- Fermin D. Adriano
Rice Tarrification: Good or Bad for the Country?
How should government manage its rice imports? Can we ever be rice sufficient? Resurgent contributor Fermin D. Adriano explains the economics of this enduring but controversial "political crop."
A milestone reform agenda in Philippine agriculture introduced by the Duterte administration is the lifting of the “quantitative restriction” (QR) on imported rice to be replaced by tariff (import tax) by end of June this year. The policy shift means that any importer who can pay the appropriate tax to be imposed by the government on imported rice can bring in rice to the country. Under a QR regime, rice importation is only allowed by the government on the basis of its calculation of how much rice the country needs to import on an annual basis.
Part of the agricultural liberalization accord when we joined the World Trade Organization (WTO) in 1994 was that all agricultural commodities under QRs shall be replaced by tariffs by country-signatories. However, the Philippines, Japan, South Korea and Israel bargained that it should keep its QRs on rice for some time because of its importance as a political commodity. WTO acceded but the exemption made was time-bound. The three other countries (i.e., Japan, South Korea and Israel) already lifted their QRs on rice in favor of tariffs, leaving the Philippines the only country remaining under the old QR regime. The Duterte administration decided that it is time for the QR to go by middle of this year.
Why the need for QR?
Those who favor the maintenance of a QR regime on rice cite three major reasons for its necessity. One, during the debate on whether we would ascend to the WTO or not in 1994, pro-QR “intellectuals” noted that our rice farmers could not compete with their foreign counterparts because of the subsidies given to the latter by their respective government to make them efficient rice producers. Note that 25 years after we joined WTO, the pro-QR “intellectuals” still peddle the same argument!
Two, there is thin supply of tradeable rice in the global market (which is around 7 percent, USDA 2016). The country cannot be left to the mercy of the whims of the global market and hence, the necessity of being “rice self-sufficient” because of the strategic importance of rice to the Filipino consumers, particularly the poor. QR is a key policy instrument in our drive to become self-sufficient. Again, despite the extension of QR for 25 years and that almost a quarter of the Department of Agriculture’s (DA) budget went to rice productivity enhancement programs, we remain a net rice importer averaging 10% of our rice consumption requirement throughout these years. In fact, an article by Briones and Olivar (2015)shows that for the last hundred years, we only experienced being a rice surplus producer for 9 years!
And three, we need to protect our rice farmers from low-priced imported rice. Our rice farmers will have a hard time competing with the low-priced imported rice which means that they have to abandon rice farming altogether in favor of higher value crops to be able to economically survive. Poor as they are, they will become poorer. Because they are poor, pro-QR “intellectuals” further argue that rice farmers and their family are also rice consumers when their rice stock is depleted even before the onset of the next harvest season. Thus, the need to maintain a protective wall against the entry of rice imports to enable them to survive!
But the arguments of the pro-QR “intellectuals” are founded on flawed logic. First, if we could not become efficient (competitive) rice producers after 25 years and after spending nearly three-fourths of the DA’s budget  on rice productivity enhancement programs throughout those years, there is no assurance that we will ever be able to be competitive rice producers in the future. The reason has nothing to do with the efficiency of our rice producers or the budget that we put into it; the simple reason is that the country is not naturally endowed  to become competitive rice producers. Unlike Vietnam, Thailand and Myanmar which have vast tracts of contiguous land irrigated by the expansive Mekong river, the Philippines is an archipelagic country whose islands are mostly mountainous and sloping. It will take more resources to irrigate its lands given the relative difficulty of accessing fresh water sources. We simply do not have, as economists term it, a “comparative advantage” in rice production.
Second, the country is not entirely relying on the thin supply of tradeable rice at the global market with the shift from QR to tariff . What tarrification is doing is just to make rice trading a more transparent process instead of being held at the whims of government officials. Stories of corruption abound on rice purchase of the NFA, the purchase of rice on a government-to-government basis, and the allocation of the minimum access volume (MAV or in-quota) of rice to favored groups and cooperatives. All of these are due to the opaque manner by which rice trading is conducted under the QR regime. So much leeway is given to government officials to decide on how much to import, at what price, when to import and where to distribute imported rice. As we all know, many government officials are neither angels nor saints who can resist tempting offers from vested interest groups.
If the shift to tariff is made, there is no need for under-the-table deals with NFA or other concerned government officials because any importer who can pay the taxes on imported rice can bring the goods in. Also, government will benefit from increased revenues from taxes collected from imported rice.
