The lessons of Egypt's perplexing whiskey tariff

The lessons of Egypt's perplexing whiskey tariff
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There are tariffs, there are prohibitive tariffs and then there’s Egypt tariff on whiskey. It is, without a doubt, the most fascinating import tax of all time, largely because nothing about it makes any sense.

Egypt’s bound tariff on whiskey, i.e., the ceiling it promises the World Trade Organization (WTO) not to exceed, is an eye-watering 3,000 percent. To put this in perspective, India’s 150 percent bound whiskey tariff is the world’s second highest. It’s all too easy to be mesmerized by a tariff of 3,000 percent, but the real mystery is why Egypt bothered to set this rate – or any rate – as its bound ceiling.  

Fully 99.3 percent of Egypt’s tariffs are bound. That’s impressive for any country, never mind a developing one. Car air-conditioners are one of Egypt’s unbound tariffs, which is to say this tariff line has no ceiling. Interestingly, Egypt’s applied tariff on these is currently a mere 5 percent. Why would Egypt leave this seemingly inconsequential tariff unbound, but choose to bind its rate on whiskey at 3,000 percent, and then max it out?

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Bound rates reduce the risk of tariff volatility. Without a ceiling, a tariff could, in theory, go to infinity. But Egypt is already there. Another problem arises when there’s too much wiggle room between a country’s applied and bound rates. This is called “tariff overhang,” and it leads to uncertainty on the part of foreign exporters, who might decide to sell their goods elsewhere. Since Egypt maxes out its applied tariff on whiskey, there’s no wiggle room for the government to exploit. At 3,000 percent, however, this does little to reassure foreign exporters.

What is Egypt up to? Back in 2018, during a WTO review of Egypt’s trade regime, Europe asked whether the government had any plans “to reduce the extraordinarily high tariffs applied to spirits?” Egypt replied that its “high tariffs” were used “for religious and cultural reasons.” To be sure, this is what most observers suspect is the case. But is it true? No.

First things first. In terms of alcohol and pork, which Islamic Law considers forbidden, or haram, products, Muslim countries typically don’t ban either, and generally have similar import regimes as non-Muslim countries on both. Brunei and Pakistan have unbound tariffs on alcohol, for example, but charge applied rates of 0 percent and 90 percent, respectively, not 3,000 percent. 

Egypt also has a storied history brewing beer, dating back to the 19th century. Egyptian brewers have been considered technologically savvy and their products widely represented in national art and media. This history might explain government protection of the beer industry against whiskey, and even Turkish coffee. But it doesn’t explain the sheer heft of Egypt’s tariff. 

In fact, whiskey is distilled in Egypt. Al Ahram, which has been in operation since 1897, produces a single malt whiskey called Devlin. This and other products can be found online for purchase in Egypt, among other outlets. Keep in mind that Egypt discounts its tariff for tourist spots (600 percent) and gives Ethiopia a sweetheart deal on spirits more generally (2,700 percent). 

The story just doesn’t add up. Egypt’s outsized tariff is not growing a domestic industry, and isn’t filling the government’s tax coffers. Instead, it is incentivizing the smuggling of spirits that pose a substantial health risk

What lessons follow? First, Egypt’s 3,000 percent whiskey tariff is an outlier, but its lack of any grounding in the country’s political or economic reality isn’t. As Egypt works to update its trade regulations, it should start with its whiskey tariff. Indeed, this single tariff has become a kind of shorthand for gauging Egypt’s trade regime, and not for the better. The government constantly quotes its average tariff without alcohol, as if other countries are inclined to look past this tariff peak. There’s little evidence they are.

Second, the U.S.’s Section 232 tariffs on steel and aluminum are this country’s version of Egypt’s 3,000 percent whiskey tariff. They don’t compare in terms of their size, mind you, but they do in terms of being backed up by an equally inexplicable narrative, i.e., hitting imports from allies under the guise of national security. With Sens. Pat ToomeyPatrick (Pat) Joseph ToomeyBlack women look to build upon gains in coming elections Watch live: GOP senators present new infrastructure proposal Sasse rebuked by Nebraska Republican Party over impeachment vote MORE (R-Pa.) and Mark Warren (D-Va.) re-introducing the Bicameral Congressional Trade Authority Act to rein in Section 232, what the U.S. can learn from Egypt’s whiskey rates is that even a single tariff can cause lasting reputational harm.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University. Follow him on Twitter @marclbusch.