RICE SMUGGLING AND ITS EFFECTS

TO THE ECONOMIC GROWTH

IN THE PHILIPPINES

A Term Paper

Presented to

Ms. Jenifer F. Nara

Faculty, English Department

Xavier University – Ateneo de Cagayan

In Partial Fulfillment

of the Requirements for the Course

English 27

(Writing Term Paper in the Discipline and Business Correspondence)

Presented by

Reyjen Kate J. Enoy

Regine May U. Tadlas

Section BE

October 2, 2014

Rice Smuggling and Its Effects to the Economic Growth in the Philippines

Thesis Statement: Rice smuggling can heavily depress the economic growth of the

Philippines because it reduces government revenues, hurts domestic rice industry, and

distorts supply-and-consumption data used as reference for sound policy-making.

Sentence Outline

I. Rice smuggling can heavily depress the economic growth of the Philippines.

II. Rice smuggling reduces government revenues.

A. Smugglers avoiding customs duties deprive the government of revenues.

B. Rice import smuggling robs government revenues from uncollected taxes.

C. Smuggled rice will not be counted in calculating the GDP of the country.

III. It hurts domestic rice industry.

A. It affects local industries by distorting prices of commodities.

B. Cheap smuggled rice can lower the price of local rice particularly during harvest

season, which discourage local farmers to plant.

C. It prevents domestic traders from engaging in the rice business because of unfair

competition.

IV. It distorts supply-and-consumption data used as reference for sound policy-making.

A. The government will be using inaccurate supply-and-consumption data as

reference for sound policy-making that later on may cause problems.

B. Since smuggled rice is unaccounted supply, it makes the estimated figure of Per

Capita Net Food Disposable (PCNFD) for rice seems smaller and it also decreases

the Per Capita Rice Consumption (PCRC).

C. A lower PCNFD, in turn, could underestimate the real rice import requirement of

the country, which could put the country’s food security at risk.

V. Conclusion

Appendices

References

Introduction

Rice, basically known in the Philippines as palay, bigas and kanin is the country’s

staple food. A Filipino meal is not complete without it, whether in breakfast, lunch or

dinner. An average Filipino consumes rice for about 12 kilograms per year, the sixth

highest in the world (Cruz, 2014). The importers, rice farmers and consumers, domestic

trades and even the government have the knowledge on its importance. However,

importers always find ways to loophole, thus rice smuggling remains to be of great

problem in the country. Rice remains to be the favorite product for smuggling. Early this

year (2014), smuggled rice discovered in Davao city made it to the headlines of

newspapers, radio, and broadcasted television news. Rice smuggling can heavily depress

the economic growth of the Philippines because it reduces government revenues, hurts

domestic rice industry, and distorts supply-and-consumption data used as reference for

sound policy-making.

The purpose of this paper is to explore in depth the economic effects of rice

smuggling in the Philippines. This paper aims to answer the following questions: a) How

rampant is rice smuggling in the Philippines?; b) What are the root causes of rice

smuggling?; c) How does rice smuggling affect the local rice industry?; d) How does rice

smuggling deprive the government revenue?; e) How does rice smuggling depress the

Gross Domestic Product (GDP) growth of the Philippines?; f) What are the legal

sanctions imposed by the government against rice smuggling?; and g) Why do countries

impose prohibitions and restrictions to certain goods?.

This paper will bring awareness to the public regarding on what the rice

smuggling is all about and what will it bring to the country. It will review the laws

mandated by the government to reduce rice smuggling cases. The readers will also be

able to comprehend facts on why Philippines had to import rice from the Asian

neighboring countries when in fact the country is into agriculture industry.

