Philippine Tariff Reforms and the Balance of Trade in the Agricultural Sector: 1985 to 2005

Chapter 1
Introduction International trade is one of the contributors to the economic growth of the Philippines. To further improve the competitiveness of the country in foreign exchange, the Philippines adopted trade liberalization since the 1980s. From an inward-looking strategy, the Philippines had moved to outward-oriented strategies (Trabajo, 1994:1). A wide range of changes in tariff rates and import restrictions resulted in undesirable outcomes in the 1970s which led policy makers to focus on policy reforms. The reform includes the lowering of tariff rates with the end goal of coming up with tariff rates for different countries and for specific goods (Tariff Commission, 1994:2). Agriculture has always been an important component of the Philippine economy. It contributed US$2.78 billion to total exports earnings in 2006 (NSCB, 2006). In 2004, it contributed 14.3% of the countrys GNP and accounted for 37.5% of the total employment (NSCB, 2004). attention in policy making. But how does international trade affect the agricultural sector of the Philippines? In particular, how do trade policies promote agricultural growth and competitiveness? The country has been engaged in the promotion of free trade. From the tariff reform program in the 1980s, trade liberalization has been expanded through the countrys membership in the World Trade Organization (WTO) in 1995 (Tariff 1 Thus the agricultural sector should be given special

Commission). Recently, the Philippines together with its ASEAN neighbors created the ASEAN Free Trade Area (AFTA) which has been effective since 2003. All of these are towards tariff reduction and abolition of non-tariff import restrictions that encourages trade liberalization. The policies mentioned above have a section on agriculture. The policy reform in the 1980s includes the tariff reductions in some agricultural products but some still remained restricted (i.e. rice). WTO policies included the Agreement on Agriculture (AoA) whose main concern is to establish a fair and market-oriented trading system in agriculture by eliminating the so-called trade barriers and trade-distorting support in agriculture. AFTA continued the lowering of tariff on some agricultural products and provided even lower rates of tariff in member countries (Gochoco and Faustino, 1994: 37). By focusing on the agricultural sector, one of the aims of this study is to determine the trends in the level of agricultural imports and exports and to determine the countrys share in the world market. Since trade liberalization focuses on tariff

reduction, it has been chosen to explain the performance of Philippine agriculture in international trade. In the end, the researchers hope to draw findings and

recommendations that could possibly help improve the agricultural sector of the country.

Statement of the Problem This study will determine the trends in the level of imports and exports of the Philippines for the following agricultural products: rice, corn, sugar, coconut, banana and coffee covering the years from 1985 to 2005. It will examine how changes in tariff policies affected the balance of trade of the Philippines for the said products.

Objective s 1. To describe the trends in the balance of trade of the Philippines for rice, corn, sugar, coconut, banana and coffee from 1985 to 2005.

2.

To determine the share of the Philippines in world trade for each agricultural product from 1985 to 2005.

3. To analyze the tariff levels pertinent to the selected agricultural crops covering the 1985 to 2005 period.

4. To examine how the BOT for each product is affected by level of domestic production, exchange rate, world price and domestic price.

5. To examine how the changes in tariff rates have affected the balance of trade for each product.

Significance of the Study Almost every country around the globe already participates in world trade. Opening a countrys economy to international trade could either be fruitful or disastrous. For the Philippines, we chose to engage in such activity in order to expand our economy. This study is focused on the trends in agricultural export and import and how it is affected by the changes in the tariff policies adapted by the Philippines. Specifically, the changes in tariff rates from 1985 to 2005 were examined using six products: rice, corn, sugar, coconut, banana and coffee. The study, for instance, assessed the agreements and commitments the Philippines has made regarding international trade. For example, how do these commitments help the Philippine agricultural sector be competitive outside the country? With this, we were able to assess the effect of liberalization through tariff reduction in the performance of the Philippines in international trade particularly in agriculture. From these findings, we can come up with a better understanding about international trade. Our awareness about the effects of the policies that the government is implementing could be helpful in further improving them. This is not only applicable to exporters and agriculture sector. The welfare of consumers is also one of the main objectives in implementing such policies. International trade gives way to a wide variety of competitive products for the consumers to choose from according to their satisfaction.

Scope and Limitation

This study will look at the effects of trade liberalization on the exports and imports of selected agricultural products of the Philippines namely: rice, corn, coconut, banana, coffee and sugar. Data availability on these crops is the primary consideration in the choice of products to include in the study. The time span covered is from 1985 to 2005 when the Philippines is already implementing tariff reduction. Basically, the researchers will determine the trend in the import and export of these agricultural products and the resulting balance of trade (BOT). The share of the Philippines the in world trade of each of these goods is also to be examined. The researchers will look further at how the BOT for these products is affected by tariff reduction. Factors that have to do with international trade like the products domestic price, the price outside the Philippines and the exchange rate were also examined. Wholesale prices were to be used for both domestic and world prices, farm gate and retail prices were not be included because these are not applicable in the international trading. The domestic price of the said products was compared against the world price to determine the countrys competitiveness in these products.

