Rice smuggling, corruption, protectionism – almost the same thing!

Rampant rice smuggling provides the headline news of the day. This is tied up with the concern for rising food prices, the problem of continued corruption at Customs, and the country’s deficiency in food production.

The tensions felt by the nation in the scandal of rice smuggling is a symptom of what underlies the current state of economic policies pertaining to the food production sector. Beneath the problem lurks the policy of protectionism that the government has put in place to “help” entrenched producers  in the agricultural sector.

We will explain why smuggling, corruption and protectionism come together as a single package. In fact, they almost become one and the same thing! This was the bane of past setback in Philippine industrialization. And this could be the lynchpin for a setback in food production even as we move forward economically.

“The face of customs smuggling.” The rampant smuggling of goods in the country is not news anymore. A recent former head of Customs said that commissioners come and go, but smuggling continues as a practice.

The industry watchdog in the private sector, the Philippine Federation of Industries, has estimated, based on discrepancies in Philippine import data and the export data of major trading partners, that the volume of smuggling is astounding, exceeding P300 billion alone in 2010 and 2011.

A recent internal report in the Finance Department has categorically stated that “a long history of backroom deals, institutionalized theft and impunity has made the Bureau of Customs one of the most prominent faces of corruption in the government.”

“Rice smuggling in the news and in the Senate hearing.” High domestic demand for rice and the high cost of production in the country relative to low-cost rice production elsewhere in Southeast Asia – Thailand and Vietnam in particular – are two major factors that have contributed to continued rice importation by the Phillippines.

In addition , the country has been unable to produce sufficient rice for the nation’s needs , despite rising yields. This has necessitated rice importation to assure the country’s food security.

Rice importation is regulated by the National Food Authority (NFA). It used to be that the NFA was the sole legal importer of rice. After determining the nation’s supply deficiency, it would contract the nation’s import needs directly.

The practice has changed. As the country’s food stabilization agency with powers to intervene in the rice trade and distribution, it has had a colourful history. In the domestic sector it sets the prices of palay prior to milling and then mills what it buys for storage and sale to the public. It acts as a rice price stabilizer for domestic production and distribution.

That role extended to the purchase and resale of imported rice to the public. That was good until the practice was changed during the time of Gloria Macapagal Arroyo when the direct importation of rice was transferred to private importers but under a regime of quantitative restrictions for each quota holder.

“Who benefited from the import quotas.” To import rice, quota holders were initially awarded licenses by the NFA. Qualified quota holders were grains importers, individuals, and entities including farmers organizations (associations and cooperatives).

The choices were undertaken by the agency. In distributing them, there were few requirements to enable quota applicants. The import quotas were not auctioned to the highest bidders.

The government, therefore, did not earn any income commensurate with the privileges being offered. Thus, selected quota holders were probably parties close to the agency or to the government in power.

In the Senate hearing, however, what surfaced was that those who were allocated import quotas turned around quickly and sold their quotas to other rice traders at a premium. That meant easy money just to be a quota holder.

Eventually, too, only a few traders controlled the importation of rice through the consolidation of the purchases of the individual quota holders.

In all these, the protection that was supposed to benefit rice farmers did not go directly to that group. The beneficiaries were those lucky to receive quotas and the traders who made profits from the trading acitivity.

“The face of corruption.” Easily, this practice led to the following: the quota holders made a quick profit. The rice importers who eventually consolidated imported the rice from the designated sources. These importers were required to pay a 40 percent tariff on the imported rice.

Did they pay the relevant import duties? Reports of smuggling of rice indicate some hint of failure to collect the tariff duties on the rice imports.

Hence, this could only mean that expected revenues from the rice imports were never fully collected. As a result, the high tariffs did not result in having any revenues earned to help strengthen the state coffers.

“Philippine agriculture and the processed food industry is highly protectionist.” Before the country’s accession to the WTO, the agricultural sector enjoyed protectionism mainly in the form of non-tariff barriers. As part of its accession to that international trade body, it committed toward remove non-tariff barriers that existed before.

This was done through the Agricultural Tarification Act of 1996 (Republic Act 8178). This law repealed other laws and regulations that granted quantitative restrictions to several agricultural products. Except for the country’s staple, rice, which was allowed temporary use of quantitative restrictions, the other agricultural products were given tariff adoption guidelines.

This led to some tariff rates on a few agricultural products which were given substantial tariffs. Among these are onions, potatoes, garlic and cabbages. Because of their high tariffs, these products are also the object of smuggling.

“Lessons from the past.” Food prices are a significant part of the poor’s incomes. High tariffs and protection for many industries do not protect industries as often claimed by their proponents.

Instead, protection serves to make our industries less competitive and less innovative. As a result, they fall behind other foreign producers making the country economically strong.

Also, high protective tariffs encourage smugglers. It gives them ammunition to defy and corrupt further our weak institutions. In the end, they also lead to higher prices. The wrong parties are enriched!

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