Article:

Philippine auto tariffs send chill through pandemic-hit industry

January 16, 2021

MANILA/BANGKOK -- As the Philippines prepares to enact import safeguards on automobiles

next week in a bid to protect domestic business, foreign automakers are bracing for a major
disruption to their supply chains and the market as a whole.

A leading industry lobby and companies like Toyota Motor, a top player in the country, have
expressed concern that the tariffs would only hurt the Philippines' auto industry, which depends
heavily on shipments from neighbors like Thailand. Still, the country is eager to bolster domestic
auto production, which has taken a major hit from Southeast Asia's push toward free trade.

Philippine Trade and Industry Secretary Ramon Lopez announced this month that the country
would start imposing a 70,000 peso ($1,460) tariff on passenger cars and 110,000 pesos on light
commercial vehicles.

"The provisional safeguard measures will provide a breathing space to the domestic industry,
which has been facing a surge in importation of competing brands," he said. The tariffs will last
for 200 days, and could change in scope and duration following a formal investigation by the
Philippine Tax Commission.

The World Trade Organization allows countries to enact such safeguards when a rapid increase
in imports threatens to seriously damage domestic industries. Passenger car imports in the
Philippines have increased an average of 35% a year from 2014 to 2018, and now equal 4.5
times the amount of domestically produced vehicles, according to the Department of Trade and
Industry.

Imports of light commercial vehicles have increased to almost 15 times domestic production.
The country's overall trade deficit has also been increasing, reaching a record high of $43.5
billion in 2018.
The surge in imports is driven largely by a regional push toward free trade. The Association of
Southeast Asian Nations began working toward a free trade bloc under an agreement that took
effect in 1993. The Philippines pledged to gradually lower tariffs on finished vehicles from its
original 40% as part of these efforts, and cut the rate from 20% to 5% in one go in 2003.

As tariffs fell, foreign automakers that assembled cars in the Philippines instead began importing
more vehicles from Thailand and other markets with a larger auto industry. Imports, which
accounted for just 14% of new vehicles sold in the Philippines in 2002, overtook domestically
assembled vehicles in 2007. They now make up over 70% of new vehicle sales there.

ASEAN completed its tariff reduction efforts in 2018, and automakers now treat its members as
one market as far as supply chains go.

But without a robust industrial sector at its back, the Philippine auto industry has lost out. Isuzu
Motors stopped producing the D-Max pickup in the Philippines in 2019, while Honda Motor
closed an assembly plant in March last year. Both companies have since switched to imports
from Thailand.

In a bid to bolster the domestic auto industry, the Philippine government is offering a subsidy of
up to 9 billion pesos per model produced in the country. Toyota and Mitsubishi Motors, which
hold the largest and second-largest market shares in the Philippines, respectively, each produce
one compact car in the country. But the industry as a whole is still shifting toward greater
imports.

The Philippine Metalworkers Alliance support the safeguards, which they see as a way to protect
employment. But automakers have pushed back against the new tariffs, which would increase the
price tag for many models by about 5% and further pressure an industry that likely suffered a
roughly 40% blow to unit sales last year.

"Safeguard measures against imported vehicles is yet another blow to the automotive industry at
a time when it is reeling from the adverse impact of the pandemic," said Rommel Gutierrez,
president of the Chamber of Automotive Manufacturers of the Philippines Inc.
Toyota's Thai arm, which oversees Asian operations, expressed concerns that the safeguards will
negatively impact the entire auto industry value chain.

"We have no choice but to import many materials and parts, and it's not profitable to assemble
cars here," said an executive from Mitsubishi Motor's Philippine unit. "We need the profits from
imported cars to balance things out."

Struggling to compete with imports, the Philippines has enacted safeguards on other products as
well in recent years. It placed an additional duty on cement in January 2019, leading to tensions
with exporter Vietnam. The country also launched preliminary safeguard investigations into
galvanized iron sheets and polyethylene products.