Discussion

Smuggling, defined under Section 3519 of the Trade and Customs Code of the

Philippines (TCCP), “is an act of any person who shall fraudulently import or bring into

the Philippines, or assist in so doing, any article, contrary to law or shall receive, conceal,

buy, sell or in any manner facilitate the transportation, concealment, or sale of such

article after importation, knowing the same to have been imported contrary to law.” It

consists of various goods or commodities such as cars, vegetables, spices, fruits, and

others. It also refers to the international trading of goods without paying the rightful

customs duties (Bordey & Litonjua, 2013). Despite that smuggling is very broad; this

paper will focus merely on rice smuggling.

Every year, the Philippines losses P7 billion per year due to rice smuggling

(Cabacungan, 2013.). Lately this year (2014), a name of David Tan flashed on the

headlines of newspapers and television reports for spearheading rice smuggling in the

country. Rosendo So, president of Samahang Industriya ng Agrikultura (Sinag) explained

the impact of Tan’s smuggling operations,

“If you looked at the official records of the rice-exporting countries Vietnam and

Thailand, the Philippines imported a total of 1.5 million MT, or 30 million cavans, of rice in 2012.

But data from the Bureau of Agriculture Statistics showed that only 692,220.74

metric tons, or 13,844,414 bags, came in through official channels during the same period.

This means that 16,155,585 bags were either sneaked in or were misdeclared as

construction materials under the noses of crooked customs officials. This data clearly showed that more than five of every 10 bags of imported rice sold in 2012

were smuggled. Each bag should have been levied 50 percent in duty, or P451.50

each, if this was shipped in through official channels. That’s P7.29 billion in

foregone revenues for the government in 2012 alone.”

Though Tan is a businessman, he should have contributed to the economic growth

of the country. Yet it’s the other way around-he is depressing economy. Imagine that P7

billion worth of money. It would have helped thousands of Filipino family. But it is up to

the government decisions on how to recover the large amount of loss.

A study, “An Assessment of Smuggling of Selected Agricultural Commodities in

the Philippines,” conducted by the Southeast Asian Regional Center for Graduate Study

and Research in Agriculture (SEARCA) shows that milled rice is the top agricultural

product being smuggled in the Philippines. During the period of 1986 to 2008, $1.96-

worth of milled rice, almost P88 billion at the peso-dollar rate, were illegally transported

into the country. It is then followed by refined sugar at $448.2 million; beef, $428.8

million; onion, $259.55 million; pork, worth 4117.45; chicken, at $27.8 million; ginger,

$7.8 million; and carrots and turnips, $6.5 million. These huge amounts of money had

impacts on government finances and on the local farmers. Thereupon, this part of the

paper will identify the three effects of rice smuggling. These include: it reduces

government revenues, hurts domestic rice industry, and distorts supply-and-consumption

data used as reference for sound policy-making. Each of the effects mentioned will be

explained thoroughly in this portion of the paper.

Reduction of Government Revenues

In order to be able to pass through the Philippines’ border, the traders have to

undergo a long process under the Bureau of Customs (BOC) and National Food

Authority (NFA). Their responsibilities includes paying all fees, taxes and other charges;

complying all required documents, such as NFA license and Letter of Intent (LOI).

However, not all importers adhere to the said customs’ duties. There are a number of

factors why importers choose to trade in an illegal way. This paper will only name two:

high import tax and the price difference between world and domestic market of rice.

The tariff for imported rice in the Philippines, established by the government is

40%. It is a high import tax for traders. They avoid such fees in order to minimize their

costs and to enjoy price advantage over rice sellers (Litonjua, Bordey, & Paran, 2013).

Another reason that induces rice smuggling is the large difference between the

world and domestic prices of rice. As seen in the Figure 1, domestic price of rice had

been higher compared to the world price by 75% in 2000 and 30% in 2012. Smugglers

can sell the rice at a cheaper price without paying the importing taxes, which allows them

to undercut competition with domestic rice sellers (Litonjua, Bordey, & Paran, 2013).

