Unfair protection

Local cement manufacturers appear to have succeeded in presenting a convincing storyline to the Department of Trade and Industry about the alleged destructive impact of imports on their profitability.

Last week, the DTI announced the imposition of a provisional safeguard duty on imported cement starting next month, claiming it needed to protect local manufacturers who were at a disadvantage because of cheap imports.

“With the elements of surge and injury clearly established, DTI is mandated to impose a safeguard duty. DTI is thus imposing a provisional safeguard duty of P8.40 per [200-kilo] bag, equivalent to about 4 percent,” Trade Secretary Ramon M. Lopez told reporters covering him. That’s an additional tax of 4 percent on imported cement.

Citing findings of his office’s probe, Lopez noted that imported cement surged to more than 3 million metric tons (MT) in 2017 from just 3,558 MT in 2013, while the share of imports by nonmanufacturers or “pure” traders increased to 15 percent from only 0.02 percent during the same four-year period.

Well then, who imported the remaining 85 percent during the period?

None other than cement manufacturers who cannot increase local production to meet the surging demand of a booming construction sector. This meant local production remained largely inadequate to meet demand.

The Duterte administration is pushing aggressively its “Build, build, build” infrastructure program, which seeks to spend as much as P9 trillion on airports, railways, roads, bridges and other public works projects until its term ends in 2022.

Cement is a critical input to infrastructure, and any increase in prices will escalate the cost of those projects.

Lopez had promised that prices will not rise, warning cement manufacturers that the DTI “will closely monitor the selling price of cement manufacturers and ensure that they will not implement increases.”

However, prices in a free market are determined by supply and demand. Prices go down when supply floods the market, and prices go up when demand is more than what manufacturers can produce.

Efforts to control prices by the government have always been futile, at times even causing prices to rise further as fears of shortages trigger hoarding.

Despite warnings of the new tax’s possible impact on the government’s infrastructure push, Lopez insisted there would be sufficient supply, noting that domestic capacity was 35 million MT a year against current demand of 25 million MT.

Cement importers have warned that the new safeguard duty will force them to stop importing cement, as the additional tax will simply eat up whatever profit margin they make. They have expressed fear that once the business becomes unprofitable because of the additional tax, the country will be less equipped to handle supply shortfall.

Besides, it is difficult to understand how the DTI can say that local cement manufacturers can adequately produce enough to meet demand, when these manufacturers themselves have been importing to fill supply shortfalls in the local market.

In 2018, they accounted for 36 percent of total cement imports, according to the Philippine Cement Importers Association. In short, why do cement makers import if local production is enough to meet demand?

Another problem is whether local manufacturers can step up production quickly enough to cover any supply shortfall when importers stop importing because of the additional tax.

The second argument used to impose the safeguard duty was that the local cement industry experienced a sharp decline in income of 49 percent in 2017. The declining profitability, however, did not necessarily mean it was caused solely by the influx of imports. Production inefficiency could be a major factor, too.

This has been a lingering problem in governance. Previous administrations just kept on protecting industries without requiring them to keep up with global standards in terms of production efficiency to keep costs down over a given number of years.

No wonder some industries remain “infants” that continue to rely on government protection against imports for decades. Cement is obviously one of them.