I. Introduction

Rice is the considered the staple food for most of the Filipinos. The

country's rice consumption per capita rose from 93. 2 kg per year in 1995 to

123.3 kg per year in 2009. Therefore, rice production is essential to the

food supply of the Philippines. In 2010, Philippines is the 8th largest

producer of rice in the Philippines, accounting for 2.8% of global rice

production, and in the same year, the Philippines was also the largest rice

importer in the world1.

The figure above shows the annual rice consumption of the

Philippines from 1960 to 2014. As you can see in the graph, there is an

1 http://ricepedia.org/philippines

increasing trend in the consumption of rice. From the 2,800 MTin 1960, the

consumption rose to 12, 860 MT in 2011. 2

The second figure shows the annual production of rice in the

Philippines. Same with consumption, the production rate of rice in the

country has an increasing trend. In 2014, the country had produced 12,200

MT of rice.3 Even though the Philippines is one of the major producers of

rice in the world, the country's production is still very small compared with

the other major-rice producing countries in Asia.

2 Philippines Milled Rice Domestic Consumption by Year N.d. Retrieved on October 15, 2015 fromhttp://www.indexmundi.com/agriculture/?country=ph&commodity=milled-rice&graph=domestic-consumption

3Philippines Milled Rice Production by Year N.d. Retrieved on October 15, 2015 fromhttp://www.indexmundi.com/agriculture/?country=ph&commodity=milled-rice&graph=production

Since rice is a major consumption item for the Filipino consumers, it

is also a major source of income for millions of Filipino farmers. Because of

this, the government is implementing certain policies regarding the supply

and distribution of rice. One of the major policies implemented by the

government is the control of imported rice through a quantitative restraint

(QR).

The primary institution concerning about restrictions in imports and

exports is the World Trade Organization (WTO). The main function of WTO

is to ensure that trade flows smoothly, predictably and freely as possible. In

1995, the Philippines became a WTO member. Through the membership,

the Philippines, along with Japan and South Korea, were granted exemption

from the removal of quantitative restrictions on rice under the Annex 5 of

the WTO agreement4.

Quantitative restrictions (QR), as defined by the World Trade

organization, are limits imposed on the volume of goods traded by a WTO

member. General Agreement on Tariffs and Trade (GATT) requires the

general elimination of these restrictions — except in defined circumstances.

Members' notifications on quantitative restrictions are compiled in a WTO

database which is accessible to the public. The Philippines was one of the

first countries subjected under the QR agreement.

4 https://www.wto.org/english/tratop_e/tpr_e/tp114_e.htm

Under the agreement, the WTO will require a minimum access

volume of 805, 200 metric tons of imported rice for the members of the

organization. Upon the limit given by WTO, the tariff imposed would be

35%, and exceeding the limit will incur a 50% tariff. The agreement will be

valid for five years and is renewable after termination5.

The graph below shows the rice importation trend from 1960 to

20146. The trend has a fluctuating pattern because the implementation of

the QR agreement is not continuous over the years. There were periods

where the country was not subjected into the restriction policy.

Despite the termination of the QR agreement in June 2012, the

Philippines continued to negotiate with the WTO for an extension of the

5 http://nfa.gov.ph/component/content/article?id=3936http://www.indexmundi.com/agriculture/?country=ph&commodity=milled-rice&graph=ty-imports

Special Treatment. The country was granted an additional 5 year-extension

that will expire in 2017. According to the Department of Agriculture, the 5-

year extension will be used as a preparation period for the country to

improve its production capability and to cope with the increased pressure

that comes with the enforcement of free trade within Southeast Asia in

2015.7

II. Statement of the Problem

The Philippines is one of the three countries granted exemption in

1995 from the removal of quantitative restrictions (QR) on rice under Annex

5 of the World Trade Organization (WTO) agreement. However, the Special

Treatment (ST) accorded to the Philippines expired on June 2012. Efforts

prior to the renewal of the ST was made by the government and the WTO

granted the extension for five more years. By the end of 2017, should the

government negotiate to extend the QR agreement or should they opt for

termination of the ST and replace the QRs for rice with tariffs?

III. Alternatives

First Alternative: The government should negotiate again with WTO

to extend the QR Agreement for another five years.

