Government tariffs can provide a spark for manufacturing

Taxes are hardly welcomed by the general working population. But import duties can raise revenues that will help to strengthen a nation's workforce.
There are not many among us who would advocate more taxation, especially in this country.

One could fairly safely presume, in fact, that the majority of people working and living in the UAE are quite glad there is less taxation here than just about anywhere else on Earth.

Many are here precisely because of that. No taxation of income means more money in the bank. It is a good thing.

Well, not always.

Don't worry, I have not lost my senses. I am not about to donate a percentage of my salary to either the British or the American revenue services - both of which I have paid handsomely in the past.

But I learnt something this week that changed my view on taxes and tariffs in the region. I was surprised to learn from one of the biggest manufacturing companies in the world that an absence of certain tariffs can be a much greater barrier to prosperity than you would ever imagine.

In this case, one very close to home for Abu Dhabi, it appeared that low or non-existent import tariffs could hinder the UAE's plan to diversify the economy beyond a reliance on oil and gas, particularly in favour of manufacturing.

I was invited to a lunch with General Motors, the American car maker.

The occasion was to introduce the company's new global head of Chevrolet, a British veteran of the motor industry called Alan Batey.

Mr Batey was very proud of the marque's success in the Middle East, particularly in the UAE, where sales have grown at an impressive lick for the past few years.

He revealed that Chevrolet sales were up between 9 and 10 per cent in the UAE for the year to date, with sales in July alone expected to notch up a 35 per cent increase compared with the same month last year. The early Ramadan accounted for the huge increase in July, but it was an impressive increase nonetheless.

With such an obvious appetite for the company's cars and in particular its big 4x4 pick-up trucks in the UAE, I wondered why GM does not manufacture here and instead chooses to import all vehicles sold in the UAE.

Indeed, here in Abu Dhabi we have the prime location for such a behemoth of global manufacturing to set up at Kizad.

A state-of-the-art manufacturing plant could employ hundreds of Emiratis in highly skilled engineering jobs, similar to those provided by Strata, the Mubadala company in Al Ain that makes complex aircraft body parts for Boeing.You would think that the UAE Government would provide lucrative incentives for any such company wanting to set up what would undoubtedly be a US$1 billion facility here.

Indeed, Mr Batey and GM's Middle East chief John Stadwick both confirmed such incentives have been offered but that there was no prospect of building such a plant here in the short or medium term.

There were several factors that led to this conclusion, not least the absence of an existing skilled workforce and a difficulty supplying components. But low import tariffs for cars, 5 per cent in the UAE, was by far the most important factor, according to Mr Batey.

A look at Egypt, where GM has a factory and a healthy share of the car market, helps to explain his theory.

The import tariff on cars in Egypt is more than 20 per cent, which means an imported foreign car can never be sold as cheaply as one made in Egypt.

This is a deliberate government policy designed to promote a skilled local labour force.

So it makes sense for GM to spend the $1bn or so it costs to open a new factory as it will be rewarded with the sale of many affordable cars.

But in the UAE there is no such barrier to import, which is good for GM but not so good for the Government if it would like GM and others to set up shop here and employ nationals in the future.

Saudi Arabia does it with import tariffs on such diverse products as matches and nails, which are manufactured at plants across the kingdom.

I am reminded of a French phrase I learnt while doing my chores in our village in Provence as a child: Couper le bois ca chauffe deux fois. Cutting wood warms you twice - once when you chop it up outside in the chilly morning air and once again when you burn it in the hearth at night.

In the same way, taxes and tariffs raise money for immediate government expenditure and simultaneously provide incentive to perform a certain activity.

Even better than that, once a levy is established it can be raised, lowered or eliminated altogether at a point in the future to further regulate the business environment or to further encourage or discourage the same activity.

So, far from putting the freeze on business as is commonly touted, taxes and tariffs can warm a government several times over.

Published: September 5, 2013 04:00 AM


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