Chapter II
Review of Related Literature

The Philippines is engaged in international trade. Most countries around the world engage in international trade. It has been a very useful strategy for the economic growth of rich countries nowadays like Britain and US (Mankiw, 2004: 677). The exchange of goods and services across national boundaries is what we call international trade. Theories about international trade are not new. In fact the most popular theory in contemporary time was introduced in 1846. David Ricardo advocated free trade on the basis of comparative advantage (Krugman, 2003:12). As stated by Byrns and Stone (1984:15), comparative advantage is an idea that trade will always be beneficial to two countries with different pre-trade cost and price structures. Different countries have different resources and capabilities. Countries benefit from free trade through specialization within the product of their expertise even if there are others who can do better (OBrien and Williams, 2004:89). This says that if country As cost is cheaper for rice than country B, country A has the comparative advantage in producing such. Through this, country A will be able to develop and specialize in producing rice while letting country B to produce other good for them. International trade allows countries

to specialize in producing narrower ranges of goods giving them grater efficiencies of large-scale production (ibid). However, the views from economic nationalism are different. Economic

nationalism can be traced back to Mercantilism. People believe that the world has a limited wealth and each state should secure its interest by blocking the economic interest of other states (OBrien and Williams, 2004:14). This view is called zero-sum game where the economic gain of one state is another states loss. Some of the Mercantilist views still exist although their weaknesses were already determined long ago. One that is very existent nowadays which they give stress to is the need to maintain an excess of exports over imports, that is, a favorable or positive balance of trade (Appleyard et. al, 2006:18). In the Philippines the NSOs definition of balance of trade is the difference between export earning and import payments of all goods or merchandise trade transacted by a country. Exports refers to all goods leaving the country which is properly cleared through the customs while imports are all goods entering any of the seaports or airports of entry of the Philippines properly cleared through the customs or remaining under customs control, whether the goods are for direct consumption, for merchandising, for warehousing or for further processing (NSO, 2007: 4). Government policies regarding international trade are state mechanisms to use as protection against free trade. Two of the most important tools are tariffs and quotas. A tariff is a special tax that are imposed on goods traded internationally while a quota is the limitation on the quantities of goods that are imported or exported at a given time (Byrns and Stone, 1984; 853). Apparently, tariffs and quotas may increase the price of a good because a tariff or quota is an additional cost to producers. The said additional cost here

results from their expenditure due to taxes that they pay upon compliance to the policies of the country that they are exporting into. Likewise, the implementation of the quota may also increase the price because lower supply tends to have higher prices especially if the product is highly demanded. Policies like these are used to protect domestic

producers from international competitors and at the same time the government generates revenue through the tariff. Protectionist activities are being lessened nowadays around the globe and the era of trade liberalization has already started. Trade reforms are also applied in the

Philippines and it has participated in international negotiations. Trade liberalization was embraced by the Philippines since the 1980s (Trabajo, 1994). It started with the Tariff Reform Program (TRP) in 1981 until 1985 which has been an extensive revision of the tariff system in the Philippines (Tariff Commission, 1994: 3). Then it was followed by the Import Liberalization Program in 1987 until 1992 to further liberalize the trade. The program aimed to reach uniform tariff rates across all sectors and to convert quantitative into tariff equivalents in the end of 1992 (ibid). From the policies implemented in the 1980s, NEDA conducted an overall tariff review in 1993 for the implementation of the Association of South East Asian Nation ASEAN Free Trade Area/Common Effective Preferential Tariff (ASEAN AFTA/CEPT) plan and General Agreement on Tariff and Trade- Uruguay Round or the GATT-UR negotiation. The Philippines then became a member of the World Trade Organization (WTO) that took effect in 1995 after the ratification of the Philippine Senate of the GATT-UR in December 1994 (Pascual and Glipo, 2002). This further liberalized the Philippine economy as it continuously lessened the trade restrictions. Together with this

ratification was the commitment of the Philippines to agreements in the Uruguay Round that includes the Agreement on Agriculture (AoA) (Ibid.). The main concern of the WTO is to regulate trade restrictions and links its members to one another. It also sets the rules and guidelines between trading partners. As a member, the Philippines is entitled to the bound rates of duty in the markets of all contracting parties for its export products and hence protected against an increase of bound duties (Macam, 1999). In the pursuit of trade liberalization, there are more factors that need to be considered other than government policies like tariffs and import quotas. There are actually a lot of factors that may affect the international trade. One of these factors is price, which is also one consideration in predicting whether a country will be an exporter or importer of specific products (Mankiw, 2006, 687). By comparing the current

domestic price of a specific product with that of another country, the consumers would prefer to buy products in a market that offers a better price (ibid). If the world price is higher than the domestic price then the country would benefit by becoming an exporter. Conversely, if the world price is lower than the domestic price, then the country would likely become an importer. The exchange rate also plays a vital role in international trade. The Philippine currency could not be used in international transactions. Through the exchange rate, a unit of Philippine currency could buy a given quantity of products in other countries (Mankiw, 2004: 688). In addition to this, the level of exchange rate could determine the willingness of an exporter or an importer to trade. If the Philippine currencys value decreases against the dollar it would be profitable for the domestic producers to sell their

