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Price to pay for trade liberalization

Bahamas Journal

Price To Pay For Trade Liberalization

9 July 2007

The Bahamas stands to lose just under ten percent of tariff revenue as a result of the complete trade liberalization with the hemisphere and the United States, according to a report on Caribbean development in the 21st century compiled by the Caribbean Country Management Unit of the World Bank.

The impact of trade liberalization has become an increasingly important matter as CARICOM countries continue to negotiate for special and differential treatment on behalf of small and vulnerable states.

The report noted what many others have concluded: as Caribbean countries are planning to extend liberalization through both regional and multilateral initiatives, the fiscal effects of liberalization will need to be dealt with.

The Bahamas obtains nearly half of its tax revenue from import duties, and Antigua and Barbuda, the Dominican Republic, St. Kitts and Nevis and Suriname all collect more than 15 percent of tax revenue through import duties, the report acknowledged.

The Free Trade Area of the Americas [FTAA] would result in an average 11 percent loss in tax revenue for the Caribbean and a Free Trade Agreement [FTA] with the U.S. along would mean about an eight percent loss, analysts reported.

They said the impact on The Bahamas is the highest and could be nearly 8 percent of GDP. The fiscal situations of Jamaica and the Dominican Republic would also continue to be strained.

"In general tariff reduction can affect revenues as well as sectors that are import competing," noted the report.

"Revenues can get affected not only because of duty reduction, but also because many other taxes are levied on the tariff-inclusive value of the product.

"Tariff reduction can of course raise concern in a country that already suffers from a fiscal problem."

CARICOM leaders have been reiterating in recent times that they are not interested in a free trade agreement with the U.S. Rather, what they want most of all is an economic partnership agreement that would allow for extended duty free access on a wider range of goods, inclusion of services and the exploitation of areas of capacity building and investments.

That was the point that new CARICOM chairman Barbados Prime Minister Owen Arthur made at the recent Conference on the Caribbean. Prime Minister Arthur has the lead role in the Caribbean for the FTAA.

Trade liberalization is costly for two reasons it was explained; there is a direct effect of the loss in tariff revenue unless it is replaced with another form of taxation and secondly, new budgetary costs accompany the move as resources must be devoted to easing the adjustment, redesigning customs and adhering to trade agreements.

The Government of The Bahamas has considered the whole question of revamping the country’s tariff structure with some observers suggesting a value added tax over an income tax. No final decision has been made.

"Unless revenues can be compensated through other taxes, expenditures will either need to be reduced or the scope for discretionary fiscal policy such as tax concessions/exemptions constrained especially in those economies that already have high fiscal deficits or high debt," said the report.

"Fiscal constraints can be eased also by requesting longer phase-out periods for especially sensitive sectors in trade negotiations. This may be especially important for countries that do not already have a well structured tax system."

The Caribbean Country Management Unit made the point that the region still has a long way to go in terms of having adequate capacity to negotiate and implement agreements and this is further strained by the individualistic drive of member countries of CARICOM.