Tariff Changes by Turkey During the Covid-19 Pandemic: Impact on Import Value and Import Prices

Transcription

1. Tariff Changes by Turkey During the Covid-19 Pandemic : Impact on Import Value and Import Prices Yusuf Kenan Bağır July 2021 Working Paper No: 21/13
2. © Central Bank of the Republic of Turkey 2021 Address: Central Bank of the Republic of Turkey Head Office Structural Economic Research Department Hacı Bayram Mah. İstiklal Caddesi No: 10 Ulus, 06050 Ankara, Turkey Phone: +90 312 507 80 04 Facsimile: +90 312 507 78 96 The views expressed in this working paper are those of the author(s) and do not necessarily represent the official views of the Central Bank of the Republic of Turkey.
3. Tariff Changes by Turkey During the Covid-19 Pandemic : Impact on Import Value and Import Prices Yusuf Kenan Bağıra Abstract Turkey introduced additional customs duties on 5,088 products for a temporary period in 2020. This study investigates the impact of the changes in effective tariff rates on quarterly import value and prices using monthly trade data at 12-digit product – country breakdown. Although the product range affected from the tariff rate hikes is quite wide, the regulations affected only 6.5% of total imports since the majority of top trade partners are excluded from the additional custom duties via existing bilateral trade agreements. Country-product level regression analysis suggests that a one percentage point increase in effective tariff rates reduces the import value by 1.24 percent. There is no evidence of heterogeneity at product level despite Turkey’s market power in certain product groups. There is also no statistically significant impact on import prices therefore the price cost of increased tariff rates is entirely borne by the Turkish firms and consumers. Overall, the regression results imply that the temporary increases in additional customs duty rates with 6 different regulations reduced the total import value by about 0.9% in the third quarter of 2020. Keywords: Tariff rates, Imports, Import prices JEL Codes: F13, F14 a Data Governance and Statistics Department, Central Bank of the Republic of Turkey, Ulus, Ankara, 06100, Turkey. Phone: +903125078039. e-mail: YusufKenan.Bagir@tcmb.gov.tr. 1
4. Non-Technical Summary Turkey is one of those countries that have been challenged by the rising current account deficit caused by the reduced exports and tourism revenues during the pandemic . The government temporarily raised effective tariff rates on 5,088 products out of 16,437 GTIP products with 6 different Presidential decrees in the second quarter of 2020. The rates are scheduled to be applied temporarily at higher rates until October 2020 and at regular rates later on. Another Presidential decree, dated September 24, further extended the due dates of temporary high rates from end of September 2020 to December 2020. This study investigates the immediate impact on import value and import prices during the third quarter of 2020. The change in effective tariff rate is calculated at country-product level since many countries are exempt from the additional customs duty via existing bilateral free trade agreements. According to the previous year’s third quarter trade data at country-product breakdown, the tariff rate hike is expected to directly impact 13,144 country-product pairs out of 92,450 pairs that had positive import value in the same period of the previous year. This corresponds to 6.5% of the total import volume in the same quarter. Among the effected country-product pairs, the weighted mean of the changes in tariff rates is around 11.32 percentage points. The overall additional tax burden on total imports due to the regulations is around 0.73 percentage point. A standard difference in differences approach at country-product level is employed to estimate the impact on the import value and import prices. The estimation result implies that a one percentage point increase in effective tariff rate reduces the import value by 1.24 percent. According to this estimate, the temporary changes in tariff rates reduced the total import value by about 0.9% in the third quarter of 2020. There is no evidence of heterogeneity at product level due to Turkey’s market power in that product. There is also no statistically significant impact on import prices suggesting that Turkey is a price-taker in the world market for the targeted products. 2
5. 1 . Introduction Turkey introduced additional customs duty2 on 5,088 products out of 16,437 GTIP (Customs Tariff Statistics Positions3) products with 6 different Presidential decrees dated April 18, April 21 (2), May 11, May 21, and June 28 of 2020. Four of these decrees introduced additional customs duty on 1,912 products, for the first time. The rates are scheduled to be applied temporarily at higher rates until October 2020 and at regular rates later on. The other two decrees, on the other hand, raised the existing additional customs duty rates on 3,174 products temporarily until October 2020. A recent Presidential decree, dated September 24, further extended the due dates of temporary high rates from end of September 2020 to December 2020 but this study will focus on the temporary application period stated in earlier decrees. The legislation overall impacted a wide range of product groups including plastics, leather, textiles, shoes, machinery, electronics, sports products and toys. There is no official statement explaining the exact rationale for tariff rate hikes. However, we may speculate that the rate hikes have probably aimed at protecting domestic producers during the pandemic, reducing the trade deficit, and increasing the budget revenue. This paper aims to estimate the immediate impact of changes in tariff rates on Turkey’s country-product level imports and import prices. Theoretically, an increase