products outside the country while if the dollar becomes weaker, importers will have more advantage (Mishkin, 2006: 435). The major crops of the Philippines include rice, corn, coconut, sugar, banana and coffee. Rice is the staple crop of the Philippines that is planted in a quarter of its total agricultural land (Lim, 1996: 15). Even though rice is the Philippines top produced crop, it became insufficient due to increasing demand so the country started to import more and more rice since 1980s (ibid). Rice remained state-traded through the National Food Authority and it is still protected via quantitative restrictions even after all other agricultural products have been liberalized in the WTO negotiation. The lifting of the quota for primary products was an exemption in the AoA. Recently, there are proposals in Congress to liberalize the importation of rice, but the bill was not passed because some concerned WTO citizens opposed it (Ignacio, 2005: 1). The exemption of rice in trade liberalization was supposed to end last 2005 but this was worked out within trading members in order to extend the special treatment to this commodity (Ignacio, 2005: 3). The corn sector is very much like with the rice sector. First, it is also a staple food to some Filipinos; second, it gets a large portion of the Philippine agricultural land; and third, it is also considered as a sensitive agricultural product together with rice. Due to its sensitivity, tariff reduction was not implemented immediately unlike in other products. Its production started to diminish since the 1980s due to land problems (Lim, 1999: 28). The coconut industry is known to be the export winner in the country. The Philippines is the number one supplier of coconut products in the world as it covers 70 percent of it (Grafilo, 1993: 13). Copra and coconut oil are its major products, although

10

these products face problems as the developed countries are having health standardization. The sugar cane industry has been one of the pillars of the Philippines to Foreign exchange but eventually its share in the world market decreased because of the diminishing consumption (Regulado, 1992: 3). The demand for sugar declined because sugar substitutes like high-fructose corn syrup (HFCS) proliferated. In the 1980s, the Philippines had a competitive edge in the banana industry because of the countys ability to offer low prices. But it was pointed out by some concerned Filipinos that banana is not an essential commodity which make the marketing of this product so risky therefore they proposed the total closure of banana plantations and the conversion of these lands into farms that will produce staple foods for local consumption (David et al, 1983:106). Although until today, it was observed that banana is still one of the top export products of the country giving the agriculture sector and the Philippine economy a significant contribution (NSCB, 2007). Fresh bananas are

exported to other countries like Japan, Korea, China, UAE and Taiwan making them into catsup and chips (Calderon and Rola, undated: 5). Coffee is the second largest commodity in the world next to oil and the consumption is still increasing. Past studies by the International Coffee Organization say that the increasing consumption of coffee follows population growth. In the Philippines, 90% of Filipinos consume soluble coffee and the remaining 10% consume ground roasted or brewed (NSCB, ). Being a net exporter in the 1980s, the Philippines earned about US$55M income from the industry annually (DTI). As the domestic demand increases

11

and the coffee production in the Philippines could not sustain rising domestic consumption, the country has become a net importer of coffee (BAS, 2000).

Figure 1. Variable Scheme

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Exchange Rate

Price World price Domestic price

Tariff Rate

Balance of Trade
From 1985 to 2005 (rice, corn, sugar, coconut, banana and coffee)

Conceptual Framework

13

The main focus of this study is the balance of trade of the Philippines for selected agricultural products namely rice, corn, sugar, coconut, banana, and coffee. The Balance of trade (BOT) is also known as net export derived by subtracting imports from exports of a good. Time series data on the BOT for each crop from 1985 to 2005 was examined. The trend in the balance of trade was described in order to

understand how trade liberalization affects the agricultural sector. The situation of the agricultural sector of the Philippines from 1985 to 2005 in the international trade was also studied. The exchange rate, domestic price, world price and tariff rates are the explanatory variables employed to explain the balance of trade over time. The balance of trade is affected by the domestic price and world price of specific goods. If the world price of a good is lower than the domestic price, the country will benefit by importing that good. This may result in a negative balance of trade. But if the domestic market charges a lower price, it could benefit by exporting to the rest of the world. This will lead to a favorable balance of trade. By expressing the two prices in common unit of analysis, which is in US dollar, the researchers would be able to compare which price is cheaper or more expensive. The exchange rate also plays an important role in international trade. Exchange rate is very useful in comparing the prices of a product domestically and internationally because it allows us to express them in common currency. It determines the quantity of the products that the currency can buy in the international market. When the dollar is strong, the exporters earn better than the importers. This may encourage exporters to engage in international trading more and this may result in a positive balance of trade.

14

However, if the dollar becomes weak, it is preferable to import because the price outside the country is cheaper. The annual average exchange rate of the Philippines against US dollar is used. The policy that the Philippine government has adopted to liberalize the market is the reduction of tariff rates. By doing this, the economy became open to world trade. The goods and services can now move freely across borders at a lower cost. The consumers can now choose from a wide range of products to gain satisfaction. And at the same time, the domestic products in the Philippines could also be exported to other countries with the same privileges that we give to imports. Other countries, especially those who also joined the trade negotiations and agreements are also expected to open their markets and reduce their tariff rates. Did the reduction of the tariff rates result in a positive or negative BOT for the agricultural products under study? If the country could produce competitive products which it could export, then it will be favorable for the Philippines. But if the Philippine products are not competitive in the world market, the consumers will prefer to buy imports. To import will not cost much because tariff is lower therefore this may cause to negative balance of trade.

