Trump, transport, trade and TRAIN

President Duterte recently blamed US President Donald Trump for the rising inflation in the country, particularly the latter’s actions to raise import tariffs on goods coming from China. While Trump’s actions did have much to do with it, it was not so much his trade war with China, but more his sanctions on Iran, that has had a more direct bearing on our recent price hikes. This led markets to price in an expected fall in crude oil exports from Iran, a major source of global oil supplies.

Exactly a year ago, world crude oil price was $56 per barrel; now it’s $79—a 41-percent increase, translating to much higher petroleum product prices at the pump. Analysts have calculated that of the P11.40 per liter increase in diesel as of August, P8.60 came from the rise in crude oil prices, and P6.80 out of the P9.80 per liter increase in gasoline. Recent excise tax hikes on petroleum products were a minor factor in raising diesel and gasoline prices, accounting for only one-fourth (for diesel) to one-third (for gasoline) of the rise in pump prices.

It is widely presumed that petroleum product price increases raise all other prices in the economy, due to increased transport costs. While it’s true that transport costs figure in the prices that consumers pay for various commodities, the role of petroleum prices may be actually smaller than what most of us think.

Based on the input-output table of the Philippine economy from the Philippine Statistics Authority, transport contributes an average of only 1.2 percent of total costs across all industries in the economy. This ranges from negligible (in sewage and sanitation services) to a high of 10 percent (in tour and travel agencies). Petroleum products, in turn, contribute about 25 percent of the total costs of the transport industry. Thus, the actual cost impact of doubling petroleum prices should be at most 2.5 percent, and less than half a percent on the average.

The bigger factor fueling inflation has been exaggerated expectations on price increases. When producers and merchants raise their prices to cover expected increases in cost, and when their expectations exceed the actual cost effects, then prices will indeed go up higher than they should. This is why we say that price expectations tend to be self-fulfilling. The net effect is that profit margins actually end up increasing, to the benefit of producers and merchants, but at the expense of the rest of us.

There are also unscrupulous profiteers, especially where lack of competition makes it possible for certain merchants to unilaterally jack up prices, or control supplies reaching the market, via strategic hoarding. The only reliable way to deal with such malpractices is to ensure adequate competition in the market, by making it possible for anyone to trade in the commodity, including importation.

When trading is controlled (as in the National Food Authority’s traditional monopoly on rice imports) or restricted to a few licensed entities, such lack of competition is bound to happen. It’s for this reason that our economic managers are calling for the removal of various licensing functions of the NFA, along with the removal of its trading functions, and shifting to rice import tariffs as our way of regulating imports.

Rice tariffication, hopefully passed by Congress soon, will be useless if competition that will drive down prices and raise quality will be negated by maintaining the NFA’s control of the rice trade every step of the way, via the licensing of every player in the rice value chain down to retail. It was, indeed, active trade liberalization that largely brought our inflation rates down to the low single digits since the 1990s.

And then there’s TRAIN, our much-bashed tax reform program. While much-needed and carefully designed, it unfortunately came at a bad time, when high world oil prices and the peso depreciation misled everyone to think it was the TRAIN running all over us that led to the price surges we are now seeing.

The most urgent need is to quell undue inflation expectations, and the measures government has lined up hope to do that. Our part is to moderate our fears, as these can only make things worse.

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