Exenciones de tarifas aduaneras a los insumos importados y exportaciones: evidencia para Colombia según datos a nivel de firma.

AuthorLópez-Valenzuela, David Camilo

Duty Drawbacks, Imported Inputs Duties and Exports: Evidence from Firm-Level Data from Colombia.

Reembolsos tarifários, tarifas sobre insumos importados e exportações: evidências de dados na empresa colombiana


Industrial policies in developing countries have played a vital role in accelerating industrialization and development (Kaldor, 1960; McMillan & Rodrik, 2011). While some Asian countries have succeeded in this goal, in other countries--mainly from Latin America and Africa--resources such as labor have moved in the wrong direction: from more productive to less productive activities. Particular attention has been paid to the role of trade in this process. Countries whose governments have supported export activities and moved from traditional import substitution to more export-oriented and outward-looking policies have reached rapid and sustained economic growth. Thus, in these countries, trade plays a crucial role as a financing source and investment in infrastructure, the dissemination of information, and the accumulation of human capital by promoting better institutions (WTO, 2003). In this context, giving exporters access to inputs at duty--and tax-free international prices may be effective in boosting manufactured exports. One method to do so is to have no tariffs or restrictions on imports, such as in Hong Kong and Singapore, but where import protection remains, the bias against exports needs to be reduced through schemes that lower import costs.

Historically, countries have put in place duty drawbacks (or rebates) schemes to permit exporters of manufactured goods to buy imported inputs at international prices in order to increase their profitability and competitiveness, without using direct export subsidies, prohibited by the World Trade Organization (WTO) (Ianchovichina, 2004, 2005). The literature has paid little attention to the assessment of duty drawbacks schemes, contrary to other forms of public intervention such as subsidies and trade protection (tariffs and non-tariff measures). There is no consensus on whether countries should embrace these programs and, if adopted, whether they are effective. This paper aims to help close this gap.

Since 1959, the Colombian Government established a system for input duty exemptions applicable to exported goods (Melendez & Perry, 2010). This mechanism is called Plan Vallejo and is part of the Special Imports/Exports Programme (SIEP), which enables producers to ask for duty exemptions on imported inputs used in manufacturing exported goods. This duty exemption covers both tariffs and value added taxes (VAT)--important cost sources for producers--which might alleviate plausible cash and credit constraints that some manufacturing firms may have to source before exporting their foreign inputs (Manova, 2008; Rajan & Zingales, 1998).

Evaluating these types of export-promotion policies is fundamental for several reasons. First, implementing duty drawbacks presents serious fiscal challenges to many developing countries where import duties, relatively easy to collect, often constitute an important source of Government revenue. Second, assessing the effectiveness and impact of the program on exporting firm performance is crucial to have an estimate of its benefits. This cost-effectiveness analysis is a valuable input for policymakers to know if the policy works as expected. Third, as the duty drawback scheme is based on a special trade regime structure, it can be a source of rent-seeking and ineffective allocation of resources which might lead to welfare losses. Finally, since tariffs have substantially declined due to liberalization processes and preferential trade agreements, it is important to evaluate whether special imports/exports regimes are still worth the hassle. This study addresses some of these issues, contributing to the existing body of research.

Furthermore, this study contributes to current trade literature in important ways. First, by using a firm-product-country-year level database, the study provides direct and new empirical evidence about the duty drawback scheme in Colombia, a fact that, to my knowledge, has not been previously shown. Second, besides examining the impact of the policy on firms' export outcomes, it also estimates the foregone program's fiscal cost or tax revenue. Finally, the paper provides evidence of the impact of import duty rates on manufacturing exports through the intensive (quantities and prices) and extensive (number of varieties) margins and how this impact is shaped by firms' experience. Therefore, the undertaken research also adds to the literature about the channel of intermediate goods on exporting firms' performance.