Chapter III
Methodology

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Data Gathering Plan: This study dealt mainly with the following agricultural products: rice, corn, sugar, coconut, banana, and coffee. Secondary data retrieved from different bureaus such as National Statistical Coordination Board (NSCB), National Statistics Office (NSO), Tariff Commission of NEDA and Bureau of Agricultural Statistics (BAS) of the Department of Agriculture were used. Some supplementary data were also collected from the website of the Food and Agriculture Organization (FAO), International Coffee Organization, Bangko Sentral ng Pilipinas, Philippine Coconut Authority (PHILCOA) and the United States Department of Agriculture (USDA). These data include tariff rates of the Philippines, import and export controls, exchange rate, domestic and world prices, quantity of domestic production and quantity of imports and exports. The data coverage is from 1985 to 2005. Some domestic prices are only available in the domestic currency and so, they were converted into US dollar to allow comparison. Data Analysis Plan: In analyzing the data, the researchers used multiple linear regression to see the relationship between the explained (dependent) variable and the explanatory (independent) variables. We used the data on exchange rate, tariff rates, prices and quantity of production to explain the balance of trade in each crop.

The regression function used is Y=b1+b2x2+b3x3+b4x4+b5x5+b6x6+b7x7 where:

Y is the balance of trade in crops in the Philippines X2 is the tariff rate (%)

16

X3 is the exchange rate of export defined as the selling rate (P/$) X4 is the exchange rate of import defined as the buying rate (P/$) X5 is the world price ($/ton) X6 is the domestic price ($/ton) X7 is the domestic production (in thousand tons)

Descriptive statistics were also derived to determine the trend in each variable over time.

Chapter IV
Data Analysis and Presentation

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This chapter presents the results of the study. The first part analyzes the tariff policies pertinent to each crop (rice, corn, sugar, banana, coconut, coffee) covering the 1985 to 2005 period. Then, the level of imports and exports for each product as well as their growth rate and level of productions are analyzed. Next, the trends in export, import and the balance of trade for each crops is explained. Lastly, we examine how the BOT for each product is affected by exchange rate, world price and domestic price.

Tariff Table 1 presents the tariff rates from 1981 to 2005 for each product: rice, corn, banana, sugar, coffee and coconut. This gives us an idea on how the tariff rates of the Philippines for each product have changed in twenty year period being studied. It should be noted that these changes in tariffs are defined by the liberalization program implemented by the government within this scope of time. The liberalization in tariffs actually started with the Tariff Reform Program (TRP) of 1981 which was implemented until 1985. It was followed by the Medium Term Philippine Development Plan

(MTPDP) in 1987 where the intention for further liberalization was mentioned. In 1991, Executive Order 470 was issued rationalizing the tariff structure in the country. Since 1996 up to the present, the Philippines has been narrowing down the tariff rates. The Philippines also became a member of international organizations like WTO in 1995 and AFTA in 1996 which promote the liberalization of the market in the form of reduced tariff rates, among others. Table 1. Tariff Schedule for Rice, Corn, Banana, Sugar, Coffee, and Coconut, in %, 1985-2005

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Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Rice 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50

Corn 50 20 20 20 20 20 20 20 20 20 20 3 3 3 3 3 3 3 3 0 0

Banana 50 50 50 50 50 50 50 50 50 50 50 30 30 20 20 20 15 10 7 5 3

Sugar 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 48 48

Coffee 50 50 50 50 50 50 45 40 35 30 50 50 45 45 45 45 45 40 35 30 30

Coconut 50 50 50 50 50 50 50 50 50 50 50 30 30 20 20 20 15 10 7 5 5

Source: Philippine Tariff Commission Over the 1985 to 2005 period, the tariff schedules for all the agricultural crops included in this study, except for rice, have been revised. Rice is a very essential product of the Philippines. It is the staple food of Filipinos and the staple crop as well. In the liberalization process, rice was excluded from the tariff reduction program with rice tariff remaining constant at 50%. Among the six crops, corn has the most observable changes in tariff rates. From 50% in 1985, it went down to 20% in 1986 which was maintained until 1995. This reduction in tariff for corn might be a result of the said need to import more of the product. The government tried to boost the production of corn to produce sufficiently for the country, but in the end, it was realized that it is better to import in order to meet the domestic demand. Thus, the government decided to further liberalize the market to

