From quantitative restrictions to tariffs

Both quantitative restrictions (QR) and the imposition of tariffs to replace import quotas (technically called “tariffication”) are measures to primarily protect domestic producers from lower priced importations that crowd out their higher priced domestic goods.

One reduces inbound supply and effectively increases its cost following a demand-pull effect. The other imposes a virtual tax. Both are not meant to lower aggregate prices. At least not in the immediate term.

In the case of rice, the operant protectionist measure is a quantitative restriction on importations. A minimum access volume has been predetermined albeit several times adjusted given normal demand and supply conditions forecasted from farm data on average yields and normal demand, forecasted from population growth and demographic statistics.

Between supply and demand, rice supply is harder to forecast as it is also a function of such uncontrollable factors as weather.

Unfortunately, controllable factors likewise influence and bear heavily on supply thus affecting both pricing and demand. These controllable factors range from the cost of production inputs to post-production costs such transportation, warehousing and trading margins.

While one of the controllable rice price factors involves trading margins, beyond econometrics, reality shows that these are so price elastic that they readily bloat when hoarding occurs.

Rice hoarding creates an artificial shortage that forces retail prices north. Forced to alleviate these shortages, recently the government was compelled to import beyond the QR parameters. Importation palliatives alleviate temporary supply constraints but have little effect on short term rice prices.

Because rice is a staple in the basket of goods that comprise the Filipino consumer price index rice price increases contributed immensely to the inflation we are now struggling with. As a percentage of total food expenditures rice accounts for 30.60 percent for the poorest quintile against only 13.89 percent for the richest quintile. Thus, high rice prices affect the poor more than the rich.

The President responded to the rice crisis in two ways. Unfortunately, given a variation of Parkinson’s Law, media chose to focus more on his directive to run after hoarders while dedicating scant attention to the proposal to shift from QR measures to the imposition of tariffs on imported rice.

Worsening matters, because tariffs increase retail prices, some tariff advocates chose to spin the tariffication proposal declaring that it will reduce the current high prices of rice.

Their zeal is understandable but tariffs will not do that in the immediate term.

However there are several reasons that augur well for replacing QR with a tariff.

One, governance-wise, it unburdens the bureaucracy from having to constantly rescue the market from supply crises whenever these erupt.

Two, by transferring cost burdens to the private importer who pays for the incremental tax, rice tariffication provides a fund source that allows for better fiscal balances.

Three, while rice production has increased in absolute terms over time, the rate of growth has been declining relative to demand. From rice self-sufficiency the concern has developed into a question of availability. QR worsen these. Fortunately, tariffication does away with restrictive quotas and increases supply which, over time, tend to lower rice prices when rice importation costs increase and equal domestic wholesale prices.

Four, the removal of quotas provide access to cheaper rice-whether imported or local — and compels domestic producers and traders to both improve local rice production efficiencies and reduce extraneous trading margins. Efficiencies are important. Philippine per capita productivity is far below that of regional rice producing economies.

Following tariffication, our economic managers predict a one percent reduction in headline inflation rates should imported costs equal domestic rice prices. We doubt that would happen soon. But it’s a target worth shooting for.