Personal import duty hikes will do more, not less, to kill retail

With their support of the personal duty hike retailers are stubbornly creating the exact opposite environment they desire.  All they're doing is increasing the competitiveness of local import firms, not decreasing it.  Today, it's a huge hassle to buy online, a path only chosen by those dedicated to lower prices or greater selection.  Tomorrow, it could be so easy that the consumer may well be able to buy online without even knowing how, with all the hassle taken out of the equation.  The day that happens, retail as we know it will be near dead and all the duty hikes will have done is accellerate our pace towards achieving it.  

It's harrowing to watch as so few see the implications that the hike on personal imports likely will do more damage than good, much like the hike at the airport did.  The intent is well meaning, but the implications of the change may not be well understood.  It is suspected that we'll see a few things result from this action.  

  • People will take to boycotting local retailers and buying online out of spite due to the Chamber of Commerce's support for the hike on personal imports.
  • The duty hike will kill demand for some importers causing more job losses that will not be offset by hires by local retailers.
  • The government will overestimate duty revenues
  • The duty hike will encourage more entrepreneurs into the import business who will make it even easier to import items on demand.  

Before I plead my case I think it's important to recognize that I'm not against an across the board hike in duty rates.  I've long advocated on this blog a hike in duty rates across the board in order to discourage the rampant addition to consumption this island suffers from.  Even today, with our rapidly rising debts duty hikes could be a good thing to help combat the problem.  However, what I don't support are protectionist policies to keep local retail afloat, not because they aren't well intentioned but usually because when you mess with the market you create unexpected side effects that you didn't originally intend for.

Ms. Elaine Murray, director of the Irish Linen Shop recently penned a letter to the editor arguing in favor of the hike on personal import duties.  The gist of her arguement, if I can do it justice, is that online shopping and discretionary spending is killing local retail.

The truth is that our global and local recession necessitates the increase in this tax and frankly, it is time to protect the local bricks and mortar retailers from any more closures which will certainly translate to higher unemployment. This is not a mandatory tax. It is a tax on your discretionary spending overseas. It is fair and it’s your choice. Keeping Bermuda dollars in Bermuda will keep Bermudians working.

The problems that I find with Ms. Murrays arguements are that she depends on three assumptions, that our local recession is largely caused by the global one (a belief not shared by this blog), that online business is responsible for the decline in retail and that brick and mortar businesses should be given special concessions over other businesses.

The belief that the local recession was caused by the global one is one which has frequently rebuted by this blog.  At it's most basic, when you crunch the numbers on the declines in the population of non-Bermudian workers, they add up to significant declines in local spending and tax revenues.  As has been argued since before many people believed the island would even enter a recession, it is out local policy which has been the primary factor behind our recession and the decline in guest workers, not global elements.  This needs to be firmly understood and rectified before we have any chance at digging ourselves out of this recession.

Next we can move on to the the assumption that online business is killing retail.  The first problem with this assumption is that we simply don't have the numbers to support the arguement for online purchases killing local retail.  It's meerly a guess.  The statistics department produces no reports on online and mail order purchases, only resident purchases abroad brought in via the airport and resident imports overall.  This poses a considerable problem as it indicates we're choosing policies based upon assumptions and not facts.  Considering the recent focus on "reality" based decision making, this seems like a glaring flaw, regardless of the outcome.

As suggested above, the decline in non-Bermudian workers is the prime culprit for declines in retail sales and online purchases are simply a correlation to local retail declines, not a primary causation.  It is very important to understand the difference.  This blog made a pretty solid attempt to approximate the impact of the decline in non-Bermudian population on the local economy and it makes for a compelling arguement.  Again, if we can regrow our non-Bermudian population, we can increase local spending and in effect, save retail.  Attacking online shopping is likely to not have anywhere the impact that retailers or government are hoping for.

Finally, let's challenge the notion that we should be saving local retail and putting it ahead of other businesses.  This is another fundamentally flawed arguement, one where people believe it is better to use protectionist policies to prop up an industry rather than strive for efficiency.  This often leads to disaster.  

One of the big questions that arises is why are retail jobs more special than other industries?  In our history we built ships, grew onions, farmed our own food and farmed flowers among other things. These industries are all gone now.  Where would we be today had we imposed taxes to protect jobs for these industries in spite of progress?  Would we still likely to be prosperous building ships or growing onions?

If we're protecting jobs for retailers, why stop there?  Why aren't we taxing all imported food at 25% to protect local farmers and fishermen?  Why aren't we taxing the internet and cell phones because of the impact it has on local telephone companies and media companies? Indeed, jobs are being lost there too.  Why are we not looking at every industry losing jobs and coming up with means of taxation to save them?  Likely because it wouldn't make much sense to do so.  Landlines are as much a thing of the past as shipbuilding.  While it is wholly unfortunate to watch as jobs decline in servicing and maintaining them, it would be entirely self destructive to attempt to protect those jobs by taxing progress.

We're not taxing these things is because we'd damage progress to do so and eventually get left behind and thats the reason why we shouldn't bail out retailers today.  The challenges for brick and mortar businesses simply aren't limited to Bermuda.  Retailers the world over are having to rethink their models and adapt to provide better service.  This isn't the first time it's occured, with retailers having faced the onslaught of catalogues and tv shopping.  The successful ones survived and adapted, the unsuccessful, rightfully failed.