19

lessen the cost of importation. In 1996, the tariff rate on corn was further reduced to 3 percent until it was totally abolished in 2004. Banana tariffs were maintained at 50% tariff level from 1985 to 1995, and then reduced to 30% in 1996 up to 1998. After that, the tariff rate was further reduced to 20% which has been effective until 2000. Finally, there has been an annual reduction of tariff rate starting from 15% in 2001 up to 3% in 2005. The tariff structure of sugar remained the same as rice from 1985 to 2003 at 50% rate. The reduction in tariff was applied to this product only in 2004, from 50% to 48%. Imported coffee also had a 50% tariff rate from 1985 to 1990. Every year from 1991 to 1994, the tariff rate was reduced by 5% reaching the lowest level of 30%. In ! 995, when all other products had reduced tariff rates, coffees tariff schedule returned to 50% until 1996. The tariff reduction program had exempted certain products like coffee which may retain or even increase its schedule up to 50% over a reasonable period of time (Tariff Commission, 1994: 17). Coffees tariff rate was reduced in 1997 to 45%. Five percent reductions per year were implemented from 2002 to 2005. Coconuts tariff structure remained unchanged from 1985 until 1995 at 50%. In 1996, the tariff rate was reduced to 30%. The cut in tariff rate for this product continued, until it reached 5% in 2004. In general, a 50% tariff rate was applied in the mid 80s until the mid 90s in most products except for corn which reduced its tariff rate as early as 1986. However, the implementation of trade liberalization through tariff reduction was felt only in 1996. From this point, gradual reduction in tariff rates became visible until 2005. Except for

20

rice and sugar, the aim of the government to implement a rationalized tariff rate on some products was already accomplished by 2005.

Rice The following table shows the volume of exports, imports, BOT, domestic production for rice, and the average domestic and world prices from 1985 to 2005. This reflects the annual performance of rice commodity being produced and traded in the Philippines. The comparison between the international price and domestic price of this commodity is also available. As seen in the data, the Philippines is a net importer of rice. The country has a negative balance of trade for this product almost every year, except in 1987, 1991 & 1992. Despite all the efforts of the government to increase domestic rice production to satisfy the domestic demand, the yield is not enough. It is rare that we do not import rice, but in 1987, rice imports reached the lowest level at 30 metric tons. In that same year we were able to export 111,590 metric tons resulting in the best trade balance in twenty years since 1985. However, this cannot be explained by the level of domestic production because during that year, the Philippine yield for rice was lower than the previous year.

Table 2. Rice Import, Export, BOT, Domestic Production, Domestic Price and World Price, 1985 to 2005

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Year unit 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Mean

Export Im port BOT Dom Prod. . ('000M T) 000t on ('000M T) ('000MT) 0.06 538.15 -538.09 8805.6 0.02 2.06 -2.04 9246.8 111.59 0.03 111.56 8539.9 0.01 181.41 -181.4 8971 16 219.765 -203.765 9458.8 0 592.73 -592.73 9319.4 10.01 0.06 9.95 9673.3 35.1 0.64 34.46 9128.9 0 201.605 -201.605 9434.2 0 0.16 -0.16 10538.1 0 263.248 -263.248 10540.6 0 862.38 -862.38 11283.6 0 722.397 -722.397 11269 0.04 2414 -2413.96 8554.8 0.29 834.378 -834.088 11786.6 0.22 638.78 -638.56 12389.4 0.01 808.23 -808.22 12954.9 0 1187.67 -1187.67 13270.7 0.15 886.47 -886.32 13499.9 0.11 1001.11 -1001 14496.8 0 1822.2 -1822.2 14603 8.2671429 627.49871 -619.23157 10845.96667

Dom Price . US$/Ton 334.1224578 299.6659462 272.4265421 318.537859 313.7815049 358.1472291 332.2356385 375 403.2620081 462.6239512 589.3416928 667.56238 576.6996925 428.7826516 450.2320784 406.5431251 347.5672266 355.5460101 340.2688682 342.4804757 381.6905261 397.9294221

W price orld US$/Ton 216 211 230 301 320 287 313 287 270 268 321 339 303 304 248 202 173 192 198 238 286 262.238095

Source: a. Bureau of Agricultural Statistics b. National Food Authority c. FAO Stat Although the annual yield in rice is not sufficient for domestic consumption, the production of rice has increased at an average of 3% annually from 1985 to 2005. Generally, the production of rice has been increasing over the years except in 1998 when production decreased by 24% which might be the effect of the el nio phenomenon that hit the country that year. Production substantially increased by 37.8% in 1999, the highest growth rate in palay production during the 1985 to 2005 period. Moreover, we can also see in the table that the price of rice in the world market is always cheaper than the price domestically. It was cheapest in the Philippines in 1987 at around US$272 per ton while it was most expensive in 1995 at US$589 per ton. It is

22

interesting to note that during the year when Philippine rice was cheapest, it was also the time when we had the most favorable BOT in rice. To determine how the rice BOT is related to the different independent variables in the study, we regressed the data and derived the following regression equation: Y= 232.498-76.788X2-2.887X3-1.704X4+0.294X5 t= (.264) (-5.205) (-1.246) (-1.585) (2.924) (.000) (.231) (.133) (.010) R2= .645

p-value= (.795) where:

Y is the balance of trade in rice in the Philippines X2 is the exchange rate (P/$) X3 world price of rice ($/ton) X4 is the domestic price of rice ($/ton) X5 is the domestic palay production (in thousand tons)

