Friday, June 3, 2016

Smuggling, hawala, under-invoicing, etc., nullify the intended effect of customs, duties, tariffs and taxes imposed by governments on goods exported or imported

Examples make this clear:
  • In order to "save" the domestic steel industry, Indian government has imposed a minimum import price [MIP] on some types of steel imports. The intended effect is to raise the landed cost of these types of imported steel, so that domestic manufacturers can merrily raise the prices of their steel products [competition from imports is effectively eliminated], forcing Indian buyers to shell out [much] more money for steel, thus feeding the coffers of India's steel companies [Tata Steel, JSW, Bhushan, etc.]. Sounds good on paper for the steel companies. If, however, smuggling is going on [which is of course going on], so that CR/HR steel coils can be imported into India without paying the various customs/duties, this cheaply imported steel will easily undercut domestically-produced steel on price, thus creating a downward price pressure on steel from Indian manufacturers. The higher the magnitude of such illegal imports, the higher the downward movement of steel prices in India. Laws and regulations to "protect" the domestic steel industry might exist on paper, but these won't cause their intended effect due to illegal movement of goods across the border [a lot of this movement happens when corrupt customs officials take bribes to clear under-invoiced shipments or shipments with wrong product type declared].
  • Similarly, in order to save the domestic cloth/hosiery/textile industries from China, Indian government has imposed various duties/taxes on imports of these products from China. However, a simple observation in the local market in Ludhiana demonstrates how these duties/taxes aren't having their intended effect. Chinese-made gloves for factory workers are selling at retail shops in India for about INR ~4.6 per piece [INR 110 for a pack of 12 pairs]. Go to large factories in China manufacturing these gloves, and take their best quotes, and try to legally import these gloves into India. Your landed cost per piece will be higher than INR 4.6. That these are selling for INR 4.6 per piece is a demonstration in itself that these were surely imported illegally, thus [funnily] making legal imports impossible [and thus nullifying the entire setup of duties/taxes]. And of course, the intended effect - saving domestic clothing/hosiery/textile industries from China - wasn't achieved.