Tariffs, triumphs and thoroughness
Thoroughness is the key for tariffs to result in triumphs for both consumers and producers.
This is especially important today since tariff charges are being considered to address our pork crisis. The pork price has significantly increased, partly causing an inflation uptick that should be controlled immediately.
Tariff levels are a critical strategy for national economic development.
If they are too high, they cuddle inefficient local producers. Consumers lose because they are forced to buy unnecessarily expensive products.
If tariffs are too low, our producers will not be able to compete with imported products. Jobs will be lost and, with few options available, poverty will increase.
The pork tariff levels today appear to have been working well. They are now at 40 percent. A small volume of 54,000 tons is given an in-quota 30-percent tariff because of special negotiated agreements.
There is currently a proposal that for the targeted 400,000 imported tons, the 30 percent in-quota tariff will be reduced to 5 percent for the first six months and 10 percent for the next six months. For the remainder (77 percent), the out-quota 40 percent tariff will be reduced to 15 percent for the first period and 20 percent for the next.
These proposals follow the conclusion of some economists that tariff reductions will motivate importers to buy more. This will therefore increase supply. But businessmen will argue that a thorough practical analysis will show that this does not need to be done. A known and respected importer said that even with the current tariff levels, a pork importer will make an annual 120 percent incremental return on investment (ROI), assuming a slow turnover of only one transaction a month.
But since the transactions are usually at least once a week, the resulting 480 percent ROI is enough motivation to import. Any additional cost savings from reduced tariffs is not needed to motivate the desired imports, since the volume required is manageable at 400,000 tons.
There are enough importers who want to import this quantity and get the high ROI with the current tariffs. If they get additional tariff reductions, they will be extremely triumphant with a windfall that they do not need. But the hog producers and backyard raisers will be unhappy. They will lose the P12 billion foregone revenue from these reductions that they should get for their ailing industry. This P12 billion will instead be given to the importers and traders.
Tragically, there is a recent second proposal to extend the in-quota benefits for all the 400,000 imported tons. If approved, the total forgone amount will increase to P17 billion, all going again to the importers and traders, and none to the swine industry.
An economist went even further and suggested that all 400,000 tons should get a standard 5-percent tariff. But an industry leader asked if the scenario building done usually by businessmen was carried out for the 5-percent tariff proposal. “Why 5 percent?” he asked. “Would the behavior be different if it were 10 percent, or 20 percent, or 30 percent? If a salesman will work to his maximum with a million peso bonus, why should I give him an extra million if he will produce the same amount? In the same way, if we get the targeted 400,000 tons with a 20-percent tariff, why should we give a 5-percent tariff? Is it not known that a 15-percent difference is worth P8 billion? Was a thorough analysis done before the 5 percent recommendation?
Besides, there is no need for any tariff reduction, because the desired behavior will come from the many importers who want the high ROI for the limited 400,000 tons. Let the swine industry get this money, for they need it much more.”
It is best that the incisive macroeconomic projections of economists are supplemented with the practical operational insights of businessmen to develop the optimal, synergistic proposals.
In the area of price ceilings, the lack of thoroughness with inadequate consultations resulted in a P270-P300 price range. Hog producers and those along the pork supply chain were penalized because they did not make money, while consumers also suffered because supply dried up. We commend the Department of Agriculture (DA) for calling a pork price meeting last Friday, Feb. 27.
The DA competently assembled in one meeting all the players in the supply chain (hog producers, backyard raiders, viajeros, processors, market vendors, etc). With commendable thoroughness, they agreed on a recommended price range of P330-P360. This is a significant decrease from previous prices that would go unpunished for as high as P450. The product can now be sold with all the players making enough money. Those selling above this range would be penalized. If this new price range is implemented, this thoroughness will mean a win for both the producers and consumers.
In areas such as tariffs, price ceilings, and a host of other issues, commitment and hard work must be supplemented with determined thoroughness. This will then make triumph an achievable goal for all.
The author is Agriwatch chair, former secretary of presidential programs and projects and former undersecretary of DA and DTI. Contact is [email protected].
