The surge of onion prices lately suggested to some of us that perhaps a cartel is controlling these prices to the detriment of consumers. Capable of storing onions, these traders release onions into the market in a way that maximizes their respective profits. When local supply of onions is short of the requirement of consumers, prices must go up. But apparently, they rose even much higher than if the market was competitive.
Imported onions, however, can alleviate the shortage. If most of us would import, the cartel faces competition, restraining them from pushing up onion prices. Since the world market is much larger than the local, there will be more than enough supply to meet expected demand, and prices will hover around the landed price of imported onions, and not at what we paid for them lately.
But most of us do not know the business of importing onions and do not have the necessary capital to use for starting it. Thus, those traders who control the supply of local onions are likely the ones capable of importing onions. It follows that even if we allow importation, the volume of imported onions may be calibrated by the few traders to continue their merry way of cooking onion users.
And even so because of the following. It turns out that the import business for onions, or agricultural products in general, is also about getting a license to import, renewable yearly, and a permit for every import transaction from the Bureau of Plant Industry if one is importing crops or products derived thereof, or from the Bureau of Animal Industry in the case of animals. The permit is called a sanitary and phytosanitary import certificate or SPSIC.
Our regulators of imported farm products have the duty to implement sanitary and phytosanitary (SPS) measures to ensure that food is safe for consumers, and to prevent the spread of pests or diseases among animals, and prevent other damage to the country caused by the entry, establishment or spread of pests. The use of SPS measures is a right of every country. No imported farm product, like onions, can be allowed entry to our country if such do not meet our standards or technical regulations.
The following are some SPS measures: requiring products to come from a disease-free area, inspection of products, specific treatment, or processing of products, setting of allowable maximum levels of pesticide residue or permitted use of only certain additives in food. Sanitary measures for human and animal health and phytosanitary — or plant health — measures apply as well to domestically produced food or local animal and plant diseases, and not just to imported farm products.
SPS measures are science-based. As food and farm products move across borders, they may pose a risk to the plant, animal, or human health of importing countries. These measures are set to provide adequate protection of the country from such risks. International organizations such as the Codex Alimentarius for food, OIE for animals, and IPPC for plants have set international standards to ensure protection. These international standards, guidelines, and recommendations, where they exist, guide our SPS regulators in doing their respective duties. We may use stricter standards if there is scientific justification. Lacking international standards, we may set our own based on appropriate assessment of risks, provided that the approach is consistent, not arbitrary.
SPS measures must not be used as an excuse for protecting domestic producers nor favor certain importers. When import tariffs are already low, there is great pressure to use SPS measures to control volume in order to raise prices for the benefit of producers and traders.
In a country study conducted by the Standards and Trade Development Facility (STDF) in 2014 on the implementation of SPS measures in the Philippines, STDF noted that “there is some evidence that the licensing and permit system is sometimes also used for controlling volume.” I recollect that there was a case filed against BPI officials when garlic prices surged, and it is likely, given the date of the study, that the author of the STDF study was referring to application of SPS measures to imported garlic.
When food prices, like onions, surge, I am reminded of the 300% increase of garlic prices a few years back. It was alleged in that case that regulators abused their duty to favor the few garlic importers.
In implementing SPS measures, our regulators require importers to secure an import license for SPS purposes and obtain import permits for every shipment they bring to the country.
These layers of requirements to import farm products are potential disincentives to go into the import business, and thus make the cartel stronger or protect domestic producers.
SPS IMPORT LICENSESImport licensing for SPS purposes are over and above the usual business registration like those required by Customs. Each SPS agency requires licensing of its importers, and one can just imagine the duplication in documentation which can easily close the door to would be entrants in the import business.
And they discourage imports as well. These permits raise transactions costs and constrain their flexibility given the cost of application, the fees, and longer planning and waiting times involved. Our system uses permits regardless of the type of farm product or risk.
One reform that we may consider is this. If licensing must be used for SPS purposes, it must be shown that it is necessary to attain the appropriate level of protection. In our country, importation of all farm products requires a license for SPS purposes regardless of the purpose of the SPS measure.
Another improvement is the requirement under the WTO agreement on import licensing: licenses should not be unnecessarily more burdensome. We must keep import entry and transactions cost down to encourage entry into the import business and prevent the formation of cartels which raise prices arbitrarily high. Many countries do not use import licensing for SPS purposes, or if they do, they apply it for a limited range of products only.
IMPORT PERMITSThen there are the import permits or the SPSICs for every shipment. Our SPS regulators require importers to request import permits for all import shipments. Other countries, like Cambodia, only apply these permits for imports of animal and fisheries products. Whether this is to protect domestic producers or favor a few traders, the use of SPSICs appear to be not good news for consumers: they always end in raising prices.
There are added specifications in the grant of import permits. One, import permits in our country include ex ante specification of sources and destinations of the imported farm products, and the shipment route. The requirement is apparently for traceability. This requirement limits the flexibility of importers to obtain the goods with the lowest price in countries with similar risk as the source country in the import permit. This may be justified if, like in the African swine fever, we know what countries we should not be importing pork from regardless of the price.
Two, import volumes must be declared, which makes it easy for regulators to calculate how much volume is allowed into the country. This is like introducing a quota in import permits, which should not be used. Use of quotas is more trade-restricting than simply requiring an import permit. Three, there is the requirement to declare the point of entry when there is no valid justification from the SPS point of view for it.
One reform to consider is the use of general authorization. General import authorization may be used if the risks are negligible, or there are no specific SPS issues involved. The regulator may publish this for a range of products, saying that imported products are allowed entry at any time and volume importers would prefer. If specific phytosanitary import requirements have been set, say, like one can import the product only from this country due to a disease elsewhere, then general authorization may be used as well.
We must only require specific import permits on a case-by-case basis. According to the International Standard for Phytosanitary Measures (ISPM), import permits may be used for emergency or exceptional imports; imports with specific, individual phytosanitary import requirements such as those with post-entry quarantine requirements or designated end use or research purposes; or imports where the NPPO requires the ability to trace the material over a period after entry.
Another improvement is applying the principle of equivalence. Article 4 of the WTO agreement on the Application of SPS Measures requires member countries to accept as equivalent to their SPS measures those measures in exporting countries if it can be shown that the latter can secure the same objective of the former. Even if these measures differ from each other. Exporting countries may trigger negotiations to establish equivalence. With an agreement, imports of the product from the country which we recognize as having equivalent protection structure can come in without any import permit.
Ramon L. Clarete is a professor at the University of the Philippines School of Economics.