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Friday, March 29, 2024

Executive Order 128: An economically flawed measure

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Executive Order 128: An economically flawed measure"The problem could have been addressed more rationally."

 

 

Tariff policy is a very important part of a country’s economic policy, but tariffs do not get into newspaper headlines on the television news as often and as prominently as interest rates, bank regulations or budget appropriations. Still, tariffs do occasionally get into the headlines and the TV news. That happened recently in the case of the public outcry over the pork-supply decline – and the resulting price increases – caused by the ASF (African swine fever) outbreak in this country’s farms.

The hike in pork prices could be contained only by restoring pork-market equilibrium, and the only way to do that was to make possible an increase in the supply of that food item. In quick order, the Secretary of Agriculture and the economic managers prevailed upon President Rodrigo Duterte to issue EO (Executive Order) 128. The EO did two things: It raised the MAV (maximum access volume) for pork imports to 405,000 metric tons (MT) from 54,000 MT and it reduced the tariff on EO 128 imports to a time-bound 5 percent from 40 percent. In one fell swoop the economic managers negatively affected the operations of this country’s commercial and non-commercial hog raisers (because of the inroads of foreign suppliers into this country’s pork market and the government’s revenue from the pork import tariff.)

A good case can be made for the increase – a massive increase, to be sure – in the MAV for pork imports, what my economics training prevents me from comprehending is the precipitous decrease in the tariff on pork. Yes, by all means bring in foreign pork sufficient to fill the market gap, but why must it come into this country on a virtually tariff-free basis? Would the foreign producers not export pork to this country on the basis of the previous tariff? Would they – and their agents in this country – not be able to export profitably with a 40 percent tariff? I have yet to see an economically rational presentation of the case for the concurrent reduction – a very sharp one, I stress – in the tariff on pork imports. The domestic hog-raising industry cannot be blamed if they feel that the economic managers dealt them a double-whammy. 

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Tariffs are one of the most powerful weapons in a government’s economic armory. Indeed, history tells us that the massive use of tariffs by one country against another has been the cause of, or has very nearly caused, the outbreak of war. In today’s geopolitical scene, the industrial and agricultural producers of the U.S. and China – the world’s greatest economic powers – can only suffer in silence as their leaders throw tariffs at one another in highly acrimonious fashion.

Punishment is not the only purpose of a tariff. A tariff is a multi-faceted economic tool. It can partake of favor-giving, as when one country sets a preferential tariff for a favored country. A tariff can likewise be a tool for providing encouragement or deploying attraction; thus a key element of investment incentive programs is the offering of a preferential tariff regime.

But the most important objectives of a tariff are protection and revenue-raising. Although the WTO (World Trade Organization) is now very much in the picture where trade protection is concerned, tariffs are still widely used to provide protection for domestic industries, especially at their nascent stage. If this country wants to develop a meat-processing industry, adequate protection has to be provided.

The precipitous reduction in the tariff on pork imports will necessarily entail a drop in government revenue from this source. A government with a treasury as strapped as the Philippine government must think twice before deciding to forego revenue. The EO has caused a significant drop in pork-tariff revenue. 

In sum, EO 128 is an economically flawed response to the pork shortage. The problem could have been addressed more rationally.

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