THE
TARIFF REFORM PROGRAM
1. What is the Tariff Reform Program?
The Tariff Reform Program (TRP) is the review/restructuring
of the Philippine tariff system that government undertakes
on a continuing basis to make the tariff structure
responsive to the needs of the economy taking into account
changing patterns in trade and advancements in technology.
2. What was the rationale behind the first TRP?
In the 1970’s,
industrial and trade policies were biased towards
import-substituting activities which resulted, among others,
in the overprotection of certain local, domestic
market-oriented industries. Said excessive protection, in
turn, led to market distortions that discriminated against
investments in agriculture and exports and encouraged the
production of finished consumer goods over intermediate and
capital goods.
The initiative
to reform the tariff system came from the recognition that
over two decades of protection through high tariffs have
proved counter-productive rather than supportive of the
country’s development objectives. Realizing the need for a
change in policy to remedy the situation, government policy
shifted the emphasis from import-substitution to promotion
of exports.
The government
embarked on a medium-term structural adjustment program
starting 1981 with the objective of altering the basic
structure of industry to make it more efficient and
competitive internationally. The two main instruments of
structural adjustment pursued by government were the Tariff
Reform Program and the Import Liberalization Program.
3. When was TRP-I undertaken? What was its
coverage?
The Tariff
Reform Program proceeded as scheduled from 1981 to 1985
while the Import Liberalization Program was briefly derailed
by the balance-of-payments crisis in 1983.
The tariff
review accompanying TRP-I covered all headings from Chapters
1 to 99 of the tariff schedule. The tariff modifications
were staged over a five-year period to cushion the impact of
the changes on the various sectors of the economy.
In the
institution of tariff reforms, a review of existing
protective rates was conducted to remove or phase out (a)
those which were excessive; (b) those which had outlived
their usefulness; and (c) where the burden of protection
outweighed the return. The modifications were expected to
induce a shift in the composition of imports of raw
materials from those with advanced processing to those which
are more basic or in crude form. TRP-I also emphasized
inter-industry and inter-sectoral linkages in the economy.
4.
What was the impact of TRP-I on the protection structure?
A. On
Nominal Tariffs
The tariff band
was narrowed from 10% - 100% to 10% - 50%. As a consequence,
the average nominal tariff fell from 42% in 1981 to 28% at the
end of TRP-I.
B. On
Effective Protection Rates
The Effective
Protection Rate (EPR) is defined as the percentage excess of
domestic value added, made possible by the imposition of tariffs
and other protective measures on the product and its inputs,
over world market value added. Generally, EPR
estimates are used to provide information on the amount of
government-provided protection that an industry receives.
TRP-I restructured
the system of protection to industries into one less biased
towards any particular industry or industry group.
Specifically, the objective was to keep industry EPR’s within a
range of 10% - 80% from the then prevailing schedule of EPR’s
which ranged from excessively high to excessively low levels.
TRP-I resulted in
the overall reduction and evening out of EPR’s across
industries. On the average, the EPR for primary and
agricultural industries continued to receive a low of 3%. The
EPR for manufacturing industries declined from 66% (pre-TRP) to
36%.
5. What was the rationale behind the second TRP?
The rationale of
TRP-II was to reduce the overall level of protection and
disperse tariff protection within and across industries.
Government was also following through on its policy of
de-emphasizing the role of tariffs in industrial and trade
promotion. The reforms were aimed at achieving the following:
more efficient resource allocation; improved access of
industry to essential inputs at lower prices; availability of
more affordable and better-quality goods for consumers; and
enhanced competitiveness of local industries in the domestic
and export markets.
6. What was the coverage of TRP-II? When was it
undertaken?
The new package
of tariff adjustments under TRP-II was promulgated under
Executive Order (E.O.) No. 470 signed by the President on July
20, 1991 and became effective on August 24, 1991.
