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# **2.1.3. Total nominal protection: Dramatic growth in 2004-09**

Para-tariff regime not only exacerbates the worst features of Sri Lanka’s MFN tariff schedule, i.e., high and dispersed rates, but also raises the levels of nominal protection to levels no longer encountered amongst WTO members. While many developing countries lowered MFN applied tariff rates in the 1990s and 2000s, Sri Lankan government raised nominal tariff protection through other means, i.e., the use of para-tariffs. Nominal rates of protection doubled not because of the increases in applied MFN tariff rates, which remained roughly at the same level in the 2000s but almost exclusively due to paratariffs. They accounted for 16 percent of TNP (total nominal protection), i.e., the sum of MFN tariff and para-tariff rates, in 2004 to 56 percent in 2009 and 51 percent in 2011. Para-tariffs were on average higher than duty rates in 2009 raising nominal protection rate from 12 percent for all tariff lines to 28 percent; doubling it for agricultural products from 25 percent to 50 percent; and more than doubling it for industrial products from 10 percent to 24 percent (Table 8).

**Table 8: Simple average values of customs duties, para-tariffs and total protection rates in 2004, 2009 and 2011 (in percent)**

|Product|Tariffs|2004<br>Para-<br>tariffs|Total<br>protection|Tariffs|2009<br>Para-<br>tariffs|Total<br>protection|Tariffs|2011(J<br>Para-<br>tariffs|an.)<br>Total<br>protection|Share o<br>2004|fpara- i<br>2009|n total<br>2011|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|All tariff lines|11.3|2.1|13.4|12.1|15.7|27.9|11.5|12.2|23.7|16%|56%|51%|
|Agricultural|||||||||||||
|products|24.6|3.5|28.1|24.6|25.0|49.6|25.4|21.4|46.8|12%|50%|46%|
|Non-agricultural|8.8|1.9|10.7|10.0|14.1|24.1|9.1|10.6|19.7|18%|59%|54%|

Notes: The VAT was also used as a para-tariff in 2009 but estimates of its incidence are not available. Source: World Bank staff estimates.

Much publicized liberalization of foreign trade implemented in June 2010 slashed the levels of TNP by 4 percentage points or 15 percent from an average of 28 percent to 24 percent. However, the average TNP still adds 47 percent and 20 percent to the price of agricultural and industrial imports, respectively. Compare also TNP rates in 2004 and in January 2011: they were between 67 percent (agricultural products) and 84 percent (industrial products) larger than in 2004.

Second, TPN rates were not only high on agricultural products but they were very substantial for many manufactures including the above mentioned clothing and transport equipment (Table 9). The average TNP rate of 28 percent on manufactured goods excluding food processing was very high. So was the TNP rate on imported electrical machinery. Construction materials including cement are also protected with very high TNP rates exceeding 60 percent.<sup>27</sup> Since construction materials account for a significant portion of many new investment projects, housing, infrastructure, etc., this has negative growth consequences.

Third, the TNP schedule, like the MFN applied tariffs schedule, ‘discriminates’ against semi-processed or intermediate products offering on average similar levels of protection to both fully processed products and raw materials: 39 percent and 32 percent respectively, whereas the TNP for semi-processed goods was significantly lower at 16 percent.

Last but not least, high TPN seriously erode incentives for exporters to develop local upstream supply chain especially if potential producers use imported inputs. Since these potential candidates are not involved directly in exports activities, they face serious difficulties in taking advantage of various ‘exit’ schemes, i.e., duty drawbacks or tariff rebates. High TPN rates on imported inputs may make them non-

> 27 Cess rate on imports of cement, articles of plaster are 35 percent (effectively 38.5 percent because of the tax base of C.I.F. value increased by 10 percent) while MFN rates are at 28 percent.