Impediments to FTA Use

In the previous section, it was shown that the majority of firms (80%) are not using AFTA. This section addresses the second key question in this paper—what factors do Philippine exporters perceive as impediments to their use of AFTA or other FTAs. Properly addressing these factors could lead to a higher probability of FTA use in the future, especially if the 41% of firms that indicated they were considering using FTAs are taken into consideration. As the majority of the respondents were nonusers, the focus of this section is on impediments faced by this group, although a comparative perspective of issues facing users and nonusers is discussed where appropriate.

Table 7 [ PDF 19.8KB | 1 page ] sets out the impediments to FTA use reported by all respondents. Among the 109 respondents that were nonusers of FTAs, a lack of information emerged as the top impediment. Delays and administrative costs and the use of export incentives other than FTA preferences were the second and third major impediments identified by firms, respectively. Other barriers to use include rent-seeking behavior due to the arbitrary classification of product origin, product exclusions, and the confidentiality of information required in origin applications. Some firms also complained of the small margins of preference and nontariff barriers employed by FTA partners. FTA users, on the other hand, had a different opinion. The impediments identified by these firms were more residual, such as rent-seeking behavior.

4.1 Lack of Information

Surprisingly, despite more than 15 years of experience with AFTA, the firm survey revealed that a lack of information is the primary reason firms do not use FTAs (as reported by around 80% of nonusers).¹⁶ When looking at firms by sector and size, the perception by firms of a lack of information correlates to low usage rates (see Figure 3 [ PDF 22.7KB | 1 page ]). A lack of information is an impediment to 93.6% of nonusers in the food sector, 76.7% in electronics, and 61.1% in transport. Within the size groupings, a lack of information was reported to be a barrier by 84% of small, nonuser firms. Meanwhile, around 79% of large firms and 50% of giant firms identified this as a factor in their decision not to use FTAs. A lack of information tends to be a greater impediment to FTA use in the food sector and among small firms.

That there is a dearth of information resulting in low use or nonuse of FTAs is corroborated by the strong demand for information-related services, as well as the low awareness of FTA provisions among Philippine firms (to be discussed in more detail in Section 6). Firms are demanding increased and enhanced awareness campaigns, FTA training, impact studies on business, more consultation, and nontariff measure (NTM) surveillance (see Section 6). In terms of awareness, only 2.6% of firms in the sample had thoroughly studied the FTA provisions affecting their businesses and an alarming 66.5% had not read any part of the agreements. Awareness in other areas is also weak, with 22% of firms having a limited understanding of the content of the agreements and 9% with knowledge of only some aspects. Table 8 [ PDF 18.5KB | 1 page ] presents the level of FTA provision awareness by firm size. The percentage of firms that have not read any of the provisions of the FTAs is highest among small firms at around 72%, the group that reported a lack of information as a major impediment to FTA use.

These findings make a case for the need to evaluate the quality of information and awareness campaigns on FTAs in the Philippines. In particular, firms complained that the tariff rates of concluded FTAs are not immediately published in the Tariff and Customs Code or in customs circulars, nor are they readily made available on the internet. Firms also said they don't have access to detailed information on whether and how their export products can actually gain from FTA preferences. Finally, only a small number of firms reported attending FTA training seminars, which, in most cases, are offered by consulting companies for a fee.

4.2 Delays and Administrative Costs

Previous studies (e.g., Baldwin 2007; Avila and Manzano 2007) have generally attributed non-utilization of AFTA and other FTAs to the tedious and complex process involved—in exporting in general, and specifically in obtaining AFTA's origin certificate. Survey results, however, show that around one-third of nonuser firms indicated that overall delays and administrative costs were together the second greatest obstacle to FTA use—more of a barrier than market access or ROO. Administrative costs include general bureaucratic costs related to exporting. Despite government-led reforms and programs to streamline the processing of imports and exports, such as the “e-customs project” (that would allow for the online submission of manifests and, eventually, the automated processing of applications), and the One-Stop Documentation Center (OSEDC), some procedural lapses persist to the detriment of firms relying on just-in-time delivery. As will be shown later, some improvements to origin administration—through self-certification and the use of electronic data interchanges (EDIs) in the ROO system—could potentially double AFTA use. The issues and areas for improvement in customs and origin administration are discussed in detail in Section 5.

