AGONCILLO COLLEGE INC.

Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 1

EFFECTIVNESS OF TARIFF REFORM PROGRAM

IN LESSENING TARIFF RATES

A RESEARCH PRESENTED TO

BSCA INSTRUCTORS OF AGONCILLO COLLEGE INC.

By:

CABRERA, MA. JAMAICA G.

DE LEON, BRYNER KENT

DE SAGUN, JOHN LEONARD

 AGONCILLO COLLEGE INC.
Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 2

CHAPTER 1

BACKGROUND AND ITS PROBLEM

Introduction

Tariffs are the most common kind of barrier to trade; indeed, one of the

purposes of the WTO is to enable Member countries to negotiate mutual tariff

reductions. Before we consider the legal framework that provides the

discipline regarding tariffs, we must understand the definition of tariffs, their

functions, and their component elements (rates, classifications, and

valuations).

Tariffs have three primary functions: to serve as a source of revenue,

to protect domestic industries, and to remedy trade distortions (punitive

function). The revenue function comes from the fact that the income from

tariffs provides governments with a source of funding. In the past, the revenue

function was indeed one of the major reasons for applying tariffs, but

economic development and the creation of systematic domestic tax codes

have reduced its importance in the developed countries. For example, Japan

generates about 90 billion yen in tariff revenue, but this is only 1.7 percent of

total tax revenues (fiscal 1996). In some developing countries, however,

revenue may still be an important tariff function.

Tariffs is also a policy tool to protect domestic industries by changing

the conditions under which goods compete in such a way that competitive

imports are placed at a disadvantage. In point of fact, a cursory examination

of the tariff rates employed by different countries does seem to indicate that

they reflect, to a considerable extent, the competitiveness of domestic

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Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 3

industries. In some cases, “tariff quotas” are used to strike a balance between

market access and the protection of domestic industry. Tariff quotas work by

assigning low or no duties to imports up to a certain volume (primary duties)

and then higher rates (secondary duties) to any imports that exceed that level.

The WTO bans in principle the use of quantitative restrictions as a

means of protecting domestic industries, but does allow tariffs to be used for

this purpose.3 The cost of protecting domestic industry comes in the form of a

general reduction in the protecting country's economic welfare and in the

welfare of the world economy at large, but tariffs are still considered to be

more desirable than quantitative restrictions.

Punitive tariffs may be used to remedy trade distortions resulting from

measures adopted by other countries. For example, the Antidumping

Agreement allows countries to use "antidumping-duties" to remedy proven

cases of injurious dumping; similarly, the Subsidies Agreement allows

countries to impose countervailing duties when an exporting country provides

its manufacturers with subsidies that, while not specifically banned,

nonetheless damage the domestic industry of an importing country.

Tariff Rates

Obviously, one of the most important components in tariff measures is

the rate at which the tariff is imposed. As noted in the discussion of the three

functions of tariffs, any imposition of a tariff has the potential to reduce the

welfare of the world economy as a whole. Since 1947, the GATT has been the

standard bearer in an on-going process of reducing tariff levels. During tariff

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Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 4

negotiations, countries set ceilings on their tariff rates. This is known as the

"bound rate" and refers to the highest allowable rate, in contrast to the rate

that is actually applied, which is referred to as the "effective rate." The GATT

has been successful in encouraging mutual reduction of these rates. Since

the conclusion of the Uruguay Round, there have been further efforts to

reduce tariffs in specific sectors.

Tariff Clasiffication

Like tariff rates, tariff classifications represent one of the basic

components of the tariff system. National tariffs are organized in the form of

tables that consist of “tariff classification numbers” assigned to goods, and a

corresponding tariff rate. The way in which an item is classified for tariff

purposes will have an important and palpable effect on the duties charged.

When classifications are applied in an arbitrary fashion, they can in effect

nullify rate reductions. The GATT contains no rules regarding tariff

classifications. In the past, countries had their own individual systems.

However, as trade expanded countries recognized the need for more uniform

classifications, which resulted in the drafting in 1988 of the “Harmonized

Commodity Description and Coding System” or “HS” system at Customs Co-

operation Council (CCC; also known as the “World Customs Organization” or

“WCO”). Today, most countries use a harmonized system of six-digit tariff

numbers.
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Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 5

Valuation

The final component in tariffs is the valuation of goods for tariff

purposes. When countries assign arbitrary values for tariff purposes, they

render tariff rates meaningless. GATT Article VII and the “Agreement on

Implementation of Article VII” (Customs Valuation Agreement) define

international rules for valuation.4 Under Article 20 of the Custom Valuation

Agreement and so on, developing country Members may delay application of

the this agreement for the particular period if other members approved. As of

January 2000, some forty members have delayed implementation.

