A tariff is not, and should not be used as, an instrument of monetary policy.
Nowadays, tariffs are in the forefront of public discussion in this country and in the U.S. Intense national discussion is in progress as to why tariff-reducing Executive Order No. 68, issued by President Ferdinand Marcos Jr. early this year, appears to have failed to bring down the prices of most varieties of rice.
In the U.S., President-elect Donald Trump is rocking the world trading system by announcing a tariff of 10 percent on all imports into the U.S. and higher tariffs – 60 percent in the case of China – on the exports of several countries.
Tariffs are serious business. They are – to borrow a line from a Vice-President Sara Duterte press conference – “no joke, no joke”. Tariffs have a very broad impact; they affect domestic consumers, foreign and domestic producers, foreign and domestic producers, tariff-imposing fiscal system, bilateral trade relations and the structure of the international trading system.
A tariff is essentially a trade tool; it is intended to promote and protect a country’s external trade. A tariff causes damage to the trade of an exporting country and under the rules of international trade law – the domain of the World Trade Organization (WTO) – a tariff may be legally imposed only when there is evidence that an exporting country is engaging in unfair or competitiveness-enhancing conduct, such as providing subsidies to its exporters.
In such situations, an importing country is entirely justified in harnessing the defensive capability of a tariff. As the regulator of world trade, WTO reviews whatever the setting of a tariff is justified by its rules.
A tariff is not, and should not be used as, an instrument of monetary policy. For instance, it should not be used as a measure to bring down the price of a particular commodity or to combat inflation generally, which has been the intent of E.O. 68.
A tariff is disruptive of trade and production patterns and thus should not be tinkered with. If the tariff for a commodity is set at a certain level – 35 percent, in the case of rice – there must have been a good economic reason for such a setting. Protection for the Filipino rice farmer was the reason. With a 15-percent tariff rate, the already-beleaguered Filipino rice farmer now has considerably reduced protection.
If rice had to be imported in order to reduce the unhappiness of rice consumers – and to protect the hides of the concerned government officials – the importation should have been done at the pre-E.O. 68 tariff rate of 35 percent. For two reasons, that would have been a more economically rational route to take.
The first reason is that the Treasury, not the importers, would have been the beneficiary of the imports. The importers paid 20 percent less tariff from their transactions. A cash-strapped government – aren’t “idle” funds of agencies being commandeered by the Department of Finance? – could have made use of that 20 percent.
The second reason relates to what economists refer to as the incidence of tariffs and taxes. The principal question that economic policymakers ask – or should ask – themselves when imposing a tariff or tax is, who will end up paying it? Recent discussions in and outside Congress about the state of the domestic rice market have led to the suggestion that rice prices have not passed on to consumers the benefit of the 20 percent tariff rate reduction but, instead, have kept it for themselves.
With E.O. 68, the economy has ended up with a triple whammy: no price relief for consumers, reduced protection for the Filipino rice farmer and reduced revenue for the Treasury.
Tariffs are the opposite of competitiveness; an industry or a company that can compete in the world market does not need tariff protection. Because its industries should be competitive, a country should deploy the tariff tool judiciously.
There is a tendency for tariff-protected industries to stay in their comfort zones and not strive to become competitive. This is not to say that there is no scope for the provision of tariff protection. Economically deserving infant industries can be given tariff protection, but periods must be set for the infants to grow up.
U.S. President-elect Trump announced that his administration would impose a tariff of 10-percent on all imports into the U.S., with a special tariff of 60 percent on goods from China and 25 percent on goods from Canada and Mexico.
Such a policy is insane. It is tariff policymaking gone berserk. Globalization is the only way towards an economically progressive and politically stable world.
(llagasjessa@yahoo.com).
