Trade liberalization can be an effective way to promote growth in developing countries and is part of the development strategies of many of them. However, the dismantlement of tariffs can reduce the revenues of countries that rely heavily on taxes on international trade, thus having adverse consequences for development. The matter is important for developed and developing countries alike and has been receiving growing attention in recent years, as it has an impact on trade negotiations and the development policies of many countries.
This article analyses the importance of tariffs for government revenue purposes and the reasons some countries use them instead of other taxes. It shows that while trade taxes are almost irrelevant for revenue purposes in developed countries, some developing countries, especially the poorest of them, still need them to raise revenue, as from a taxation point of view, they are particularly well suited to their specific characteristics. It concludes that, although there are no magic solutions, the best way to deal with fiscal losses is for developing countries to reform their tax systems, but careful and gradual liberalization of trade and support from developed countries are also important. Developing countries cannot reform their tax systems overnight, and the recipe of the Bretton Woods Institutions has produced mixed results. While tax reform is the responsibility of developing countries, developed countries also have a role to play by supporting these reforms and allowing developing countries to liberalize trade on their own terms and according to their development strategies.Global Trade and Customs Journal