The equation above shows that for every P1 increase in the foreign exchange rate, balance of trade for rice will decrease by 76.788 thousand tons, holding all other variables constant. When the world price of rice ($/ton) increases by $1/ton, the balance of trade for rice decreases by 2.887 thousand tons, holding all other variables constant. This result affirms the theory of price which says an increase in the world price cause rice import to become more expensive more expensive, causing us to lessen our imports of rice, resulting in a more favorable balance of trade for rice. Also, we got the value -1.704 for the variable domestic price ($/ton), which shows that as the domestic price of rice increases by $1/ton, the balance of trade for rice decreases by 1.704 thousand tons, holding constant all the other variables. As economic theory states, as the domestic price of rice increases, it would be cheaper to import rice from abroad, pushing the imports

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upward, this will result to an unfavorable balance of trade of rice (exports minus imports). The variable quantity of production of rice in the Philippines per year for the time series of 1985-2005 obtained a value of 0.294 in the regression function which tells us that as the quantity of production of rice increases by 1 ton thousand ton, the balance of trade of rice increases by 0.294 thousand tons or becomes more favorable, holding all other variables constant. At the 5% level of significance, only the variables exchange rate and domestic palay production were found to be significant in explaining the balance of trade for rice. We also obtained an adjusted R2 value of .645, telling us that the model, given its variables, was able to explain only 64.5% of the variation in the balance of trade for rice. Moreover, F-test shows that the independent variables used are collectively significant to explain the BOT of rice.

Corn Table 3 summarizes the volume of annual export, import, BOT, domestic production, domestic and world prices of corn from 1985 to 2005. Next to rice, corn also constitutes a big part of the Philippine agricultural production in volume. The domestic production of corn in the Philippines has an increasing trend from 1985 to 2005. The country produced 3,862,800 metric tons in 1985 which reached 5,253,200 metric tons 20 years after. In 2004, it yields its largest amount of production in twenty years since 1985 which amounted to 5413400 metric tons. This years production of corn grew at 17 percent which is also the highest growth rate from 1985 to 2005. However, corn production in 1998 was also affected by the el nio phenomenon which

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resulted to a negative growth rate of 11 percent, the lowest growth rate since 1985 to 2005. That year also had the lowest volume of corn production.

Table 3. Corn Import, Export, BOT, Domestic Production, Domestic Prices and World Price, 1985 to 2005
Ya er 18 95 18 96 18 97 18 98 18 99 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 Ma en E pr x ot (' 0 M ) 00 T 07 .2 7 01 .0 4 02 .0 5 07 .0 5 08 .0 09 .0 1 15 .8 04 .0 1 .3 79 05 .0 07 .0 03 .2 07 .3 07 .1 08 .0 05 .2 05 .1 05 .3 05 .1 03 .1 05 .0 1 44 .0 2 8 Imot pr (0 0 T ' 0M) 21 7 8 .1 8 05 .1 9 5 .8 4 51 2 .1 2 57 12 6 7 .2 3 34 1 4 .2 0 .3 0 .6 04 .6 09 .8 28 2 0 .0 42 4 0 .3 32 6 0 .9 42 2 6 .1 19 6 4 .4 46 3 4 .4 11 7 7 .7 28 4 7 .2 4 .9 8 9 .4 2 14 5 .7 75 16 9 6 .6 8 BT O (' 0 M ) 00 T -2 0 8 .9 -0 4 .1 5 -5 .7 9 58 -2 .0 7 59 -1 2 8 7 .1 -3 4 2 4 .1 15 .5 -0 6 .5 1 .7 65 -0 4 .8 -2 7 5 0 .9 -4 2 1 0 .1 -3 2 9 0 .5 -4 1 5 6 .9 -1 9 8 4 .3 -4 6 8 4 .1 -1 1 2 7 .6 -2 7 9 7 .8 -4 .7 85 -9 .3 2 11 -5 .7 7 -1 5 6 6 .6 Dm r d o .P o . (' 0 M ) 00 T 3 6 .8 82 4 9 .7 00 4 7 .1 28 42 48 4 2 .2 52 4 5 .9 83 4 5 .9 64 4 1 .9 68 4 9 .9 77 4 1 .2 59 4 2 .5 18 4 5 .3 11 4 3 .4 32 3 2 .2 83 4 8 .6 54 4 1 .1 4 51 0 42 55 4 1 .3 39 4 1 .6 65 5 1 .4 43 5 5 .2 23 4 8 .7 4 49 2 D m rc o .P i e y lo (U $M ) el w S / T 12 800 9 .0 0 6 3 10 596 7 .9 6 6 18 524 7 .0 0 0 3 16 961 8 .0 0 7 7 25 639 0 .9 2 0 4 18 116 9 .5 1 6 3 10 923 6 .9 5 4 3 27 472 3 .3 1 7 2 24 703 2 .0 6 1 8 23 741 1 .5 7 2 8 22 478 4 .9 6 0 5 24 607 8 .0 9 9 9 23 064 6 .4 9 3 4 15 036 7 .7 2 1 4 24 459 1 .5 3 7 2 13 717 9 .7 7 6 7 11 778 8 .3 3 0 7 13 665 7 .9 5 7 5 19 607 5 .1 4 1 11 22 8 .6 9 9 12 823 7 .8 2 8 2 20 284 0 .5 8 2 2 D mP ic e o. r wit (U $M ) he S / T 16 798 7 .4 6 1 1 19 477 4 .3 1 1 4 10 309 6 .5 7 6 5 18 193 4 .1 2 8 6 20 021 1 .1 9 0 5 14 757 9 .3 5 1 14 792 5 .7 4 7 6 29 539 0 .2 6 2 1 18 698 8 .1 3 9 2 26 462 2 .5 4 2 4 28 985 7 .9 6 6 2 37 641 0 .8 9 8 8 22 256 4 .2 7 3 7 15 036 7 .7 2 1 4 13 804 8 .0 4 6 10 644 8 .9 5 5 1 14 135 4 .3 0 8 6 13 597 5 .6 9 1 6 16 905 4 .8 2 2 1 10 937 8 .1 6 1 3 14 250 7 .5 3 7 7 19 128 8 .8 5 9 3 WrdP i e ol rc U $M S/ T 16 1 9 5 9 0 18 0 16 2 14 1 17 0 14 0 11 0 17 0 13 2 15 6 17 1 .1 12 0 7 .3 53 7 .9 32 7 5 9 0 10 1 10 1 10 0 15 01 0 .2 7 4