Figure 1. Domestic and World Price of Rice, 2000-2012

Source: PhilRice and IRRI

As a result, the tariff (tax) that is supposed to be an additional to the government

revenue is not already counted. Only then the smuggler can benefit, with the profit he

gained from importing under the economy. Gerardo Sicat of the Philippine Star says that

“… high protective tariffs encourage smugglers. It gives them ammunition to defy and

corrupt further weak institutions. In the end, they also lead to higher prices.” (Sicat 2014).

With tariffs that are not collected, it will not then be added up to the country’s

GDP. All imports, whether from industrial, agricultural, and manufacturing industry,

which serves as revenue of the country, is deducted from all the exports which is the cost,

the difference then is the profit. Sad to say, rice imported in an illegal way is not part of

the country’s GDP. As explained by the study, entitled “The Underground Economy:

Causes, Approaches, Extent,” (2001, p. 9)

“In principle, GDP includes all production, without regard to its legality. In

practice, illegal activities such as the sale of narcotics, although deemed productive in an economic sense in that they satisfy a demand expressed on the

market, are left out of official statistics because there is no way of measuring

them with sufficient reliability. The official GDP thus refers, by and large, to legal production. Other criminal activities such as robbery or extortion are a

transfer of wealth from one person or group to another. They are not productive

and do not enter GDP at all.”

Harming the domestic industry

Filipinos often question the government, “Why do we import rice?” PhilRice

revealed, “The Philippines’ area harvested to rice is very small compared with major rice

producing countries in Asia. This is the major reason why we import rice. Although we

say that we are an agricultural country, we do not have large land resource to produce our

total rice requirement.” Philippines is the world’s top importer of rice. It imports around

15% of its rice supply (which is equivalent to 2.2 million tons of rice) annually, mostly

from Vietnam and Thailand (Analyzing the Rice Crisis in the Philippines, 2008).

Currently, the Philippines is still 98% self-sufficient to rice. It had not achieved its

goal of 100% rice self-sufficient. Thus it continues to import rice. When there is a rice

importation activity in a country, there is always smuggling. When smuggled rice is not

caught by the BOC, it will then be sold in a cheaper price compared to the rice produced

by local farmers. The result then is that, local farmers suffer from smuggling activities.

They will be forced to lower down the price of milled rice during the harvest season.

With high cost in rice production along with decreasing price of rice, farmers will not be

able to gain profit, which discourages them from planting.

Rice smuggling prevents domestic traders from engaging in the rice business

because of unfair competition. According to Emmanuel Alonzo, “Smuggled rice are sold

below production cost, hence “killing” domestic industry.” Smugglers avoid tax

payments on imported rice, minimizing their costs, and giving them price advantage over

sellers who source rice locally. The demand for smuggled rice is higher compared to the

local rice because of its cheap price. It will affect the other marketing players in the

country and it is also the reason for the closure of other local rice industries that is why

traders get discouraged to engage in the rice business industry to avoid competition with

cheap rice imports traded illegally in the country.

Distorts supply-and-consumption data

Rice smuggling also distorts data on rice supply-and-consumption data that are

commonly used as reference for making a sound policy on food security. The government

will be using inaccurate supply-and-consumption data .They will report wrong

estimations that later on may cause problems. Since smuggled rice is an unaccounted

supply, it makes the estimated figure of Per Capita Net Food Disposable (PCNFD) for

rice seems smaller and it also decreases the PCRC. Two of the most important variables

used in estimating the rice requirement of the country, estimating rice imports and in

setting rice self-sufficiency targets are the Per Capita Rice Consumption (PCRC) which is

approximate measure of the amount of milled rice consumed by a person in a year and

the Per Capita Net Food Disposable (PCNFD) which is the total amount of rice available

for consumption after deducting allotments for exports, seeds, feeds and wastes,

processing, and ending stocks from total supply of milled rice .The Bureau of

Agricultural Statistics said that “In our 2012 survey the per capita rice consumption in

the Philippines had declined steadily since 2008 to 119. 25 kg. in 2009 to 114.81 kg in

2010.”A lower PCNFD and a decline in PCRC, in turn, could underestimate the real rice

import requirement of the country, which could put the country’s food security at risk.