E.O. 470
incorporated a five-year phase-in period from 1991 to 1995 and
transition rates to provide local industries reasonable time
to make the necessary adjustments. The E.O. covered some 80%
of the Tariff and Customs Code (TCC).
The number of
Harmonized Commodity Classification and Coding System (HS)
lines was reduced by 10%, from 6,193 tariff lines to 5,561
lines. This reduction, which made for easier customs
administration, was due to the simplification of tariff
nomenclature (e.g., tariff lines that would eventually
have the same rates of duty were combined into a single line)
but such nomenclature modification adhered faithfully to the
basic text of the international Harmonized System.
7. What was the impact of TRP-II on the protection
structure?
A. On
Nominal Tariffs
The final rates
under E.O. 470 clustered around four levels: 3%, 10%, 20% and
30%. Fully 95% of total tariff lines were dutiable at these
rates in July 1995. However, E.O. 470 imposed duties of zero,
5%, 15%, 25% and 50% on a limited number of items.
Under E.O. 470,
the average nominal tariff was reduced from the pre-E.O. 470
level of 28% to only 20% at the end of the period. Among the
three major industrial sectors, manufacturing registered the
biggest reduction in tariffs, from 27% before E.O. 470 to only
19% by 1995. For agriculture, the average tariff declined by
20%, from the pre-E.O. 470 level of 35% to 28% in 1995. The
more moderate reduction in agricultural tariffs was a
consequence of the decision to protect sensitive agricultural
products by retaining their tariffs at 50%.
E.O. 470 was
eventually overtaken by the third tariff reform program.
B.
On Effective Protection Rates
Under E.O. 470, a
substantial decline in the overall average EPR level was noted,
from 25% under the pre-E.O. 470 structure to 19% five years
after when the final duties were implemented. Along with the
decline in EPR levels, the structure of protection also
changed.
The tariff
restructuring reduced the bias against agriculture relative to
manufacturing. Specifically, effective rates of protection for
selected manufacturing industries which thrived under a highly
protected regime were reduced to more reasonable levels.
8. What were the objectives of TRP-III?
TRP-III further
liberalized the trade environment by reducing the level and
spread of tariff rates towards a uniform level of protection
across all sectors. It was aimed at promoting global
competitiveness, simplifying the tariff structure for ease of
customs administration, and providing a level playing field
for local manufacturers vis-à-vis foreign competition.
As stated in E.O.
264, the final rate structure under TRP-III will consist of a
uniform tariff rate of 5% by the year 2004, to be reached
after a penultimate stage of only two tariff rates: 3% (for
raw materials and intermediate goods) and 10% (for finished
products) in 2003.
9. When was TRP-III implemented?
The issuance of
E.O. 189 on July 18, 1994 marked the onset of TRP-III. Among
the major E.O.’s issued during this phase of the Program
were: E.O. 264 (effective August 28, 1995) which contained
the tariff modifications on industrial products, E.O. 288
(effective January 15, 1996) which set in place the tariff
reductions on non-sensitive agricultural products (those not
covered by quantitative restrictions), and E.O. 313 (effective
May 7, 1996) which provided interim tariff protection to
sensitive agricultural products. Such protection was deemed
necessary in view of the lifting of import restrictions as
part of the country’s commitment as a member of the World
Trade Organization. Under E.O. 313, 170 tariff lines were
subject to tariff quotas.
E.O. 461 which
took effect on January 4, 1998 and provided for a tariff of
3% on imported crude oil and refined petroleum products
concluded TRP-III.
10. What was the impact of TRP-III on the protection
structure?
A. On
Nominal Tariffs
TRP-III followed the basic 3%-10%-20%-30% tariff
structure first set in place under the second tariff reform
program. Thus, more than 95% of total tariff lines were
dutiable at any of these four (4) tariff levels from 1995 to
1997.
With respect to
tariff averages, the average nominal tariff declined from 19.72%
in 1994 to 13.43% in 1997. The average tariffs for the
agricultural sector were consistently above the overall tariff
average reflecting the higher tariff protection accorded to
sensitive agricultural products.