Source: a. Bureau of Agricultural Statistics b. National Food Authority c. National Statistical Coordination Board The annual amount of corn export has been minimal at less than a thousand ton, except in 1993 when we exported 17,390 metric tons. Whereas the amount of corn import has been minimal only in 1986 and 1991-1994 when we imported less than a thousand ton. In general, we import corn at an average of 166,698 metric tons annually. Corns balance of trade is mainly unfavorable from 1985-2005, except in 1991 & 1993 when corn exports exceeded imports. The most unfavorable BOT was experienced 25

in 1998 while the least unfavorable was in 1986. A ban on corn imports was imposed in the second quarter of 1986 because of over-production. Corn could be classified into two varieties: yellow corn and white corn. In the domestic market, the two are segregated showing difference in their prices. In general, white corn is cheaper than yellow corn in the Philippines. In the world market, the available price data makes no distinction between the two varieties. The domestic price of yellow corn reached its cheapest in 2003 at US$159 per ton while for white corn, it was cheapest in 2001 at US$144. In 1996, corn was most expensive both domestically and internationally. The regression equation for corn trade balance is: Y= -881.755+1.183X2-4.991X3+0.764X4+0.237X5+0.429X6-1.890X7 t= (-1.565) (.256) (-1.053) (.312) (.759) (2.583) (.022) (.178) (.861) (-.918) (.374) R2 = .210

p-value= (.140) (.802) (.310) where:

Y is the balance of trade in corn X2 is the tariff rate of corn (%) X3 is the exchange rate (P/$) X4 world price of corn ($/ton) X5 is the quantity of production of corn

X6 is the domestic price of yellow corn (P/ton) X7 is the domestic rice of white corn (P/ton)

The equation for corn shows a value of 1.183 for the variable tariff rate in the regression function, which tells us that holding all other variables constant, when the tariff on corn increases by 1%, the balance of trade of corn increases by 1.183 thousand tons, given a tariff value, when imports on corn decreases, the balance of trade for corn 26

increases. A value of -4.991 in the variable exchange rate shows that an increase in exchange rate by 1 peso per dollar will result to a decrease in the balance of trade of corn by 4.991 thousand tons, holding all other variables constant. Another explanatory variable, which is the world price of corn, has a coefficient of 0.764 indicating that as the world price of corn increases by $1 per ton, the balance of trade of corn increases by 0.764 thousand tons, holding all other variables constant. In economic theory, if the Philippines is a net exporter of corn, an increase in the world price of corn would result to more expensive imports of corn that will result to more favorable balance of trade of corn. The variable quantity of production of corn got a value of 0.237 in the regression function which tells us that an increase in the domestic corn production by one thousand tons, will result to an increase in the balance of trade of corn by 0.237 thousand tons, other variables being held constant. The domestic price of yellow corn has a coefficient of 0.429 which states that as the domestic price of yellow corn increases by P1 per ton, the balance of trade of corn will increase by 0.429 thousand tons, holding all other variables constant. Also, we got the value -1.890 for the domestic price of white corn as another variable telling us that as the domestic price of white corn increases by P1 per ton, the balance of trade of corn would decrease by 1.890 thousand tons, other variables being held constant. In other words, if the domestic rice of corn increases, it would be cheaper to import corn abroad resulting to an unfavorable balance of trade in the case of yellow corn and its opposite for the white corn. Of all the independent variables in the model, only the variable quantity of production of corn is found to be significant. There are other factors not included in the study that will explain the balance of trade for corn. The adjusted R squared value is

27

only .210, telling us that the model, given its variables, was able to explain only 21% of the balance of trade for corn.

Banana In the next table (table 4), the volume of annual production, exports and the prices of banana internationally and domestically are discussed. The Philippines does not import bananas, especially raw bananas. Because of this, the BOT in bananas is equal to its bananas exports. Although this crop grows abundantly in our land, we do not consume it as much as rice and corn. Domestic production over the years has been increasing, so does the level of exports. The highest yield since 1985 was in 2005 which amounted to 6298.2 thousand tons with a growth rate of 11 percent from the previous year. This increase was not the highest because in the year 1999, the growth rate was recorded to be 30 percent. The highest level of banana export was also in 2005.

