By Jonathan Lynn
GENEVA, Nov 21 (Reuters) - Governments in many developing countries rely heavily on import taxes for revenue, so proposals to cut tariffs in a new global trade deal have raised fears that the spending power of poor countries could also be curtailed.
A summit of the G-20 economies called last Saturday for an outline deal in the World Trade Organisation's (WTO) seven-year-old Doha round to be reached by the end of this year.
That would involve cuts to the tariffs imposed on imported manufactured and agricultural goods, and to farm subsidies.
But trade experts say the impact on the budgetary position of developing countries, affecting their ability to spend and invest, and their need to borrow, is likely to be limited.
"Given the urgent need for domestic resource mobilisation for wider development needs, potential downward pressures on revenue are a significant concern," International Monetary Fund economists Michael Keen and Mario Mansour said in a paper.
Tariffs and duties are one of the oldest forms of government revenue. But for developed countries their budgetary importance is now negligible and they are used more to influence import flows, as an instrument of industrial or agricultural policy.
But in poorer countries they still represent a sizeable, if falling, share of government receipts.
In sub-Saharan Africa, revenue from tariffs was 4 percent of gross domestic product in 2005, down from 6 percent in 1980, Keen and Mansour estimate. Trade taxes account for more than 20 percent of total revenue in most African countries, and more than 40 percent in some, they said.
LIMITS TO PROTECTIONISM
Under current proposals at the WTO, the poorest countries and some recent members would not have to make any cuts in industrial tariffs. Small countries and recently-acceded members would make smaller cuts than other developing countries in farm tariffs.
Also, the WTO proposals affect agreed maximums, or "bound" rates, rather than actual duties that are applied, which in many cases have already been cut unilaterally below those ceilings.
For instance Rwanda has an average bound tariff rate of 89.5 percent for all goods, but an average applied rate of 18.7 percent. Lesotho has an average bound rate of 78.5 percent and an average applied rate of 7.8 percent.
Thus cuts in the bound rates may not have any impact on the actual tariffs being levied. Such reductions are still valuable, because they reduce the extent to which countries can legally raise tariffs, and so limit the scope of protectionism.
The World Bank estimates that the roughly 30 developing countries subject to industrial tariff cuts would cut their average applied tariff rate for all commodities to 6.2 percent from 6.9 percent now, according to proposals on the table.
"In effect you're not going to see a whole lot of pressure," Bernard Hoekman, director of the bank's trade department, told Reuters. "There's very limited action on applied tariffs -- most of what is going to happen is cutting bound rates."
The IMF did some rough calculations when tariff proposals -- since modified -- were issued in July last year.
They suggest the average cut for the roughly 30 developing countries cutting tariffs would be two percentage points, from roughly 10 percent to roughly 8 percent, phased in over 10 years, Tom Dorsey, division chief in the fund's strategy, policy and review department, told Reuters.
That amounts to a fall in tariff revenue of roughly 2 percent a year -- assuming that there is no growth in trade or other related tax revenues.
Hoekman of the World Bank said most developing countries have been cutting tariffs to liberalise trade over the past 20-30 years, but the resulting boost to trade has actually increased tariff revenues on lower tariff rates.
"The share of tariffs in total revenues has gone down but at the same time overall tax revenues have gone up," he said. Countries undertaking such liberalisation often turn to the IMF for advice on how to compensate for the loss of revenue.
The IMF recommends reforms to broaden the tax base in line with long-term growth plans, Keen, who is an adviser in the Fund's fiscal affairs department, told Reuters.
The revenue loss from tariff cuts has not been a problem for middle-income countries, but has been more of an issue for some lower-income countries, he said.
"A lot of the emphasis we put on is on accompanying domestic tax reforms, value-added tax for instance...The nature of the accompanying tax reform plays a critical role," he said. (Editing by Angus MacSwan)