Low-hanging fruit

Nearly five years ago (in January 2010), import tariffs on more than 99 percent of all the products we trade with our Asean neighbors went down to zero, in accordance with the Asean Free Trade Agreement. I thus find it amusing every time I hear misinformed alarmists warn that our domestic producers will be drowned in a tsunami of Asean products by next year, when the Asean Economic Community (AEC) is said to take full effect. The only remaining Asean products not freely imported into the Philippines are actually rice, sugar and a few livestock products—and even these will still not go down to zero tariffs next year. Rice imports, for one, will continue being restricted at least until 2017.

If we’ve all but attained complete free trade in goods in the Asean, what else is left to do to achieve the single market and production base envisaged to mark the AEC? The fact is, even with almost all import duties gone, it’s still not that easy to move products—whether raw materials, intermediate inputs, or finished goods—across the region due to cumbersome border procedures that impede trade. Customs procedures and other government requirements on import and export transactions are not standardized and predictable, not to mention corruption and inefficiencies associated with such processes. As such, the transaction costs incurred to clear export and import shipments at the border can be as formidable as the import duties that used to prevail, often even more so.

For this reason, the prominent focus in trade agreements today, including in the AEC, World Trade Organization (WTO), Asia-Pacific Economic Cooperation and the brewing Trans Pacific Partnership, has shifted from trade liberalization to trade facilitation. The WTO defines it as “the simplification and harmonization of international trade procedures,” referring to “activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade.” The need to provide information, submit declarations and submit to border checks adds to business costs due to associated time delays, leading to forgone business opportunities and reducing competitiveness. The aim, then, is to maximize efficiency and reduce cost burdens associated with these trade processes, while safeguarding legitimate regulatory objectives.

From a development perspective, it is important to streamline and minimize disruptions to the movement of goods due to border procedures, to sustain the tremendous growth in cross-border movement of commodities that has happened over the years. The problem is that customs officers with ulterior motives do not see it in their interest to pursue such streamlining and facilitation, as the opportunities for illicit incomes through bribery and extortion are directly related to the greater complexity of procedures. On the other hand, fiscal authorities aiming to maximize revenue collections and plug leakages from corruption would also favor more rigid (hence cumbersome) controls and procedures. Either way, the impetus for trade facilitation is undermined.

But there can be win-win outcomes. A case in point is the need to drastically raise the customs “de minimis” threshold. “De minimis” in this context is defined as the threshold value for traded goods, below which no duty or tax is charged and clearance procedures are waived or reduced to a minimum. This is important because the administrative cost of examining, assessing and collecting duties on low-value items could end up exceeding the revenue collected, making the effort not just a waste of time and effort, but a losing proposition as well. Furthermore, the needed paperwork impedes the flow of trade and adds to transit time, thereby dampening trade in general. Clearly, customs officials would better spend their time focusing on items that can generate higher revenues.

Guess what our current de minimis value is? By law, it has remained at the princely sum of P10 or US$0.23, a level that had been set by our antiquated Tariff and Customs Code of the Philippines way back in 1957, or nearly six decades ago. This means that customs officials are still obliged to spend time and effort collecting duties even on shipments worth only that little. (This is even less than half the minimum transaction amount for which an invoice or receipt is required by the Bureau of Internal Revenue, which is P25!) So if your Amazon or eBay order for a $5 item still gets held up by the obligatory customs examination—and then you are made to pay duty on it too—blame it on our absurd de minimis threshold. And because it was set by law, only another law can change it. The customs modernization and tariff act bill pending in Congress proposes to raise this to a more realistic level of $100, among other things. An Apec study estimated that setting a $100 de minimis value would yield $19.8 billion in net benefits for all 21 Apec economies, in cost savings net of the minimal reduction in revenues. Setting it even higher at $200 would net $30.3 billion. And inasmuch as the bulk of low-value shipments is done by small and medium enterprises (SMEs), the dominant beneficiaries of raising the de minimis threshold and other trade facilitation measures would be the SMEs.

De minimis is just one of a number key trade facilitation measures that comprise a relatively small policy or administrative change, yet could pay off handsomely in substantial expansion in trade and economic activity (translation: jobs). It’s high time we gathered these low-hanging fruit toward boosting inclusive economic growth.

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