The real score on Tariffs
Former Trade Secretary Mar Roxas outlines the key developments over the past years in the country's foreign trade and tariff policies
By Mar A. Roxas

The country has had four tariff reform programs (TRP) and it began towards the end of the term of President Marcos. In general, our tariffs have been declining through the years, regardless of who the President was. This has been the consistent policy of the country over the past decades.

The World Trade Organization (WTO), the largest of all the free trade organizations in existence in the world, only talks of bound tariffs. Countries bind their tariffs, meaning they commit to not exceed certain levels of tariffs for product lines. but what a country actually charges as tariffs up to the bound rate is its own business. Our commitments to WTO are represented by average bound rates, while what we ourselves decided to do as a country over the last decades – as can be gleaned from our tariff reduction programs – has brought us to what we call our average applied tariff rates over the years.

The country’s avenge bound rate for all products is 26%, while the average applied rate is 5.7% for all products. The ASEAN 3’s (Indonesia, Malaysia, and Thailand) average bound rate is also about 25.8%, but their average applied rate is about twice that of ours – about 10.3%. This is not to say anything about the quality of the negotiations in the Uruguay Round. In effect, what this says is – from a negotiating point of view – we negotiated bound rates which are just about the same as what our immediate neighbors negotiated for themselves. It is just that, on an applied basis, our country took a much more aggressive tack than they did. That is why our applied rates are lower than their applied. On a per country basis, the closest to us is Thailand with a bound rate of about 25.7%, but their applied rate is 16.8% for all products whereas our applied rate is 5.7%.

Review of Tariff Reduction Program
The Department of Trade in Industry (DTI), as Chair of the Tariff and Related Matters Committee of the Cabinet, undertook a review of Most Favored Nation (MFN) tariffs – meaning all of these tariffs we extend to the rest of the world outside ASEAN. The review has the following algorithm: finished products locally produced, components and intermediate products locally produced, raw materials locally produced, and all those not locally produced.

The rational for the grouping is fairly self-explanatory – if it is not locally produced, we want the tariff as low as possible. For those that are locally produced, we are reviewing what the impact would be on consumer price index, the businesses themselves, as well as what it means for the output of these products as part of the broader supply chain. We’ve finished about 1,500 out of about 5,600 tariff lines. Of those 1,500, we’ve increased tariffs on about 400 tariff lines. The increase is substantial in percentage terms, but I would refer to it as de minimus in nominal or actual terms. Case in point, if you go from three percent tariff to five percent tariff, it is a 67% increase, but, in terms of the total cost of that product, it is only two percentage points and is considered de minimus.

The range of increases we have undertaken is from five to seven percent, from seven to ten percent, and from ten to 15 percent.
We have done this because we believe that we have been very aggressive in the tariff reduction program. In fact, in 1996-1997, there was an Executive Order that mandated the annual automatic reduction in MFN tariffs until the year 2004, whereby in 2004 our tariffs for the rest of the world will match our tariffs for ASEAN which is zero to five percent.

When I first came in the DTI towards 2000, during the last year of President Estrada, and 2001 during the first year of President Macapagal-Arroyo, one of the first things that I did was to put a freeze on the automatic annual reductions. So you might say tariffs today are at 2001 levels because the 2001 reduction did not happen and likewise for 2002 and 2003. Since the time after freezing it at 2001 levels, we’ve undertaken a series of consultations with industry. This is now the outcome of all of those consultations where in fact 400 of the 1,500 lines that we’ve reviewed have been increased. We will complete our review and adjust tariffs upward as we deem necessary given the hearing process and the consultation process with industry.

We believe we’ve been very aggressive in the past with our tariff reduction program. Thus, we still have some headroom for adjustments to ensure that there is some breathing space for the domestic industry. We don’t believe that a two or three percentage-point or even a five percentage-point increase in tariff necessarily harms consumers – consumer price index and inflation statistics remain to be very, very benign. But, on two counts – in reality and for psychological reasons – it is a boom for the business community, at least for those firms whose tariffs have been increased. It gives them some additional headroom against competitive pressure from abroad. It also psychologically gives them the sense that the government is with them and is trying to help them so that they do not just give up and instead become traders versus producers in our country.

It is very important to ensure that there is a domestic industrial base for our country as we move ahead.

Other Trade Agreements
We now move to the other trade agreements that the country is part of. The only other agreement that we are part of — and this is the more significant agreement — is our agreement with ASEAN known as the ASEAN Free Trade Agreement (AFTA). We are in compliance with our AFTA commitments: meaning, 100% of all the tariff lines in our Inclusion List are now at zero to five percent. This means that any product from the Philippines to our ASEAN neighbors enters their markets at zero to five percent the same way that their products enter ours at zero to five percent as well. This has led to a very, very robust increase in trade with our neighbors.

