Dominican Republic: Selected Issues
Author:
International Monetary Fund
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Publication Date:
20 Oct 1999
eISBN:
9781451811285
Language:
English
Keywords:
ISCR; CR; reform agenda; tariff reform; tariff structure; Central America-tariff rate; a number of export prohibition; trade restrictiveness; Trade policy; Exports; Customs unions; Trade barriers
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This chapter assesses the trade reforms undertaken by the Dominican Authorities during the 1990s. It argues that while significant progress has been made toward creating a more liberal trade regime, in particular, through the abolition of nontariff barriers, tariff rates remain relatively high when compared with regional trading partners. However, this comparative lack of openness has been largely offset by an extensive network of free-trade zones, which have become the primary source of the strong export performance during the last ten years. Once congress approves several regional trade agreements, and the proposed tariff reform, the Dominican Republic will be making further progress in harmonizing its trade policies with those of its neighbors.

Abstract

This chapter assesses the trade reforms undertaken by the Dominican Authorities during the 1990s. It argues that while significant progress has been made toward creating a more liberal trade regime, in particular, through the abolition of nontariff barriers, tariff rates remain relatively high when compared with regional trading partners. However, this comparative lack of openness has been largely offset by an extensive network of free-trade zones, which have become the primary source of the strong export performance during the last ten years. Once congress approves several regional trade agreements, and the proposed tariff reform, the Dominican Republic will be making further progress in harmonizing its trade policies with those of its neighbors.

III. Trade Reform in the Dominican Republic23

A. Introduction

31. During the early 1990s, the Dominican Republic undertook a number of important reforms toward liberalizing its trade regime. The most significant reforms took place as part of the New Economic Program (September 1990), when the old protectionist regime, which shielded domestic producers with high tariffs and cumbersome nontariff barriers, was largely dismantled. These reforms were consolidated in 1991–92, when the authorities simplified the exchange rate system and introduced a series of tax reforms, which eliminated several important trade-based taxes, including all export taxes.

32. In tandem with these tax and tariff reforms, the Dominican Republic has also actively sought to improve trade relations with its neighbors through a series of multilateral and bilateral trade arrangements. This has included, inter alia, membership in the World Trade Organization (WTO), the Association of Caribbean States (ACS), the Central American Free Trade Agreement (CAFTA), and the Caribbean Community (CARICOM).24

33. This chapter examines the trade reforms undertaken by the Dominican authorities during the 1990s. It argues that while the Dominican Republic has made significant progress toward liberalizing its trade and exchange system, further reform is necessary to harmonize its trade policies with those of its neighbors. Such reform is being considered by congress at the time of this writing. The openness of the trade regime is effectively increased by an extensive network of free-trade zones. These zones continue to expand in size and number, while the enterprises within them have become the primary source of export growth during the 1990s.

B. The Trade Regime Prior to the 1990 Reform

34. Like many countries in Central and South America, the Dominican Republic had developed by the mid-1980s, a restrictive trade system, with high import tariffs, import exemptions, prohibited export lists, export taxes, exchange restrictions, and multiple exchange rate arrangements.25 This system sought to develop import-substituting manufacturing industries. In addition, periodic balance of payments crises prompted the authorities to introduce further measures, which increased both the overall restrictiveness and the administrative complexity of the system.

35. Beyond creating vast economic inefficiencies, the system invited rent-seeking activities and in some cases, outright corruption. The complexity of the system ensured that serious monitoring of customs administration was impossible. The array of exemptions and overvalued multiple exchange rates made misclassification and wrongful valuation of imports and exports commonplace. Groups or individuals with special interests pursued personal advantages from restrictive licensing and nontariff barriers.

36. The trade system also created a strong antiexport bias. This bias was most serious within the traditional agricultural sector, where export taxes were levied on important export products such as sugar, bananas, coffee, and cocoa. In addition, all exports were subject to a foreign exchange commission of 1½ percent of revenues.

37. The tariff system was particularly restrictive and lacked transparency. It included both specific and ad valorem tariffs, which operated in a cumulative manner. In some cases, nominal tariff rates in excess of 200 percent were imposed (WTO Trade Policy Review, 1996). The system was extremely complex to administer. In line with the import substituting objective, tariff exemptions played an important role, greatly increasing effective protection for domestic industries. Firms that were registered as import substituting could obtain tariff exemptions for their imports of raw materials and intermediate inputs. Individual enterprises often obtained total or partial exemptions arising from special contracts with the government. The government also passed a series of laws and decrees which provided further specific exemptions on an ad hoc basis.

