Statutory import liberalization is inadequate for pork and rice

I talked to a leader of a fairly large pig raisers association. He confirmed that pork prices had remained high despite the lowering of pork tariffs this year. I heard that Secretary William Dar conducted a meeting of his officials to inquire into what has happened. If the purpose of lowering tariffs was to reduce pork prices to pre-African Swine Fever (ASF) levels, why has it not accomplished its objective?

One likely answer comes from the law of supply and demand: imported pork had not really entered the country in the quantities expected by those concerned about the lowering of pork tariffs. Industry leaders and their supporters in the Senate were opposed to the proposal to temporarily reduce tariffs because that would have “killed” the industry much faster than the ASF.

One may observe that statutory reduction of tariffs is inadequate to immediately reduce local prices of the imported substitutes. It may not be in all situations, but it applies very well for imported pork. There are two constraints to pork importation after tariffs were lowered. One is the ASF itself. With ASF outbreaks in many pig producing countries, the supply of imported pork is difficult to find. An importer may find the cost of imported pork higher because regionally there is a shortage of it due to ASF, and supply search costs can be significant.

But there are other countries which are ASF-free, such as the United States, Taiwan, and a few other countries in the EU like Germany. While true, it takes time for our importers to establish transactional relationships with pork suppliers in those countries. This can still be search costs. After all, if not for the outbreak of ASF here, our market in the eyes of pork exporters is small, capped in only tens of thousand tons by the government because we are protecting our local producers.

The other constraint is the lack of cold storage and cold chain logistics to move around frozen pork. The country’s cold chain system has not been designed to accommodate significant volumes of imported pork. Importers have to compete with other users of cold chain facilities in the country. That raises the cost of imported pork.

Both constraints manifest themselves in higher prices of pork in world markets and storage costs locally. These are still legitimate costs, that would help explain why the quantities of imported pork had not come in the expected quantities. It is not surprising that pork prices had not really gone down to pre-ASF levels.

Let us compare the reduction of pork tariffs with the rice tariffication law. To recall, the 2019 law ended the import monopoly of the National Food Authority (NFA) in rice and effectively reduced rice tariffs to 35%. The law allowed any of us to import rice subject to the phytosanitary import permit from the Bureau of Plant Industry.

There was no shortage in rice in mainland Southeast Asia, our primary source of imported rice. Imported rice requires no specialized storage facilities such as for frozen pork.

Wholesale rice prices in the National Capital Region (NCR) dropped by 14.4% in 2019 from 2018. The reduction was significant but less than what was expected based on the reduction of the rice import tariff to 35%. Imported rice should have fetched a price of nearly P30 to a kilo, but wholesale prices ended the year nearly P4 higher.

The rice import business can be viable for smaller firms. Why then did new importers stay out of the import business? Or we may ask, why then did existing big importers not increase further the quantities they imported? The P4 margin is still significant enough to compete for.

One possible explanation is that existing or the large experienced importers may have found themselves searching for more supply of rice. We have taken for granted that the world supply of rice is huge. It is not. Only about 4% to 6% of global production is exported by surplus countries.

The Philippines has been competing with Indonesia to become the world’s largest rice importer. In fact, we were in 2008. Indeed, the NFA’s significant importation that year jacked up the world price of rice then, so much so that Thailand had to request the Philippines to stop importing so as not to increase prices further.

Our decision to liberalize rice importation might have pushed prices of imported rice up because of potential added demand from Philippines. Importers might have found themselves importing at increasing costs, which explains why the quantities that were brought into the country in 2019 fell short of expected.

But if rice can be viable for smaller firms, why do those not even into rice trading yet, like you and I, not enter the import business? The inexperience of these potential entrants in the trade can become a significant entry barrier. Eventually, if they study the trade carefully, ordinary businessmen not into this business will learn the trade and import rice. But they need time.

From both experiences in liberalizing imported food items, pork and rice, one may observe that statutory trade reforms are not enough. Import restrictions had been an important barrier, but once these are removed by law, new barriers to import emerge. This may not always apply to each imported food item. But in a few like pork and rice, it is useful to make a more wholistic assessment of the barriers to imports.

There is potentially another barrier when it comes to importing food items: sanitary and phytosanitary (SPS) import permits. SPS measures are necessary to protect our local food industries, like pork or rice, from pests or diseases that may be brought into the country through imports. They are legitimate regulations, but should be implemented as automatic import licenses, i.e., when the product meets the standards, SPS regulators should grant the permit. They are not designed to control the volume of imports to limit the competition in the local market, and thus protect local producers from competition.

But these measures can be abused, i.e., they can become de facto instruments to limit the volume of imports or the number of importers, who can go into the import business. Potential entrants into the business of importing food items may find these regulations become the new import barrier.

 

Ramon L. Clarete Is a professor at the University of the Philippines School of Economics.