in tariffs at country-product level is expected to reduce the overall import demand at product level, to shift the import demand from effected countries to exempt countries, to increase domestic production at product level due to increase in equilibrium product prices, and to increase government tax revenue if price elasticity of import demand is not too high. This paper will focus on import value and import price effects in particular. Rising trade protectionism has become a global trend in recent years after the United States raised import tariffs in 2018 and partner countries responded in retaliation. Hence, trade protectionism and its impact on local and global economies became a central debate issue in the international trade literature after the decades of free trade discussion (Fajgelbaum et.al., 2020; Cavallo et.al., 2020; Amiti et.al., 2019; Amiti et.al., 2020; Huang et.al., 2018; Handley et.al., 2 Additional customs duty is separately collected from the conventional customs duty and recorded as a revenue in the general public budget. 3 GTIP is a 12-digit product classification system. The first six digits of GTIP corresponds to the Harmonized System (HS) product code. 3
6. 2020 ; Flaaen et.al.,2020). Majority of these studies find significant declines in import values and almost complete pass-through to domestic prices in the United States. There is no study that empirically investigates the impacts of Turkey’s recent increases in effective tariff rates on import and import prices to our best knowledge and this study is the first attempt. Following the standard difference in differences strategy employed in the Fajgelbaum et. al. (2020), I found that a one percentage level increase in effective tariff rates reduces imports by 1.24 percent on average. There is no evidence for product group and market power heterogeneity. Import prices are not affected from the tariff increase at all therefore the price burden is completely borne by the Turkish companies and consumers. The next section estimates the expected effective increase in tariff rates due to the additional customs duty rate hikes, section 3 describes the methodology used in estimating the impact on import value and prices, section 4 provides information on the sources of data and summary statistics of the sample used in the regression analysis, section 5 reports the results of regression analysis, and section 6 concludes. 2. Effective increase in tariff rates Distribution of additional customs duty rates across effected products are shown on Figure 1-a and 1-b. Figure 1-a shows the histogram of additional duty rates for products that are imposed an additional customs duty for the first time (group 1 products) and the rates among this group range between 2% and 50%. The right hand side histogram shows the increase in the additional customs duty rates of products that were already imposed an additional customs duty rate prior to the recent regulations (group 2 products). Increase in effective tariff rates are lower among the second group. 4
7. Figure 1-b : Histogram of Additional Customs Duty Rates for Group 2 Products .6 .2 .4 Fraction .15 .1 0 .05 0 Fraction .2 .8 .25 Figure 1-a: Histogram of Additional Customs Duty Rates for Group 1 Products 0 10 20 30 Change in duty rate 40 0 50 5 10 15 Change in duty rate 20 25 Note: Group 1 products are those imposed an additional customs duty tax rate for the first time and Group 2 products are those that experienced an increase in existing additional customs duty tax rates. The rates are not homogenously imposed on partner countries since the imports of products originating from countries that are parties to bilateral trade agreements with Turkey are kept exempt from the additional customs duty. The set of exempt countries includes EU member countries, EFTA member countries (Iceland, Norway, Liechtenstein and Switzerland), Israel, Macedonia, Bosnia-Herzegovina, Morocco, the West Bank and the Gaza Strip, Tunisia, Egypt, Georgia, Albania, Jordan, Chile, Serbia, Montenegro, Kosovo, Moldova, Faroe Islands, South Korea, Mauritius, Malaysia and Singapore. Thus, imports from those countries are not affected from the regulations at all. The rates are, on the other hand, applied homogeneously across nonexempt countries. The unit of observation in the analysis is country-product pairs and will be able to capture the variation in treatment across products and countries. Considering the facts that the rates are temporarily applied at a higher rate until October 2020 and the 6 decrees became effective in differing dates, the analysis in this paper is restricted to the total country-product level imports in the third quarter of the year; namely July, August, and September, in which all 6 decrees were effective and there was no other variation in the rates to our best knowledge. This period is also less prone to the effects of global pandemic on international trade and consumer demand since the restrictions on transportation, businesses, and social life were lifted to a great extent. How much of the total imports will be affected by additional customs duty rates can be estimated using 2019 third quarter trade data on the breakdown of country and product. 13,144 country-product pairs are expected to be affected from the additional customs duty out of 92,450 country-product pairs that had positive import value in the third quarter of 2019. The total 5
