The Downward Drift in ASEAN Tariffs: Implications on Philippine Trade

Philippine Institute for Development Studies

Policy Notes August 1998

The Downward Drift in ASEAN Tariffs: Implications on Philippine Trade

No. 98-03

Coddling the baby But why restrict the supply of imports, in the first place, when additional imports mean additional income in the form of tariff for the government? There are many answers to this but the most appropriate to the Philippine situation is the infant industr y argument. According to this argument, we need to protect from foreign competition particular domestic industries, especially promising new ones which cannot compete on an equal footing since they are still starting out. That, in itself, is sufficient justification for imposing tariffs, so the argument goes.

Just another form of tax: tariff as a tool in trade policy

Tariffs in Southeast Asian countries: Used to be high but have altogether changed

Tariffs are a traditional tool in trade policy. They have been used in differing degrees by all countries throughout the world ever since trade across nation-boundaries was invented.

A tariff can be seen as a barrier to trade. Higher tariffs mean higher trade barriers while lower tariffs mean the opening up of trade.

A tariff is a tax on imports. Its manifest function is to ser ve as a source of government income. However, its more fundamental purpose is to protect particular domestic industries. Simplistically speaking, this means that the higher the tariff imposed on a foreign product tr ying to enter the domestic market, the greater the disincentive for the foreign manufacturer of said product would be since the tariff, in effect, raises the price of the imported good in the domestic market. A higher price means lower demand for the imported good. In turn, local manufacturers of goods which are assumed to be per fect substitutes for the imported good become the direct beneficiaries of a high tariff since their products now become comparatively cheaper.

The last decade has seen more openness in international trade as a result of low tariffs. In particular, a significant downtrend in tariffs among countries compris-

PIDS Policy Notes are observations/analyses written by PIDS researchers on certain policy issues. The treatise is wholistic in approach, and like the PIDS Executive Memo, it aims to provide useful inputs for decisionmaking.

This Notes was recast and repackaged by Wilbert R. San Pedro based on PIDS Discussion Paper No. 97-20 entitled "Comparative Study of ASEAN Tariff Profiles" authored by Chulia J. Azarcon, former Chairperson of the Tariff Commission. The views expressed are those of the author and do not necessarily reflect those of PIDS or any of the study's sponsors.

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ing the Association of Southeast Asian Nations (ASEAN) has been noted.

Table 1 shows that Singapore, a virtually duty free market, further reduced its tariff from 6 percent over a decade ago to just 0.04 percent today. Thailand’s 32 percent average tariff in 1984 went down to 20 percent in 1996. Indonesia’s 33 percent over a decade ago is now lower by a third to just 12 percent while Malaysia’s 25 percent is now only 8 percent. In the homefront, the Philippines's 29 percent is down to 13 percent.

Table 1. Average Tariffs in Southeast Asia (In percent)

Country Brunei Indonesia Malaysia Philippines Singapore Thailand Vietnam

1978

1983-84

33 15 44 5 29 -

33 25 29 6 32 -

1996 4 12 8 13 0.04 20 12

Three major factors led to the downward trend in tariffs Multilateral trade negotiations resulting in the GATT/WTO agreement. Multi-countr y negotiations under the general agreement on tariffs and trade (GATT) Uruguay Round of negotiations had been going on for decades culminating in the creation of the intergovernmental body known as the World Trade Organization (WTO) in 1994. The GATT’s aim is to have a freer world trade and tariff reduction has been acknowledged as a major tool toward this end.

Unilateral tariff reforms in ASEAN countries. The idea of a free trade area within ASEAN (formally known as the ASEAN Free Trade Area or AFTA) where member countries can engage in trade with ver y limited restric-

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August 1998

tions has set the stage for the reduction of trade barriers through lower tariff rates. In the Philippines alone, the tariff reform of 1995 targeted a uniform 5 percent tariff by the year 2000.

Common effective preferential tariff program. The goal of closer economic cooperation among ASEAN countries has led to the region-wide common effective preferential tariff (CEPT) program. Under the existing post-WTO tariff regime, most favored nation (MFN) tariff rates apply to imports from all non-ASEAN countries. For imports among ASEAN member countries, CEPT tariff rates have been applied to products covered by the program. CEPT tariff rates are lower than MFN tariff rates thereby inducing more trading among ASEAN countries for items covered by the program. Where no CEPT concessions are granted, MFN rates are applied.

As an example, Japan, a non-ASEAN countr y, will have to pay tariff to the Philippine government using MFN rates for its exports to the Philippines. A countr y such as Indonesia, which is part of ASEAN, however, has to pay tariffs using the CEPT rates for a comparable shipment of goods to the Philippines, provided that the good in question is covered by the CEPT program. For those goods not covered by the CEPT, Indonesia will then have to pay the usual MFN rates paid by any other non-ASEAN country.

Most favored nation?

The phrase "most favored nation" conjures images that suggest vassal countries subjugated to an all-power ful nation somewhere during the Middle Ages. The meaning of the term, though, is not as archaic. When one says a nation has been granted an MFN status, it only means that the nation in question has been guaranteed that its exporters will be paying tariffs no higher than that paid by the exporting nation paying the lowest tariff. This is based on the principle of nondiscrimination. All countries granted MFN status pay the same rates.

