2003 Q1 | Across Borders | Portcalls - the Philippines only Shipping and Transport Guide

Trading in the future: Zero Tariffs under AFTA (March 31, 2003)

Just recently, the Philippines has been reported to express opposition on further plans for liberalization and regional integration under the ASEAN Free Trade Agreement (AFTA). A recent proposal for a more liberalized trading scheme was presented during the Senior Economic Officials Meeting (SEOM) in Kuala Lumpur, Malaysia last March 10, 2003.

The proposal, among others, recommended further liberalization of strategic sectors such as electronics, consumer goods and tourism. In particular, it was suggested that tariffs on various goods related to these industries, both upstream and downstream items, be eliminated.

AFTA Common Effective Preferential Tariff Scheme (CEPT). In general, AFTA involves the removal of obstacles to free trade among the 10-member states of ASEAN. This involves the lowering of tariff rates and the removal of quantitative restrictions (QRs) and other non-tariff barriers that limit or prevent the entry of imported goods. While the intent of AFTA is to create an integrated market among ASEAN's close to half billion people, the ultimate objective is to increase the region's competitive edge as a production base for the world market.

The main instrument for making ASEAN a free trade area is the Common Effective Preferential Tariff Scheme (AFTA-CEPT), which hopes to reduce intra-regional tariffs and remove non-tariff barriers. Specifically, the goal is to reduce tariffs on all manufactured goods to 0-5% by the year 2003. By year 2010, the original six members - Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand - will realize the free trade area with 100% of their inclusion list at 0% tariffs.

The Philippines has committed itself to lower its tariff rates for ASEAN goods to 0-5% by end 2003. In recent years, however, the Philippines has been having difficulty complying with certain CEPT commitments involving products in the plastics, textiles, electrical machinery, industrial chemicals, fertilizers, ceramics and other industrial goods. Last December 2002, the government reportedly invoked an ASEAN protocol, which exempted the petrochemical industry.

Exclusions and Exceptions under CEPT. While the general impression at present is that all products originating from member states of ASEAN enjoy the 0-5% tariff starting 2004, there are exclusions and exceptions under the CEPT Scheme. Under the scheme, all manufactured products, including capital goods and processed agricultural products, and those falling outside the definition of "unprocessed agricultural products" are covered.

(a) General Exceptions. A member state may exclude a product, which it considers necessary for the protection of its national security, the protection of public morals, the protection of human, animal or plant life and health, and the protection of article of artistic, historic or archaelogical value.

(b) Temporary Exclusions. These exclusions involve products deemed sensitive by a member state. The exclusion however is on a temporary basis.

(c) Unprocessed Agricultural Products. These are agricultural products defined as: (1) agricultural raw materials and unprocessed products, and (2) products which have undergone simple processing with minimal change in form from the original products.

Rules of Origin - FORM D Certificate of Origin. Under AFTA-CEPT, there is a set of criteria to determine the country of origin of a product for purposes of availing of the special rates. To prevent transshipment of goods originating from non-ASEAN states, it is not enough that the goods were exported from a member state.

The rule on country of origin is based on the concept of "substantial transformation", which assigns origin to the country where the last substantial transformation occurred. Substantial transformation may be roughly defined on the basis of a change in tariff heading, achieving a threshold of proportion of value-added, or on the basis of certain manufacturing processes. Under AFTA, the basis of substantial transformation is based on a 40% threshold level of the value of the product. In other words, at least 40% of the value of the imported product must be considered as originating from ASEAN to avail of the preferential tariff rates under AFTA-CEPT.

In the Philippines, the Bureau of Customs (BoC) is the sole government agency tasked to oversee the implementation of the preferential tariff treatment under AFTA-CEPT. In particular, the Export Coordination Division, OCOM or the Export Division of the Port concerned are the units tasked to evaluate whether a particularly product qualify for ASEAN CEPT treatment and if necessary, issue the corresponding FORM D Certificate of Origin (CO).

Planning for the Future under AFTA. In the last decade, we have seen how multinational companies have restructured their whole supply chain and manufacturing facilities across the ASEAN region to avail of the benefits under the AFTA. These companies are now starting to reap the benefits of advance planning in terms of greater efficiencies and streamlined operations resulting in lower-priced products for the region.

On the other hand, many domestic companies are now finding it extremely difficult to compete with products manufactured by these multinational companies that have long planned for trading under the concept of a free trade area. To the extent possible, the Philippine government has extended its helping hand on affected domestic industries. This is, however, a temporary relief and in the future, domestic companies will have to face the reality of a zero-tariff ASEAN by year 2010.

