The proposed reduction (to 5%) in the levy for imported cars: a crash reflection on trade policy and the governance problem in Nigeria.

During the week, the Government of Nigerian announced the approval of the Finance Bill 2020, which among other things provides for the reduction in duties on tractors from 35 to 10 per cent; reduction in duties on motor vehicles for the transportation of goods from 35 to 10 per cent; reduction of levy on motor vehicles for the transportation of persons (cars) from 35 per cent to 5 per cent. I invite you to take note of the underlining I added on ‘duties’ in the first two cases and ‘levy’ in the third case because that is the key to understanding what the government has proposed.

With reference to third category (cars), I have seen people interpret this to mean the reduction in the duty for cars from 35% to 5%. This is not the case. I know you want to know why I said so, but since you have started reading, I reckon that I might as well take you through a crash reflection on trade policy and the governance problem in Nigeria. First, let’s understand how the tariff (customs duty) structure in Nigeria works.

In 2015, Nigeria began to implement the ECOWAS Common External Tariff (CET). As the name implies, all member states of ECOWAS decided to harmonise their tariffs as part of the regional integration process. The idea is that the same tariff applies to the same product coming into the region from other outside the region, irrespective of the country the product enters first or is designated as the final destination. So, if Mr. E.B. Thins imports computer screens into Ghana, he is expected to pay the same duty as Ms. E.K. Gwuru who imports the same item into Nigeria. It is also possible that Ms. E.K Gwuru decides to import the items through Cotonou but has indicated that Nigeria is the final destination, then she would pay the duty at the Nigerian border (just pretend that the borders are open) before she would be allowed to bring the goods into Nigeria. Of course, she would be required to pay some service charges at the Cotonou port. This scenario is called “transshipment”, and this is the way landlocked countries like Niger and Chad do their imports (and exports) – through Cotonou, Lome or even Tema. Well, Nigeria used to enjoy good share of that transit trade, but our ports operations can break your heart, even if it is made of Sapele rubber – but that is a story for another day.

Let me show here one of the commonest ways of ‘smuggling’ from our neighbouring countries’ ports (Cotonou and Lome or even Cameroun) into Nigeria: Ms. E.K Gwuru could choose to import her rice (yes, that troublesome product) and list Cotonou port as the final destination but in her mind she knows the product is meant to service the numerous owambes in Isale Eko and across Nigeria. Because she has listed Cotonou as the final destination of the rice, she is obliged to pay the full import duty in Cotonou (10%). Then she looks for different apian ways to land the rice into Nigeria. Sad to say that the government of Benin knows about and, in fact, indirectly encourages this trade because it brings a lot of money to their country. You now see why our government official and big businessmen shut the borders? Anyway, that is just a part of the story.

But were we not talking about cars? Ok, I know you’ve been itching to know how much duty you will not pay on that Tokunbo car you’ve been eyeing online. So, the duty for cars under the CET is 35%. But Nigeria said we want to support local assembly and manufacturing of cars (remember our National industrial Revolution Plan, NIRP; and the National Automobile Development Policy, NADP?) so we decided to add additional 35% levy – which is allowed as part of a supplementary protection measures a member state can take in derogation from the general tariff. Well, none of our neighbouring countries have this additional levy so car importers did what Ms. E.K Gwuru did with rice – import into Cotonou or Lome and find apian ways to land the cars into Nigeria.

After years of implementing this 35% ‘levy’, our government has now said they want to reduce the levy from 35% to 5%. What this means is that after the Finance Bill is passed – hopefully before the end of the year – you’d only pay 40% duty on cars (35% duty + 5% levy) instead of the present 70% (35% duty + 35% levy). I am sure the Bill will stipulate commencement date: whether the new rate would be applicable for cars SHIPPED after it comes into force or to cars LANDING after it comes into force, irrespective of when they were shipped.   

If your interest is beyond how much duty you’d pay for that Tokunbo car and the impending general reduction in the price of imported Tokunbo and new cars, then I invite you to a deeper policy discourse in the following section.

Governments impose tariff for a variety of reasons: to protect local industries, to earn revenue, to offset the cost of subsidy granted by other countries to their industries, etc. When government imposes tariffs, they essentially increase the amount of money you as the consumer pay for the product (yes, you bear the tax). So, effectively, the government collects money from you. Similarly, when the government reduces tariff, it does not “lose” money per se, what happens is that the price of the product reduces (well, ideally) so you pay less and have some change in your pocket. So, what I’m trying to say is that low tariff and reduction in tariff is not a loss to the economy but a transfer of resources from one economic actor (government) to another (consumer). The question then is: who should have this money? But this is not the entire story, though.

