Tariff and duties: The case of the furniture industry

Simply stated, a tariff is a tax levied on imports, either on finished or raw materials in revenue augmentation. Tariffs on the final product increase the price of the imported product in the domestic market and give the leeway for the domestic industry to survive at the very initial stage. This is the celebrated infant industry argument often vouched in many countries as an import substitution strategy. However, a tariff or duties on imported raw materials increase the product's production costs, and given the competitive international price, reduces value addition in the domestic product. Thus, tariffs or duties on imported raw materials create a disincentive for a potential industry with a competitive advantage in domestic and international markets.   

The import duties on raw materials in the manufacturing sector and the tariffs on the finished product are crucial in understanding the viability of many domestic industries. The most important point, in this case, is the understanding of the nominal and effective rate of protection of the domestic industries. The nominal rate of tariff provides the nominal rate of protection. A 10 per cent duty on any imported finished product increases the price of the product in the domestic market by 10 per cent. It helps the domestic producer to take a larger market share of the product when raw materials are available in the local market. However, when import duty on raw materials is too high, the value addition in the production process through competitive pricing makes the effective rate of protection negative for the domestic industries. The unsustainable negative effective rate of protection ultimately results in the extinction of the industry with comparative advantage. The case is more important for the nascent industries in under-developed areas of the country. The more appealing case for higher tariffs lies in the production of a product with an export subsidy in the foreign market that enables a producer to dump a product in the foreign market. 

We may consider the duties on raw materials in the furniture industry with huge domestic demand. The industry also faces competition from abroad, especially from China, Thailand, and India. The world market value of the furniture industry in 2022 is about USD 547 billion. It is projected to exceed USD 650 billion in 2027. Bangladesh enjoys a competitive advantage in the furniture industry because of the low level of wages compared to other major suppliers in the world market. A study on intra-industry trade singled out the furniture industry as a viable sector among the thirteen prominent sectors in the intra-industry trade between Bangladesh and the United States. The market value of the furniture market in the United States is over USD 100 billion, with huge potential for export from Bangladesh. The furniture industry may be a potential source of an export diversification drive. Unfortunately, high import duties on raw materials are now a threat to this burgeoning industry. On average, 60 per cent of the raw materials are imported from different countries. Timber, wood coating materials, hardware and accessories, and world-class fabrics are the major imported items. High import duties on raw materials like good fabrics, finishing coating materials, hardware, and accessories dent domestic value addition. 

Furniture industry owners demand a slashing of the current 20 per cent supplementary duty (SD) and withdrawal of three percent regulatory duty on the import of raw materials. The export incentives of 15 per cent are nullified through these higher duties and a higher incentive in the threshold of 25 per cent only can ensure the industry's profitability. Moreover, there are a few inconsistencies in the existing tax structure that adds up to over 80 per cent. This sector can create more jobs in the tertiary sectors with sound policy support by being an employment multiplier and maybe a solid addition to Bangladesh's export basket. The industry currently employs about two million both skilled and semi-skilled workers, and productivity in the sector could be enhanced through on-the-job training. 

The furniture industry has a long history and tradition in Bangladesh. Prior to independence, a few small traditional furniture businesses were operating in Bangladesh, but most of the big furniture brands have been operating in the country since independence. As demand increased in the early 1990s, the industry transformed into a mass-production-oriented industry and gradually became one of the major economic contributors in the country. The contribution of the furniture industry is USD 3.5 billion, about 1.25 percent of GDP at the current market price [Tk. 25,000 crore] with over 71,0000 entrepreneurs [ including small, micro, and medium], but the brand items constitute only 20 per cent of the market size. The non-branded items, to the extent of the market size of 80 per cent in the unorganized category, may be restructured to feed into the backward linkage that would reduce the cost in a significant manner. 

Bangladesh entered the furniture export market in 2005. During the last decade, the total export value is about USD 80 million, a paltry sum considering the world market size. The high domestic demand is met by both domestically produced and imported furniture. The import of furniture has almost doubled over the past decade, reaching almost $100 million in 2018-19; about half of it from China. China accounts for over 30 percent of the total global export value. In 2020, China's furniture exports abroad amounted to around 58.39 billion USD. 

The SME foundation predicts that the total export value could exceed over USD 100 million in the near future with congenial policy support. The export policy 2018-2021 considered the furniture industry as a 'thrust sector" and is recognized as one of the highest priority sectors. 

Bangladesh stands on a competitive edge with China in capturing China's furniture export market. The major hurdle is in the existing tariff structure. Besides the United States, there is demand for hand-carved wooden furniture in the UAE, Australia, Saudi Arabia, Kuwait, Egypt, and Qatar. Prominent furniture companies like Akhtar, Hatil, Brothers, Partex, and Navana, are major exporters; some have market outlets abroad. The local furniture industry has achieved significant growth during the last 10 years. Still, it is yet to establish a brand reputation in the world market.

The writer is the Treasurer and a Professor at the School of Business and Economics, United International University. He may be contacted at obaidur@ eco.uiu.ac.bd