Fine print

Great! Let’s have a civilized debate about tariffs!

I nearly missed Bobby Tañada’s rejoinder to my November 8 column that took issue with EO 241 and its effects on our economy. I was busy running around and meeting with budding entrepreneurs.

Fortunately, my comrades at the Foundation for Economic Freedom (FEF) caught the rejoinder and prepared their appraisals of it.

Bobby Tañada’s rejoinder was put out in the November 14 issue of The Philippine STAR. Although by-lined by Bobby on behalf of something called the Fair Trade Alliance, I nurse this suspicion he did not write the piece himself. The rejoinder was disjointed, dogmatic and lends itself to a bit of demagoguery. That is so unlike Bobby.

Specifically, the piece refers assigns to me a "blind free trade ideology" because it objected to the wide spread between tariffs on raw imports and the new tariffs on select finished goods.

There is a more common term to use in place of "blind free trade ideology." It is called economics.

The first line of Bobby’s rejoinder was pretty accurate. It described my piece as raising objections to an executive order that maintained tariff levels of most finished goods and increased tariffs on some.

Sadly, after the first sentence, the rejoinder descends into inaccuracy, incoherence and plain ideological hectoring. That is so unlike Bobby.

In the end, Bobby Tañada’s rejoinder missed the economic issues being raised.

I might have failed to properly frame our objections to EO241.

Let me try and do it again: The Foundation Economic Freedom does not object to raising tariffs per se. If we want to raise revenues then we should raise tariffs across-the-board, for inputs as well as finished goods. And for that matter, for all finished goods.

We object to EO 241 because it widens the spread between existing tariffs on inputs and selective increases on certain imported finished goods. In the end, the rejoinder fails to explain why some goods ought to be subjected to higher tariffs and other finished goods exempted. There is no economic logic to the selection – although there might be a political logic to this.

The rejoinder quotes Finance Secretary Jose Isidro Camacho as saying increasing tariffs will improve revenues. I am very sure what Lito Camacho had in mind was a uniform tariff increase across-the-board to spare us the economic distortions. EO 241 will have no significant effect on revenues.

Phillip Medalla, expert on public revenues, in his note to me, put this point across very well. I quote his input liberally:

Revenue gains from the EO are insignifican. A good example is the tariff on cars – high on completely built-up units (CBUs) and low on completely knocked down kits (CKDs).

With the 30 percent tariffs on CBUs, there will hardly be any CBU imports. Practically all the imports will be CKDs (except ASEAN CBUs which are imposed very low tariffs). Low CBU importation will deny government revenues. Higher volumes of CKD imports paying very little tariffs will hardly bring government revenues.

In short, uniform tariffs will be much better than what the EO has done if the goal is to raise revenue. The story will of course be rather different if the goal is to please strong lobbies since lobbying power is not uniform.

Bobby Tañada’s rejoinder seems to endorse the present practice of duty draw back systems. But this method of giving select industries incentives by tax credit is cumbersome to administer, sloppy to maintain and breeds a lot of corruption. Ever heard of the tax credit scams?

For too long, we have protected industries because politicians and bureaucrats think they are strategic. But we can protect these industries only by raising costs for other potential export winners and by punishing our consumers. One firm’s tariff protection is another firm’s cost.

Again, the better method, at any tariff level, is to have uniform duties across-the-board. By doing this we prevent tariffs from masking real comparative advantages. What EO 241 has done is to create an uneven playing field for our own businesses. That politicizes the economy and distorts our production systems even further.

By politicizing the tariff system, we help maintain the oligarchy. We invite lobbies to pressure government and interfere in the selection of those who govern us – thereby diminishing the quality of our democracy.

It is about time governments (and politicians beholden to vested interests) keep out of the business of choosing winners and losers in the economy. Let market disciplines accomplish that.

By the way, a wide spread on tariffs between imported inputs and imported finished goods encourages smuggling and misclassification of goods. That will benefit only politicians patronized by smugglers.

Much has been said by the pamphleteers of protectionism about lower tariffs cutting away jobs and penalizing our farmers. Neither is true if we look at the facts carefully.

Robust trade creates more competitive players and more secure jobs. In the case of our farmers, it is important to note that they are net food importers. No one is helped by maintaining a high cost food regime.

If we want to raise revenues by restricting trade, then by all means impose a 100 percent tariffs on all imports uniformly. By imposing tariffs selectively and differentially, we not only restrict trade. We distort our domestic economy and penalize new businesses by protecting the old. We set ourselves up to be mere assemblers without downstream and upstream integration of our production.

And please, Bobby, let’s not invoke "national interest" in justifying an uneven tariff structure that is largely politically determined. The record shows "national interest" is invoked more often by the oligarchy protecting old industries by stifling new ones.

The record shows that the best performers in our economy – Jollibee, San Miguel, Oishi, the software companies, the advertising firms and other service providers – flourished because they were ignored by government and not provided tariff protection. They simply went out there and did better.

The protected industries, by contrast, are nearly all albatrosses on the necks of our consumers – and taxpayers.