The effects of tariffs

The most basic effect that an import tariff has is to raise domestic

prices in the country imposing the tariff. In “small countries” the rise in

domestic price is equivalent to the amount of the tariff. In “large countries” the

price rises somewhat less than the amount of the tariff because part of the

tariff is reflected in a reduction in international prices. A tariff-induced price

rise creates a gap between prices in the importing and exporting countries.

This in turn causes supplies (production) to rise in the importing country, while

demand (consumption) falls, which is the essence of the “industrial protection”

function of tariffs. Obviously, a tariff also generates revenues for the

government of the importing country (revenue function). Tariffs therefore

benefit the government and producers of the importing country in the form of

tax revenues at the expense of its consumers in the form of higher prices.

Because tariffs bring different benefits and costs to different groups,5 the net
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Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 6

cost to the importing country is the “cost to consumers minus profits to

producers minus government revenues.” This is equal to the sum of the

“efficiency loss” caused by distortions to the pricing system and the “profits

from improved terms of trade” brought by a reduction in international prices.

Therefore, for “small countries” which see no improvement in their

terms of trade because their tariffs have no influence on international prices,

the benefits from a tariff will necessarily be negative. However, for “large

countries” that can expect an improvement in terms of trade because part of

the tariff will lead to a reduction in international prices, the pros and cons are

not so easily weighted. Economists sometimes refer to “optimal tariffs” that

are low enough for the improvement in the terms of trade to exceed the costs,

thereby maximizing economic welfare. The degree of protection afforded by a

tariff (the effective protection rate) is not equal to the tariff rate. The first

reason for this is because of the potential influence from an improvement in

the terms of trade. The second reason is that the effective protection rate will

differ depending on which stage of the production process the tariff is applied

(tariffs on parts or tariffs on finished goods). We must therefore point out that

even a relatively low tariff rate can function adequately as a means of

protecting domestic industry.

The researchers undertook this study because they see that it will be a

great help for them in the near future when they are in the field, they can

easily determine how effective the tariff reform program interms of lessening

the tariff rates. The topic “Effectiveness of Tariff Reform Program in Lessening

Tarrif rates” will give benefit to the researchers since they are future customs
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Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 7

brokers who will undertake such clearing shipments of imported or exported

goods someday. This study will bridge the gap of knowing the significant

differences between the assessment of license Customs Broker and BSCA

Instructors. This research will firmly develop their knowledge on how to

enhance the implementation of Tariff reform.

The proponents deliberately chose this particular topic so that they may

be informed of issues and challenges encountered by customs broker in

implementation of tariff reform program. They want to use this opportunity if

their fellow students are well aware about the Effectiveness of Tarif reform

programs in lessening the tariff rates, so that it will be easy for them to assess

tariff rates when they are in the field in the near future. They can use this

research as a reference. The researchers also open this study for

improvement, for use as basis, and foundation of data that can be of use by

customs students and future researchers.

 AGONCILLO COLLEGE INC.
Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 8

THEORETICAL FRAMEWORK

The Tariff Reform Program (TRP), As a result of the TRP, the average

nominal protection rate (NPR) was reduced from 34.6 percent in 1981 to 27.9

percent in 1985. Some studies indicated that while the TRP of 1981 brought

down the levels of protection and dispersal of rates among sectors, the

structure of protection remained bias against the exports and the agriculture

sector. Domestic industries derived protection not only from high tariff walls,

but also from import restrictions. To complement the TRP, liberalization of

quantitative import restrictions and licensing requirements likewise started in

January 1981. The implementation of the program, was however, impeded by

the economic and financial crisis that gripped the country following the

assassination of former Senator Aquino in 1983.

A series of tax reforms from 1983 to 1985 gradually unified the sales

taxes on imports and import substitutes, removing the additional protection

from the differentiated sales tax rates. By 1985, the mark-up rate2 was also

reduced to a uniform of 25 percent on semi-essential and essential goods and

was eventually removed in 1986. Under the Economic Recovery Program and

subsequently the Medium Term Philippine Development Plan of 1987-1992, a

policy of further trade liberalization to raise industrial competitiveness was

adopted. The trade reform package includes the rationalization of the tariff

structure, making it the principal instrument of protection, the elimination of

the remaining quantitative restrictions and licensing requirements, and

strengthening of safeguard measures against unfair trade practices were

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Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 9

among the other components. A more uniform rate of protection rate across

sectors was targeted.