Conclusion

Smuggling clearly destroys the local economy and exacerbates poverty in the

country as manifested by the closure of local industries, decline in agricultural

production, uncompetitive agricultural products, loss of jobs, unfair competition, loss of

government revenues, heightened corruption in the bureaucracy, and risks in consumer

welfare.

Appendices

REYJEN KATE JUAREZ ENOY

District 2- Ampalaya, Tagcatong, Carmen, Agusandel Norte

rkje23@gmail.com, 09128410580

EDUCATIONAL ATTAINMENT Bachelor of Science in Business Administration

Major in Financial Management

Xavier University, Ateneo de Cagayan

Corrales Avenue, Cagayan de Oro City

2012-

EXTRA CURRUCULAR ACTIVITIES

POSITION NAME OF ORGANIZATION DATES

1. Member XU-JFINEX 2014-2016

2. Volunteer KKP 2014-2016

3. Events Team Staff SBM-SC 2014-2015

4. Department of Finance- Staff Sophomore Core 2013-2014

REGINE MAY URBINA TADLAS

Purok 6, Casisang, Malaybalay City 8700, Bukidnon

reginetadlas@yahoo.com, 09358943418

EDUCATIONAL ATTAINMENT

Bachelor of Science in Business Administration

Major in Business Economics

Xavier University, Ateneo de Cagayan

Corrales Avenue, Cagayan de Oro City

2012-

EXTRA CURRUCULAR ACTIVITIES

POSITION NAME OF ORGANIZATION DATES

1. Member ABECS 2014-2016

2. Volunteer KKP-SV 2014-2016

3. Head, Research Department Peer Facilitators 2014-2015

4. Staff Sophomore Core 2013-2014

References

A. Online Articles and Documents

Alberto, J. R. (2013, April 12). NSCB - How Important is Agriculture in the Economy?.

NSCB News. Retrieved October 1, 2014, from http://www.nscb.gov.ph/beyond-the-

numbers/2013/04122013_jrga_agri.asp#fig1

Analyzing The Rice Crisis in the Philippines. (2008, May 31). AEA Blog. Retrieved

October 1, 2014, from http://ateneoeconomics.wordpress.com/2008/05/31/analyzing-

rice-crisis-in-the-philippines/

Cabacungan, G. (2013, December 30). 'Rice smuggling costs PH P7B a year'. Inquirer

News. Retrieved October 1, 2014, from http://newsinfo.inquirer.net/554419/rice-

smuggling-costs-ph-p7b-a-year

Emmanuel, A. (2013). Rice Smuggling: have we learned yet?. PDF, 5(19), 13. Retrieved

October 1, 2014, from https://www.senate.gov.ph/publications/taxbits 2019 20vol5

20May 20- 20J

Philippines Per Capita Rice Consumption Decreasing Since 2008, Says BAS.

(n.d.).Oryza. Retrieved September 25, 2014, from

http://www.oryza.com/content/rice-consumption-decreasing-philippines-2008-says-

bas

Ranada, P. (2014, August 13). Alcala: PH 98% rice self-sufficient in 2014. Rappler.

Retrieved October 1, 2014, from http://www.rappler.com/business/industries/247-

agriculture/66110-alcala-98-percent-rice-self-sufficient

B. Unpublished Theses

Cruz, C. J. (n.d.). Surveillance of the Philippine Rice Market. Bangko Sentral ng

Pilipinas. Retrieved September 2, 2014, from

http://www.bsp.gov.ph/downloads/EcoNews/EN14-02.pdf

Litonjua, A., Bordey, F., & Paran, S. J. (n.d.). PalayCheck System ®. Pinoy Rice

Knowledge Bank. Retrieved October 1, 2014, from http://www.pinoyrkb.com/