Quantitative restrictions on rice

The author is the Vice President of Action for Economic Reforms.  This article was published in the Yellow Pad column of BusinessWorld, 13 December 2004 edition.

Government and civil society share goals of food security, food
self-sufficiency, and increased farmers’ income. Yet, these goals are
not mutually reinforcing. There are times when one goal is achieved at
another’s expense. For one, food security can take precedence over or
conflict with the goal of increased farmers’ income. Who, then, is to
be given priority, the consumer or the producer? Thus does one face the
dilemma of choosing policy instruments that best push a goal without
compromising another.

The removal of quantitative restrictions(QRs), their replacement with
tariffs and the eventual phasing down of tariffs on all trade
transactions is the path that all World Trade Organization-member
countries have pledged to take toward a liberalized global trading
regime. Without doubt, this policy shift would, at least in the short
term, impact on those common goals. Apart from ideological reasons, the
basic premise for advocating a shift from QRs to tariffs is easy to
understand. Greater transparency and the removal of discretion from
importing authorities are attractive reasons why tariffs should be
preferred over quantitative restrictions, not just for rice, but other
commodities as well. And the revenues that can be derived, can be a
primary motive for most cash-strapped developing nations. So, if that
is all there is to it, then the most logical move would be to
immediately tariffy all commodities. But when offers were laid on the
table for the WTO ratification in 1994, government chose to maintain
the quantitative restrictions (QRs) on our staple for 10 years,
invoking Annex 5 of the Agreement on Agriculture (AoA).

Certainly, there are pros and cons on the issue of shifting from QRs to
tariffs. Here, then, are the major issues of this very tricky and
emotionally laden debate.

Lower prices for the consumer

Indeed, the domestic price of rice is high compared to the global
market. Even if we imposed a 50% to 70% tariff on imported Vietnam or
Thai rice, which is about the level that would be allowed under WTO
rules, they would still be cheaper compared to locally produced rice.
Of course, that would remain true if the exchange rate of the peso
vis-a-vis other foreign currencies does not plummet.

It could be argued that importing cheap rice, instead of insisting on
producing it at higher cost, is a rational decision. That is, given
that we have about three million farmers and 80 million consumers, with
the farmers themselves becoming consumers when their stocks dwindle.

Yet, shifting to tariffs may not necessarily result in cheap rice if
importation is left mainly to those who are able to fulfill
government’s stringent requirements to import. While lately, not much
has been heard of the rice cartel, there exist key players in the
industry to this day, ready to capitalize and leverage on more profit
opportunities within the rice sector. Granted that they are able to
procure imported rice cheaply, it is doubtful if they would sell it at
a tremendously lower price than that prevailing in the domestic market.
The possibilities of and incentive for collusion abound, which might
not at all result in cheaper rice in the domestic market.

Tax revenues vs quota rents

Tariffs undoubtedly give government the much-needed revenues that could
possibly augment its spending to raise farmers’ productivity, and
concomitantly, raise their incomes, which an import quota will not be
able to provide. Compared to a QR, a tariff is more transparent and
thus less prone to lobbying and corruption. But this setup assumes that
government can monitor all the possible ports of entry for imported
rice and collect the revenues that are due. Further, a high tariff rate
may, for all intents and purposes, act as a de facto quantitative
restriction and would, like a QR, encourage smuggling. At the end of
the day, therefore, the question of whether it will be a tariff or
quota boils down to government’s capacity to enforce a policy it so
chooses.
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Thin global rice market

Perhaps one of the strongest arguments why a nation with rice as staple
should strive for rice self-sufficiency and not just rice security, is
the thinness of the global rice market. Despite trade liberalization,
rice traded in the global market has not gone beyond five percent of
total production. A shock from a major rice supplier, or a sudden spike
in the demand of a major importer can trigger volatility in global
supply as well as the price of rice. As it is, China has already
reduced its land devoted to grains production from 112.5 million
hectares in 1996 to 99.4 million hectares in 2003. And this has caused
a rise in world rice prices. Coupled with a currency contagion like
that in 1997, a small country such as ours would be highly vulnerable
to social unrest should the supply of a staple be highly dependent on
imports.

While a shift to tariffs, which may initially be set at a high level,
can be done, such tariffs would have to be gradually lowered, according
to WTO rules. Should tariffication be done without the needed push to
ensure the stability of rice farmers’ income, then certainly, the
already unprofitable rice farming activity would eventually be driven
out of business. It would be good if we could always buy rice cheaply
from the global market, but such might not always be the case –
considering the thinness of the market. It is no wonder that even
Malaysia, which is rice-secure, has set to maintain a rice
self-sufficiency level of no less than 65%. And Vietnam, which is a
major rice exporter, maintains the option to enforce an export quota
should its domestic food security be threatened.

