Analysis

Has the Time Come for Israel to Eliminate Duties on Basic Products?

Tariffs raise the cost of living and contribute little to state revenues, but the government has only moved in a piecemeal fashion to address the problem

FILE PHOTO: Customers inspect Qingdao Haier Co. Ltd. refrigerators in Shanghai, China, on Monday, Aug. 10, 2009.
Bloomberg

Together with purchase taxes, duties can raise the price of goods between 6% and 30% for items like eyeglasses, refrigerators, ovens and baby products. So why is a government that says it is determined to lower the cost of living for Israelis doesn’t just eliminate them?

They don’t just contribute to Israel’s high cost of living, these days they contribute little to government revenues. In 2015, the Finance Ministry says tariffs brought in only 2.9 billion shekels ($810 million), or just 1.1% of all tax revenues.

Tariffs are also supposed to protect local industry and agriculture from lower-cost foreign competition. But the biggest beneficiary of tariff protection now is the farm sector, not industry – although there are cases of tariffs being imposed on industries that no longer exist, like refrigerators.

Today, according to treasury figures, about 60% of all imported products are exempt from customers and another 24% are subject to duties of no more than 12%.

But the products that do carry duties include basics like plastic bottles, cribs for babies, which are subject to 12% duties; stoves and apparel, which have rates of 6% to 12% and refrigerators and TV sets, whose rates climb to 30% if purchase taxes are added in. Rescind duties on those last two categories could save consumers 1,000 shekels on each purchase on average.

Until the 1990s, tariffs were universally high and constituted a real barrier to imports. But officials began to realize that far from protecting local industry, they were making it less efficient by blocking competition. Almost every sector was open to import competition in a program known as the “hasifa” (exposure).

The only exception was agriculture, which was regarded as a national security asset and a way of ensuring Israel’s population remained dispersed. The textile industry was given a grace period to adjust. But for everything else, duties were gradually eliminated. Many industrial products were lowered to 12% and for raw material at 8%.

At the time, the industrialists were resolutely opposed to the plan, but it forced them to become more efficient and in the process more competitive in overseas markets.

The push for tariff reform emerged again in the wake of the 2011 social-justice protests. Now lower tariffs were framed as a way to reduce income gaps and lower the cost of living for consumers.

“Maintaining import barriers benefits a narrow group at the cost of harming the entire economy’s welfare,” concluded the Trajtenberg Committee, which was formed to recommend reforms in the wake of the protests aimed at helping the poor and middle class.

In the committee’s view, the groups that tend to benefit the most from import barriers like tariffs and quotas are cartels; sectors of the economy where local competition is brisk don’t gain much from import protection because they need to contain their costs and keep prices low.

As a result of the Trajtenberg recommendations, another round of tariff reductions went into effect, again with agriculture exempted (as well as vehicles). The process was supposed to run until this year, but it ran out of steam already by 2013 due to fiscal pressures.

In any case, many products were removed from the duty-free list due to pressure from interest groups. For example, canned tuna, whose shelf price soared after it was removed from the list of products due to become duty-free.

In fact, the government took in a lot less money from customers, with the figure dropping to just 0.25% of gross domestic product in 2015, a decline of about a fifth of its pre-protest level. But the impact of the Trajtenberg recommendations on the cost of living was minimal, according to the treasury’s State Revenue Administration.

More recently Finance Minister Moshe Kahlon has taken on the fight for a lower cost of living with his Family Net program. It includes a targeted program to eliminate tariffs on a handful of critical products like pacifiers and eye glasses.

Meantime, however, consumers have been able to take things into their hands – to a degree. The government introduced an exemption on personal imports, setting off a storm of online purchasing on e-commerce sites like Amazon and Alibaba. The Economy and Industry Ministry, in coordination with the treasury, wants to raise the exemption from the current $75 ceiling.

The federation of Israeli Chambers of Commerce wants to match those reductions with tariff cuts all across the board, otherwise its members, many of them importers, will face unfair competition, the group contends.

“Why do we have to have duties on basic products, or a 6% duty on imported textiles and apparel, when everyone is importing clothing and shoes free of duties over the internet?” says one source at the Chamber. “It’s a free world now and Israel hasn’t adjusted itself to it.”

The Manufacturers Association, which represents Israel’s industrialists, said it’s in favor of tariff reductions, too, but it doesn’t want them undertaken unilaterally, rather only in the framework of trade agreements where both sides cut tariffs reciprocally. For products that aren’t made in Israel, the association said it favors eliminating tariffs altogether.