RP detergent industry struggles to stay afloat

(Conclusion)

Shouldn’t local detergent manufacturers petition government for an increase in tariffs on imported finished detergents? Aside from the fact that this may no longer be possible because of government commitments under the WTO and the ASEAN Free Trade Area (AFTA), Al Supetran, president of ACS Manufacturing, believes that "any business that depends on protection will not survive." 

According to Supetran, the sodium tripolyphosphate or STPP stocks that he bought before the imposition of the provisional safeguard duty are already running out, which means that he will have to import soon. Buying from Chemphil, he says, is out of the question — a feeling shared by other members of the Soap and Detergent Association of the Phils.(SDAP) who believe that government should not be protecting a monopoly such as Chemphil at the expense of the detergent industry. 

What is ironic, he adds, is that Chemphil imports most of its yellow phosphorus from China, the raw material it uses in the manufacture of STPP.

Chemphil has admitted that despite the provisional imposition of safeguard duties, it did not receive any orders of STPP in July and August, a trend that is expected to have continued to this date.

Shape up or ship out

Supetran says that while SDAP members employ more than 20,000 workers and have invested more than P3 billion over the last 10 years to develop the local laundry detergent manufacturing industry, Chemphil only has 97 employees. He claims it has for the last 35 years enjoyed monopoly status, and has seen many years of substantial tariff protection accorded by government. "It should have matured by now and been able to compete with imported STPP. It should not rely on government protection to make its operations viable," he emphasized.

The former president of SDAP adds that the imposition of safeguard measures on STPP will motivate local detergent manufacturers to stop producing in the Philippines and just outsource the manufacture of their brands in other countries like China where the cost will be cheaper. "It will cause the mass layoff of Filipino employees and the loss of market of STPP for Chemphil," he pointed out.

Furthermore, the additional duties may mean the death of the domestic laundry detergent industry that contributes around P600 million in taxes annually.

Supetran also believes that the imposition of safeguard measures on STPP is not in accordance with the purpose of the World Trade Organization on trade liberalization and can trigger STPP exporting countries to file a complaint against the Philippine government at the WTO. His view is shared by diplomatic representatives from other countries who, during the Tariff Commission hearings, expressed the belief that while the imposition of safeguard duties is allowed by the WTO, it cannot be used to prevent trade.

During a Tariff Commission hearing, Vietnam Ambassador to the Philippines Dong Van Chung noted: "In the Philippines, there is only one company producing STPP and this company for various reasons is not competitive. Using safeguard measures could mean protecting the production monopoly of the company rather than protecting an industry. Applying safeguard measures is not conducive to trade development among ASEAN countries in general and commercial expansion between Vietnam and the Philippines in particular."

In its memorandum to the Tariff Commission, the SDAP noted that safeguard measures are responses to fair trade acts and should be applied carefully, as studies show that these measures do not promote the economic development of the importing country.

Safeguard or protectionism?

Safeguard measures, it pointed out, are exceptions to the most favored nation (MFN) principle and should therefore only be applied within a very limited set of parameters and under extraordinary circumstances, lest the very principles of the WTO on non-discrimination and reciprocity be undermined. 

"These protective measures should not be granted for industries which are incompetent, inefficient and uncompetitive lest it breeds a dependency between the industry concerned and the government, thereby eliminating any incentive for the said industry to develop into competitiveness," SDAP added. 

In a WTO study, it was stressed that if firms fail because they cannot compete when protection is relaxed, they should be allowed to go out of business. "It must be clear that at a certain point, domestic producers are required to compete," according to the study.

Another study notes that while the government should protect a new industry from foreign competition so that it can eventually grow strong enough to hold its own, the problem is that once government grants protection or subsidizes a particular industry, it is difficult or nearly impossible to remove the protection because of special interests that stand to lose if left free to sink or swim in the marketplace.

"And even if an industry can be helped by protectionism, it does so by diverting resources from other industries, thus weakening them. The infant industry or breathing room argument is theoretically unsound. Competition provides incentives to improve quality and reduce costs. Taking away this incentive by insulating an industry from foreign competition retards these improvements," the study adds.

Citing the case of the American automotive industry, the study pointed out that the US auto industry has been receiving protection since the early ‘80s, yet it still does not make cars that American consumers want, mainly because without the pressure of competition, there is less incentive to do what is necessary to make a competitive product. "Industries that know they can get protection use their resources to lobby government to continue the protection rather than plowing their resources into making better products or cutting costs," the same study emphasized.

Safeguard unjustified

According to the SDAP, Chemphil’s inability to compete finds roots in its inept business practices and the faulty decisions it has made in the past, such as the devaluation of its investments in the Petrochemical Corp. of Asia Pacific (Petrocorp) causing Chemphil to incur severe net losses, Chemphil’s extensive investment in capital equipment to bolster production capacity in anticipation of an expansion in the domestic market which never took place, the company’s reliance on a limited number of suppliers of yellow phosphorus causing its production costs to soar, and its high selling prices causing the company to lose market share. 

Chemphil and the DTI, on the other hand, believe that the company’s problems are all linked to the surge of cheap imports of STPP.

Should government protect one company at the expense of an industry? Is saving Chemphil worth killing the domestic laundry detergent industry inspite of the fact that the latter’s death will mean the demise of Chemphil’s only market? What about the 20,000 people who depend directly and indirectly on the local detergent sector for their livelihood as well as the millions of Filipinos who use detergents, which have become a necessity rather than a luxury? Are we about to see Indonesian detergent brand Wings dominating the Philippine market? What about the billions of pesos in taxes which government stands to lose with the death of the domestic detergent industry? And what about the Philippines’ image in the foreign investment community getting another blow? Are there personal interests being protected at the expense of a legitimate multi-billion peso industry?

The unanswered questions keep piling up. The DTI has a lot of explaining to do. Why does one 35-year-old company deserve to be protected? Isn’t the DTI sending the wrong signal that any aggrieved company from now on can just file a protest with the DTI if it is losing money because of imports? When is importing proper and when is it not?

The Tariff Commission, meanwhile, has the unenviable task of making an impartial recommendation based on facts and not on personalities, and of making sure that the Philippine government does not violate any of its WTO commitments.

Whatever the final decision will be, let’s hope that government officials responsible will be able to sleep at night with a clear conscience, knowing that a lot of businesses and jobs are at stake.