4.3 Other Trade and Investment Schemes—Use of EPZs and ITA

Firms identified export incentives other than FTA preferences as another impediment to their use of FTAs. 31 nonuser firms (28.4%) cited their use of multilateral or unilateral schemes as their reason for not using FTAs. Examples of such schemes include the duty-free importation and exportation of electronic products under the WTO's ITA, duty drawback schemes, and EPZs. Firms located in any of the 111 special economic zones are exempt from import and other such tariffs. In particular, the existence of fiscal and non-fiscal incentives in EPZs appears to have greater weight than simple tariff preferences through FTAs. For firms to make better use of FTAs, further investigation is needed into how to make FTAs complement other schemes, rather than being mere alternatives to them (see Box 3 [ PDF 22.6KB | 1 page ]).

4.4 Arbitrary Classification of Product Origin

At least 20 nonuser firms (18% of nonusers) identified arbitrary classification of product origin as their reason for not using FTAs. Even more relevant is that 44% of AFTA users also complained that this is an issue for them. The slow adoption of harmonized tariff classifications could result in different classifications being used by exporting and importing countries. In such cases, origin and duty determination becomes discretionary or subject to an arbitrary determination made by the processing or approving officer. This type of arbitrary classification causes disputes between customs authorities and makes it possible for rent-seeking behavior to become a great disincentive to FTA use.

4.5 Market Access—Too Many Exclusions and Small Margins of Preference

Product coverage and margins of preferences are two factors that influence a firm's decision to use or not to use FTAs. 14 nonuser firms (12.8%) complained about exclusion or sensitive lists in FTAs. For example, some engines, diesel trucks, chassis, and gear boxes are on the PRC's sensitive list under the ASEAN-PRC FTA. Japan, meanwhile, in its bilateral FTA with the Philippines, excludes sensitive agricultural products like rice, wheat, milk, herring, sardines, and mackerel. Under the ASEAN-Korea FTA, Korea excludes fresh or dried bananas and pineapples and lists powdered milk and cream, jams, and fruit jellies as sensitive products.

The small marginal difference between MFN and AFTA tariff rates also discourages the use of AFTA. In fact, nine nonuser firms (8.3%) found the applied MFN tariff rate more advantageous (i.e., lower) than the AFTA tariff rate. This was particularly true for electronics firms that were already eligible for very low or zero MFN tariffs. The food sector has variable incentives to use AFTA, with a 0–5% preference margin for Philippine exports to Malaysia and Indonesia, and a preference margin of 5–45% for exports to Thailand and Viet Nam. On the other hand, firms in the transport sector have consistently had high margins of preference, and hence more of an incentive to use FTAs than the other two sectors surveyed. This reveals a direct relationship between a low margin of preference and nonuse. Appendix 4 provides a comparison of tariff rates faced by Philippine exporters in select ASEAN countries.

4.6 Confidentiality of Information

When applying for a certificate of origin, firms have to submit documents with specific information on source, components, and raw materials to prove origin. Some firms perceive this process as requiring the disclosure of confidential information. Eleven nonuser firms cited this as a reason for not availing themselves of FTA preferences. However, this requirement of disclosure holds true only when complying with AFTA's regional value content rule. With the introduction of the coequal or option rule, whereby firms can choose between value content or a change in tariff classification, the risk is mitigated as such confidential information is not required (see Section 5 for a discussion of rule type preferences among surveyed firms).

4.7 Nontariff Measures Employed by FTA Partners

Nontariff barriers, such as SPS measures and technical requirements, also contribute to FTA nonuse. Philippine firms in the processed food sector are particularly affected by these types of barriers (Pasadilla 2007) because they are required to comply with SPS measures in FTA markets (e.g., ASEAN and the PRC). 48.8% of the processed food firms surveyed reported that they have to produce additional export documents and comply with a number of standards, such as quality and chemical free certification, SPS certification, and certification from authorized agencies or certifying bodies (e.g., WHO's Codex Alimentarius Commission and the World Halal Council). At least 38.5% of all SMEs and more than half of large firms (56.3%) in the food sector found it difficult to comply with these measures. Firms also highlighted the lack of effective surveillance on the requirements of importing countries and insufficient lobbying for the acceptance of Philippines-issued certifications (either by authorized entities or self-certification). As the ASEAN-EU FTA goes into effect, it is expected that NTMs will become more of an issue among exporters, particularly as the EU is viewed as a major export destination for food products and because EU regulations are especially stringent.

4.8 Other Barriers to FTA Use and Exporting

Preferential trade agreements are viewed as the drivers of trade liberalization, opening up new markets to firms and providing incentives for industrial reform across all sectors. However, optimal export behavior and the use of FTA preferences may depend on other domestic and environmental factors (see Box 4 [ PDF 18.2KB | 1 page ]).

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