The social costs of removing tariffs | Margaret Gisladottir writes

Margaret Gisladottir. Photo: ANNSÝ

The debate about food prices and how they are shaped is an ongoing one in most, if not all, societies. When household finances are tight, people look for ways to reduce the cost of living, and the discussion often turns to tariffs. An example of this was yesterday (August 8) when most media outlets appeared to be calling on the Icelandic Chamber of Commerce to remove tariffs on imported food.

This is not a new argument, but ideas of this nature are extremely concerning and often poorly thought out.

Why do all countries impose tariffs?

The purpose of tariffs on food in this country, and in almost every other country in the world, is to balance the competitive position of domestic production against similar imported food, thereby supporting food security, a diversified economy and regional economies. Stabilize and support the domestic workforce. All of our major trading countries and neighbors use the same control tools to protect their GDP, such as the European Union and the United States.

The Swedish Chamber of Commerce stated in the above announcement that the elimination of food tariffs includes social benefits in the form of increased competition, efficiency and value creation. This statement is quite special because people do not understand that without tariffs, Icelandic agricultural production will shrink and some sectors will simply close down. Value creation will be transferred abroad.

The reason is that without tariffs to balance the position of domestic production against imported products, Icelandic agricultural products cannot compete on price with similar foreign agricultural products. Production costs in Iceland are higher than in many other places for reasons including high wages and interest rates, a small market, high transportation costs and the fact that production units are much smaller than in many other countries. Therefore, if we do things here in a completely different way than in other places around, it will have a huge impact on Icelandic agriculture and Icelandic society. The integration of domestic products will probably be considerable due to the associated regional disruption of rural areas in the country. Therefore, the removal of tariffs will have a negative impact on the sustainability of Iceland’s food security as well as on regional stability and rural business life.

Customs protection is getting worse year by year

In most cases, tariffs on food products are imposed, on the one hand, on quantity taxes, i.e. a number of Icelandic kronor per kilogram of the product in question, and on the other hand on ad valorem taxes, i.e. a number of kronor per kilogram of the product in question as a percentage of the product’s value. However, over time, customs have changed a lot and then decreased. It is worth mentioning that in 2007, Iceland signed an agreement with the European Union to reduce quantity and price tariffs on meat and meat products by 40% compared to the general situation. Since then, no changes have been made to the bulk tariff, i.e. a fixed ISK per kilogram. As a result, the value of the tariff has been decreasing year by year due to the depreciation of the kronor. Little is said about this development, despite the fact that it is very negative for Icelandic food production. Imports have increased year by year, while domestic production has stagnated or shrunk. In this way, between 2022 and 2023, meat imports increased by 17%, with beef imports increasing by 48%, reaching a record high.

In addition to this spontaneous and little-discussed development, the customs environment has also changed radically in just a few years. With the entry into force of the 2015 agricultural trade agreement between Iceland and the EU in 2018, tariffs on most processed foods such as chocolate, pizza and pasta were eliminated. At the same time, EU agricultural tariff quotas increased exponentially, including sevenfold for beef, more than threefold for pork and more than fivefold for poultry. It became clear early on that the agreement was heavily skewed towards domestic producers, and in 2020 the then foreign minister announced that it would be reviewed in this light. So far, however, little has happened on these matters.

Strengthening Iceland’s economy

According to the Chamber’s website, the organization works to “promote Icelandic business life and thereby create the conditions for progress and improved living standards”. Therefore, this encouragement from the organization to the Icelandic government is somewhat surprising. Customs protection is an important pillar of Icelandic agriculture, but removing tariffs would have a negative impact not only on primary producers, but also on service and processing companies and their employees across the country. Therefore, it would be better to focus on strengthening the Icelandic economy rather than encouraging activities that move value creation out of the country and reduce Icelandic jobs.

Margaret Gisladottir
The author is executive director of the Agricultural Enterprise Association.
This article was previously published on Vísir.is