Second Alternative: The government should terminate the QR

Agreement and opt for tariffication of Rice trade.

7 Rice imports under MAV slapped with 35% tariff, June 28, 2014, Retrieved on October 15, 2015 fromhttp://www.philstar.com/business/2014/06/28/1339791/rice-imports-under-mav-slapped-35-tariff

Third Alternative: The government should renew the QR Agreement

for a couple of years while formulating longer-term policies

concerning the improvement of Rice or Palay production in

accordance to Rice trade tariffication.

IV. Presentation of Data

A. First Alternative: The government should negotiate again with

WTO to extend the QR Agreement for another five years.

PROS

– Limits the entry of rice

imports in the country

– QR has greater protection

effect than tariff measures.

– QR increases profits of the

domestic industry.

CONS

– Limiting the amount of rice

imports in the country may

lead to unstable prices.

– Distortion of free trade

– QR harms consumers and

downstream industries in the

importing countries.

– QR may impede efforts of

domestic producers to

improve productivity or

rationalize operations.

Quantitative restriction (QR) is a non-tariff barrier that limits

the volume or value of goods traded by a World Trade Organization

(WTO) member.8 These trade policy measures are designed to cushion

the domestic rice farmers from any imbalances that may arise as a

result of trade liberalization. The Philippines is a member of the WTO

and was granted a “Special treatment (ST)” clause for rice. The ST is

a regulatory measure that allowed the country to impose Quantitative

restrictions on rice thus permitting the Philippines to set Minimum

Access Volume (MAV)-minimum amount of rice that can be imported

per year. Last 2012, the agreement expired and the Philippine

government negotiated with WTO for another 5-year extension of the

ST.

Retaining the Quantitative restriction has pros that need to be

carefully analyzed. First benefit is that QR limits the entry of rice

imports in the country thus preventing sudden increase in the

amount of rice imports. It allows the government to control the

amount of imported rice that can enter the country. Second benefit is

that QR has greater protection effect than tariff measures. By

limiting the amount of rice imports, local farmers and their produce

are protected from extreme foreign competition. QR is advantageous

in terms of helping local farmers prepare for competition and keeping

farm income attractive. Lastly, QR increases profits of the

8 World Trade Organization. N.d. Retrieved on October 15, 2015 fromhttps://www.wto.org/english/tratop_e/markacc_e/qr_e.htm

domestic industry. Because QR protects particular domestic

products from competition with foreign products by having a high

level of competitiveness, they may be beneficial in the short term in

protecting and increasing profits of the domestic industry by

producing competing products and maintaining stable employment in

that industry.

On the other hand, retaining the Quantitative restriction has its

downside. First, limiting the amount of rice imports in the

country may lead to unstable prices. Without QR, foreign countries

can freely export their rice/palay in the country. If this happens, the

aggregate supply of rice will increase and will lead to price surge

making the imported rice cheaper compared to the locally produced

rice. Therefore, Filipinos will patronize the cheaper imported rice.

This in turn could hurt domestic producers. The expected surge in

rice imports will translate into larger negative income effects for

household groups where the problem of poverty is most severe.

Second, QR leads to distortion of free trade. When a trading

partner uses tariffs to restrict imports, it is still possible to increase

exports as long as foreign products become price competitive enough

to overcome the barriers created by the tariff. But when a trading

partner uses quantitative restrictions, however, it is impossible to

export in excess of the quota no matter how price competitive foreign

products may be. Thus, quantitative restrictions are considered to

have such a greater distortional effect on trade than tariffs.9 Third,

QR harms consumers and downstream industries in the

importing countries. Without mid-term plans to eliminate restrictive

measures, domestic producers will be unlikely to develop the ability to

earn foreign currency through exports, which is the true indication of

competitive strength. The quantitative restrictions leave at best

import-substitute effect, and consumers and downstream industries in

the importing country also suffer disadvantages such as higher prices

and other disadvantages that are the immediate results of import

restrictions. Therefore, such measures may cause a negative overall

effect on the importing nation's economy in the mid or long term.10

Lastly, quantitative import restrictions may impede efforts of

domestic producers to improve productivity or rationalize

operations in order to survive the tough business environment,

depending on the operation of the quantitative restriction. Unless it is

clarified that the restrictions are temporary, and appropriate

measures are taken to ensure that protected producers acquire

sufficient competitiveness, quantitative restrictions could harm the

mid- or long term development of the affected industry and the

economic benefits of the country employing quantitative restrictions.11

Overall, retention of quantitative restriction may cause a

positive and negative overall effect on the importing nation's economy 9Mangabat, M. (1999). Effects of Trade Liberalization on Agriculture in the Philippines: Commodity Aspects. 10N.d. Quantitative Restrictions. 11 Ibid.

in the short, mid, or long term. This alternative impose both mid and

long-term costs that clearly outweigh benefits of protecting domestic

industries.

