**28 |** P a g e

products subject to export duties, albeit under a different name of export Cesses, is much larger and rates are much higher. The product coverage extends over 23 product groups.<sup>29</sup> Except for three product groups—raw hides, wood, and metal scrap—other Cess are not ad valorem tariffs but specific Cess tariffs, which makes it very difficult to assess their depressing impact on domestic prices of these products. It seems, however, that their ad valorem tariff equivalents are probably within the range of Cess ad valorem rates that are between 10 percent and 75 percent of the fob value of a shipment of three ‘ad valorem product groups.’ Their schedule has a similar cascading effect as imports nominal protection structure but in reverse and more structured direction. Like in imports, the rates depend on the level of processing: but in contrast to nominal imports protection, rates decline rather than grow with the increase in the level of processing.

For example, producers of hides are protected from competition from imports by tariff rates up to 15 percent ad valorem and penalized if they want to export. The disincentives to export are quite powerful: assuming zero transportation and insurance costs (to account for a fob base of the Cess tax) and the world price of 100, products subject to a 75 percent rate could only be profitably exported if their cost (or more precisely the FOB value of a shipment) did not exceed 57 units. Table 10 gives break-even points for other Cess tariff rates.

**Table 10: Maximum production cost for profitable exports at the world price of 100 (in percent and currency units)**

|**Exports cess tariff rate**|**10%**|**14%**|**50%**|**75%**|
|---|---|---|---|---|
|**Break-evenpoint for the worldprice of 100**|91|88|67|57|

While without a more detailed in-depth analysis of market conditions for each product subjected to Cess export taxes it is impossible to assess the impact of exports border charges on domestic prices, but the direction of impacts is straightforward. First, there is little doubt that in the absence of exports taxes the domestic price would be much higher as domestic users would have to compete with external ones. Note that production whose cost exceeds the break-even point can be sold profitably only on domestic markets: for a Cess tariff rate of 75 percent, the barrier is set very high. Second, export tax introduces an incentive to smuggle with highly undesirable impact on business climate. Last but not least, there are inevitable dynamic effects as, taking into account artificially suppressed prices and profits, new investments will not come whereas existing firms may adjust by exiting and moving to other areas.

The above discussion boils down to a single observation: taxes on exports distort allocation of resources and prevent the emergence of production patterns in line with a country’s comparative advantage suppressing exports.

# **2.3. Administrative ease of foreign trading: Policy-induced versus logisticsrelated barriers**

Administrative procedures that businesses have to observe in order to carry out foreign trade transactions always impose costs and take time. According to the World Bank’s cost of doing business in 2011, Sri Lanka ranked 65<sup>th</sup> in the ease of cross-border trading. This was the highest ranking among

> 29 The list includes among others tea, rubber, coconut, pepper, vanilla, cinnamon, cloves, nutmeg, mace, maize, rice, graphite, coral and similar matter, silica sands and quartz sand, quartz, natural calcium phosphate, natural aluminum, calcium phosphates and phosphatic chalk, emery, natural corundum, natural garnet and other natural abrasives, granite, prophyry, basalt, sandstone and other monumental or building stones, pebble, gravel, broken or crushed stones, mica, metal scrap.