38. Import prohibitions and other nontariff barriers were widespread. As part of a series of measures introduced to resolve the balance of payments crisis of 1979, the authorities introduced a list of prohibited imports covering more than 150 types of consumer goods such as certain garments, furniture, and light industrial goods. In 1982, the list was expanded to cover a further 200 items.

39. Throughout the 1980s, the central bank maintained a multiple currency system, with several overvalued official rates.26 Inevitably, a parallel exchange market emerged. These exchange arrangements heightened the antiexport bias, since they not only imposed surrender requirements on traditional exporters, but also required manufacturing exporters to surrender a proportion of their receipts at disadvantageous official rates. In contrast, importers of tariff-exempt goods could exchange domestic currency at advantageous overvalued official exchange rates.

40. The authorities made several attempts to unify the exchange rate. Unfortunately, these efforts were short lived, as frequent balance of payments crises forced the authorities to use administrative measures to maintain the supply of foreign currency needed for official uses. The exchange system became extremely restrictive after a crisis in June 1987, when all commercial banks were required to surrender their foreign exchange to the central bank, which became the sole provider of foreign exchange.

C. Trade Reform in the 1990s

41. The comparatively poor export performance during the 1980s, coupled with persistent balance of payments problems prompted the authorities to reevaluate their import-substituting development strategy. As part of the New Economic Program, the Dominican authorities undertook a wide ranging reform of their trade system.27 The tariff system was simplified by reducing the number of import taxes. Most import quotas, import licensing requirements, and import prohibitions were abolished. Agricultural export taxes were suspended. In an attempt to provide a more neutral tax regime, all tax incentives and ad hoc measures, except those specifically applying to the free-trade zones, were eliminated.

42. In January 1991, the authorities began the process of reforming the exchange system. While still formally maintaining a dual exchange rate system, a freely determined interbank rate was introduced.28 The official rate was regularly devalued and the spread between the official and interbank exchange rates was reduced. In 1993, the central bank started to reduce the number of exports which were subject to surrender requirements.

43. The initial trade liberalization was further consolidated during the tax reform of 1992. The import surcharge was reduced from 15 percent to 10 percent and a program for its eventual abolition by 1995 was announced. By 1993 most export restrictions, such as export licensing, minimum export prices for agricultural products, and all export taxes were abolished. Furthermore, the export administration system was greatly simplified when most special registration and documentation requirements were eliminated. However, for statistical purposes, certain minor registration and documentation requirements are still maintained. Customs administration has also benefited from the recent automation of customs documentation, which reduced the discretion available to customs officers.

44. The current tariff structure has ten tariff bands, ranging from zero percent to 35 percent, levied on all imports on an ad valorem basis (Table 1). The simple average tariff is 17.7 percent, while the most common rate is 10 percent, affecting around 28 percent of all tariff lines. For certain “luxury goods” a further consumption tax (Impuesto Selectivo al Consumo) of between 5 percent and 80 percent is also levied, which when included raises the simple average tariff to 18.6 percent (Table 2). The value of this tax is based upon the C.I.F. price, and the amount of prior taxes and duties. In addition, a general 8 percent value-added tax, known as ITBIS (Impuesto a las Transferencias de Bienesy Servicios), is levied on alt goods.

Table 1.

Dominican Republic: Tariff Structure 1/

(Excluding selective consumption tax)

article image
Sources: Dominican authorities; and Fund staff estimates.

Does not include the contingent tariffs applied to beans, chicken, garlic, milk, onions, rice, corn, and sugar.

At the eight-digit HS level.

Table 2.

Dominican Republic: Tariff Structure 1/

(Including selective consumption tax)

article image
Sources: Dominican authorities; and Fund staff estimates.

Does not include the contingent tariffs applied to beans, chicken, garlic, milk, onions, rice, corn, and sugar.

At the eight-digit HS level.

45. However, the present system still maintains a number of exemptions from import tariffs. The most notable exceptions are for those products used in the agricultural sector, for example insecticides, herbicides, and pesticides. Certain goods which are regarded as socially important, such as medicines, also benefit from exemptions. The Dominican Republic also maintains a number of export prohibitions. Exports of fresh milk and meat are prohibited in order to guarantee supplies for the domestic market, while exports of unprocessed wood, charcoal, and certain animal species are forbidden on environmental grounds.

46. The system still offers important effective tariff protection to many domestically produced goods. According to the WTO, significant tariff escalation exists, especially amongst the more processed products. The WTO argues that tariff escalation is particularly pronounced for textiles and leather products.

