Tariffs

When President Gloria Macapagal-Arroyo issued Executive Order 241, effectively raising tariffs on imported finished products to 1998 levels, alarm bells were sounded across the economic policy community.

The Executive Order was framed with evidently very little consultation – even if the order would send a horrible signal to those the world over who closely follow the uneven path of economic reform in the Philippines.

Among those that sounded the alarm was the Foundation for Economic Freedom (FEF). Immediately a discussion on the EO began in our e-group. Then a dinner meeting was called last Wednesday to discuss the feasibility of coming out with a position paper on the matter, considering that the EO issued last month appears to be only the first step in a series of reversals in our tariff and trade policies.

Among the FEF fellows participating in the discussion are three former economic planning secretaries and two former tariff commissioners. We are currently soliciting the views of two other fellows of the FEF: former Prime Minister Cesar Virata and former finance secretary Roberto de Ocampo.

First, let us put this issue in context.

Since we began tariff reforms two decades ago, average tariffs have dropped from well over 40 percent to an average of 8 percent in 2000. With falling tariffs, our industries became more competitive. As a result, we became a stronger trading economy.

The evidence favoring liberalization is overwhelming.

The share of exports to GDP rose from 16 percent in 1980 to 44 percent in 2002. Furthermore, the composition of exports shifted to new growth areas. The most remarkable of these new areas is electronics. The share of highly efficient firms in production rose from 19 percent in 1983 to 42 percent in 1994. Factor productivity improved at a rate of about 2.1 percent in the 1990s.

Since 1991, the value of our exports grew four-folds and reached $34B in 2002. This translates into hundreds of thousands of quality jobs in exporting industries. Lowering tariff rates and liberalizing trade was even more meaningful to consumers since it brought down the cost of consumer durables.

In our discussions, a number of things have become clear.

First, the increase in tariffs stipulated by EO 241 will not significantly increase government revenues. Because the EO in question retained low tariffs on imported inputs and raised tariffs on finished goods, the tendency will be for our industries to concentrate on importing raw materials. That will not raise government collections.

Second, higher tariffs on imported finished goods will raise their prices for our consumers. They will also allow enough head space for our own manufacturers to raise their own prices, thereby penalizing Filipino consumers. This will likewise penalize our competitiveness and over the long term probably serve to diminish our exports.

To put it bluntly, the new EO will not create new quality jobs in export-oriented manufacturing. But it might cut existing jobs in industries that become sloppy because of a high protection rate – thereby losing their share in contested export markets.

Third, higher tariffs on the finished goods listed in EO241 will penalize a vast range of productive activities in the domestic economy. It will make manufactures more expensive for our consumers. Higher truck, refrigerated van and motorcycle prices will punish our transport sector. The new EO imposes a 30 percent tariff on trucks, refrigerated vans and motorcycles.

Higher costs for twines and fishing nets will penalize our fishing industry. 15 percent duties on sacks, boxes, cases and crates will force our agriculture to shoulder higher costs for containers and packaging. The 15 percent tariff on polymers and petrochemical products will penalize downstream industries that use these inputs. A 15 percent tariff on pipes, flexible tubes, linoleum and fluorescent lamps will raise construction prices and harm the housing sector – supposedly one of the flagships of this administration.

Consumers will eventually shoulder the 15 percent tariff re-imposed on a wide range of consumer goods, including radios, televisions sets, bicycles, matches, tableware, shirts, blouses, etc. Our own industries will have to pay more for capital goods such as mechanical and electrical machineries.

And this is important for me: our consumers, because of the re-imposed tariff rates, will pay more for paper products, books and computers. The wider tariff spread, among other evils, is now also a tool for making idiots of us all.

Then, finally, there is the adverse signals this EO sends to the rest of the world. While our neighbors are liberalizing quickly to catch the crest of the region’s recovery (Thailand is now proposing a free trade agreement with the US), we are moving backwards to the shadows of protectionism.

It is as if we learned nothing from our experience from the 1950s to the 1980s: protectionism caused our economy to stagnate and forced our consumers to pay high prices for low quality "local" manufactures. Now we are making our consumers hostage to a protectionism oligarchy once more.

We have looked at the economic data from every angle. Of this we are convinced: every Filipino consumer will be victimized by this EO.

Because the EO protects capital intensive domestic industries and labor-intensive industries are likely to be harmed by it, the effect on domestic employment will be neutral at best and adverse at worse. Because the EO raises tariffs on imported finished goods and maintains low tariffs on raw inputs, there will only be marginal benefit for alleviating the fiscal crisis that haunts us in the face.

So, if no new jobs are created and no new revenues realized, if consumers will be punished with higher prices and both our agricultural and manufactures exports discourage from being more competitive, who benefits from this EO?

We hate to say this: from the evidence, EO241 will benefit only the established interests in our economy. Which is to say, it will protect the inefficient and enrich the rent-seekers.

And for the rest of us, the price to pay will be profound. The underperforming structure of our economy will be conserved rather than challenged. The space for new entrepreneurs and innovators will be constrained.

We do not reinvent the economy with this EO. We freeze its reinvention. And we do so because old fears have been regurgitated and old ideas recycled.