measure of protection, flexibly applied. The challenge is how to balance consumer satisfaction with industrial development and job creation. Often, the matter has to be decided case by case, or industry by industry.
THE JAMAICAN BUSINESS ENVIRONMENT
Right up to the mid-1980s Jamaica almost uniformly protected all its industries with high tariffs of up to 110 per cent. But in January 1983 the Seaga Government began a process of deregulation, cutting tariffs to 68 per cent as the initial step in a structural adjustment programme expected to last seven years. One year later, the administration further reduced tariffs to 40 per cent and eliminated many quota restrictions on imports. Going one step further, in the atmosphere of triumphal liberalism that was associated with the end of the Cold War, the Patterson Administration passed a Fair Trading Act in 1993 outlining a Competition Policy. It also established the Fair Trading Commission and Anti-dumping and Subsidies Commission as part of the same liberalising thrust.
Noting that "competition lies at the heart of any successful market economy and is crucial to the protection of consumer's interest and the efficient allocation of resources," the policy defines competition as "a process whereby firms constantly try to gain an advantage over their rivals and win more business by offering more attractive terms to customers."
The purpose of the Fair Trading Commission (FTC), like the referee in a game, is to monitor the rules of free-market competition and to proscribe anti-competitive practices that might prevent businesses from competing "fairly and fiercely" with each other. Among the practices sharply proscribed are predatory pricing, collusion to control prices or markets, and bid-rigging.
On occasion the Ministry of Finance still grants tariff protection to particular industries or businesses for limited periods in the national interest. Or the FTC might permit entities like the coffee or cocoa boards to engage in monopolistic practices, that is, centralised buying and distribution of output. But overall, since the 1980s, Jamaica's business environment has changed from an overwhelming protectionist to a competitive ethos.
CARIB CEMENT VS IMPORTERS
The particulars of this dispute have been well aired. Caribbean Cement Company previously wholly owned by Jamaican public and private sector interests for 45 years was taken over by Trinidad Cement Limited (TCL) in 1999. TCL now owns 74 per cent of the company, Jamaican shareholders 21 per cent, and Cemex, the Mexican giant, owns 5 per cent.
Caribbean Cement Company Limited (CCCL) is often spoken of as if it were a run-down basket case in the late 1990s, but that might be an overstatement. Though long recognised as an uneconomical plant by world standards because of its small capacity (500,000 to 600,000 tons per year), which saddled it with high unit costs, as the sole supplier in the local market, it turned a profit in most years of its existence. In the mid-1990s, trying to push through a modernisation programme, the company became overly leveraged on high interest rate, short-term debt amounting to $2.5 billion, and began haemorrhaging money. Between 1997 and 2000 CCCL accumulated losses amounting to $1.8 billion.
Enter TCL in 1999 and they proceeded to plough US$100 million in loans and equity into CCCL to restructure the capital base of the company, and spent another US$18 million to improve plant and machinery. Efficiency in the plant is now up to 85 to 90 per cent, and over the past three years the company's output has grown from 687,000 tons in 2001 to 708,000 tons in 2002, and is expected to be 770,000 tons in 2003. Correspondingly, revenues generated were approximately $3,160 billion in 2001 growing to $3,676 billion in 2002. After tax profit over the period has likewise increased from $293 million in 2001 to $348 million in 2002 and could hit record levels in 2003.
GROUNDS FOR PROTECTION
On the face of it, Caribbean Cement Company seems to be a long established profitable company that is dominant in its domestic market and hardly in need of protection. But TCL argues for a 50 per cent tariff on the following grounds. Firstly, that it is being injured by dumped cement as reflected in its declining market share from 87 per cent in 2000 to 75 per cent in 2002 and its large build-up of inventory. Secondly, that they are seeking to borrow US$100 million to retool their plant to lower their cost to world standards, and the company and lenders need the assurance of fair competition for three to four years. CCCL also complain that while they have successfully proved dumping on two previous occasions against certain importers, these importers simply shift their sources of supply, requiring TCL to engage in new and costly investigations and legal submissions. Further, CCCL claims that though they are now making a profit, their 8 per cent rate of return is less than the service cost of their debt.
The importers charge that TCL is aiming to re-establish a monopoly as the 50 per cent tariff on imported cement would wipe out their profit margins and drive them out of the cement supplying business. They also argue that they contribute to an evening out of cement supplies, and that they pay approximately $100 million in general consumption taxes to the treasury. There are also a rash of charges and counter-charges, such as, TCL is using imputed prices to inflate its costs and reduce its taxes. CCCL counter-charges, that the importers are making "super-profits" by sourcing dumped cement while ruining the local industry.
CONSUMER INTEREST
AND POLICY OPTIONS
Ultimately, consumer interest in this matter is a stable supply of high quality cement at a reasonable price. The development objectives of the country on the other hand, requires that we sustain employment in value-added enterprises, otherwise eventually, even the importers will have no one to purchase their imports. The World Trade Organisation rules frown upon import quotas and other direct restrictions on the volumes of imports, while higher tariffs lower consumer welfare.
SOLUTION
I believe the most appropriate solution under the circumstances would be to freeze present market shares between CCCL and importers at existing levels, and to utilise a "tariff rate quota." A tariff rate quota (TRQ) does not impose any overall limit on imports, but utilises differential tariff rates for different levels of imports. Thus, under what I am proposing, the 200,000 tons or 25 per cent of supplies that are currently imported would attract a tariff rate of 15 per cent and amounts above that level would attract a higher tariff, even the 50 per cent rate now proposed by the Government. The effect of the TRQ would be to guarantee Carib Cement the equivalent of 75 per cent of the market at the present 15 per cent tariff rate. This should be enough protection to enable CCCL to raise their loan; while providing consumers with the assurances they need that they will not be left to the whims and mercies of a monopoly. As the market grows, the authorities would vary the levels of imports to maintain the same proportional market shares.
The tariff rate quota could also be applied where new businesses are seeking to enter the market or make substantial investments. Rather than imposing a high tariff on existing imports to the detriment of large numbers of consumers, the Government might maintain current tariff levels, but impose a much higher tariff on additional volumes of the imported items. That way, the new industry will become established in the incremental market as the industry expands, while functioning in a competitive environment from the outset, and without substantially restricting or diminishing consumer satisfaction.
Competition and protection are two sides of the same coin in the process of developing a market economy. Jamaica cannot go back to the situation of the 1960s of inefficiently producing poor quality goods behind high tariff walls. Nor can we disregard the needs of our industries for some measure of protection to allow them to become established or to continue to survive. Judicious use of the "tariff rate quota" could provide an appropriate measure of protection without markedly diminishing consumer welfare, and without violating world trade rules.
Earl M. Bartley is an economist and businessman. You can email him at adapapa@cwjamaica.com
