Commentary: Lift or impose tariffs? It’s not that simple

Despite hopes for a better year, 2021 did not start out quite well for Filipino consumers. With belts already tight after a year of economic downturn, market-goers late last January were greeted by soaring prices on basic commodities. Pork, a mainstay for many Filipino dishes, quickly went well beyond the financial means of most people.

Outbreaks of the African Swine Fever (ASF) decimated local stocks of the staple meat. Hog raisers and farmers’ groups have now butted heads with meat processors and importers over proposals to slash tariffs on pork. Such a move would allow foreign pork to be imported cheaper, and hopefully, sold at a lower price to consumers. 

But the debacle over tariffs only underlines a decades-old tug-of-war over trade, with fears over losing livelihoods to foreign competition. The question remains as to how trade must be approached for the benefit of ordinary Filipinos, both farmers, and consumers.

Pushing against the fence

Pork, like many other agricultural products in the Philippines, is protected from foreign competition by a tax called a “tariff”, which raises the price of imports to keep local products from being flooded out by cheaper imports.

According to the Philippine Tariff Commission, imported pork is currently levied with a 40 percent tariff. But Free Trade Agreements (FTA) can lower these charges even further. Under the ASEAN FTA, sugar imports from ASEAN countries are only charged a five percent tariff.

Without an FTA, agricultural imports can still be charged a minimum access volume (MAV), a lower tariff within a quota. About 54,000 metric tons of pork can be imported at a rate of 30 percent.

Apart from tariffs, imports can also be stemmed through quantitative restrictions (QR), setting absolute limits for amounts of goods to be imported. Rice imports were restricted via QR prior to the implementation of the Rice Tariffication Law (RTL). Now, rice can be imported openly from ASEAN countries with a 35 percent tariff, while 50 percent is levied on imports from non-ASEAN nations.

Lift the barrier?

Because tariffs hike the prices of imports closer to more expensive local products, consumers tend to pay more for basic commodities. In theory, lowering tariffs and acceding to FTAs would help reduce prices and benefit consumers. But it is not that straightforward.

Let us look at another product with a high tariff: sugar. Imported sugar is charged with a 65 percent tariff, allowing more expensive Philippine sugar to compete in the local market.

At millsite price, domestic sugar costs around P30.63 per kilogram (kg), according to February figures from the Sugar Regulatory Administration (SRA). This is far higher than the international price of sugar estimated at around P14.55 per kg by business research firm Fitch.

Although Filipinos are essentially paying nearly twice for sugar compared to international prices, proposals to cut the sugar tariffs to around 30 to 40 percent were shot down. Reducing restrictions on imports means that local producers would face more competition. For local producers, “protectionist” policies such as tariffs and quotas offer a defense against foreign competition.

Rice was protected by QR only a few years ago. But as rice prices rose in 2018, the impetus to cut trade barriers gained steam. For economic managers, lifting the QR on rice was the “no-brainer” solution to cut market-goers’ expenses.

But the implementation of rice tariffication in the country would show that poor policy planning can practically nullify any gains from trade.

The trade blunder

Since the Philippines’ accession to the World Trade Organization, rice tariffication had been eyed to replace the old import quota system for rice. The steady rise of Philippine rice prices in the past decade became the flashpoint. In January 2018, one kg of rice in the Philippines fetched around P40 on average; the same amount of rice fetched only around P19 in Thai and Vietnamese markets.

Pushed by the high price of the staple food, President Rodrigo Duterte signed the RTL in February 2019. To help local rice farmers become more productive, the law also provides a yearly P10-billion budget to the Rice Competitiveness Enhancement Fund (RCEF) for six years. With this, farmers were to receive seeds, farming implements, and small cash subsidies.

While the move was hailed by authorities as a success—not least by the Department of Agriculture (DA)—for many rice farmers, the passage of the law was a catastrophe.

Just prior to the signing of the RTL, a late harvest started to increase supply again, pushing rice prices back down. Unfortunately, the relaxation of import controls meant that prices continued to drop instead of normalizing. Prices fell well below farmers’ planting costs. The much-anticipated bonanza of cheap rice fell apart.

Furthermore, University of the Philippines economics professor Dr. Ramon Clarete already warned in a Business World opinion piece last October 2018 of “red flags” in the law: abuse of import licenses to manipulate prices; lack of information dissemination for prices; and failure to provide for a bigger rice buffer stock. 

Raul Montemayor, National Business Manager of the Free Farmers Federation, sharply criticized the RTL in a commentary published in the Philippine Daily Inquirer September last year, calculating that rice traders, not buyers and farmers, made most of the gains from the new arrangement. 

Without strong provisions against cartels and price manipulators, Montemayor reckoned that rice traders colluded with each other to keep rice prices high. The RCEF fell drastically short in compensating farmers’ financial losses.

“For sure, all parties do not want to go back to the time when QRs were in place but were used in exchange for government neglect and complacency,” Monetmayor acknowledged. “But neither will these groups accept the current situation under the RTL…Opening up the rice market must be calibrated so that farmers can survive while striving to become competitive.”

Cutting a fair deal

In contrast to the calamitous cascade of events during the recent rice crisis, the ongoing pork shortage is not expected to find any resolution soon. The DA projects that hog stocks will only recover from ASF in 2023.

The President, however, approved via executive order a massive tariff cut last April 7, temporarily lowering the tariff rate to five percent within the quota and 15 percent outside the quota. Lawmakers responded with alarm. Seventeen representatives filed a joint resolution last April 14 to reverse the executive order.

Sen. Kiko Pangilinan, in an interview with Rappler last March 22, expressed that while importation will be needed to stabilize supply, “it has to be the right amount and not too much to the point that the local hog industry [will compete with imports], which is already facing so many challenges”. In the long-term, Pangilinan urged for more support to be given to hog raisers.

It may be too early to tell if there will be a repeat of the RTL fiasco, but it is clear that there cannot be blind faith in hasty gambles for prosperity. There will be those who lose out on trade, especially the poor who rely on meager livelihoods.

Filipinos cannot be forced to choose between farmer or consumer, and the government cannot neglect both through reckless policymaking. Yesteryears’ trade blunders are still fresh in the people’s minds; a repeat of the same will be a turn for the worse.

Gershon De La Cruz

By Gershon De La Cruz

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