Free trade is only gaining support, with 15 countries recently signing on to the Regional
Comprehensive Economic Partnership. Government policy could deal a blow to more business
sectors as countries struggle to protect industries at home in an increasingly competitive trade
environment.
Commentary:

Attempting to revive its domestic production, the Philippines government is going to impose
tariffs (taxes levied on imports) on automobiles. This article sheds light on the consequences of
such an action on the Philippines. While these tariffs will provide a ‘breathing space’ to domestic
producers, it comes with a few challenges.

The equilibrium price set by the intersection of the Philippines’ supply and demand of
automobiles - SP and DP respectively - is Pp. However, the world price of automobiles is Pw. At
Pw, the quantity of automobiles supplied decreases to Q1 and the quantity demanded of the same
increases to Q4. This mismatch gives rise to imports. The difference between the quantity of
automobiles supplied and demanded equals to the quantity of automobiles imported. Imposing
tariffs will increase the world price of automobiles from Pw to Pw+t thereby shifting the quantity
supplied to Q2 and quantity demanded to Q3. Since (Q4 - Q1) > (Q3 - Q2), therefore imports
decrease as tariffs are imposed.

The market share occupied by imported goods has consistently increased over the years and
currently is set at ‘70%’. The imposition of tariffs would reduce the competitiveness of imported
automobiles and encourage consumers to move to domestically produced cars. A boost in
domestic production of the economy would prove to be beneficial in the long run as it will cause
economic growth. As more automobiles are produced domestically, the availability of jobs would
increase, leading to a decrease in the unemployment rate and an increase in the average living
standards. A reduction in imports is also necessary to improve the BOP position of the
Philippines. Philippines’ current account deficit reached a record high of ‘$43.5 billion’ last year.
The current account is one of the components of BOP; such a deficit would lead to the
depreciation of the Peso and would reduce the confidence of foreign investors. The imposition of
tariffs will also increase government revenue. This revenue can be injected into the Philippines
economy in the form of government expenditure, leading to economic growth.
The Philippines government is providing a ‘9 billion dollar’ import substitution subsidy (a sum
of money given by the government to aid domestic producers in fighting international
competition)1 per model produced in the economy. This subsidy will decrease the average cost
of production of domestic producers thereby increasing the supply and shifting the supply curve
from SP to SSub. After providing the subsidy, the quantity supplied at Pw increases from Q1 to Q2.
As (Q3 - Q2) < (Q3 - Q2), import substitution subsidy reduces imports in the economy.

An executive of Mitsubishi states that the automakers ‘have no choice but to import materials
and parts’. Unavailability of choices leads to price inelastic demand for imports. Since
automakers import raw materials and parts, the tariffs will increase their average cost of
production, leading to a rise in prices of domestically produced automobiles. Some automakers
believe that these tariffs would push the prices of their models by up to ‘5%’. Since domestically
1
"What Is Subsidy? Definition of Subsidy, Subsidy Meaning." The Economic Times. Web. 11 Feb. 2021.
produced cars aren’t popular amongst consumers, the demand for these cars is price elastic.
Thus, a ‘5%’ increase in price would lead to a more than proportionate decrease in the quantity
demanded. This contraction in demand would force domestic manufacturers to cut back on
production which will lead to a rise in unemployment and a decrease in the average living
standards. While tariffs might reduce the imports in the economy, it increases the prices of
commercial and passenger vehicles. An increase in the price of passenger vehicles will make
them less affordable which would reduce the average living standards of the Philippines as fewer
people will own a vehicle. More expensive commercial vehicles would result in increased fixed
costs for businesses and may force some businesses out of the market, causing unemployment
and poverty. On the other hand, importing substitution subsidies reduce imports while keeping
the price of automobiles constant at PW. Also, imposing tariffs would reduce trade creation as it
goes against Southeast Asian nations’ free trade agreement. A reduction in trade creation would
limit specialization as the Philippines would produce all the goods required by itself, leading to a
decrease in consumer choice and quality of goods. However, import substitution subsidies reduce
imports without discouraging free trade. Thus, I believe import substitution subsidies are the best
course of action to decrease imports and promote domestically produced automobiles.

In conclusion, the government should not re-impose the tariffs after the completion of ‘200 days’
and should instead continue to provide subsidies to domestic automobile producers.

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