Import Substitution: How do Increased Import Duties in Uganda Affect Trade, Revenue and Welfare
During the reading of Uganda’s budget for FY 2019/20, new tariffs were stipulated—partly as means of attaining Uganda’s import substitution aspiration. This study examines the implications of increased import duties on selected products in a production and supply constrained environment. The study examines the trade (trade creation and diversion), revenue and welfare effects using the WITS-SMART simulation model. The results show that the net trade effect is negative across the 10%, 25%, 35% and 60% tariff rates. There is a minimal loss in consumer welfare that the nation can withstand in the short term. The total revenue effect is positive across all tariff lines, but not significant. We note that the expected revenue gains from the tariff increments may not be realised in the short run since most of Uganda’s trading partners are within the EAC and COMESA and thus exempted from this tariff change. We conclude that the government should first identify and address the supply side constraints of producers and their capacity deficiencies and then focus on stimulating domestic production, rather than imposing import duties to boost production. In addition, there is an urgent need to apply empirical analysis to determine the appropriateness of new tariffs vis-à-vis revenue mobilisation.