Tariff reductions under GATT are always made on an MFN basis.

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The overall average MFN tariff rate for the ASEAN community is 10 percent. There is a wide disparity in the range of countr y averages. Thailand, Malaysia and the Philippines showed high deviations from the average rate, suggesting possible opportunities for manipulating the effective rates of protection. High deviation indicates that tariffs are not uniform across tariff lines. Conversely, those countries with low deviation are the same countries that have fairly uniform tariffs across tariff lines as well as more neutral protection systems.

Thailand has the highest average tariff and the most disperse tariff structure. The Philippines and Indonesia have about the same level of average tariffs although the Philippines's are more widely dispersed. Malaysia, Brunei and Singapore have low average tariffs and fairly limited dispersion.

No. 98-03

Table 2. Selected Average Sectoral Tariffs in ASEAN (In percent) Alcoholic beverage, tobacco products and processed food Footwear, headgear, umbrellas Vehicles and transport equipment Vegetable products Textiles and garments Plastics and rubber Animal and vegetable fats and oils Furniture Live animals and animal products Pulp, paper and paper products Raw hide and leather Wood and wood products Machinery and mechanical appliances

26.51 20.42 19.41 19.25 19.21 18.52 18.19 15.85 15.58 15.48 12.90 10.98 7.96

Some sectors are more sensitive than others As tariffs in different countries differ, so do tariffs in different sectors. This is due to the fact that individual countries tr y to protect particular sectors by imposing high tariffs in such sectors and at the same time opening less sensitive sectors to foreign trade by imposing lower tariffs in these sectors. The theoretical answer to why countries tr y to protect sensitive sectors is encapsuled in the infant industr y argument. Of course, political patronage as well as interest group lobbies also creep into the picture.

In the Southeast Asian region, among the most sensitive sectors are consumer goods consisting of footwear, textiles and garments, and processed food as gleaned in Table 2.

Although there has been a general downtrend in tariffs, there are still major sectors hiding behind high tariff walls. Many ASEAN countries started out as major exporters of simple manufactures such as textiles and footwear. To this day, though, they continue to protect these sectors heavily. Accustomed to protection based on the infant industry argument, these sectors have resisted trade liberalization moves in a number of ASEAN countries.

Alcoholic beverages are also consistently levied higher rates of duties in all countries along with cigarettes and tobacco products. Vehicles and transport equipment is another sector enjoying protection status. Tariff protection for motor vehicle assembly or manufacturing is oftentimes part of a countr y’s commitment to its foreign investors. It is also closely linked to progressive manufacturing programs.

Lastly, agricultural products are also on the list of politically sensitive commodities. Negotiations on agricultural tariffs are generally considered separately from industrial tariffs.

On the whole, average sectoral tariffs are consistently higher in Thailand followed by the Philippines and Indonesia.

Tariffs are highest on final products Sectoral tariff structures remain escalated with the highest protection given to final goods. Evidence of excessively high effective rates of protection is demonstrated by the practically duty-free entr y of raw materials

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and capital equipment but higher than average tariff rates imposed on final products.

Textile and garment. The structure of protection in textile and garment is comparable in the Philippines, Indonesia and Malaysia but is much higher in Thailand.

Leather and footwear. Raw hide, the basic material for footwear, is duty free in all ASEAN countries ex-

August 1998

cept the Philippines where it is subject to the minimum 3 percent duty. Leather enjoys protection in the Philippines but is practically duty free in the rest of ASEAN. Although this is good for the local leather industr y, it is a major problem to local footwear manufacturers. It is therefore clear that the 20 percent tariff on leather makes the Philippine footwear industr y uncompetitive in the region.

Food processing. The distorted tariff structure of

Current Tariff Structures Across Southeast Asia From the very low… ] ] ]

Singapore’s tariff system is virtually duty free, with very few exceptions Average tariffs in Brunei are less than 5 percent Malaysia has relatively low average tariffs in the vicinity of 7 and 8 percent. However, actual averages could be higher if the impact of specific or compound rates which are widely used for selected subsectors are taken into account

To middling… ] ]

Indonesia has average tariffs close to 12 percent The Philippines also has average tariffs in the 12 percent vicinity. Point of difference is that tariffs are more widely dispersed in the Philippines than in Indonesia

To high… ]

]

Thailand’s average tariff of 19 percent is double the regional tariff average. Its tariffs are the highest for most sectors and are the most widely dispersed in the region. Thailand relies heavily on specific and alternative duties despite a standing agreement in ASEAN to express all tariff rates on an ad valorem basis Vietnam still imposes highly escalated tariffs common in the 1970s. Although negligible tariffs are imposed on capital equipment and raw material, tariffs as high as 50 to 100 percent are applied on selected final goods

And some generalizations… ] ] ]

There is a wide disparity in the existing tariff structures applied by ASEAN countries Tariffs in ASEAN countries are generally escalated with tariffs rising according to the degree of processing. Singapore and Brunei are exceptions to this generalization Sectoral tariffs in ASEAN are highest in consumer goods, processed food, vehicles and transport equipment, and selected agricultural products

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the Philippine food processing industr y stems from the high tariff duties on corn. This is one area that clearly calls for a policy review. Compared with the rest of ASEAN, the Philippines is the only countr y that imposes heavy import duties on corn.

