Tariffs, Tea, and Trade: Research Notes from Sri Lanka
During large research engagements like the one conducted by the Growth Lab at Harvard’s Center for International Development in Sri Lanka from 2016-18, the research team produces many presentations, research notes, and other deliverables that share research findings incrementally with government counterparts. The Growth Lab team uses a variety of types of deliverables with the aim of developing adaptive collaborative research and strengthening government capacities to address economic problems. Sometimes these research outputs are refined over time or incorporated into larger report or working papers. In other cases, initial deliverables jumpstart new government efforts, and Growth Lab support moves from a research-focus to providing training and other capacity-building support. In still other cases, research outputs that were intended to build collaborative research space do not find willing counterparts, and the Growth Lab team chooses to put that area of research aside in order to focus on other issues.
The following are several research outputs related to trade policy issues that were delivered to the Government of Sri Lanka (GoSL) over the course of the research engagement that were not fully incorporated into subsequent work or made available on the project website to date.
This presentation, which was discussed with five trade officials attending an Executive Education Course at the Harvard Kennedy School, walks through implications for trade policy in Sri Lanka based on emerging findings from the growth diagnostic analysis. It presents evidence of positive impacts of the existing trade agreement with India on Sri Lanka’s economic complexity, identifies particular weaknesses, and provides analysis of strategic opportunities for future trade agreements to help Sri Lanka diversify and grow its exports. The presentation also introduces early analysis of ways in which existing trade policy – particularly through high, complex, uncertain and non-transparent import duties – creates a bias against new export industries. This analysis is used to comment on a Draft Trade Policy Framework, which was under development by the GoSL at this time.
By request of the Agency for International Trade (AfIT), the Growth Lab team conducted applied research on the tea sector, in particular to evaluate the arguments for and against the liberalization of tea imports for blending of tea exports. The team took the opportunity to study the tea sector in depth, given its size and importance to the economy and well being of Sri Lankans. This research note concluded that the liberalization of orthodox tea imports would not solve the central problem facing the tea industry in Sri Lanka (low prices resulting from limited global demand vis-à-vis high supply of Sri Lankan-grown tea), but that it would be likely to provide some benefits and very unlikely to cause the harm to producers that was widely feared. Moreover, the research outlined that the central problem facing the tea industry resulted in very different issues from the perspective of tea exporters versus tea growers, as well as between different types of tea exporters (bulk vs. processed, etc.) and different types of tea growers (estates vs. smallholders, etc.). The note discussed several preliminary recommendations for steps that government could consider to benefit both growers and exporters. This note was intended to serve as the basis for new discussions between stakeholders, with the goal of breaking through the deadlock and developing a shared vision between tea exporters, tea growers, and government institutions. Unfortunately, such discussions did not emerge at this time, but the research note remains a public resource for the government and other stakeholders to utilize moving forward.
This presentation was given to the Minister of Finance, together with Ministry advisors and technical experts, in Colombo after the Growth Lab team from CID completed an initial, exploratory simulation of a tariff rationalization process utilizing Ministry-provided tariff revenue data for more than 5,500 product codes from 2015 and 2016. The presentation first walked through a critical finding from the recently completed growth diagnostic for Sri Lanka that the structure of import tariffs was a critical problem for export diversification. It then showed the results of a simple simulation under extremely conservative assumptions. This simulation provided strong evidence that a series of simple, transparent and predictable rules could guide a holistic tariff reform process that resolved constraints to growth stemming from the tariff system while at the same time being revenue neutral or even improving government revenues. The Growth Lab team recommended that the Ministry of Finance establish a working group with the goal of developing a holistic plan for tariff reform that utilizes the many degrees of freedom available to policymakers. The team also stressed the importance transparent stakeholder engagement in the design process decided upon by the Ministry.
This short note was provided to the Ministry of Finance in advance of a cross-ministry working group meeting on reforming the tariff system. The Growth Lab team from CID, which was invited to provide analytical inputs, sent this note in response. The note describes four specific ways in which Sri Lanka’s tariff structure constrains export diversification and stronger economic growth, and presents six objectives for tariff rationalization that, if achieved through the reform process, would be expected to effectively solve the underlying problems.