Terrified by tariffication?

The author is the team leader of the advocacy component of the ADB-DA Grains Sector Development Program and was DA undersecretary for policy and planning, 1988-1992.

Two bills currently under consideration in the legislature are of great
importance: House Bill (HB) 3339, filed by Speaker Jose de Venecia and
Rep. Ben Cruz, and Senate Bill (SB) 1912 filed by Sen. Manuel Villar.
Both bills are entitled: AN ACT TO PLACE SAFETY NETS FOR FILIPINO RICE
PRODUCERS BY IMPOSING TARIFFS IN LIEU OF QUANTITATIVE RESTRICTIONS ON
RICE IMPORTS, DIRECTING TARIFF COLLECTIONS FROM RICE IMPORTS TO
PROJECTS AND PROGRAMS THAT ENHANCE RICE PRODUCTIVITY AND INCREASE
FARMERS’ INCOMES, AND FOR OTHER PURPOSES – or in short, the “RICE
SAFETY NET ACT OF 2001.”

Rice Trade Policy and Performance: The NFA Monopoly

Under current policy – as codified in Presidential Decree 4 of 1972,
the government sets – through an administrative process – the amount of
rice that may be exported out of, or imported into, the country. This
policy of quantitative restrictions, or QRs, is implemented by the
National Food Authority (NFA), which is accorded the sole authority or
the monopoly on all international trade of rice. As a government
entity, the NFA’s decisions on international rice trade are heavily
influenced by politics and hampered by bureaucratic constraints and
inefficiency.

The policy to maintain government monopoly on rice trade was intended
to protect BOTH rice farmers and consumers. Farmers were to be assured
of palay (paddy or unmilled rice) prices above market levels. Consumers
would be served by NFA ensuring that retail rice prices are below
market levels. Furthermore, the NFA was expected to stabilize these
prices. Thus, the strategy of the NFA is often described as: “buy high,
sell low and hold long.”

The NFA’s operations are financed by the National Government. Over the
last decade, the NFA has received budgetary appropriations and equity
of at least P1 billion per year. The NFA has also been allowed by the
Department of Finance to borrow, with the government’s guarantee, up to
P20 billion from commercial banks, both local and foreign.

The evidence of the past 28 years since 1972 is clear: the monopoly policy has failed.

Over the 1990s, the NFA only procures an average of less than 3% of all
palay produced. With such a small procurement capacity, the NFA is able
to serve only about 70,000 out of over two million rice farmers.

On the other hand, the great mass of 80 million Filipino consumers
suffer rice prices that are double to triple those borne by Thai or
Vietnamese households. Recent surveys show that only about 15% of
Filipino households – including farmers, are able to purchase NFA rice
sold at below-market prices.

As of August 2001, the wholesale price of regular-milled rice in the major Manila wet markets was P16.53 per kilo.

The cheapest rice in the Philippines is regular milled sold at P14 per kilo by the NFA in its relatively few “rolling stores.”

In the most depressed areas, the stocks of the NFA’s rolling stores are
not fully exhausted, indicating that even P14 is apparently expensive
to the very poor!

The gap in consumer price and producer cost between the Philippines on
the high side, and Thailand and Vietnam on the low side has been
growing since the mid-1980s.

For the same quality of rice that Filipinos consume, Vietnamese
households pay only P6.36 per kilo, while Thai households pay P7.54 per
kilo – less than half the prices faced by Filipino households!

Also, Thai, Vietnamese and world rice prices have been more stable than Philippine rice prices.

Furthermore, when NFA imports rice, the 50% tariff currently required
by the Tariff and Customs Code is waived. This has resulted in forgone
tariff revenues to the government averaging about P4 billion per year
between 1995 and 2000.

Proposed Legislation to ‘Tariffy’ Rice QRs

HB 3339 and SB 1912 remove government monopoly on rice international
trade by “tariffying” the QRs on rice. The bills propose the
replacement of the QR on rice with an import tax or tariff that
provides protection equivalent to that currently given to rice farmers
under QRs. Therefore rice farmers and the rice industry will continue
to be protected – but by tariffs, not by QRs.

Under the “tariffied” system, the NFA may continue to exist, operate
and trade as a government corporation, but no longer as a monopoly. All
entities – including farmers, cooperatives, agribusiness enterprises,
traders, associations and consumers may engage in international rice
trade, responding to trading opportunities that emerge from the cycles
of production and prices not only in the country but also
internationally.

All rice importers and exporters will pay the required tariffs and
taxes to the Bureau of Customs. The import tariffs that represent the
“tariff-equivalent” level of protection are estimated at between 70%
and 100%.

HB 3339 and SB 1912 propose that the tariff revenues will be directed
to the Rice Farmers Development Fund that is dedicated to the financing
of crucial support services for rice farmers.

Filipino rice farmers badly need crucial public goods and support
services so that they can make a decent living from rice farming and be
competitive with other rice producing countries such as Vietnam and
Thailand.

The crucial support services required include: communal and private
irrigation, high-yielding seeds, efficient transport networks and
effective extension systems. However, the Philippine budget can hardly
provide for the cost of the crucial support services.

However, the design of the Rice Farmers Development Fund must ensure
that the mistakes made with the Agricultural Competitiveness
Enhancement Fund (ACEF) created under RA 8178 (Agricultural
Tariffication Act of 1995), will be avoided.

International Trade in Rice and WTO and ASEAN

The Philippines is one of only three countries worldwide which were
granted exemptions in 1995 from the removal of QRs on rice, under Annex
5 of the WTO agreement. The others were Japan and South Korea.

In April 1999 Japan gave up its QR for a high tariff rate on rice.
South Korea has already announced it is ready to give up rice QRs and
is designing alternative protection modes. The Philippines will soon be
the only country still claiming exemption from the tariffication of
rice QRs.

The exemption from the tariffication of rice QRs under the WTO expires on December 31, 2004.

Currently the Philippines is the only country in the ASEAN that still relies on QRs to protect its rice sector.

The Philippines has pledged that rice will be covered by the ASEAN CEPT by January 1, 2005.

Rice Smuggling

Since rice prices in the Philippines are so much higher than rice
prices from exporting countries like Vietnam and Thailand, it is
particularly profitable to smuggle rice into the country, despite the
risks of being caught and penalized.

World rice prices have fallen steadily over the past decade. In
contrast, Philippine rice prices have climbed fairly rapidly. These
trends have provided greater incentives and rewards for importers and
smugglers.

The enforcement of anti-rice smuggling rules and regulations is very
weak, given the archipelagic nature of the country and the poor
resources provided to enforcement authorities.

When rice is found to be smuggled, it is confiscated and later sold by
the government in the domestic market. Thus even smuggled rice still
adds to total domestic rice supply.

HB 3339 and SB 1912 propose that part of the tariff revenues from rice
imports be directed to the financing of intensified anti-smuggling
efforts.

Not Terrified by Tariffication

In summary, the proposed change in rice policy is the correct direction
for the government. HB 3339 and SB 1912 lessen bureaucratic constraints
and political influence on rice trade, while maintaining protection and
also enabling the generation of much needed tariff revenues. The
revenues are directed toward the enhancement of productivity, which
will lay the foundation not only for sustainable farmer
competitiveness, but also stable national food security.

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