Impact on poverty

Caesar Cororaton, a Senior Research Fellow at the Philippine Institute
for Development Studies (PIDS), in his study entitled, “Can the poor
benefit from the removal of QR on rice?” published in May 2004, argues
that the “displacement effects of the expected surge in rice imports
will translate into larger negative income effects for household groups
where the problem of poverty is severe.” He attributes this to the fact
that lower income groups rely heavily on agriculture, palay production
in particular. Below is a summary of the effect of a total removal of
the quota on rice, coupled with a reduction of the tariff on rice based
on his simulation:

•    local price of rice imports: -64.2%
•    consumer price for rice: -4.9%
•    consumer price index: -0.65%
•    imports of rice: 3,676%
•    impact on domestic production:
– rice milling: -2.0%
– irrigated palay: -1.93%
– non-irrigated palay: -1.60%
•    ave. agri wages: -1.70%
•    ave. return to capital in irrigated palay: -7.3%
•    ave. return to capital in non-irrigated palay: -5.7%
•    employment in irrigated palay: -4.6%
•    employment in non-irrigated palay: -3.3%

Cororaton recognizes the need for market reforms in the rice sector,
but adds words of caution on the way the reform is carried out –
especially for a critical commodity such as rice. He proposes the
provision of direct government transfers to those adversely affected
household groups in the short-term to mitigate its immediate negative
impact, and strongly urges the implementation of measures that have
long-run positive effect on the productivity at the farm level, such as
irrigation, better farm-to-market roads and post harvest facilities.
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The Philippine Notification of Extension of Annex 5

The government’s decision to request an extension of Annex 5 of the AoA
last March 29, 2004 was met with mixed reactions from civil society.
While others welcomed the move, others were more skeptical, asking if
it was for real.

Based on the previous discussion, the maintenance of the QRs seems to
be a logical move by the government for a number of reasons:

First, maintaining the QRs on rice appears to be the best protection
that government can offer to our farmers against the uncontrolled
influx of and unfair competition from cheap imported rice, especially
from countries like the United States, that heavily subsidize rice
production and export.

A study by the Institute for Agriculture and Trade Policy (IATP) based
on data from the US Department of Agriculture (USDA) and the
Organization for Economic Cooperation and Development (OECD) indicates
that the US has been dumping rice at the average rate of 20% since
2001. (IATP 2003)

The continuous subsidization of countries like the US to the production
and export of rice in the form of export credits, loan deficiency
payments, market price support, commodity loan interests, state credit
programs, direct government payments, etc. renders a tariff regime that
is bound to 50% useless. It is likewise difficult for countries like
the Philippines to use other WTO mechanisms such as the special
safeguard measures (SSM), anti-dumping duties (ADD), countervailing
measures, or the dispute settlement body (DSB) to guard against
possible dumping, since these require hefty investments in technical
and resource capacity.

Second, government’s direct admission of lack of support for the
industry in terms of infrastructure, post-harvest facilities,
irrigation and technology is a major reason for the industry’s
uncompetitiveness. The Philippine Peasant Institute (PPI) has pointed
out in their position paper against tariffication that, “(E)ven if
imported Vietnam rice is imposed a 100% tariff, it will remain cheaper
than the cheapest available rice (i.e. NFA rice) in the market. Vietnam
rice is priced at P6.50 and will retail for only P13 with a 100% import
tariff while NFA rice sells at P14. Clearly, imposing tariffs will not
protect domestic rice producers because they are not yet capable of
competing with other rice-producing countries.”

Third, as NFA Deputy Administrator Gregorio Tan quipped, “It is better
that we find out the concessions that other countries would ask for in
exchange for the maintenance of the QRs. If we don’t, then we will
never know what the costs to us had we shifted to tariffs.” On the
other hand, if we let go of the QRs, we must also know the concessions
that are due us.

Korea has earlier given out a similar notice of extension and nine
countries signified their intention to engage it in negotiations: US,
Argentina, Australia, Egypt, Canada, China, Thailand, India and
Pakistan. Had Vietnam been a full-fledged WTO member, it is expected
that it will similarly manifest its intention to engage.

This same set of countries has been reported to have manifested their
intention to engage the Philippines in its request for the extension of
the maintenance of its QRs on rice.
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Mere leveraging?