But what about the argument that tarrification will result in higher rice smuggling? Theoretically, it would if the tariff is set so high. This means that if the price of imported rice plus the tariff imposed is higher than the local price, there will be an incentive to smuggle rice to avoid paying taxes. But the argument gains greater traction under a QR regime because if the cost of imported rice is much cheaper than the local price, then windfall profits can be realized in rice smuggling. This is the primary reason why rice smuggling flourished during the Aquino administration wherein the US Department of Agriculture FAS Manila estimated, based on industry sources, that smuggled rice to the Philippines amounted to 400,000-600,000 metric tons per year from market years 2012/13-2015/16.
And three, the argument that QR is needed to protect the welfare of poor rice farmers and consumers is inherently flawed using simple arithmetic. Our population is around 100 million, most of whom eat rice as a staple food. Assuming that, we have 10 million rice farmers and their dependents relying on rice farming for their income . Due to the entry of cheap imported rice, the tendency of rice prices is to go down. Undoubtedly, this will have a net beneficial effect on the welfare of the 90 million rice consuming Filipinos. On the other hand, cheap imported rice will adversely affect the income of 10 million rice farmers and their dependents because the former will reduce the selling price of their produce.
In a situation wherein 30-40% of food expenditures of the poorest segment of the Filipinos goes to rice purchase, lower rice prices will mean savings for them, savings that they can either use to buy more nutritious food items or other basic needs of the family (i.e., clothing, shoes, etc.). On the other hand, rice farmers will at face value, lose but will also be partly be benefited by lower rice prices by virtue of being rice buyers during the time when their rice stock is depleted.
The solution lies in providing social protection to affected farmers by cushioning the impact of rice tarrification. Note that not all rice farmers will be equally adversely affected by tarrification given that the great majority of our rice tillers are competitive (efficient producers). What will be crucial is to assist those who will lose out from the reform measure by encouraging them to shift to the production of high-value crops or providing them skills for other livelihood projects. For the rest, government can help them by providing greater assistance that will improve their productivity such as irrigation, fertilizer, subsidized credit, improving farm to market roads, post-harvest facilities and more effective extension support services. The funds for this social protection program can be sourced from the tax collected from imported rice.
The government now has a farm registry that identifies who the active farmers are in the countryside. There is still a lot of work to be done to make it a better system. But it can be the start of a targeted social protection program for the rice farmers who will be negatively affected by tarrification.
The DA should be moving towards this direction instead of nostalgically wishing for the extension of the Jurassic measure called QR on rice. It should listen to agricultural economists who have advocated for more than thirty years for this reform measure rather than to ideologues. It is about time that we become more scientific in our policy-making process on agriculture.
1. To the detriment of other major agricultural commodities such as coconut, corn, sugar and cassava, which also need major funding support, particularly on R&D, to increase productivity. The “poorest of the poor” Filipinos are in the coconut, corn and municipal fishery sectors.
2. A good analogy is our passion for basketball, a game to which we will never excel at the international level no matter how much money we pour in to its development because we are not “genetically predisposed” to meet international success in the game.
3. A previous mechanism proposed to cushion us from the so-called thin supply of tradeable rice at the global market was to forge an agreement with rice-surplus producing countries (i.e., Vietnam, Thailand and Myanmar) in the ASEAN to set aside a certain portion of their production as buffer stock for emergency purposes. Rice deficit countries like the Philippines, Indonesia and Malaysia will have a priority access to this buffer stock when they need it provided that they pay a subscription premium to this stock during a certain period of time (i.e., right after harvest season) till they need it during their lean rice season. If the subscription time elapsed without the rice-deficit countries securing stock or just partially securing the stock, the rice-surplus countries can sell the stock to the open market. The arrangement offers a number of benefits to the country because: (a) it is guaranteed of supply during the lean months when it needed the grains most; (b) it will reduce government expenses because it does not need to ship and stock the grains in the Philippines but will only do so when it needed the supply; and (c) it will lessen corruption as it does away with government-to-government transactions which are so opaque that it encourages corruption among government officials involved in the negotiations. Unfortunately, the proposal did not meet the approval of our previous government officials.
4. Households of rice farmers do not solely rely on rice farming for their income. They are engaged in variety of livelihood activities, such as poultry raising, vegetable gardening, piggery, tricycle driving, etc. to augment their income derived from rice cultivation.
(Fermin D. Adriano, PhD. serves as Professorial Lecturer at UP Los Banos’ College of Public Administration, teaching development studies at its doctorate program. The author wishes to thank Dr. Rolando T. Dy and Mr. Senen Reyes for reviewing the paper.)