B. Second Alternative: The government should terminate the

QR agreement and opt for tariffication of Rice Trade.

PROS

- Import tariff gives price

advantage to locally produced

goods.

- Government and producers

earn revenue under

tariffication

- Government no longer

assumes planning function of

computing the annual quota of

imported rice

- Avoids the added uncertainty

from discretionary import

targeting

CONS

- Government relinquishes

control of imports to the

private sector

- World and domestic prices are

unpredictable

- Avoids the timeless problem of

allocating the import quota to

private traders in a fair and

transparent manner

Tariffication is converting existing non-tariff barriers into import

equivalent tariffs or in simple terms it gives or confers the same level

of protection as the original trade barrier. Unlike Quantitative

Restrictions, Tariffs have revenue generating function and less of a

distorting effect on markets where monopolies exist.

There are five advantages that tariffication provides first is that

the import tariffs raises domestic prices in the country

imposing the tariff, for small or developing countries the rise in

domestic price is equivalent to the amount of the tariff while for large

countries the rises in price is somehow or somewhat less than the

amount of the tariff because part of the tariff is reflected in a

reduction in international prices12. Second, Government and

producers earn revenue under tariffication in the form of tax

revenues- the revenue equals the tariff rate per unit of imported

goods times the quantity of goods imported13, so the same amount 12 http://www.meti.go.jp/english/report/data/gCT9904e.html

13 http://research.bworldonline.com/popular-economics/story.php?id=90&title=Imposing-tariffs-on-rice

goes to government as tariff revenue -and producer surpluses at the

expense of its consumers in the form of higher prices. Third,

Government no longer assumes planning function of

computing the annual quota of imported rice because the

Government would now only compile different information and

forecasts to have an estimate on domestic demand, domestic supply,

and the deficit or surplus to be filled up by imports depending on

existing conditions of demand and supply. Fourth, it avoids the

added uncertainty from discretionary import targeting because

the original role of the Government is to provide its people a clean

intervention in stabilizing the domestic price and reduce its volatility,

however private sectors cautious to public sector because they believe

that it can be politically driven. Lastly, it avoids the timeless

problem of allocating the import quota to private traders in a

fair and transparent manner because tariffication shows good

governance for traders. The import business is liberalized in terms of

licensing, permits, and payment of custom duties.

The disadvantages of Tariffication are Government

relinquishes control of imports to the private sector –this boils

down to “trust issues” in the private sector because there is no

guarantee that the private sector will bring the right amount of rice at

the right time and would they be able to balance the household food

security with domestic industry and farmer interest and World and

domestic prices are unpredictable therefore the fluctuation of

market prices makes it hard for the receiving country to calculate the

equivalent tariff that is needed.

If the tariff reduces or decreases, the country should expect that

imports price would rise and will lead to a fall in the producer price

owing to availability of cheaper imported rice. The country should still

stop the renewal or negotiation with Special Treatment under

Quantitative Restriction agreement and start the tariffication or Rice

liberalization in the country. But the country should ensure to

negotiate a tariff that offers equivalent protection to its producers as

well as to its consumers. The Government should also find the right

mix considering different factors such as fluctuation in international

prices, exchange rate, local rice production, and rice smuggling

because removing QR can significantly decrease the domestic price,

bringing it closer to the world or international price that can help

reduce rice smuggling as the price advantage of selling smuggled rice

is diminished. Income from smuggling would then be insufficient to

compensate for the risk and high transaction costs involved.14

C. Third Alternative: The government should renew the QR

Agreement for a couple of years while formulating longer-term

14 http://www.philrice.gov.ph/wp-content/uploads/2014/09/RS4DecisionMakers_september2014_G.pdf

policies concerning the improvement of Rice or Palay production in

accordance to Rice trade tariffication.

