Tariff Reform Program

_________
1. What is the Tariff Reform Program?

The Tariff Reform Program (TRP) is the review/restructuring of the Philippine tariff
system that government undertakes on a continuing basis to make the tariff structure
responsive to the needs of the economy taking into account changing patterns in trade and
advancements in technology. So far, four (4) tariff reform programs have been undertaken
since the 1980s.

2. What was the rationale behind the first TRP?

In the 1970s, industrial and trade policies were biased towards import-substituting
activities which resulted, among others, in the overprotection of certain local, domestic
market-oriented industries. Said excessive protection, in turn, led to market distortions
that discriminated against investments in agriculture and exports and encouraged the
production of finished consumer goods over intermediate and capital goods.

The initiative to reform the tariff system came from the recognition that over two
decades of protection through high tariffs have proved counter-productive rather than
supportive of the countrys development objectives. Realizing the need for a change in
policy to remedy the situation, government official policy shifted from emphasis on import-
substitution to promotion of exports.

The government embarked on a medium-term structural adjustment program

starting 1981 with the objective of altering the basic structure of industry to make it more
efficient and competitive internationally. The two main instruments of structural adjustment
pursued by government were the Tariff Reform Program and the Import Liberalization
Program.

3. When was TRP-I undertaken? What was its coverage?

The Tariff Reform Program proceeded as scheduled from 1981 to 1985 while the
Import Liberalization Program was briefly derailed by the balance of payments crisis in
1983.

The tariff review accompanying TRP-I covered all headings from Chapters 1 to 99 of
the tariff schedule. The tariff modifications were staged over a five-year period to cushion
the impact of the changes on the various sectors of the economy.

In the institution of tariff reforms, a review of existing protective rates was

conducted to remove or phase out (a) those which were excessive; (b) those which had
outlived their usefulness; and (c) where the burden of protection outweighed the return.
The modifications were expected to induce a shift in the composition of imports of raw
materials from those with advanced processing to those which are more basic or in crude
form. TRP-I also emphasized inter-industry and inter-sectoral linkages in the economy.

4. What was the impact of TRP-I on the protection structure?

A. On Nominal Tariffs

The tariff band was narrowed from 10% - 100% to 10% - 50%. As a
consequence, the average nominal tariff fell from 42% in 1981 to 28% at the end of
TRP-I.

B. On Effective Protection Rates

The Effective Protection Rate (EPR) is defined as the percentage excess of

domestic value added, made possible by the imposition of tariffs and other
protective measures on the product and its inputs, over world market value added.
Generally, EPR estimates are used to provide information on the amount of
government-provided protection that an industry receives.

TRP-I restructured the system of protection to industries into one less biased
towards any particular industry or industry groups. Specifically, the objective was to
 keep industry EPRs within a range of 10% - 80% from the then prevailing schedule
of EPRs which ranged from excessively high to excessively low levels.

TRP-I resulted in the overall reduction and evening out of EPRs across
industries. On the average, the EPR for primary and agricultural industries continued
to receive a low EPR of 3%. The EPR for manufacturing industries declined from
66% (pre-TRP) to 36%.

5. What was the rationale behind the second TRP?

The rationale of TRP-II was to reduce the overall level of protection and disperse
tariff protection within and across industries. Government was also following through on its
policy of de-emphasizing the role of tariffs in industrial and trade promotion. The reforms
were aimed at achieving the following: more efficient resource allocation; improved access
of industry to essential inputs at lower prices; availability of more affordable and better-
quality goods for consumers; and enhanced competitiveness of local industries in the
domestic and export markets.

6. What was the coverage of TRP-II? When was it undertaken?

The new package of tariff adjustments under TRP-II was promulgated and signed by
the President under Executive Order (E.O.) No. 470 on July 20, 1991 and became effective
on August 24, 1991.

E.O. 470 incorporated a five-year phase-in period from 1991 to 1995 and transition
rates to provide local industries reasonable time to make the necessary adjustments. The
E.O. covered some 80% of the Tariff and Customs Code (TCC).

The number of Harmonized Commodity Classification and Coding System (HS) lines
was reduced by 10%, from 6,193 tariff lines to 5,561 lines. This reduction, which made for
easier customs administration, was due to the simplification of tariff nomenclature (e.g.,
tariff lines that would eventually have the same rates of duty were combined into a single
line) but such nomenclature modification adhered faithfully to the basic text of the
international Harmonized System.

7. What was the impact of TRP-II on the protection structure?

A. On Nominal Tariffs

The final rates under E.O. 470 clustered around four levels: 3%, 10%, 20%
and 30%. Fully 95% of total tariff lines were dutiable at these rates in July 1995.
However, E.O. 470 imposed duties of zero, 5%, 15%, 25% and 50% on a limited
number of items.