The author is an international trade and customs lawyer, and a licensed customs broker. He is also a partner of the law firm of David Leabres Uvero Gaticales Sto. Tomas. For comments or inquiries, he may be contacted at worldtrade@skyinet.net or at (632) 4002145 / 4050021.

RA 8752: Rule on Dumping of Imports (March 17, 2003)

Dumping in General. In general, there is "dumping" when a company is importing goods at a price lower than the domestic price at the country of origin. Specifically, there is dumping when a company imports its product into a market at a price lower than the domestic price (normal value) at which comparable goods are sold at in the country of export. Is this unfair competition? Within the framework of the WTO, action can only be taken when dumped imports cause or threaten to cause material injury.

Under the WTO Agreement on Dumping and RA 8752 (including its Implementing Rules and Regulations), goods are "dumped" if any product is "Éimported into the Philippines at an export price less than its normal value in the ordinary course of trade for the like product destined for consumption in the country of export or originÉ".

WTO Agreement on Dumping. Part of the agreements under the WTO is that binding tariffs must be applied equitably to all trading partners who retain Most Favored Nation (MFN) status. In other words, tariff rates must uniformly apply to all importations regardless of origin. However, there are exceptions as follows: (a) actions against dumping; (b) special "countervailing duties" to offset subsidies; and (c) emergency measures to temporarily limit imports to "safeguard" domestic industries.

Article VI of GATT 1994 and the WTO Agreement on Dumping (implementing Article VI) contains the procedures by which countries may take action against dumping. To effectively implement the said agreements, the Philippine Government, in August 1999, approved the Republic Act No. 8752, otherwise known as "Anti-Dumping Act of 1999". RA 8752 effectively amends Section 301 of the Tariff and Customs Code of the Philippines (TCCP).

Elements of Dumping. Under the new rules, dumping basically has four elements, namely: (a) like product, (b) margin of dumping/price difference, (c) material injury or threat thereof, and (d) causal link between dumping and the alleged injury. Under the IRR of RA 8752, "like product" refers "Éto a product which is identical or alike in all respects to the allegedly dumped product, or in the absence of the former, another product which, although not alike in all respects, has characteristics closely resembling those of the allegedly dumped product.

While dumping per se is not prohibited, it becomes an issue when the dumped product is causing or is threatening to cause material injury to a domestic industry producing a like product. Under RA 8752, there is an assumption of negligible injury when the estimated margin of dumping, as determined during the preliminary determination, is less than 2% of the export price, or when the volume of the alleged dumped products or injury is negligible.

The volume of the dumped imports from a particular country is considered negligible if it accounts for less than 3% of the total imports unless countries, which individually account for less than 3% of the total imports collectively account for more than 7% of said product.

Dumping Investigation. An anti-dumping case is initiated by the filing of a petition to the Department of Trade and Industry (DTI) in the case of non-agricultural products or the Department of Agriculture (DA) in the case of agricultural products. An investigation will not be initiated unless the application has been made "by or on behalf of the domestic industry". DTI or DA may, under special circumstances, initiate the investigation on its own accord. If the DTI or DA find the application properly documented and sufficient, it shall initiate a preliminary inquiry into the need to impose a provisional anti-dumping duty.

Upon completion of the preliminary inquiry, DTI or DA will decide whether to dismiss the application or to issue an order for the imposition of a provisional anti-dumping duty. Upon receipt of the records (in case of affirmative findings), the Tariff Commission shall initiate a formal investigation, which shall be summary in nature. If the final determination is affirmative, the Tariff Commission shall recommend to the DA or DTI that anti-dumping duty be imposed.

Implications on the Domestic Industry. With the changes in anti-dumping law, a question confronting many in the business community is how effective these new rules will be in protecting domestic industry from unfair trading practices and ensuring a level playing field. In a positive move, RA 8752 has, in principle, provided a more transparent process for initiating and conducting an anti-dumping investigation as well as calculating and implementing anti-dumping measures.

In the last two years, we have seen several dumping actions filed against certain imported commodities (cement and ceramic tiles). These actions were later withdrawn and subsequently, separate actions under the Safeguards Measures Act (RA 8800) were filed.

Previously, domestic producers complained of the slow resolution of anti-dumping cases. Importers, on the other hand, complained of the holding of the alleged dumped importation without the benefit of being able to post a bond pending resolution of a prima facie case. To address some of these concerns, the present rules now provide that a formal investigation be conducted in a summary manner and that no dilatory tactics or unnecessary delays be allowed.

