Safeguard duties not a ‘win-win’ solution

As you read this, three things are threatening the Philippine automotive industry: 1) disruption of the global supply chain by COVID-19; 2) the Department of Trade and Industry’s (DTI) plan to impose retaliatory tariffs on cars imported from Thailand, and 3) the DTI’s probe of calls made by a metalworkers’ union and local auto parts suppliers for safeguard measures to maintain the viability of domestic production.

The slowdown or closure of factories in China and other sources of automotive components due to COVID-19 is beyond anyone’s control. But the good news—at least for the PH auto industry—is that the DTI’s move to impose retaliatory tariffs on vehicle imports from Thailand has been temporarily blocked.

According to a news item in the business section of PDI last Monday, DTI had gone to the World Trade Organization to settle a decade-old dispute against Thailand for unfairly taxing the cigarettes the PH exports in favor of Thailand’s state-owned cigarette manufacturer.

The DTI won the dispute, thus earning the right to slap additional tariffs on cars, Thailand’s biggest export to the PH, for non-compliance with the WTO ruling on the cigarette tax case. Under WTO rules, cross sector retaliation or the imposition of sanctions in a different sector is allowed when the complainant sees it impractical or ineffective to focus on the same sector.

BLOCKED. However, Thailand, taking advantage of the prevailing uncertainty in the WTO, blocked the agenda of the WTO Dispute Settlement Body’s (DSB) meeting scheduled last weekend that would have granted the PH the notice to proceed. The DSB will meet again tomorrow for more consultations.

With the retaliatory tariffs on Thai-sourced cars out of the way for now, the auto industry faces a petition for safeguard measures filed with the DTI by the Philippine Metalworkers Association for safeguard duties on vehicle imports in view of the increasing volume of imports that threaten local manufacturing and jobs in the automotive industry. The DTI has begun a preliminary investigation and consultations with stakeholders.

Under the Safeguard Measures Act, the government can impose safeguard measures or duties on products when a surge in imports of such products hurts the domestic industry. DTI Undersecretary Ceferino Rodolfo has been quoted as saying that Thailand was the Philippines’ biggest source of motor vehicle imports from 2014 to 2018.

The metalworkers’ petition for safeguard duties was boosted after Honda Cars PH, Inc. suddenly closed its assembly plant, and Philippine Parts Makers Association president Ferdinand Raquelsantos urged the DTI to fast-track the safeguard measures to sustain local assembly, and even attract new entrants to promote additional employment.

Raquelsantos claimed that if the DTI imposes the safeguard duties by the end of the second quarter, prices of locally produced, completely knocked-down (CKD) vehicles will be competitive versus the imported completely built-up units (CBUs.)

ZERO DUTY. The pricing of motor vehicles is dictated by many factors, including tariffs. Starting in 2012, the ASEAN Free Trade Agreement liberalized trade in the region through the elimination of tariffs and non-tariff barriers among ASEAN members.

With zero duty imposed on vehicle imports within the region, global automotive brands took to exporting CBUs from Thailand, Indonesia and Malaysia to the PH instead of assembling CKD vehicles here.

The hard truth is that the PH lags way behind its ASEAN neighbors in automobile production. These countries have become export manufacturing hubs, with Thailand producing 2,167,693 vehicles in 2019, Indonesia made 1,268,848 units last year, Malaysia came up with 571,848 units, and Vietnam put out 176,203 vehicles, according to the ASEAN Automotive Federation.

In stark contrast, the PH produced only 95,094 units in 2019. Significantly enough several years ago, the car companies that compose the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) announced that their Vision 2020 was to SELL 500,000 vehicles by the end of this year, NOT necessarily to ASSEMBLE them.

In this context, shortly after the Honda assembly plant shutdown last month, CAMPI issued a statement that while incentives, plus strong government support and assistance are needed to maintain the viability of local production and competitiveness in the region, the government must seriously study any initiative that would discourage domestic auto assembly operations, and further endanger employment and existing investments, among others.

What is needed at this critical stage is consistent government policy to maintain investor confidence, CAMPI emphasized.

CAMPI was perhaps indirectly criticizing the proposed safeguard duties on vehicle imports, which is understandable since 90 percent of the vehicles that CAMPI members sell are imported CBUs, mainly from Thailand.

AVID’S VIEW. It remains for the Association of Vehicle Importers and Distributors, Inc. (AVID) to give their view on the safeguard duties issue.

Asked online for her opinion, AVID president Ma. Fe Perez-Agudo, concurrent president/CEO of Hyundai Asia Resources, Inc. (HARI), e-mailed: “The imposition of safeguard duties on vehicle imports is not a ’win-win’ solution since it will only pass on the added burden to consumers.

“Additional duties will not trigger an immediate rise in automotive manufacturing, nor does it guarantee additional investments in the sector. Imposing this at a time when the entire industry is only recovering from the additional taxes brought about by the TRAIN (Tax Reform Acceleration and Inclusion) Law in 2018, may actually have the opposite effect.

“If you recall, sales dropped by 15.1 percent in 2018, followed by a weak recovery of only 2.3 percent in 2019. In January 2020, automotive sales already dropped by nearly 16 percent compared to the same month last year.

“We are now feeling the effects of the global economic slowdown aggravated by COVID-19. Instead of spurring demand, additional duties will stifle demand and further weaken the local automotive industry.”

UPGRADE ECOSYSTEM. The way forward, Agudo added, is “to take a focused and long-term approach to upgrade the entire local automotive ecosystem that takes into consideration the cost of doing business, supply chain support, production incentives, infrastructure, policies, and technical know-how of our workforce.

“We look forward to working with the government, industry partners, and concerned groups for solutions that will establish a more robust auto assembly and manufacturing industry, and consequently, spur economic growth.”

As a Korean manufacturer, Hyundai Motor Co. will not be affected if the DTI decides to impose safeguard duties on vehicles imported from Thailand. Agudo revealed that the bilateral agreement between the Philippines and South Korea is being worked out, but meanwhile under the existing ASEAN-South Korea Trade Agreement, a 5 percent duty is imposed on all vehicles imported from South Korea. A 30 percent duty is imposed on models outside the Philippines’ free trade agreements.

MANUFACTURING SUPPORT. Incidentally, although HARI is a member of the PH group of vehicle importers, it supports local manufacturing by assembling the Hyundai Accent (the second best-selling subcompact sedan after the Toyota Vios), the Shuttle and Cargo bodies of the H-100 light truck, and Shuttle bodies of the H-100 Class 1 and HD50S Class 2 Modern Jeepneys.

HARI will soon start the body assembly of the HD50S Class 3 Modern Jeepney. Once the PUV (Public Utility Vehicle) Modernization Program goes into full swing this year, HARI expects to fully utilize its production capacity. For many years now, Hyundai has ranked among the top five best-selling brands in the country, currently ranking fourth.

In conclusion, Agudo said: “Government initiatives such as the PUV Modernization Program is a perfect example of a ‘win-win’ solution since it gives transport cooperatives more revenues, promotes the safety and comfort of the riding public, and generates employment and economic activity for builders of the Modern Jeepney.”