Under E.O. 470, the average nominal tariff was reduced from the pre-E.O.
470 level of 28% to only 20% at the end of the period. Among the three major
industrial sectors, manufacturing registered the biggest reduction in tariffs, from
27% before E.O. 470 to only 19% by 1995. For agriculture, the average tariff
declined by 20%, from the pre-E.O. 470 level of 35% to 28% in 1995. The more
moderate reduction in agricultural tariffs was a consequence of the decision to
protect sensitive agricultural products by retaining their tariffs at 50%.

E.O. 470 was eventually overtaken by the third tariff reform program.

B. On Effective Protection Rates

Under E.O. 470, a substantial decline in the overall average EPR level was
noted, from 25% under the pre-E.O. 470 structure to 19% five years after when the
final duties were implemented. Along with the decline in EPR levels, the structure of
protection also changed.

The tariff restructuring reduced the bias against agriculture relative to

manufacturing. Specifically, effective rates of protection for selected manufacturing
industries which thrived under a highly protected regime were reduced to more
reasonable levels.

8. What were the objectives of TRP-III?

 TRP-III further liberalized the trade environment by reducing the level and spread of
tariff rates towards a uniform level of protection across all sectors. It was aimed at
promoting global competitiveness, simplifying the tariff structure for ease of customs
administration, and providing a level playing field for local manufacturers vis--vis foreign
competition.

As stated in E.O. 264, the final rate structure under TRP-III will consist of a uniform
tariff rate of 5% by the year 2004, to be reached after a penultimate stage of only two tariff
rates: 3% (for raw materials and intermediate goods) and 10% (for finished products) in
2003.

9. When was TRP-III implemented?

The issuance of E.O. 189 on July 18, 1994 marked the onset of TRP-III. Among the
major E.O.s issued during this phase of the reforms were: E.O. 264 (effective August 28,
1995) which contained the tariff modifications on industrial products, E.O. 288 (effective
January 15, 1996) which set in place the tariff reductions on non-sensitive agricultural
products (those not covered by quantitative restrictions), and E.O. 313 (effective May 7,
1996) which provided interim tariff protection to sensitive agricultural products. Such
protection was deemed necessary in view of the lifting of import restrictions as part of the
countrys commitment as a member of the World Trade Organization. Under E.O. 313, 170
tariff lines were subject to tariff quotas.

E.O. 461 which took effect on January 4, 1998 and provided for a tariff of 3% on
imported crude oil and refined petroleum products concluded TRP-III.

10. What was the impact of TRP-III on the protection structure?

A. On Nominal Tariffs

TRP-III followed the basic 3%-10%-20%-30% tariff structure first set in place
under the second tariff reform program. Thus, more than 95% of total tariff lines
were dutiable at any of these four (4) tariff levels from 1995 to 1997.

With respect to tariff averages, the average nominal tariff declined from
19.72% in 1994 to 13.43% in 1997. The average tariffs for the agricultural sector
were consistently above the overall tariff average reflecting the higher tariff
protection accorded sensitive agricultural products.

B. On Effective Protection Rates

Following the tariff restructuring, effective protection levels not only fell but
the bias against the agricultural/fishery/forestry sectors relative to the
manufacturing sector was also reduced.

11. Why was TRP-IV undertaken?

TRP-IV was initiated by a review and evaluation of the impact of the pace of
tariff reductions on the competitiveness of local industries. The review also sought
to smoothen the pace of the schedule of tariff reduction for deserving industries and
correct any remaining distortions in the tariff structure.

The Commission adopted a tariff recalibration scheme to serve as framework. This

scheme provided for a more flexible 3%-5%-7%-10%-15%-20%-25%-30% structure in
place of the 3%-10%-20%-30% structure.

Twenty-two (22) industries identified as "Philippine Winners" were initially targeted

for re-calibration of tariff rates. The products covered by these industries, selected on the
basis of their global competitiveness (actual or latent), employment, and inter-industry
linkages, were: copper products; fertilizer; motor vehicle parts and components; iron and
steel products; jewelry; electronics; ceramics; marble products; marine products; processed
foods; petrochemical and oleochemical products; leather goods; footwear; lumber; particle
board; fiberboard; veneer and plywood; textiles and garments; basketwork; seaweeds and
carageenan; holiday dcor; furniture; and fresh fruits. The modified tariff schedules for
these items were implemented by E.O. 465 which took effect on January 22, 1998.