In fact, our export statistics from January to September indicate 0.4% in export growth – minimal but positive. This is despite the fact that export receipts from the US is minus 20%, reflecting the weakness in the US economy, the country’s largest export market. However, even if our exports to the US posted negative growth, we still managed to have a positive although very minimal growth because of the strength of our exports to other ASEAN countries. That, of course, and including China. In China, our exports grew by about 50% last year and about 60% year-to-date this year. So, a lot of the robustness in our trade and in our exports really stem from ASEAN, China, and North Asia.

In that context our agreement with ASEAN through AFTA is very, very important for us. It allows the Philippines to be part of a supply chain or logistics manufacturing chain which is spread out all across ASEAN. It also allows us to project ourselves or to market ourselves as a gateway for a market of 500 million people, versus the Philippines’ 85 million. Secondarily, it is very important to us because through ASEAN we have opened up negotiations with other trading partners which are very, very large – China, India, and now Japan.

The framework agreement between China and ASEAN calls for the creation of a free trade zone by 2010. The framework for a free trade agreement with India calls for an effectivity date of 2011. We are still in the process of negotiating the terminal date or the effectivity date of the free trade agreement with Japan, but it looks like it will be about 2012. For the Philippines, in every one of these cases, we have also negotiated flexibility parameters such that these deadlines of 2010, 2011, and 2012 do not necessarily apply to the Philippines in to as well for parts of the products that we still need to continue to help beyond those dates. But in general, that is what ASEAN is looking forward to – a much bigger trading area to be competitive with the EU, – which this year will be adding ten new members, and with the American hemisphere. And so, therefore, we here in ASEAN have indeed begun these negotiations with China and India so that we can present ourselves as a part of a much larger trading bloc.

What Next After Cancun?
With the breakdown of WTO talks at Cancun, one will note that there have been much more aggressive moves by other countries to undertake either bilateral or regional trading agreements with their dominant trading partner. What is the Philippines’ view in this regard? Certainly, we are open to bilateral trading agreements. Bilateral and regional trading agreements as well as multilateral trading agreements are just another tool for trade and the enhancement of trade among economies.

Clearly, a bilateral trade agreement with Japan that we are pursuing quite vigorously will have different implications for our economy versus a bilateral trading agreement that we might pursue with China. In Japan, the economy has a great deal of complementation. For example, our agricultural products will not compete with their agricultural products and vice versa. Theirs are too expensive for us to purchase and ours are of a quality that is not acceptable to their market. In industrial products, we are in raw materials and components, they are in finished products and in higher technology products. Essentially, they buy from us the components they need and we buy the finished products from them and this represents a great deal of complementation. In services, they have a large, wealthy, and aging population, we have a young, educated, and large population. Again, there can be a great deal of complementation with respect to the service industry particularly in health care and care-giving. This is an example of how our country is pursuing a bilateral trade agreement with another country that we believe suit our development agenda at present.

So, how come we are not too aggressive with the United States or with China? We need to be a little more careful with these countries because there is a great deal of overlap particularly in agriculture with these countries. Case in point is that our trade statistics with China is very robust – double digit growths in the neighborhood of 50 to 60%. It is absolutely good for the economy. But there is a downside to this because our trade with China is asymmetric. What products are benefiting from this double digit growths? Copper cathodes that is PASAR (Philippine Amalgamated Smelting and Refining Company), electronics - multinationals, fresh fruits – DOLE, Del Monte — some handicrafts here and there. What are the products we import from China? School bags, shoes, apparel, pants which affect thousands of small and medium enterprises.

So, you might have trade statistics which are very, very positive. But at the real economic level, you have a few companies that might be able to export more, but you also have thousands of companies which are going to be displaced. These are examples of why we need to be careful with stats per se as a basis for opening up negotiations and, second, with our choice of which countries and how aggressively we pursue bilateral trading agreements.

Our garments sector is actively pursuing a free trade agreement with the US. Why? Well, in 2005, as we all know, the Multilateral Fiber Agreement will expire — meaning no more quotas into the US. It becomes an open market where everybody produces in the best of their ability.

As a country without a free trade agreement with the US, anything we produce will be subject to a tariff whose average right now is 15 to 17% on these products. The garments industry wants a free trade agreement with the US to enable them to have access to the US at an advantage versus those which do not have a free trade agreement with the US. How come we are not pursuing this very aggressively? Well, the US produces corn, rice, and a whole bunch of agricultural products that can wipe out a huge part of our economy. We can negotiate a phasing-in for when and how these products can enter our market, but we believe our environment is not ready to accept these challenges at present.

A free trade agreement is a simple opening of the door. It is an opportunity but not the cure. What we need to do in this country is to fix what needs fixing. Otherwise, it will be useless to open that door if our products cannot go out because they are uncompetitive. It is useless to open the door if the trade will only be one-way — without our domestic economy having a chance to sell to the outside world. Are there niche products? Yes. Pineapple, banana, and the like. But these are niche products – they do not represent the totality of our economy. And it is for that reason that the government is being very assiduous in choosing how, where, and why we are able to pursue either bilateral, regional, or multilateral trading agreements.

Mar Roxas is former Secretary of the Department of Trade and Industry. Speech delivered before members of the Makati Business Club on 20 November 2003.