PROS

– Limits the entry of rice

imports in the country

– QR increases profits of the

domestic industry.

– Import tariff gives price

advantage to locally

produced goods.

– Government and producers

earn revenue under

tariffication

– The three-year extension of

the ST will serve as the

transition period towards

tariffication

– Stable employment in the

industry

– Efficient rice production

CONS

– Limiting the amount of rice

imports in the country may

lead to unstable prices.

– Higher government

expenditure

– Government relinquishes

control of imports to the

private sector

– World and domestic prices

are unpredictable

– Increased effort in

maintaining political

stability

The third alternative is a two-way process for it is a continuous

plan concerning both the short and long run economic implications. In

the short run, the government needs to negotiate again with WTO for

another 3-year extension of the Special treatment agreement in

preparation for the total abolishment of the quantitative restriction.

During that period the government must prepare the country’s

resources and formulate new policies concerning the implementation

of tariffication on rice imports. By 2020, the Philippines would impose

tariffs and engage in free trade.

In the short run, the first advantage is that QR limits the entry

of rice imports in the country thus preventing sudden increase

in the amount of rice imports. It allows the government to control

the amount of imported rice that can enter the country. Second, QR

increases profits of the domestic industry. Because QR protects

particular domestic products from competition with foreign products

by having a high level of competitiveness, they may be beneficial in

the short term in protecting and increasing profits of the domestic

industry by producing competing products and maintaining stable

employment in that industry. Lastly, the three-year extension of

the ST will serve as the transition period towards tariffication

because it will give the government sufficient time to make the

adaptation to the new policy easier. One policy that the government

should impose is the improvement of Rice Production in the

Philippines through boosting farmers’ competitive edge and

subsidizing equipment and resources that can be used in the

production.

While in the long run, import tariffs raises domestic prices

in the country imposing the tariff, for small or developing

countries the rise in domestic price is equivalent to the amount of the

tariff while for large countries the rises in price is somehow or

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

is reflected in a reduction in international prices15. The Government

and producers earn revenue under tariffication in the form of tax

revenues- the revenue equals the tariff rate per unit of imported

goods times the quantity of goods imported16, so the same amount

goes to government as tariff revenue -and producer surpluses at the

expense of its consumers in the form of higher prices. Third, stable

employment in the industry - increase incentives to farmers will

prevent them from transferring to other industry thus making the

employment the Agriculture Industry stable and when the domestic

price of rice is stabilize the income of local farmers will also be

steadfast . Lastly, efficient rice production will increase the quality

of locally produced rice making it equally competitive with the

15 http://www.meti.go.jp/english/report/data/gCT9904e.html

16 http://research.bworldonline.com/popular-economics/story.php?id=90&title=Imposing-tariffs-on-rice

imported goods. This in turn could lead to a reduction in the price of

rice making the consumers better off.

In the short run, the third alternative also has its disadvantages.

First, limiting the amount of rice imports in the country may

lead to unstable prices. Without QR, foreign countries can freely

export their rice/palay in the country. If this happens, the aggregate

supply of rice will increase and will lead to price surge making the

imported rice cheaper compared to the locally produced rice.

Therefore, Filipinos will patronize the cheaper imported rice. This in

turn could hurt domestic producers. The expected surge in rice

imports will translate into larger negative income effects for

household groups where the problem of poverty is most severe.

Second disadvantage is higher government expenditure. The

government needs to invest heavily on the training of the domestic

farmers, new technology prior to equipment, research and

development and the improvement of irrigation systems.

While in the long run, Government relinquishes control of

imports to the private sector –this boils down to “trust issues” in

the private sector because there is no guarantee that the private

sector will bring the right amount of rice at the right time and would

they be able to balance the household food security with domestic

industry and farmer interest and World and domestic prices are

unpredictable therefore the fluctuation of market prices makes it

hard for the receiving country to calculate the equivalent tariff that is

needed.

Increased effort of the government in maintaining political

stability applies to both short and long run process because it is an

unceasing effort in coping up to the never-ending changes in internal

and external environment. Maintaining a stable political condition will

eventually lead to stabilization of the Philippine economy because the

government is merely the backbone of a well-performing economy.

V. Conclusion and Recommendation