Motor vehicles and other transport equipment.

Motor vehicle assembly and manufacturing enjoys one of the highest levels of protection across ASEAN. Malaysia applies the most protective tariffs on motor vehicles followed by Indonesia, the Philippines and Thailand. With the adoption of domestic car manufacturing programs in Malaysia, Indonesia and the Philippines, effective protection rates (EPRs) increased to ver y high levels due to special low rates on completely-knocked down (CKD) packs. Singapore imposes no duties on motor vehicles but subject all car sales to a 41 percent excise tax.

Motorcycle manufacturing and assembly is likewise a protected subsector enjoying special tariff regimes for CKD packs in the Philippines and Malaysia. Bicycle manufacturing lost the protective levels it once enjoyed in the region, with the exception of Thailand which continues to impose a 40 percent duty on imported bicycles.

The CEPT program: how is it faring?

The CEPT program is a region-wide tariff reduction program covering intra-region trade. Lower tariff rates are imposed on selected products to encourage greater trade among ASEAN countries.

Benefits so far. The average tariff of all CEPT lines was 5.28 percent in 1996 and a projected 2.92 percent in 2000. Compared with the MFN average of 9.86 percent in 1996, the CEPT average tariff rate for the same year is 46.5 percent less.

No. 98-03

Focus on the Philippines In the last fifteen years, there has been a steady decline in tariff brought about by significant changes in Philippine trade policy.

The first overall tariff reforms began in the early 1980s, part of a broader industrial restructuring program. Average tariffs were brought down from 42 percent to 35 percent. The next round of tariff reforms took effect in 1991 consisting of a five-year program of tariff reduction, with gradual and substantial reductions in the number of tariffs still remaining at 40 and 50 percent ad valorem. The aim was to reduce the number of tariff levels to only four: 3, 10, 20 and 30 percent, with some exceptions for sensitive agricultural and industrial products which remained subject to 50 percent duty. The program led to average tariffs falling from 28 percent in 1985 to somewhere near 16 percent in 1995.

Before the end of the five-year period, subsequent changes in the tariff schedule reduced the tariff levels even further with the passage of Executive Order 189 which cut down tariff duties on capital equipment to 10 percent and machinery spare parts to 3 percent. Shortly thereafter, Executive Order 264 and Executive Order 288 further reduced the duty on industrial and agricultural products.

The multi-year program of tariff reduction is expected to bring 767 tariff lines to 0 to 10 percent by 2000, after which only two levels will apply: 3 percent for raw materials and 10 percent for finished products by 2003. The Philippines has announced its intention to reach a uniform level of tariff of 5 percent for all industrial products by 2004.

Hiding behind protective walls. The intransigence of some sectors, which remain behind protective tariffs and continue to lobby for exclusion from the CEPT reduction program, is a challenge to ASEAN leaders. Other nontariff barriers, including state trading operations, the

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use of export taxes, arbitrar y customs procedures and abuse in the application of the rules of origin, undermine the success of the CEPT program.

Recommendations Based on the above, the following recommendations are hereby offered: ] There should be full transparency in the rules of the game. This is essential in the administration of a complex undertaking such as the CEPT program. ] There should be a harmonization of customs tariff schedules along the line of the scheme adopted by the European Community. This will facilitate the progress of the future exchanges of concessions under the CEPT. ] Adopt the standard use of ad valorem tariffs (a tariff based on a rate percent of the value of a product rather than a specific sum for a given quantity of number) instead of specific or compound tariffs. This will help make cross-countr y comparisons less tedious in the future.

Thinking ahead: policy implications for the Philippines What are the implications for policy that may be drawn from all of these? ] Countries such as Thailand, Malaysia and Indonesia continue to pursue protective tendencies through

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tariffs. Given the similarity of our production mix, what effect will this have on Philippine industries? ] Under the unilateral reform programs undertaken by ASEAN countries, exceptions had been made for certain industries. This trend carries over to the area of CEPT concessions resulting in the application of higher rates or special exclusions. The Philippine government makes no such exceptions (to the consternation of Philippine producers). In view of this, the prospect of adopting a uniform 5 percent tariff in the very near future needs to be justified due to ver y real threats from alternative suppliers in the ASEAN region. ] With the cumulative rules of origin, Singapore is likely to be the biggest beneficiar y of the CEPT program. How does the Philippine government propose to counter this trend? What steps should it take to make the benefits from the CEPT more equitably distributed?

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For further information, please contact The Research Information Staff Philippine Institute for Development Studies NEDA sa Makati Building, 106 Amorsolo Street Legaspi Village, Makati City Telephone Nos: 8924059 and 8935705; Fax Nos: 8939589 and 8161091 E-mail: jliguton@pidsnet.pids.gov.ph, publications@pidsnet.pids.gov.ph