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Taxing vehicle imports

/ 04:07 AM January 11, 2021

The local automotive industry was estimated to have suffered a nearly 50-percent decline in sales last year, not only because of the COVID-19 pandemic but also due to the disruption in supply caused by the eruption of Taal Volcano in January 2020 and a series of typhoons that struck the country.

In August last year, the automotive industry asked the Department of Trade and Industry (DTI) for support as the pandemic could lead to worse problems such as layoffs, rather than just fewer car sales. Vehicle sales had fallen by 48.7 percent in the seven months to July or before the appeal for help, according to data from the Chamber of Automotive Manufacturers of the Philippines Inc. and the Truck Manufacturers Association.

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Last week, Trade and Industry Secretary Ramon Lopez surprised the industry not with measures to assist it to survive the slump. Instead, he said he was imposing a tax on all imported vehicles. That tax is referred to as a provisional safeguard duty in the form of a cash bond amounting to P70,000 per unit of imported passenger cars and P110,000 per unit of imported light commercial vehicles. It was, in the words of the DTI official, intended to save jobs in assembly and manufacturing plants.

It may be a well-intentioned measure, but many are expressing fear that it is overshadowed by its bad timing. While safeguard measures are imposed by the government if a surge in imports is found to have seriously injured a local industry or at least threatens to cause serious injury, what this additional tax will likely injure is the very industry it seeks to protect. Safeguard measures usually involve local companies that claim to be hurt by too many imports. This case, however, was not started by big local players such as Toyota Motor Philippines Corp., Mitsubishi Motors Philippines, or Hyundai Philippines, which are actually opposing the safeguard duty. Instead, unionized workers initiated the move, filing a petition for the safeguard measure back in 2019 through the Philippine Metalworkers Alliance. With some 13,000 members, it said the surge in imports had been hurting local jobs.

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The DTI, in siding with the workers, cited data from the Philippine Statistics Authority showing that the jobs in the manufacturing sector of motor vehicles saw an 8-percent drop in 2018 from 90,275 workers in 2017. The DTI also noted that imports of passenger cars rose by an average of 35 percent during the period of its investigation from 2014 to 2018, with imports exceeding domestic production. Imports of light commercial vehicles, which include pick-up trucks, surged during the period from 17,273 units in 2014 to 51,969 units in 2018.

What seems ironic, however, is that these imports were made by the companies that make up what the DTI calls the local automotive industry, which employs the workers the department seeks to protect. They will now be burdened by the safeguard duty designed to protect them in the first place. Thailand and Indonesia accounted for 70 percent of the imported vehicles during the DTI’s review period, shipping 428,000 units and 312,000 units, respectively. These countries have been exporting cars to the Philippines at zero tariff since 2015 due to a Free Trade Agreement among members of the Association of Southeast Asian Nations. Toyota and Mitsubishi, for example, have manufacturing hubs in the two countries and import some of their models being sold in the Philippines.

It’s true that the government is not banning the sale of imported units, only making them more expensive purportedly to protect jobs in local assembly lines. However, these same jobs will be at risk if sales of current assemblers decline due to the additional tax burden on their imports that, in turn, will increase selling cost. If assemblers decide to absorb the cost, they will need to offset this by cutting their own cost structure, and the possibility of laying off workers will be on the table.

Consumers do have other options, and dealers can now sell more of the locally made vehicles such as Toyota Vios and Innova and Mitsubishi Mirage and L300, the prices of which are not affected by the tax. However, other models that make up the local assemblers’ sales are imported. Any additional tax on them will impact on their bottom line, at a time when such bottom lines have been eroded by the successive shocks to the economy. It’s also unclear how the small cars like the Vios and Mirage can replace the surging demand for pick-up vehicles that many Filipinos use for their small businesses.

Whatever reasons the DTI may have for imposing the additional tax on vehicle imports, its timing seems off, considering the current plight of local assemblers. It would not be meeting stiff opposition from the industry itself had the DTI waited at least until local assemblers had recovered somewhat from the pandemic.

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