Following the issuance of E.O. 465, it was also considered necessary to evaluate the
tariff schedules of residual items to achieve a total and comprehensive phased tariff
reduction program. E.O. 486, which took effect on July 10, 1998, contains the re-
calibrated tariff schedules for the residual items. It also reduced to 144 the number of tariff
lines subject to tariff quotas.

12. What is the current status of TRP-IV?

Government's intent to reform the tariff structure was realized with the
issuance of E.O. 334 which provides the tariff schedule from 2001 to 2004 for all
products (excluding certain meat products falling under HS Chapter 2, rice, corn and
sugar whose individual tariff schedules have yet to be determined). Under this
E.O., a tariff band of 0% - 5% will be implemented by 2004 (except for a limited
range of sensitive agricultural products with a 2004 tariff rate of 30%).

With the effectivity of E.O. 334 on January 1, 2001, the average nominal
tariff will decline from approximately 10% in 1999 to 5% in 2004 (Table 1).
Average tariffs for the agricultural, fishery and forestry sectors are higher due
mainly to the greater tariff protection accorded sensitive agricultural products.

From 2001 to 2003, more than half of total tariff lines will be dutiable at 3%
and below. In 2004, nearly 97% of all tariff lines will have duties falling within the
target tariff range (Table 2).

With respect to effective protection, the agricultural/fishery/forestry sectors

now enjoy greater protection from the tariff system vis-a-vis the traditionally-
favored manufacturing sector (Table 3).

13. What appeals procedure is available to parties interested in requesting a

modification of tariffs?

Petitions for tariff modification may be filed by interested parties under Section 401
of the TCC, as amended. The Tariff Commission conducts investigations on the petitions it
receives during which public hearings are held to afford interested parties reasonable
opportunities to present their views. The Commission submits its findings and
recommendations to the National Economic and Development Authority (NEDA) which then
schedules these for deliberation by the Tariff and Related Matters (TRM) Technical and
Cabinet Committees. Final approval is granted by the NEDA Board after which the
Commission prepares the implementing Executive Order.

TABLE 1
Average Nominal Tariffs: 1997 - 2004
(in percent)

Agriculture, Fishery
and Forestry
Mining Manufacturing Overall
1997 25.28 4.68 11.45 13.43
1998 18.91 3.58 9.36 10.69
1999 16.33 3.51 8.98 9.98
2000 14.40 3.27 6.92 7.96
2001 14.25 3.25 6.68 7.72
2002 12.57 3.18 5.43 6.42
2003 11.62 3.18 4.62 5.61
2004 10.56 3.18 3.74 4.72

Note: As of EOs 334 and 11 (series of 2001).

Products falling under Annex B of E.O. 133 were considered zero-rated from 1999 to
2002.

TABLE 2
Frequency Distribution of Tariff Rates: 1997 - 2004

Tariff Number of HS Lines

1997 1998 1999 2000 2001 2002 2003 2004
Level
(%)
0 - 11 158 318 321 321 180 180
3 2,295 2,875 2,760 2,704 2,812 2,813 2,930 2,930
5 13 63 51 111 245 551 1,259 2,349
 7 10 40 107 579 412 838 544 19
10 1,295 789 856 947 789 450 486 15
15 - 453 353 408 464 499 73 4
20 1,129 758 880 464 435 6 6 1
25 1 462 294 - - - - -
30 840 51 43 61 46 47 57 78
35 4 1 2 2 2 10 14 1
40 30 29 30 11 11 15 27 2
45 36 28 30 30 30 24 20 17
50 23 12 20 18 18 30 11 11
55 - - 1 1 1 4 1 1
60 1 3 46 46 46 27 27 27
65 10 10 7 7 7 4 4 4
70 - - - - - - - -
75 - - - - - - - -
80 57 53 - - - - - -
100 - - - - - - - -
Specific 4 - - - - - - -
TOTAL 5,748 5,638 5,638 5,707 5,639 5,639 5,639 5,639

Note: As of EOs 334 and 11 (series of 2001).

Products falling under Annex B of EO 133 were considered zero-rated from 1999 to 2002.

TABLE 3
Estimated Weighted Average Effective Protection Rates: 1997 - 2004
(in percent)

Agriculture, Fishery
and Forestry
Year Mining Manufacturing Overall
1997 19.18 0.79 24.00 21.78
1998 14.27 0.55 13.50 13.17
1999 14.83 0.41 17.83 16.32
2000 14.84 0.43 17.78 16.30
2001 15.68 0.36 14.31 14.10
2002 15.07 0.33 12.41 12.62
2003 14.90 0.39 11.26 11.77
2004 14.52 0.42 9.94 10.76

Note: As of EOs 334 and 11 (series of 2001).

The EPR estimates are based on the 1988 237 x 237 Input-Output Table.