The removal of import licensing requirements was resumed in 1986. As

of 31 December 1989, 2,4273 items were liberalized. Among the items where

import licensing requirements were removed, included fresh fruits, iron and

steel products, canned sardines and mackerel, fabrics an textiles, synthetic

resins, pulp and paper and cement. Apart from the lifting of the quantitative

restrictions, the government also undertook tariff adjustments to further

rationalize the tariff structure or otherwise cushion the impact on local

industries affected the import liberalization program. On the other hand, tariffs

on certain critical items such as spare parts and components of motor

vehicles and cement were reduced on a temporary basis to abate supply

shortages in response to the emergency situation in 1989.

In July 1990, government undertook efforts to achieve a simplified and

more unified tariff structure. Tariff levels were to be reduced from seven to

four and the tariff band narrowed down from 0-50% to 3-30%. However, it

implementation was suspended due to allegations of a number of industries

that the changes in tariffs were too drastic and would cause serious

dislocation to industries.
 AGONCILLO COLLEGE INC.
Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 10

CONCEPTUAL FRAMEWORK

This study used the IPO model to discuss the variables regarding the

effectiveness of Tariff Reform Program in lessening tarrif rates. The input,

process and output model utilized in this study showed the procedures

followed by the researchers to attain the objectives of this study.

INPUT PROCESS OUTPUT

Effectiveness of tariff Assessment through Proposed plan of

reform program in the use of survey actionto enhance
lessening tariff rates. questionnaire. the implementation
of tariff reform.

FEEDBACK

Figure 1

Conceptual Paradigm of the Study

The paradigm of the study interprets the researchers’ flow of concepts.

The conceptual framework shows in input, which includes the Effectiveness of

tariff reform program in lessening tariff rates. The arrow pointing to the next

box indicates the process indicating the assessment of respondent regarding

the Effectiveness of tariff reform program in lessening tariff rates. The arrow

pointing to the next box indicates the relationship of the process to the output

is about proposed plan to enhance the implementation of tariff reform.

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Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 11

Statement of the Problem

This study aimed to determine the factors affecting students’ motivation

in taking up CBLE with the end view of proposing an action plan to encourage

BSCA students to take CBLE.

Specifically, this study aims to answer the following:

1. How effective is the tariff reform program as assess by the licensed

customs and to BSCA instructors?

2. What are the significant differences between the assessment of two

groups of respondents?

3. What are the challenges encountered in the implementation of tariff

reform program?

4. What plan of action maybe proposed to enhance the implementation

of tariff reform program?

 AGONCILLO COLLEGE INC.
Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 12

Assumption of the Study

The researchers of the study entitled “Effectiveness of Tariff Reform Program

in Lessening Tariff Rates” assumed the following:

1. The respondents will answer the online questionnaire honestly and

correctly.

2. The result of this study will give necessary information to the re-

searchers.

3. This study will be beneficial to all and can help them to know the ef-

fectiveness of tariff reform program in lessening tariff rates.

Hypothesis of the Study

The null hypothesis mentioned below was tested:

There is no significant relationship between the students demographic

profile and the effectiveness of tariff reform program.

 AGONCILLO COLLEGE INC.
Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 13

Significance of the Study

This study entitled Effectiveness of Tariff Reform Program in Lessening

Tariff rates said to be significant to the following:

Students. They may be aware on how effective is tariff reform program to

lessen tariff rates. This study shall inform them on the different plan of action

that they can do to enhance implementation of tariff reform program.

Parents. This study shall benefit parents in a way that as the primary caretak-

ers of the students, they shall be informed of the plan of action to help them

guide and motivate their children to implement the content of tariff.

Future researches. This study shall be beneficial to future researchers by us-

ing this as referencein there future reaserch.

Scope and Delimitation of the Study

This study entitled Effectiveness of Tariff Reform Program in Lessening

Tariff rates covers assessment of the respondents on the chosen topic. All the

questionnaire and ideas here all come from the observations and data from

internet through the help of each Licensed Customs and BSCA Instructor. 20

BSCA instructors around Agoncillo Municipality and 30 Licensed Customs at

Agonciilo Municipality were considered respondents of the researchers. No

other topic can be found on this study because it is limited only on the con-

cept.
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Poblacion, Agoncillo, Batangas

COLLEGE OF CUSTOMS ADMINISTRATION 14

Definition of Terms