The greatest problem with the proposed duty hike is that it will likely lead to an even worse situation for retailers rather than a better one.  It is harrowing to watch and realise that they simply don't see it. Duty hikes will take make importing models even more competitive.  People who today suffer through the hassle of ordering something online, coordinating payment, shipping, forwarding, and duty by themselves do so only because it is easier to do all that than buy locally.  It is only the very committed who will trudge through this path to save a few dollars or attain that nearly unattainable item.  

Tomorrow will be very different.  The duty hike creates opportunity.  All those who buy online today won't be disinclined to do so, but they'll likely search for alternatives.  They'll turn to enterprising import firms who will import on their behalf to take advantage of cheaper duty rates.  Those firms are being positioned to take advantage of the duty hikes to make ordering online and importing not only possible, but far easier than it is today.  

Budget hopes

Here's my impromtu budget wishlist to get our economy back on track.  

Reintroduce growth

  • Eliminate term limits
  • Relax work permit requirements for skilled jobs traditionally unfilled by Bermudians
  • Eliminate red tape and delays in work permit approval process
  • Cut payroll tax

Cut costs

  • Introduce 12 or more unpaid holidays (one friday a month) for the civil service over the next year which would save nearly $15 million in labor costs but allow people to keep their jobs.
  • Privatisation of some government services, eg public transport.  Increase support for mini buses to handle the kinds of routes regular buses cannot service.
  • Eliminate GP cars and credit cards
  • Eliminate non-essential spending, especially external spending and trips
  • Reduce the size of cabinet
  • Halt further development of low cost housing
  • Change trash collection to a rotating 3 days every 2 weeks rather than 2 days every week.

Increase revenues

  • Duty simplification/harmonization to a flat rate for everything but food for all types of imports, not just personal (ala the Fair Tax Cut proposal).  This would have the added benefit of reducing duty related accounting.  

The sad state of real estate

“Home buyers saddled with debt as repossessions continue”.  Sigh… this was all sadly predictable years ago.

What happens if you combine a weakening global economy with off-shoring of local jobs and a rapidly softening local housing market?

A weakening global economy means global spending is getting tighter.  While Bermuda is typically quite shielded by such events is there a guarantee that Bermuda will feel no side effects?  Further, will the off-shoring of local jobs mean a decrease in overall employment levels, subsequently decreasing local spending?  Spending that keeps many supplementary industries afloat?  Finally, what happens if the housing market continues to soften and a large number of mortgage holders (especially those with interest only loans) wake up to realize that the value of their home has dropped and they now are in a state of negative equity if they try to sell?

Why retail sales are drying up

It is very frustrating to watch as retailers come out blaming online purchases for the decline in retail sales when it is quite likely it could largely be attributed to the decline in the number of non-Bermudian workers.

Let’s follow up on a few charts we threw together back in September when the last employment brief was released.  At the time we used the 2000 census numbers as well as the annual employment briefs to approximate the impact of non-Bermudian job losses on housing demand and the impact of non-Bermudian expenditures on the local economy.

Let’s convert the approximate impact of non-Bermudian population growth on weekly expenditure chart to a bar chart (it was previously an area chart) to better appreciate the impact.

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In in 2009, we saw more than $400,000 less spent than in 2010 and more than $800,000 less spent in the economy in 2010 than 2009 each week.  To put this in context, that means that each week we saw nearly $1.3 million less spent in the local economy each week in 2010 vs. 2008.  That’s nearly $68 million less spent in the economy in 2010 vs 2008, and $45 million less spent in 2010 than 2009.

Still not obvious?  let’s look at the year over year total approximation of non-Bermudian expenditure. 

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Still not clear enough?  Ok, let’s break it down further, here’s the approximate impact of the year over year loss of non-Bermudian expenditure in 2009, 2010

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$3 million less sent on food in 2009 over 2008, $6 million in 2010 over 2009.  The list goes on, clothing, housing, household goods, transportation, education.  This isn’t even 2011 numbers included.  Many millions less spent in the economy each year.

Still think online purchases are the biggest factor and that a duty increase on personal imports will make much of a difference?

False pretenses

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Government claimed that the airport duty hike to 35% was to protect retailers.  The above chart pulled from the retail sales index reports demonstrates that this is an unfounded argument.  If overseas purchases were the cause for retail sales declines then why are they down year over year just like retail?

Frustratingly, we simply don’t make decisions based upon the statistics.  Retailers are busy trying to convince government to hike duty for personal imports to 35% as well, and yet where is the evidence to showcase that online purchases are indeed the problem?  Presently, we only collect statistics on overseas purchases at the airport and yet we should be collecting statistics on personal imports (by collating duty submissions made by the various importing firms) in order to make an informed conclusion.

If you ask me, the biggest problem facing local retail isn’t competition from purchases on the internet, it’s from the decline of people with high disposable incomes.  Retailers should be making that message well heard so more people understand the value our guest workers (aka. long term tourists) bring rather than expecting handouts.

Unfortunate passing

It is with sadness and regret that I learned of the unfortunate passing of cousin Sean at such a young age.  It is never easy losing someone of strong character and is only made worse when they’re family and dedicated to doing what they can to make the island a better place for the rest of us.  Thank you cousin for your dedication to setting a great example, I’m sorry to see you leave us so early and hope that you’ve moved on to a better place.

For those wondering, typically I don’t post anything regarding the passing of family and friends though given cousin Sean’s interest in public service I thought a few words were warranted.