B. On
Effective Protection Rates
Following the
tariff restructuring, effective protection levels not only fell
but the bias against the agricultural/fishery/forestry sectors
relative to the manufacturing sector was also reduced.
11.
Why and when was TRP-IV undertaken?
TRP-IV was
initiated by a review and evaluation of the impact of the
pace of tariff reductions on the competitiveness of local
industries. The review also sought to smoothen the pace of
the schedule of tariff reduction for deserving industries and
correct any remaining distortions in the tariff structure.
The Commission
adopted a tariff recalibration scheme to serve as framework.
This scheme provided for a more flexible
3%-5%-7%-10%-15%-20%-25%-30% structure in place of the
3%-10%-20%-30% structure.
Twenty-two (22)
industries identified as "Philippine Winners" were initially
targeted for re-calibration of tariff rates. The products
covered by these industries, selected on the basis of their
global competitiveness (actual or latent), employment, and
inter-industry linkages, were: copper products; fertilizer;
motor vehicle parts and components; iron and steel products;
jewelry; electronics; ceramics; marble products; marine
products; processed foods; petrochemical and oleochemical
products; leather goods; footwear; lumber; particle board;
fiberboard; veneer and plywood; textiles and garments;
basketwork; seaweeds and carageenan; holiday décor; furniture;
and fresh fruits. The modified tariff schedules for these
items were implemented by E.O. 465 which took effect on
January 22, 1998.
Following the
issuance of E.O. 465, it was also considered necessary to
evaluate the tariff schedules of residual items to achieve a
total and comprehensive phased tariff reduction program. E.O.
486, which took effect on July 10, 1998 indicated the
re-calibrated tariff schedules for the residual items. It
also reduced to 144 the number of tariff lines subject to
tariff quotas.
Government’s
intent to reform the tariff structure was embodied in E.O. 334
that provided the tariff schedule from 2001 to 2004 for all
products (excluding certain meat products falling under HS
Chapter 2, rice, corn and sugar). On January 1, 2001, this
E.O. provided for the implementation of a tariff band of 0% -
5% by 2004 (except for a limited range of sensitive
agricultural products with a 2004 tariff rate of 30%).
12. What
is the current government strategy on tariffs?
During the
National Economic and Development Authority (NEDA) Board
Meeting on September 3, 2002, the President announced that,
given the government’s huge budget deficit, the government
could not afford to lower tariff rates at this time.
In October 2002,
the President ordered a review of the tariff liberalization
policies and programs with the end in view of encouraging
manufacturing.
In January 2003,
the President announced that the government was adopting the
policy of slowing down the pace of the tariff reform program
to the ASEAN Free Trade Area (AFTA) and World Trade
Organization (WTO) minimums, and that it was taking full
advantage of all exception windows allowed. In addition, plans
to support critical industries such as the steel, textile and
shipping industries were formulated.
13.
What measures has the government recently taken, through the
MFN tariff structure, to level the playing field for domestic
industries vis-à-vis unbridled globalization?
Even prior to
her recent policy statements on the tariff reform program, the
President was fully aware of the need to further support the
crucial agriculture and manufacturing sectors.
Thus, in March
and April 2002, the President issued EO’s 83 and 91 which
reduced to 1% the MFN tariff rates on various imported raw
materials, intermediate inputs, machinery and parts upon the
request of the concerned domestic industries.
This tariff
modification was intended to assist domestic industries to be
globally competitive vis-à-vis foreign counterparts and remain
viable in the face of economic difficulties.
The President
also signed EO 84 in March 2002 which provided the tariff
schedule from 2002 to 2004 on sensitive agricultural
products. Among the products covered were meat of swine,
sheep or goats, fresh, chilled or frozen; meat and edible
offal of ducks, geese, turkeys and guinea fowls, fresh,
chilled or frozen; cane or beet sugar, in solid form; and
maize (corn), with tariff rates ranging from 35% to 50% in
2003. The tariff structure prescribed by this EO was intended
to help the agriculture sector be more efficient and globally
competitive.
