Indonesia's ludicrous idea of taxing expensive smartphones

By Tim Worstall , written on April 25, 2014

From The News Desk

Indonesia is looking to introduce import duties on the more expensive smartphones, something that strikes most economists as being somewhere between barkingly mad and ludicrous. The argument in support is that the local manufacturers only make low-end phones so raising the tax on the high-end phones won't affect them.

Umm, quite, that's why it won't work.

Here's the argument from the horse's mouth:

The government is considering a 20 percent tax for smartphones retailing at or above 5 million rupiah ($430), which would make Indonesia the most expensive country in Asia to buy an Apple iPhone 5s.

The tax would be part of efforts to protect domestic brands such as Evercoss Mobile Phone and MITO Mobile, and slow a surge in imports that has caused a deficit in the country's current account.


'The purpose is to damp the influx of import products since domestic manufacturers only produce low-priced handphones,' Budi Darmadi, director general at the Ministry of Industry and Trade, recently told Reuters. There are two competing economic theories about whether there should be such import duties. The first is known as "infant industry protection." The underlying idea is that small and/or nascent domestic industries won't be able to survive if exposed to the full competition of the global players. Thus they should be protected so as to grow a domestic industry, one that adds value in country. In opposition is the idea that, whatever the product, it is consumers that really benefit from being able to use it. Thus such import duties might possibly aid the development of local industry but only at the cost to local consumers. My money's firmly on that second horse, but that's not the point to make here.

The point is that the proposed tax doesn't actually accomplish that "infant industry protection." For, as they say, local small industry doesn't compete at the higher end of the smartphone market. So taxing high-end phones makes no damn difference at all to that local industry. If you did want to support local assembly then you would tax imports of low end phones, thus raising the price of competing imports above the price of comparable domestically-produced ones. You don't give a cuss what happens in the high-end market because you've not got any local producers in that market.

So the actual policy that's being followed could be wrong, in that perhaps the infant industry argument is valid and perhaps it's not, but it's certainly incompetent in that, even if the first argument is correct, then the wrong policy is being applied to gain the intended goal.

All of which is perhaps the best argument against the entire idea of trade policy and infant industry protection, for it does depend on the idea that governments are competent -- Something we're not seeing a great deal of evidence of here, are we?

Image via Wikimedia.