Preventing tariffs from causing tragedies
Though tariffs can be very helpful, they can also cause dangerous tragedies. In the past few years, there were recent events when agriculture tariffs have hindered rather than helped, as in the cases of rice and pork.
A price gap methodology effectively used in other countries should now guide our tariff decisions. If tariffs are too low, jobs are lost, poverty increases and our trade balance worsens. If they are too high, producers become inefficient and local consumers suffer from poor quality and high prices.
The price gap method can help avoid both these tragedies. It argues that as a starting point, a tariff should equate import price with domestic price. Let us look at the examples of rice and pork.
Rice
When rice tariffication started at a 35-percent level, the Alyansa Agrikultura and the Federation of Free Farmers (FFF) filed separate petitions to increase this level. At that time, a Philippine Rice Institute study showed a 70-percent price gap between imported and domestic rice. They did not argue a 70-percent tariff should be implemented.
Instead, a level was desired which would encourage competitiveness (that is, 50 percent initially), but would allow the farmers to survive and prepare better for lower tariffs with the necessary government services (such as irrigation, technology, credit, etc.) that would enable them to succeed.
Philippine rice farmers could not sufficiently adjust to this new trade regime. They suffered a 23-percent decrease in incomes. The promise of a significant retail price decrease did not happen. Compared to the three normal years preceding the 35-percent tariff, the retail price decreased by only 2 percent.
Subsequent severe tariff reductions without sufficiently considering the price gap resulted in job losses. Imports ballooned above the needs of our people. Farmgate prices dropped with severe losses incurred.
This was not only because domestic prices had to decrease to compete with the very low import prices. In addition, the oversupply from these imports also forced farmgate prices down.
The repeated promise of significant price decreases from severe tariff reductions continued to be unfulfilled. The reality is that, specially in an environment with imperfect market conditions, it is supply and demand that truly determine retail prices.
In a further move to fight inflation, the already low 35-percent rice tariff was decreased to 15 percent. This still persists even with changing conditions, despite Agriculture Secretary Francisco Tiu Laurel Jr.’s position that the 35 percent now be restored.
In many areas, while rice production cost was P14 a kilo, farmgate prices averaged only P11, causing much suffering. Largely because of these tariff decisions, our self-sufficiency in rice is now 78 percent, down from 85 percent in 2020.
When the Alyansa Agrikultura requested a tariff hearing to review the 35-percent tariff because the imported landed price had decreased from $520 to $400 a ton, the request was denied. When the FFF asked for immediate safeguards to halt the suffering of the rice farmers, it took a year for any decisive action to take place.
The safeguard issue is still unresolved to this day. It should be noted that Tiu Laurel favored the tariff rice restoration from 15 percent to 35 percent, but the other government economic managers have still not agreed. Today, since the price gap has not been considered properly, local farmers are still suffering from this tragedy.
Pork
Our situation with respect to pork is similar to that with rice. The 30-percent minimum access volume tariff and 40-percent regular tariff was decreased to 25 percent and 15 percent, respectively.
The Philippine Statistics Authority reported the national average farmgate price from April to June was P172 per kilo. This is much lower than the production cost of P185 to 205 per kilogram (kg).
It gets worse. In August, the Department of Agriculture reported an even lower farm gate-price of P150 per kg, which is 25 percent below production cost.
Using the price gap method, it is obvious that we must immediately adjust these damaging tariffs, which Tiu Laurel has been fighting for.
The chart shown here demonstrates this method as applied to pork.
The International Trade Committee of the public-private Philippine Council of Agriculture and Fisheries has consistently supported the position of Tiu Laurel that the 15/25-percent pork tariffs be immediately restored to 30/40 percent. The 88-percent gap shows the necessity and urgency of taking this action.
At a 40-percent tariff, the domestic price of P350 per kg would still motivate local producers to decrease to the P327 per kg price level, at the same time not be subjected to the severe losses at the current tariff levels.
It is about time we use the price gap method to guide our tariff decisions. Only then can we become globally competitive and more importantly, prevent future tragedies.
