A tariff policy for Jamaica: a computable general equilibrium analysis

The role of tariffs in Jamaica has undergone significant changes over time. From the dawn of emancipation to the dusk of the Great Depression, tariffs were the single most important source of central government revenues. In the post-War era, it was not until 1961 before income taxes eclipsed customs duties in their contribution to the public purse. This trend has continued unabated, and by the mid-1970s customs duties contributed a mere 5.06 per cent to government revenues, while income taxes accounted for 28.20 per cent of the total;Perhaps the most central element determining the competitiveness of Jamaican exports is the trade regime under which the economy operates. Jamaica, as a founding member of the Commonwealth Caribbean (CARICOM), subscribes to CARICOM's common external tariff (CET). The CET is a highly differentiated tariff schedule with a wide dispersion of tariff rates that are relatively high in comparison with most of the countries of Central and South America;It is important, however, to recognize that de defacto and de jura tariff rates often do not coincide. This issue is particularly relevant to Jamaica where the official tariff rates are very misleading. There are a complex set of exemption procedures, which ensure that the actual rates paid for broad categories of imports are substantially below published nominal rates;This paper is concerned with second-best policies in the presence of existing distortions. In particular, it determines optimal tariff rates in the presence of pre-existing distortions (indirect taxes and rigid nominal wages) using a model with: (1) imperfect substitutability between domestically produced outputs and their imported counterparts; (2) imperfect substitutability between domestic output and exports; (3) unemployment in the non-agricultural sectors; and (4) a fixed balance of trade. The analytical framework is of relevance to the debate on partial trade policy reform in developing countries, where existing tariffs are constrained to satisfy the non-efficiency objective of revenue generation;The current research finds that during 1986, the year immediately prior to the imposition of tariff reforms, Jamaican trade taxes exhibited substantial elements of an optimal structure with optimal rates.