No Free Lunch

‘Worse than the disease’

/ 12:10 AM October 20, 2015

PROVIDED THAT the Senate does its part—and does it well—we should have another landmark law coming in November. It’s almost certain that the 16th Congress could add the Customs Modernization and Tariff Act (CMTA) to its list of key achievements. CMTA will overhaul the long-outdated 1978 Tariff and Customs Code of the Philippines, and according to a House briefer, “will help the country transform the Bureau of Customs (BoC) into a modern and efficient organization (on a) par with global standards.”

But there’s good news and bad news about CMTA.


The good news is that the CMTA bill has cleared the House of Representatives, and is due for plenary deliberations in the Senate. Pending for over a decade, it was filed in the 15th Congress, where it was also passed by the House but stalled in the Senate. It will overhaul the outdated customs provisions of the 1978 Tariff and Customs Code of the Philippines; only a decisive action by the Senate now stands in the way of its passage by Congress.

The bad news is that a provision was inserted at the eleventh hour in the House-approved version that directly contradicts the very name of the law. A whole new title was added providing for pre-shipment inspection (PSI, aka “load port survey”)—that is, having import shipments undergo inspection at the place of origin, at the expense of (hence added cost to) the shipper.


James S. Henry, in an investigative research paper, described PSI services as “a First World-based industry that is really a throwback to the ‘tax farming’ of the Middle Ages, when European governments outsourced tax collection to private agents.” In short, there is nothing “modern” about PSI. In fact, we would be insulting ourselves to actually impose it, as we can see below. I trust that our senators would know better.

Henry, formerly chief economist at McKinsey & Co. and fellow at the Fletcher School of Law and Diplomacy at Tufts University, researched extensively on PSI and concluded that it is a “remedy (that) has often turned out to be worse than the disease.” He described PSI services as a global industry “dominated by a tight-knit group of five global ‘competitors’ that generates more than $800 million a year of revenue and $150 million-$200 million in profit (as of 2003) from inspection contracts.” He explained: “Because of rampant corruption, many of the world’s poorest countries distrust their own customs bureaucracies and export agencies, so they are willing to hire expensive private firms to backstop them,” in effect privatizing the work of customs. “This industry’s target market includes the world’s most impoverished, corruption-ridden countries—benighted places like Bangladesh, Bolivia, the Congo, Haiti, Kenya, Nigeria, Pakistan, Togo and Zimbabwe, all with per capita incomes below $1,000 a year and consistently ranking in the bottom quarter of Transparency International’s annual corruption ratings.” Surely not the kind of club we’d like to belong to.

Reviewing voluminous court documents, Henry detailed alleged massive bribery and money laundering that accompanied the contracts for PSI services in Pakistan (among other countries) under past rulers. “It is ironic,” Henry wrote, “that First World companies… which are supposed to be engaged in the very business of fighting corruption, have sometimes actually turned to be among the worst offenders. Indeed, (their) corporate culture appears to have tolerated and even encouraged such behavior.” Are vested interests again at play, in what appears to be an organized effort to enshrine PSI in our customs law, no matter how contradictory to its modernization intent?

In the end, the core issue is: What is inherently wrong with PSI that the Export Development Council and the foreign chambers of commerce, among others, have been protesting against it? Its proponents misrepresent it as a trade facilitation measure, on the promise that shipments that have undergone PSI will not have to be examined on arrival, and supposedly undergo faster clearance. But if it indeed facilitates trade, why does Article 10, Section 5 of the World Trade Organization’s Agreement on Trade Facilitation (ATF) expressly prohibit it, particularly for purposes of customs valuation and tariff classification?

The answer is quite simple: The cost of undergoing PSI adds significantly to the costs of all importers of goods from abroad, if charged to the shipper as intended in the CMTA insertion. And there’s even no guarantee of easier processing on arrival, as the proposed provision gives conditions that will still require inspection on arrival anyway. As an added cost, it would harm our export competitiveness, or burden our consumers. Even if government pays for it, it would additionally burden taxpayers who are already paying the costs of maintaining BoC anyway. Given PSI’s purported intention to simply check on the integrity of the contents of sealed cargo, one wonders what the Bureau of Customs’ substantial investments, already made, in an X-ray system are for.

Customs, in fact, already has more than enough statutory and administrative power to control suspect imports—continuing alerts, hold orders, border inspection, post-entry audit, and seizure, among other measures—without having to inflict collateral damage on non-suspect imports. We all know the problem has always been lack of enforcement—and the political will not to tolerate it for reasons of politics or corruption. With willing accomplices, smugglers will always find a way, and PSI, even put into law, will not stop them. And based on Henry’s observations, it could well be worse than the disease it’s supposed to cure.

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TAGS: Bill, Bureau of Customs, CMTA, Customs Modernization and Tariff Act, Export, opinion, PSI
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