Where The Money Is

The real "tariff men" are in LMICs

For all the recent Trumpian bluster, tariffs are almost pocket change to rich world governments. In 2023, they represented only 1.8% of US government revenue and only 0.4% across the wider OECD group. By contrast, governments of low- and middle-income countries (LMICs) rely on tariffs for 40% of their revenues. The true “tariffs men” aren’t in the White House. They are in the state houses of LMICs.

Unfortunately for the citizens of LMICs, that tariff dependence is regressive, distortionary, and a brake on industrialisation. But it is likely here to stay.

Ideology, maybe. Easy pickings, for sure.

From Argentina to Zimbabwe and all points in between, leaders in governments across the globe talk of boosting domestic manufacturing. Many people in governments in LMICs may indeed sincerely believe the best way to do this is from behind a protectionist tariff wall. After all the historical correlation between protectionist policies and manufacturing growth in what is now the rich world is very tight indeed. But there is another reason tariffs are high in LMICs; they are easy to collect.

A ship arrives in port. You have a look to see what’s on it. You tell the person who is importing the goods to pay an import duty. You don’t let them take the goods until they cough up. That’s it. You know they will pay as they’ve already bought the goods and presumably want them for some commercial reason in your country.

Robbing Peter to Pay Paul. But You Really Need Matthew

Despite what Trump may say, tariffs reliably raise the cost of goods behind the tariff wall. The importing company can either ‘eat’ the tariff (reducing their profits) or pass it on to their customers (raising prices). Either way the government has money that otherwise would have stayed in their citizens’ pockets. But money in citizen’s pockets is harder to tax.

OECD citizens pay a dazzling array of taxes. Property, company, income, sales, stamp duty, capital gains, royalty tax, franking, even hypothecated special levies. This complex web of taxes makes governments less reliant on one specific source and is part of the reason why rich countries can dial up or dial down their tax take as politics allows.

To collect these taxes, rich countries have assembled armies of tax agents. In 2022, according to the International Survey on Revenue Administration (ISORA), the famously light taxing US has one tax officer to every 4,000 citizens. The UK has one for every 1,000 Brits. And Canada has one officer for every 783 Canucks.

But the mandarins of the Federal Inland Revenue Service (FIRS) of Nigeria are much thinner on the ground. In a country of well over 200 million people, there is only one FIRS employee for every 21,000 Nigerians. According to the ISORA, the five least resourced tax departments cover an average of 44,000 people per employee. With so few people it makes sense to concentrate your resources where the effect will be the largest.

It’s Tariffs or It’s Bust

LMICs do not have economies that are structured for easy taxation. Income tax is only possible to levy on a large scale when people are working in the formal economy; large informal sections abound. Corporate taxes can only be wrung from profitable companies; medium to large companies report smaller profits in LMIC. Property taxes require clear maps to determine where one property finishes and another one starts; you can guess what LMICs are also missing. The list could go on.

The consequence of having hard to tax economies and too few people to do the taxing is a reinforcement of the tariff first strategy. Bank robber Willie Sutton was once asked why he robs banks. He replied, “because that’s where the money is”. If you are looking to get money for your government, taxing imports is where the money is.

This has real world consequences. An import tariff is a regressive tax; the effects fall more on the poor who spend a higher proportion of their income on easily tradable goods like food, fuel, and basic manufactured goods. It is also distortionary as it arbitrarily makes some goods more expensive than others and therefore preferences some parts of the economy over others.

Trade advocates, a group that includes the GPI, need to understand that if they want tariffs to be lowered, revenue must be found as a replacement. LMICs should progressively lower tariffs whilst concurrently continuing to invest in tax collecting capabilities. Different countries will have different priorities, but options abound. Governments could embrace digitisation of VAT collection, invest in cadastre surveys to unlock property taxes, simplify and broaden VAT rates, or lower the cost of formalisation of the workforce to collect more income tax. They probably should do all that and more.

Tariffs are an ideological and fiscal crutch. They are used to support populist calls for self-sufficiency, and they are the bedrock of government revenue. At their worst, they can also be used to prop up whole governments who need to buy favours from politically connected businesses. But regardless of their merits, few people kick away their own crutches before they can walk.