Import tax reduction for Capital Goods

The reasons the President gave to take this measure were twofold. First, that a much needed economic openness would be fostered, leading towards greater participation in the world markets. And second, that we would advance towards a harmonization of tariff policies in Central America, since Guatemala will now be at the same tariff level as El Salvador and Nicaragua. These countries adopted similar measures at the beginning of the year.

Both arguments are true and nobody can deny that with this measure, our products will benefit, especially for those businessmen who use imported goods in the production process. This also increases their ability to compete with their trading partners.

Nevertheless, it seems that this measure will not improve the economic efficiency that we already have, if it is implemented as planned: reducing from 5% to 1% the lowest tax without changing the 20% maximum. On the contrary, by widening the present difference on tariffs form raw materials and finished goods, protectionism will be strengthened among sectors, creating greater distortion than we already were experimenting.

When the tariff is set on materials needed to produce an export good, the border tax adjustment, according to the rules set by the GATT, must guarantee that it will not interfere with international competitiveness of these exports. Tariffs for imported products needed for exports treated by the GATT rules are annulled. What we can conclude from reality is that reducing tariffs of finished goods or increasing tariffs for raw materials can be considerably beneficial to the point where tariffs for both are even.

Therefore, anyone who defends the free market philosophy, in general, is called to support a small, even tariff, in order to increase economic efficiency and free politicians from the nightmare of establishing benefits for some on the expense of others.