The next consideration is: if you reduce or eliminate all tariff – of course, imported goods become cheap – but are you NFA (you remember those students we called No Future Ambition is school?). Don’t you want to grow at least few industrial sectors to meet your local needs and export some? In fact, if you do not have crude oil to earn foreign exchange, how are you going to finance the imported goods you love to buy cheaply? Ehn, because you need dollars to import them so the country must earn dollars and that is why export becomes important. Again, if you don’t manufacture, how would you create enough jobs so that citizens can earn money to buy the imported things? Okay, you can work in the services industry but that one is not enough. So, what am I trying to say: every country needs to produce something to sell or at least meet part of its domestic consumption. Following this logic, every country would want to reduce or eliminate the tariff on intermediate goods serving as inputs in manufacturing or other economic activities (now you understand why the duty on tractors and vehicles for carrying goods are lower than duties on private cars? This applies to raw materials of various kinds); Low or zero duty also applies to essential/social goods that are not produced (or not produced in sufficient quantity) locally such as drugs, food (when it is not of political interest as is the case with rice), educational materials, etc.

You may wonder if imposing high tariffs or even import prohibition is all we need to develop our domestic industrial capacity. Well, that is not how it works, even though we mostly pretend in Nigeria that that is how it works. So we impose these duties and prohibitions, draw up nice documents on how we want to be “self-sufficient” in product xyz, throw some money at real and dubious local producers to support them produce more, and after many years, we realise that not much has really changed except that: one, we now have a hole in the pocket of CBN because the money they spent on intervention has entered voice mail; two, the consumers have been robbed though the high cost of the essential products they need to survive. Okay, something actually changes: in most cases, some ‘business men’ and ‘politicians’ have become richer and some farmers have married new wives! We have basically transferred the money Mr. Kpomkpom makes under the sun, “we oyel money”, and the tax of Mrs. Obioma to one big man flying upandan in private jets. This very thing is not far from what has happened with cement, sugar, rice, wheat, cars, etc. Because the government hardly undertakes independent audit/evaluation of these policies, we never get to know what they cost us a s a nation and what we benefit from them as a nation, but not as if we don’t know that many big men become bigger from these policies. Again, because these intervention policies hardly come with sunset clause (like, saying how and when it would be withdrawn), we end up supporting and protecting industries/sectors that never outgrows the feeding bottle!

So, what more is needed beyond high import tariffs and import prohibitions? Government support for industrialisation should be more nuanced (oyibo!). It is a collection of a number of policies focusing on human capacity development (education), health and basic infrastructure. Then you add to it policies targeting at making it easy for people to start and run businesses (just think of all those irritations from all the tax collectors from federal, state and local government officials, when they can make tax administration transparent and stress free, or is it customs and port processes, now Uncle Meffy of CBN keeps adding one headache or the other to importers and exporters). Other policies include those encouraging access to finance, etc. But as someone rightly observed, the Nigerian business environment is designed to frustrate entrepreneurship and investment. This makes it quite difficult to convince local or foreign investors that it makes sense to invest in the country even with our ordinarily attractive population size. Please, allow me to pretend that large population of largely poor people constitute a “huge market”. In fact, we need to deliver our politicians and their followers from this evil spirit of “demographic arrogance” – yes, na me talk so! Which one is every time they will be singing that Nigeria has huge/large market by virtue of our population? Who population epp? At best what we have is potential large market. Unfortunately, the work that needs to be done to realise our economic potentials as a nation is hard and long term, but unfortunately, that is not the kind of thing politicians like to do. They want quick fixes for the next election campaign.

Now, have you seen the problem? No? It is the politics, stupid! With good political leadership comes the hard work we need to move from the wilderness of poverty to the promise land of prosperity. It is doable, other countries have done it. So, you that have read up to this point, you need to consider or reconsider your involvement in politics. You may not need to contest an election, but you must definitely get interested in who occupy political positions at the national, state and local government levels both in the executive and legislative branches of government. You also need to be properly schooled on the rudiment of public policy and governance so that when you get elected or appointed to leadership position in the country tomorrow, you’d not join those who use “native intelligence” to make public policy and those who turn bad ideas from the beer parlour into laws. Link up with the various citizen movements towards political and governance reforms in Nigeria. For me, I have identified with #fixpolitics.