47. While many formal nontariff barriers have been abolished, importers may still face serious administrative trade barriers. For example, some importers complain that customs valuations are discretionary, while arbitrary customs clearance procedures can delay the importation of merchandise.29 According to the U.S. Commerce Department report, import permits which are required for certain agricultural items, are sometimes delayed or withheld.

48. While the majority of formal nontariff barriers were abolished as part of the trade reforms introduced in the early 1990s, until recently certain quotas were maintained on eight important basic consumption goods—beans, chicken, corn, garlic, milk, onions, rice, and sugar. During the Uruguay Round, the Dominican Republic agreed to eliminate all nontariff barriers and introduce a maximum tariff bound of 40 percent. However, it also sought a waiver on its WTO obligations with respect to these eight products, which would have allowed the Dominican Republic to introduce tariff rates above the agreed bounds and maintain nontariff quotas. The issue was unresolved during the Uruguay Round, and subsequently the authorities sought to amend their WTO schedule of concessions (through the procedures outlined in Article XVIII of the WTO Agreement). In early 1999, the WTO accepted a proposal from the authorities, which permitted the Dominican Republic to set a two-tier tariff structure for each of the eight products. The authorities propose to charge tariff rates ranging from 5 to 25 percent, on imports below a specified volume, while maintaining a maximum tariff bound of 40 percent. Imports in excess of the specified limits (Table 3) would be subjected to higher tariff rates, known as contingent tariffs, ranging from 60 percent to 137 percent in 1999 (Table 4). The authorities have also announced a schedule under which these contingent tariffs will be reduced slightly to between 40 percent and 99 percent by 2005.

Table 3.

Dominican Republic: Initial Import Level Before Contingent Tariff Applies

(In metric tons)

article image
Source: Data provided by the Dominican authorities.
Table 4.

Dominican Republic: Schedule of Contingent Tariffs 1/

(In percent)

article image
Source: Data provided by the Dominican authorities.

Tariffs only apply when imports exceed a prespecified amount.

49. The Dominican Republic still maintains surrender requirements for selected exports of goods and services. Exporters of traditional agricultural products are subject to a 100 percent surrender requirement. Foreign exchange proceeds from the provision of certain services such as telecommunications, credit card transactions, and remittances from insurance claims are also subject to surrender requirements. However, these requirements would be abolished when the new Monetary and Financial Code is passed by congress.

50. Compared with its regional neighbors, the Dominican Republic maintains a relatively restrictive trade regime, despite the significant progress made during the early 1990s. Table 5 provides a comparison of tariff rates for countries of comparable size in the Caribbean and Central America. Tariff rates in the Dominican Republic are amongst the highest in the region. Despite recent progress in reducing its Trade Restrictiveness Index (TRI),30 the Dominican Republic still has a higher index than other countries in the region (Table 6). The main reason for the relatively higher TRI is the high level of tariffs in the Dominican Republic compared with other countries in the region. Once the proposed tariff reform is approved (see below), the TRI is likely to decline further.

Table 5.

Dominican Republic: Caribbean and Central America–Tariff Rates Selected Countries

article image
Sources: Dominican authorities; and Fund staff estimates.

Does not include the selective consumption tax or the contingent tariffs applied to beans, chicken, garlic, milk, onions, rice, corn, and sugar.

Table 6.

Dominican Republic: Caribbean and Central America—Trade Restrictiveness Selected Countries

article image
Sources: Dominican authorities; and Fund staff estimates.

51. Recently, the Dominican authorities have taken further steps toward liberalizing the trade regime. In March 1998, a number of nontariff barriers, which were created by either presidential or administrative decree, were abolished. Legislation has been submitted to congress, that provides a timetable for further significant tariff reductions and a simplification of the tariff structure. Under the proposed legislation, tariffs would be liberalized in two stages, starting in 1999, and concluding in 2000. The number of tariff rates would be reduced to four, while the new rates would range from zero to 15 percent. More specifically, the tariff structure would be: zero for raw materials not produced domestically and all capital goods, 5 percent for domestically produced raw materials and intermediate goods not produced domestically, 10 percent for domestically produced intermediate goods, and 15 percent for final consumption goods.