The government’s sincerity in pushing for Annex 5’s extension on rice
can be challenged, especially when several Arroyo
administration-aligned legislators in the 12th Congress have sponsored
bills removing the QR on rice and replacing it with tariff. For the
13th Congress, no less the speaker Jose C. de Venecia, Jr. refiled the
bill. Said bills also allow the private sector to import rice and
removes NFA’s monopoly on rice importation.

Of course, government also looks at the bottom lines. Should countries
that wish to engage us push for an increase on the minimum access
volume (MAV) over and above our projected import demand, we shall be
swamped with surplus rice in the domestic market. Our DA sources
intimated that based on initial discussions, the Federation of Free
Farmers headed by Raul Montemayor thinks that a minimum access volume
of 600,000 metric tons at a 25% in-quota tariff is workable. Note that
currently, the Philippines imposes a 50% tariff whether or not imported
rice is in- or out-quota. Mr. Tan of the NFA cautioned that if our
trading partners ask for concessions should we push for a lower MAV,
then the lowering of the in-quota tariff rate is expected to be pushed
by them.

And should our trading partners ask for concessions in terms of further
opening up of our markets to other commodities just so we can enjoy
this privilege (e,g., Thailand for greater access of its sugar, or
China, its shoes) then government will be confronted with a host of
problems since competing industry interests will set in. Without a
clear agro-industrial plan for the country, it would not have any basis
as to which sector it will use as a pawn in order to preserve another.

Opportune time

NGOs and POs working around the rice issue should view government’s
notification of the extension of Annex 5 as counter-leverage to demand
clear and doable policies. They should utilize it to similarly
strengthen networks among farmer organizations within the region for
calls that preserve the livelihood of small rice farmers.

First, if government is indeed sincere about protecting the livelihood
of small rice farmers and at the same time achieving a near 100%
self-sufficiency in our staple, it should now be ready to offer
concessions in other areas which it thinks it has adequately protected
for quite sometime and can now be left to the vagaries of the world
market. Sugar easily comes to mind. But while exposing protected
sectors to competition is a quick way to scan what can be given out as
a concession, forcing the government to really lay down a coherent
agroindustrial plan should be the overriding parameter for any
concession to be given out. Caution must be exercised, though, because
as in any negotiation, one must avoid prematurely putting his cards on
the table.

Second, serious effort in increasing the productivity and incomes of
our rice farmers must be given. Irrigation, appropriate technological
inputs, access to technologies that promote cost effectivity should be
in place. While the government’s hybrid rice program might increase
productivity, without the subsidy that it provides for the use of its
seeds, as well as the much-needed agriculture infrastructure, what is
its impact on farmers’ income? And while we are pushing for the
retention of the QR, it will not be there forever as surely, we are
expected to eventually phase it down. As such, should government have
the political will to really work for Annex 5’s extension, it should
merely be viewed as a breathing space for our rice farmers and for
government itself to get its act together.

Third, this brings to fore the issue of enforcement. The government
must be able to strictly enforce the quota and the concomitant in- and
out-quota tariff rate that goes with it. Smuggling remains as a major
problem of the industry and becomes more and more attractive if quotas
are low and tariff rates are set at very high levels.

Indeed, while there are no guarantees on assuring the farmers’
livelihood even if quotas are maintained, there is no substitute for
increasing government spending on rural infrastructure, farm-to-market
roads and access to information and appropriate technologies to make
rice farmers more bankable and productive.

On the international level, NGOs and POs must use this as a platform in
forging areas of cooperation among their counterparts in the region in
issuing common calls.

For one, the removal of export subsidies and export credits of
developed nations on their rice industry is urgent, especially when
they have a minuscule number of rice farmers to speak of.

Second, the expansion of the special and differential treatment for
developing nations, especially the concept of having some permanent
recognition within the WTO of strategic/special products of developing
countries, must be pushed. The fight that was started by the so-called
SP-SSM (Special Product-Special Safeguard Measures) group led by
Indonesia and supported by the Philippines in Cancun must not come to
naught. There must be some room within that advocacy to fight for
tariff flexibility based on world rice prices and crop seasonality.
Along these lines, we must likewise exploit the opening that Article 28
of the AoA offers, which would allow tariffs on certain products to go
beyond the WTO-mandated levels should tariffs be used for rice, which
is 50%.

Finally, linkages among farmer organizations across the regions must be
strengthened. The fact that small Thai farmers are still debt-ridden is
ironic, given the much-touted success of Thai rice’s export. And for
Thailand to demand concessions in the name of its rice farmers when the
benefits of its export policy has not trickled down to them should find
some resonance among the regional network partners working on the
issue.

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