Due to plausible endogeneity concerns as a result of reverse causality and omitted variables, the empirical strategy is based on two corrections. First, the estimates account for fixed effects at the firm-product and country-year level and control time-varying characteristics of the industry through sector-year dummies. Second, I exploit variations both in the import duties rates--which are tested to be exogenous to initial sectoral performance indicators--and in the intensity (exposure), using the duty drawback system at the firm-country-product-year level. This strategy is conceptually similar to a difference in differences estimate, where the treatment (duty exemptions) affects the treated group over time. The methodology also ensures that the control group is like the treated group by guaranteeing that for each beneficiary firm, there is at least one non-beneficiary firm exporting the same product to the same destination in the same year. The present paper takes advantage of disaggregated imports and exports data at the firm-product-country-year level over the period 2010-2019.

Overall, the findings suggest that 34% of the value of Colombian manufacturing exports have been channeled through the SIEP over that period. Nonetheless, beneficiary firms constitute a small share of the total exporting firms, indicating the program is highly concentrated in a few companies. The administrative and economic costs associated with the compliance of several requirements, as well as the tariff reductions due to preferential trade agreements, have discouraged producers from importing and exporting through this special regime. Results suggest that the scheme works as an effective mechanism to smooth the impact of changes in imported input duties. Hence, in times when customs taxes increase, the benefited exports are shielded from the negative effect of tariff or VAT raises, bringing gains in terms of exported quantities and varieties for treated observations relative to the control group. However, if an input-duty cut takes place, the marginal and positive impact that these reductions might have on boosting exports is lower for exports benefiting from the program. Besides, the impact of the SIEP on export outcomes increases as firm experience rises and is driven mainly by exports to low and middle-income destinations. Finally, the results allow concluding the revenue forgone from duty exemptions of the SIEP represents 1.73% of the GDP, which seems to be high in comparison with other tax revenues collected by the Government.

The paper's organization is as follows. The first section presents a short review of the literature about duty drawbacks and duty exemption policies worldwide. The second and third sections intend to describe some stylized facts about the SIEP scheme in Colombia and the data used. The fourth section shows the procedures carried out to choose the firms and the observations to be considered in the empirical strategy, presented in the fifth section. This is followed by the results, along with some robustness tests and estimates of the fiscal cost of the program. Lastly, it presents some conclusions and final considerations.

  1. Duty Drawbacks Schemes and Duty Exemption/Deductions

    Nowadays, many governments pursue export promotion policies to support economic growth in their countries. Export promotion's vast array of policy options includes public good provisions, exchange rate policies, financial and credit assistance, and non-financial services, such as marketing and advertising services. Besides, these export promotion measures have also included duty drawbacks and duty exemptions (or deductions) on imported goods.

    Export performance can be delayed not only by existing barriers in the country of destination but because of a country's own pattern of import protection; its tariff structure that acts as a tax on its export sector may also frustrate its goal of increasing export profits (Costinot & Werning, 2019; Lerner, 1936; Tokarick, 2006). There are several channels through which tariffs act as a tax on exports. They create a disincentive to export by directly reducing the cost of exports relative to imports and altering indirectly the price of exports relative to the rates of nontraded or home goods--relative prices channel--(Clements & Sjaastad, 1984). Additionally, tariffs and other import barriers discourage exports by raising the price of imported and domestic intermediate inputs used by exporters--the cost of inputs channel.

    Henceforth, tariffs on inputs act like a tax on exports, thereby damaging the competitiveness of the export sector in world markets. To compensate for this anti-export bias, drawbacks schemes are one of the instruments mostly used to enable exporting firms to recover duties paid on imported inputs utilized in export production while maintaining the protection of the rest of the economy. However, duty drawbacks often do not remove the bias against exports completely since they are costly to administer, reduce the government's revenue, which would lead to the increase of other distorting taxes that might discourage exports, and do not reverse the impact of tariffs on relative prices (Tokarick, 2006).

    Duty drawback schemes involve a combination...

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