52. The diffuse nature of trade policy making was regarded as a major weakness of the trade regime, tending to slow the pace of trade reform (see WTO Trade Policy Review, 1996). While the Ministry of Foreign Affairs has the responsibility for negotiating and concluding international treaties and agreements, the Ministry of Industry and Trade determined trade policy. However, the National Sugar Institute has direct responsibility for all issues relating to sugar, including trade issues, while the Ministry of Agriculture has undertaken various technical responsibilities related to agricultural exports. Matters were further complicated by the existence of a number of special commissions and interministerial committees—for example, the Foreign Trade Commission, the National Free-Trade Zones Council, the National Council for Development, and the Tariff Study Commission.

53. More recently, the authorities have tried to resolve these coordination difficulties with respect to new trade agreements. In line with a WTO recommendation, the National Trade Negotiation Commission was created in 1997. It has the ultimate responsibility for negotiating all new trade arrangements. However, technical discussions will still remain the responsibility of the relevant ministry or government body. At various times, the authorities have considered creating a new ministry which would be responsible for all trade policy issues, but this idea has not, as yet, been acted upon.

D. Free-Trade Zones

54. Over the last 30 years, the Dominican Republic has developed an extensive system of industrial free-trade zones. The rapid growth of the free-trade zones, in terms of employment, export value, and the number of firms locating in such areas has been remarkable. By 1998, there were more than 35 industrial parks, containing over 500 enterprises, employing approximately 250,000 employees, and accounting for 8½ percent of total employment. In 1998, net export receipts generated from the free-trade zones were US$1.4 billion, and accounted for 61 percent of all exports. Since 1994, net export receipts (in U.S. dollars) from the free-trade zones have grown, on average, by 18 percent per year (Statistical Appendix Table 37).

55. The rapid growth of the free-trade zones can be explained by three factors. First, the regulations governing the free-trade areas are generally regarded by both domestic and foreign investors as stable and transparent, in contrast to the legal framework governing other exports. Second, the tax incentives offered to enterprises locating to these areas are considered attractive.31 Finally, the geographical advantage of being close to the United States, coupled with the preferential trade arrangements such as the Caribbean Basin Initiative (CBI) and the U.S. textiles agreement,32 has facilitated export growth. However, this has led to a comparative lack of market diversity with the free-trade zones being heavily dependent upon U.S. export markets. However, this lack of diversity is partly compensated by other important sources of foreign exchange, such as tourism, which are dependent on other markets, namely Europe.

E. Trade Agreements

56. As part of the outward reorientation of trade policy, the Dominican Republic has actively sought closer trading relations with the rest of the world. In March 1995, the Dominican Republic became a member of the WTO. In order to comply with the requirements of WTO accession, the Dominican Republic passed important legislation on foreign investment and telecommunications. At present, the congress is also considering further legislation protecting intellectual property rights which it is expected to pass in early 1999.

57. During the 1990s, the Dominican Republic has also joined a number of regional organizations. In 1999, it joined the CAFTA. It was a founding member of the Association of Caribbean States (ACS), a body launched in January 1995 and comprised of 24 member countries. The ACS has the objective of promoting trade liberalization, and regional economic integration within the Caribbean basis. It has also recently joined the Caribbean Community (CARICOM). The main objectives of CARICOM are the economic integration of its members by the establishment of a common market, the coordination and regulation of commercial and economic relations, and the creation of a common policy with respect to other regional trade initiatives. The Dominican Republic has also supported the proposed Free Trade Area of the Americas (FTAA). However, the authorities are keen to strengthen CARICOM and use the organization to improve the region’s negotiating position, once final discussions on the creation of FTAA start.

58. The Dominican Republic enjoys important preferential access to export markets in the United States. The most important arrangement is the Caribbean Basin Initiative (CBI), which was introduced in 1984 to promote trade relations and foreign investment between the Caribbean basin and the United States. The initiative provides duty-free access for most products, except textiles, petroleum, footwear, canned tuna, and certain watches. The Dominican Republic accounts for about 25 percent of all imports entering the United States under the CBI. The Dominican Republic also benefits from the U.S. generalized system of preferences, which gives duty-free access to a wide range of products. The Dominican Republic has also negotiated a bilateral textile agreement with the United States that gives guaranteed access to Dominican textile products. The Dominican Republic became a beneficiary of the Lomé Convention in 1990, which provides for duty-free access to the European Union.33 However, the Dominican Republic was not an original signatory to the convention, and in order to gain membership, it had to unilaterally revoke certain preferential provisions of the convention relating to important export products such as sugar, bananas, and rum.

F. Conclusion

59. During the early 1990s, the Dominican Republic made significant progress toward liberalizing its trade system. Much of the old trade system, which tried to foster domestic import substituting industries, has now been dismantled. Most significantly, tariff rates have been simplified and reduced, most nontariff barriers have been eliminated, and export taxes have been abolished. Much of the administrative complexity, which characterized the old system, has now disappeared.

