Stacked against small business

A recent direct experience gave me yet another firsthand sense of why the odds are truly stacked against small businesses in our country. Picture a small entrepreneur for whom power tools are vital to his trade. A piece of equipment sourced from overseas turns out to be faulty and a part needs to be replaced for it to function properly. He contacts the China supplier, who kindly agrees to replace and ship the faulty part, a flat small metal tabletop, for free. But on its arrival here, the hapless entrepreneur spent nearly 10 times the value of the part itself just to claim it—a huge dent on the finances of his struggling business.

That struggling entrepreneur is my son, an artist who designs and produces finely crafted wood products in his little workshop. His experience has deeply discouraged him and led him to rethink his occupation. I feel bad, because it has been my public advocacy to preach entrepreneurship and micro-, small and medium enterprise (MSME) development over many years, but witnessing similar experiences by other small entrepreneurs, I keep seeing how much of an uphill battle it is. And the sad fact is that it need not be so, if not for inordinate greed in certain places.

I’ve written before of how our MSMEs lag behind their Asia-Pacific counterparts on contributions to GDP, exports and employment. Comparative data compiled across the Asia-Pacific in 2015 showed that MSMEs contribute only 36 percent of our GDP, against Indonesia’s 56 percent and Vietnam’s more than 40 percent. MSMEs account for 61 percent of our total jobs, against 77, 84 and 92 percent, respectively, for Vietnam, Thailand and Indonesia.

There are various reasons why our small business sector lags behind, and I’ve dealt with them in past articles. Often overlooked is one particular hurdle for our small firms: very high trade costs, which makes sourcing of often cheaper raw materials, equipment and other inputs from overseas too costly or prohibitive to be an option.

How did my son’s $65 tabletop end up requiring P30,000 in payments before he finally got it? Don’t think it was Customs; it was not. No duties applied to the item as its value is under the “de minimis” threshold of $200, below which customs duties are waived. For that, we can thank the Customs Modernization and Tariff Act of 2016 (Republic Act No. 10863) that finally set our de minimis value to the world norm. For decades, it was at the ridiculous amount of P10, so everything above that value was subject to customs examination and taxation—but our law finally caught up with that.

With the help of an industry insider friend, I found that the greed lies somewhere else in the trade chain. It comes out when one brings in a “break-bulk” or LCL (less than container load) shipment, which would inevitably be the case for small firms. It turns out that shared containers are not handled by the port operators but transferred off-dock to a container freight station (CFS) or warehouse. I’m told that these warehouse operators, organized under the Association of Off-Dock CFS Operators of the Philippines (Acop), operate like a cartel and are known to overcharge customers, who are mostly small firms, for their services. The industry practice is that Acop members share their windfall with freight forwarders via rebates.

How excessive are these overcharges? My son’s small tabletop is illustrative: We paid more than P7,000 for “warehouse charges”; P3,000 for trucking (as if that alone took most of the truck); two “forwarding charges” totaling more than P10,000; “customs processing” of P3,500 even as it fell under de minimis; and a host of other smaller charges.

All told, it can actually be cheaper to rent an entire 20-foot container for a small shipment rather than send it as LCL. The Bureau of Customs and the Department of Trade and Industry have tried to regulate such overcharging in the past, with off-and-on success.

My friend writes: “As it is now, the warehouse operators, in cahoots with certain freight forwarders, seem to be back to their old wicked ways, overcharging importers under the protection of certain customs officials. And yes, this is all at the expense of small entrepreneurs.”

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