Executive Director's Corner

AEC 2015: Is Agri-Food Sector Ready?

Posted on March 17, 2014 09:09:30 PM

AEC 2015: Is agri-food sector ready?

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Map Insights
Rolando Dy

THE LEADERS of the Association of Southeast Asian Nations (ASEAN), at their Summit in Kuala Lumpur in December 1997, decided to transform the ASEAN into a stable, prosperous, and highly competitive region with equitable economic development, and reduced poverty and socio-economic disparities (ASEAN Vision 2020).

  The Declaration of Concord II of 2003 in Bali, Indonesia decided to establish the ASEAN Economic Community (AEC) by 2020. The AEC Blueprint provides that each ASEAN member-country shall abide by and implement the AEC by 2015. The AEC Blueprint “will transform ASEAN into a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy.” The Blueprint was adopted in Singapore in 2007 (www.aseansec.org).

An ASEAN single market and production base “comprise five core elements: (i) free flow of goods; (ii) free flow of services; (iii) free flow of investment; (iv) free flow of capital; and (v) free flow of skilled labor. In addition, they also include two important components, namely, the priority integration sectors, and food, agriculture and forestry” (www.aseansec.org).

The plan to open up the Philippine market started way back in 1997, or 17 years ago! But it is only in the past year that the country appears to be moving. Other ASEAN countries started preparing for the ASEAN Free Trade Area (AFTA) much earlier.

There are contrasting views about opening the Philippines to AEC in 2015. To ordinary laymen, it can get confusing. One government official said in one forum: “the Philippines is ready. AFTA is anti-climactic.” This was seconded by another official in another department. Meanwhile, a number of industry groups are in “panic.”

Let us focus on the implications of the ASEAN Trade in Goods Agreement (ATIGA) 2015 on several agri-food products of the country, namely rice, corn, coconut, sugar, chicken and pork.

Rice appears to be in a flux. Indonesia and the Philippines appear hesitant to open up their markets. Under the World Trade Organization (WTO), the Philippines is the only country holding out on the removal of quantitative restrictions (QR).

There are sectors that want the QR to be further extended to 2017, after the extension made in 2005. Rice will remain a protected sector with tariffs yet to be set. An ATIGA tariff of 35% appears on the radar after the QR lifting.

QR is not the major issue for some. It is smuggling that capitalizes on arbitrage: low rice prices in Vietnam and Thailand. The higher the tariffs, the higher the incentive to smuggle.

Meanwhile, the corn tariff has been zero since 2010. Corn farming remains viable due to high world prices and little surplus within the ASEAN, such as Thailand. Disaster has not happened. Few imports came as non-AFTA tariff (or Most Favored Nation — MFN) for US corn remained at 35%. But feed users imported low-priced feed wheat from outside ASEAN.

There are fears that zero duty on animal feeds may hurt corn demand, but this is unsubstantiated as Thailand is also short of corn and imports from Cambodia and Laos.

Then there is coconut. Vegetable oil tariffs (coconut oil, palm oil, etc.) have been zero percent for some time now. The main problem is internal: low productivity and profitability of coconut farming due to many decades of neglect. Smuggling of palm oil to evade the value added taxes is massive and is hurting both coconut and domestic palm oil industries.

The sugar tariff was 50% in 1995 and down to 18% in 2013, 10% in 2014, and 5% in 2015. The non-AFTA tariffs remain at 50 to 65%. The deadline for sugar has already been moved five years from 2010.

The government and the industry had many years to prepare. Some planters hoped for another extension. As in any industry worldwide, liberalization will have winners and losers. The efficient managers will survive and expand. The inefficient will not. Some players feel that the agrarian reform program is a barrier for trading in the land markets. The developments in the farms will surely have an impact on the already under-utilized sugar mills.

Chicken meat tariff will drop to 5% in 2015 from 40% in 2014 under ATIGA. The danger to the industry remains the entry of low-priced leg quarters from the United States and Brazil, not from AFTA. Processed, value-added meat can come from Thailand.

The industry is heavily commercialized. In the past, the cost of local corn was always the culprit for the high cost of chicken and pork. Maybe so as US corn still lands at 35% duty. But cost is not only a corn problem. It is also production technology, farm management and logistics.

The pork tariff will fall to 5% in 2015 from 30-40% in 2014 under ATIGA. There is a large efficiency gap between commercial growers and backyard raisers. Small players need new business models to survive.

However, there is little surplus of ASEAN pork so that imported pork will continue to be sourced from Canada and the United States. A large part of the imports are pork fat and mechanically deboned meat for hotdogs and processed meat. Local consumers prefer buying local fresh pork in the “wet market.”

What lessons can be learned from this “flux?”

First, last-minute or “photo-finish” preparation is typical in Filipino culture. Unfortunately, neither structural change nor people development can be done overnight. More so with achieving competitive positions.

Second, the analysts know what an industry faces. However, there is a disconnect among the bureaucracy, industry players and the politicians.

Third, where is the Filipino consumer in the whole debate? If food comprised, say 40% of the consumption basket, then lower food costs can increase real income and enhance family nutrition. Thus, the drive for competitiveness across many industries will have dramatic welfare effects.

Fourth, the 100-million strong Philippine market will attract investors from within and outside the ASEAN. They will bring markets, capital and jobs. There will be net job gains. But, there will still be winners and losers. The economy will eventually adjust to the new realities.

Meanwhile, the perennial problems need solutions and actions: the high power cost, the weak transport system, the scarcity of raw materials for agri-food manufacturing, the land access issues that affect scale, the lack of project managers, and others.

Lack of competitiveness in this country is more self-inflicted rather than externally induced. Calibrated structural change takes time to come to fruition. Policies must be based on good analytics and benchmarked solutions, rather than popular voices.

AEC is just around the corner. It is time to be pro-active rather than reactive. But is there enough time left?