60. The present trade system could best be described as dualistic. Several restrictive elements of the pre-1990 system remain in effect. Exporters of traditional agricultural products are still subject to foreign exchange surrender requirements,34 and tariffs on imports are relatively high and disperse by regional standards. There is also some evidence that administrative measures are still used on occasion to delay and even prevent the importation of goods. However, parallel to this restrictive system, there is an extensive collection of highly liberalized free-trade zones, where the most dynamic export-orientated enterprises are located.35 Not surprisingly, the significant export growth from these zones has far outpaced the lackluster performance from traditional export sectors.

61. The authorities recognize the need for a further round of trade liberalization. The legislative process for significant reductions in tariffs is now underway, while the nontariff barriers placed on traditional agricultural products are now in the process of being converted into two-tier tariffs. The final approval of the Monetary and Financial Code would unify the exchange rate and remove all outstanding surrender requirements.

List of References

  • European Commission, 1997, “Libro Verde sobre las Relaciones Entre la Union Europea y los Países ACP en los Albores del Siglo XXI”, Official Publications Office of the European Communities (Luxembourg).

    • Search Google Scholar
    • Export Citation

  • International Monetary Fund, 1998, “Trade Liberalization in IMF-Supported Programs,” (Washington, DC).

  • Pellerano, and Herrera, 1998, “Legal Guide to the Free Zones of the Dominican Republic,” State Secretariat of Industry and Commerce (Santo Domingo).

    • Search Google Scholar
    • Export Citation

  • United States Commerce Department, 1999, “Dominican Republic: Foreign Trade Barriers,” (Washington, DC).

  • World Bank, 1985, “Dominican Republic: Economic Prospects and Policies to Renew Growth,” World Bank Group (Washington, DC).

  • World Trade Organization, 1996, Dominican Republic: Trade Policy Review (Geneva).

23

This chapter was prepared by Jimmy McHugh.

24

Ratification of the CAFTA and CARICOM is still pending in congress.

25

The World Bank Country Study, “Dominican Republic: Economic Prospects and Policies to Renew Growth,” (1985) provides an extensive survey of the trade regime and the impediments it placed upon economic growth.

26

In addition to maintaining a multiple currency system, the Dominican Republic also maintained many other exchange restrictions, most notably a limitation on the level of permissible profit remittances.

27

Initially, the tariff reform was conducted by means of presidential decrees (339-90 and 340-90). These decrees were subsequently ratified by congress in 1993 (Law No. 14-93).

28

Since 1991, the authorities have maintained a dual currency system. In practice, the official rate is revalued fairly often, but on various occasions the spread between the official and interbank rate has become significant. Under the monetary and financial code, which is under consideration in the National Congress, the exchange rates shall be fully unified, though the elimination of all surrender requirements.

29

See U.S. Commerce Department report, “Dominican Republic: Foreign Trade Barriers,” (1999).

30

For further information on the construction of this index see “Trade Liberalization in IMF-Supported Programs,” (1998). Care should be taken when interpreting this index in the case of the Dominican Republic because it only refers to tariffs paid on imports to the domestic economy, and thus excludes the tariff system which applies to products imported into the free-trade zones.

31

Enterprises which choose to locate within the free-trade zones are exempt from corporate income tax, construction taxes, fees relating to the registration of loan agreements, charges related to transfers of real estate, and VAT (ITBIS). Furthermore, they are exempt from virtually all standard import duties, including duties on materials and equipment used in the establishment and operation of the company. For a full description of the tax incentives offered to enterprises locating in free-trade zones see “Legal Guide to the Free Zones of the Dominican Republic,” (Pellerano and Herrera, 1998).

32

At present, the Dominican Republic is seeking parity vis-à-vis Mexico and Canada for its textiles exports.

33

For further details on trade relations between the Dominican Republic and the European Union, see “Libro Verde sobre la Relaciones entre la Union Europea y los Paises ACP en los alboresdel Siglo XXI.”

34

Export receipts are surrendered at the official exchange rate.

35

The tourism industry, which has generated impressive growth in receipts in the services account, also operates within a highly liberal framework.

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Cover IMF Staff Country Reports
Dominican Republic: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 1999: Issue 117
Publisher:
International Monetary Fund
ISBN:
9781451811285
ISSN:
1934-7685
Pages:
158
DOI:
https://doi.org/10.5089/9781451811285.002