On January 10,
2003, the President signed EO 164 which maintained the 2002
levels of the tariff rates on products whose duties were
scheduled for reduction in 2003.
To provide
further tariff support to the agriculture and fisheries
sectors, the President also issued EO’s 196 and 197 on April
16, 2003. E.O. 196 reduced to 1% the MFN tariff rates on
critical inputs to the agriculture and fisheries sectors while
E.O. 197 raised the tariffs on certain vegetables from 7% to
20%/25%.
On October 2,
2003, the President issued E.O. 241 - the result of a
comprehensive tariff review that prescribed the 2003-2005 MFN
tariff schedule for locally produced industrial finished
products. On December 30, 2003, E.O. 264 was issued providing
the 2004-2005 tariffs for residual products not covered by E.O.
241. A number of EOs followed with the intent to provide an
enabling environment for local industries to attain global
competitiveness.
In 2004, the
ASEAN Harmonized Tariff Nomenclature (AHTN) was implemented as
a more product-specific nomenclature was required to
facilitate trade among ASEAN members. Tariff lines increased
and almost doubled from 2003.
Further tariff
adjustments took place in 2005. E.O. 450 promoted the
competitiveness of the paper and aerosol industries; E.O. 440
alleviated the impact on VAT on the increasing prices of
petroleum products. To encourage energy conservation and
independence in the transport sector, E.O. Nos. 419 and 449
were issued. E.O. Nos. 418, 443 and 477 were likewise issued
to support the Clean Air Act and to promote road safety.
The most recent
tariff review was conducted to set the tariff structure from
2006 to 2010. The results of this review took effect in 2007
with the issuance of E.O. 574.
From the first
TRP to the current tariff structure, staggered cuts were
implemented reducing the average tariff by 80% from 41.37% in
1980 to the current average of 7.82%. Deeper cuts were
applied during the 1st and 3rd TRP but
in 2002 government adopted the policy to decelerate the speed
of tariff reduction program to support critical industries. As
shown in Figure 1 while tariff continuously decreased in the
earlier years, average tariffs for agriculture and machinery
slightly increased in 2004 and have remained constant for the
succeeding year.
14. What appeals procedure is available to parties
interested in requesting tariff modification?
Petitions for
tariff modification may be filed by interested parties under
Section 401 of the Tariff and Customs Code (TCC), as amended.
The Tariff Commission conducts investigations on the petitions
it receives during which public hearings are held to afford
interested parties reasonable opportunities to present their
views. The Commission submits its findings and
recommendations to NEDA which then schedules these for
deliberation by the TRM Technical and Cabinet Committees.
Final approval is granted by the NEDA Board after which the
Commission prepares the implementing Executive Order for
signature of the President.
15. What is now the average MFN tariff?
Pursuant to E.O.
574, the overall average nominal tariff is 7.82% in 2007 (see
Table 1). Tariffs on the agriculture, fishery and forestry
sectors remain the highest, averaging about 12%, compared to
less than 3% for mining and 7% for manufacturing. Average
tariffs for agriculture, fishery and forestry are higher due
mainly to the greater tariff protection accorded to sensitive
agricultural products.
In terms of
effective protection, the agriculture, fishery and forestry
sectors and the manufacturing sector generally enjoy the same
level of protection (see Table 2). Overall and sector-wise,
effective protection levels have remained stable since 2005.
Of the total
11,490 AHTN lines in 2007, approximately 56% have tariff rates
of 0% to 5% (see Table 3). Tariff lines dutiable at 7% to
15% comprise 34%. The remaining 10% are high-tariff lines
with duties above 20%.
Figure 1
TABLE 1
Average
Nominal Tariffs: 2002 – 2007 (in percent)