8. import value of the effected pairs corresponds to 6 .5% of the total imports in the same quarter. The weighted mean of additional duty rates on effected imports is around 11.32 percentage points. If we take the ratio of additional customs duty burden over the total imports of Turkey in the third quarter of 2019, the rate is around 0.73 percentage point. Following the same approach, Table 1 and 2 provide two-digit product group and region level expected effective percentage point increases in tariff rates based on the 2019 third quarter trade data. Table 1: Expected effective increase in tariff rates by 2-digit product group Product Group (HS, 2-Digit level) Effective Increase in Tariff Rates (percentage points) Clocks and watches and parts thereof Toys, games and sports requisites; parts and accessories thereof Miscellaneous manufactured articles Metal; miscellaneous products of base metal Iron or steel articles Raw hides and skins (other than furskins) and leather Tools, implements, cutlery, spoons and forks, of base metal; parts thereof, of base metal Apparel and clothing accessories; not knitted or crocheted Apparel and clothing accessories; knitted or crocheted Albuminoidal substances; modified starches; glues; enzymes Stone, plaster, cement, asbestos, mica or similar materials; articles thereof Furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings; lamps and lighting fittings, n.e.c.; illuminated signs, illuminated name-plates and the like; prefabricated buildings Man-made filaments; strip and the like of man-made textile materials Wadding, felt and nonwovens, special yarns; twine, cordage, ropes and cables and articles thereof Fabrics; knitted or crocheted Textiles, made up articles; sets; worn clothing and worn textile articles; rags Footwear; gaiters and the like; parts of such articles Plastics and articles thereof Paper and paperboard; articles of paper pulp, of paper or paperboard Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut (other than silk-worm gut) Ceramic products Cotton Wood and articles of wood; wood charcoal Man-made staple fibres Carpets and other textile floor coverings Fabrics; special woven fabrics, tufted textile fabrics, lace, tapestries, trimmings, embroidery Copper and articles thereof Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof Essential oils and resinoids; perfumery, cosmetic or toilet preparations Glass and glassware Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations Rubber and articles thereof Electrical machinery and equipment and parts thereof; sound recorders and reproducers; television image and sound recorders and reproducers, parts and accessories of such articles Textile fabrics; impregnated, coated, covered or laminated; textile articles of a kind suitable for industrial use Optical, photographic, cinematographic, measuring, checking, medical or surgical instruments and apparatus; parts and accessories Wool, fine or coarse animal hair; horsehair yarn and woven fabric Furskins and artificial fur; manufactures thereof Aluminium and articles thereof 6 14.84 12.37 11.99 5.73 4.03 3.99 3.77 3.20 2.87 2.65 2.55 2.23 2.20 2.16 2.12 2.03 1.99 1.87 1.65 1.39 1.24 1.21 1.20 1.14 1.12 1.11 1.05 0.88 0.84 0.79 0.65 0.65 0.58 0.36 0.35 0.27 0.23 0.21
9. Vehicles ; other than railway or tramway rolling stock, and parts and accessories thereof 0.16 Soap, organic surface-active agents; washing, lubricating, polishing or scouring preparations; 0.10 artificial or prepared waxes, candles and similar articles, modelling pastes, dental waxes and dental preparations with a basis of plaster Printed books, newspapers, pictures and other products of the printing industry; manuscripts, 0.09 typescripts and plans Ships, boats and floating structures 0.06 Organic chemicals 0.05 Iron and steel 0.02 Inorganic chemicals; organic and inorganic compounds of precious metals; of rare earth metals, 0.02 of radio-active elements and of isotopes Pharmaceutical products 0.00 Note: Effective increase in tariff rates at 2-digit product group level represent the weighted mean of the increases in tariff rates at country-product pair level. The effective tariff rate increase at two 2-digit product groups depends on not only whether a product is subject to tariff rate increase but also whether the country exporting that product is an exempt country. 2019-Q3 import shares are used as pair weights. Table 2: Expected effective increase in tariff rates by regions Regions Effective Increase in Tariff Rates (percentage points) Asia 2.28 Central America 1.04 Northern America 0.89 South America 0.51 Middle East 0.48 Oceania 0.33 Eastern Africa 0.30 Europe (Exc. EU) 0.27 Southern Africa 0.22 The Caribbean 0.10 Western Africa 0.10 Northern Africa 0.05 Middle Africa 0.01 European Union 0.00 Note: Effective increase in tariff rates at region level represents the weighted mean of the increase in tariff rates at country-product pair level. The effective tariff rate increase at region level depends on not only whether a country exporting that product is an exempt country but also whether a product is subject to tariff rate increase. 2019-Q3 import shares are used as pair weights. 3. Estimation strategy Our estimation strategy exploits the variation in treatment rates across country-product pairs and relies on the assumptions that the increases in additional customs duty rates were unexpected and were exogenous to the pairwise import growth trends. The first assumption is supported by the sudden spread of Covid-19 outbreak in March and April 2020 across the world that forced the Turkish government to take temporary measures against its devastating impacts on the country’s balance of payments and domestic production (BBC, 2020). The second assumption is supported by the scope of regulations, which did not focus on a specific group of products but included many product groups from electronics to clothing. Nevertheless, the validity of the second assumption is examined with placebo tests and sector specific controls, 7
10. details of which will be explained in the related section. The empirical model employed in estimating the effect of the change in the effective tariff rate on import value at country-product level is given by equation 1. ∆