Further, the technical rules of evidence used in regular courts shall not be applied. More importantly, the withholding of shipments shall no longer be allowed. What is provided as a provisional remedy now is the imposition of a cash bond equal to the provisionally estimated margin of dumping on the alleged dumped product.

In principle, the passage of RA 8752 and its IRR should enable domestic industries a positive and transparent platform to take action against "unfair" trade practices and ensure that a level playing field prevails. For importers, dumping should be a recognized business consideration when planning and trading internationally.

Risk Assessment of Customs Brokerage Operations (March 3, 2003)

LAST February 21, 2003, we made a presentation at the Century Park Hotel before the National Assembly of the Chamber of Customs Brokers, Inc. (CCBI) on the "Latest Developments of the Post Entry Audit (PEA) system and its Implications on Customs Broker Operations".

Given the recent issuance of Executive Order No. 160 (Creating the Post Entry Audit Group), the presentation was both very timely and relevant. For the past months, stakeholders in the so-called "gateway" community have been waiting with bated breath on how the PEA system will slowly unfold and be implemented. For most customs brokers, the foremost question that they had wanted to ask was how this new system will likely affect their operations.

Record Keeping and PEA systems. To understand how the PEA system will impact on customs brokers, we have to assess the current customs regulatory environment. For the last decade, the rules governing international trade, tariff and customs have become more complicated. Three years ago, the rules on Customs Valuation, the PEA system, the Record Keeping system and the AFTA-CEPT were either non-existent or were just starting to be implemented.

As seen in more developed countries, we foresee that these changes will likely result in higher rates of non-compliance. Many companies will find itself non-compliant not because there is intent to defraud but simply because of poor understanding and knowledge of the new rules.

Implications on Customs Broker Operations. Given the growing complexity in the trading environment, what we have recently noticed these past months is that many companies have started to take greater control of their importing activities. Some companies have initiated an assessment of compliance levels given the requirements of the Record Keeping and PEA systems. In some of these cases, the compliance assessment of import activities included customs brokers operations.

As a proactive step, many companies have now included "quality assurance" and "integrity" as part of the criteria when bidding out their customs brokerage requirements. In other words, it is no longer enough that goods are released from customs custody within established timelines; the release must also be done in a compliant manner.

Challenge for Customs Brokers. Most of the responsibilities under the new rules now rest with the importer. Among these responsibilities are as follows:

(a) Ensure proper declarations in the Import Entry and SDV;
(b) Keep business records and information as required by customs; and
(c) Pay correct taxes and duties.

Under the Record Keeping and PEA systems, the penalties for not properly performing the above responsibilities will primarily rest with importers. In reality, however, customs compliance has always been outsourced to customs brokers. Since the beginning, importers have always relied on customs brokers not only to process the release of imported goods from customs custody but also to resolve disputes involving valuation, classification and other technical issues. In other words, customs brokers have always acted as the customs and trade advisers of the importers.

The challenge for customs brokers now is whether they are still willing to act as customs and trade advisers notwithstanding the growing complexity of the rules and the possible stiff penalties that may apply to importers in case of error in the advise given. Customs brokers have to likewise realize that any misjudgment on their part may have huge financial impact on the company and may result in the company taking action against the former to recover whatever damage caused.

Preparing for PEA. In recent months, the Bureau of Customs (BoC) has reportedly been reviewing VAT and duty payments to customs using information from various sources. As a result several companies, both local and multinational, have been assessed with underpayments amounting to millions of pesos.

Most of these additional assessments resulted from patent errors in the declarations to customs. For some of the companies, however, under payments resulted from malpractices of customs broker staff resulting in diversion of funds originally intended for payment to customs.

The new rules require greater corporate responsibility and accountability for compliance with customs rules. Companies in turn continue to demand that customs brokers not only perform importing processing services but also provide customs and trade advisory services. Customs brokers, on the other hand, ran the risk of being the subject of court actions in case of negative findings resulting from a customs audit.

The recent developments in the customs front, particularly the establishment of the PEA system, certainly have tremendous impact on customs broker operations. From a business and risk management perspective, customs brokers will have to review their relationship with their clients and ensure that the roles, risk and responsibilities of the parties involved are well defined.

Specifically, it will have to make clear whether existing brokerage rates automatically encompass trade and customs advisory services over a whole range of import related issues. A basic understanding of the scope of customs brokers services should prevent any future issues between the customs broker and the importer particularly in case the BoC audits an importer and there is a finding of underpayment.