Table 4. Banana Export, Domestic Production, Domestic Prices and World Price, 1985 to 2005

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Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Mean

Export 000MT 789.251 855.743 774.983 866.793 851.047 839.779 941.842 821.737 1153.471 1155.187 1213.411 1252.196 1143.336 1149.552 1319.632 1599.92 2129.309 1684.986 1829.384 1797.343 2024.321 1247.296

Q of prod. 000MT 3127.1 3192.6 3157.4 3067.3 3190.3 2913.3 2951.1 3059.2 3153.5 3200.8 3499.1 3311.8 3773.8 3492.6 4570.6 4929.57 5059.36 5274.8 5369 5631.2 6298.2 3915.363333

Dom. Price US$/MT 56.671688 56.690902 50.642148 85.449798 86.163203 96.774194 110.50128 116.29747 114.46955 144.54615 140.18417 158.25336 145.71233 101.03499 130.54409 91.798216 82.850327 89.960365 94.271211 106.66691 119.49485 103.76082

World price US$/MT 19.54 20.36 21.14 21.45 22.06 22.43 21.37 21.75 21.78 23.13 24.22 23.03 23 21.58 18.34 17.86 19.09 19.56 14.68 15.24 15.29 20.32857143

Source: a. Bureau of Agricultural Satistics b. National Statistical Coordination Board The regression equation for the banana trade balance is: Y= -84202.8+1273.933X2+32626.198X3+3046.553X4+1301.993X5 t= (-.110) (.184) (3.268) (.005) (.114) (.911) (.839) (.414) R 2 = .852

p-value= (.914) (.856) where:

Y is the balance of trade in banana in the Philippines for the time series of 1985-2005 X2 is the tariff rate of banana X3 is the exchange rate (P/$) X4 world price of banana ($/ton) X5 is the domestic price of banana (P/ton)

29

The slope coefficient of the variable tariff of banana is 1273.933. This means that as tariff of banana increases by 1%, the balance of trade for banana increases by 1273.933 thousand tons, other variables held constant. Logically, if the tariff rate is higher, imported products would be costly therefore importation is not a choice. Moreover, we got a value for the coefficient of exchange rate in the regression model, in which we can infer that balance of trade for banana increases by 32626.198 thousand tons when exchange rate of export increases by P1 per dollar, ceteris paribus. Given a value of 3046.553 for the world price in the regression function, we can infer that there would be an increase of that amount in the balance of trade of banana (in thousand tons) when the world price for banana increases by $1 per ton, holding other variables constant. For the domestic price of banana, it shows that as it increases by P1 per ton, the balance of trade for banana also increases by 1301.993 thousand tons, all other variables held constant. We obtained an adjusted R squared value of .852 which tells us that 85.2% of the balance of trade of banana was explained by the model, given its variables, and shows a significant value on the variable exchange rate. F-test was able to show that the independent variables to explain the BOT of banana. Only the variable exchange rate was found to be significant at 5% level of significance.

Sugar Table 5 gives an idea about the volume of sugar export, domestic production, domestic prices and its world prices in 1985 to 2005. Like banana, the Philippines has no importation of sugar, therefore, we assume that the BOT is the same as the level of

30

exports. There are many different products from sugar but this table indicates only raw sugar products. Table 5. Sugar Export, Domestic Production, Domestic Prices and World Price, 1985 to 2005
Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Mean Export (raw) 000MT 571.6 222 162.9 142.6 210.3 247 274.14 208.06 324.19 182.11 153.21 317.7 197.82 184.8 142.53 138.6 56.73 88.68 145.335 229.627 300 214.282476 Dom. Prod. 000MT 17542.1 14831.1 13797 17275 21424.8 18666.9 21824.5 21801.9 22915.1 24695.2 17774.4 23142.2 22273.1 17333.4 23777.8 21223.438 21708.722 21417.3 23978.4 25579.2 22917.7 20757.10762 Dom. Price US$/MT 255.03067 232.85518 318.15528 391.64491 399.02318 378.41191 360.40981 354.03481 296.64821 362.31884 547.02194 522.07294 410.31773 366.6831 401.23775 322.58065 336.92138 344.80739 309.03107 269.57799 310.75043 356.64453 World Price US$/MT 90.30837004 129.9559471 149.7797357 229.0748899 279.7356828 279.7356828 301.9823789 279.0748899 273.5682819 322.0264317 395.814978 383.4801762 318.9427313 272.246696 216.0792952 200.4405286 250 233.2599119 221.5859031 225.7709251 274.6696035 253.6920495

Source: Bureau of Agricultural Statistics National Statistical Coordination Board Sugar is the export winner of the country. Statistical data showed no importations in this particular product. However the volume of exports of raw sugar from 1985 to 2005 has been fluctuating. In 1985, we exported 571,000 tons but in 2005, we exported only 300,000 tons. Sugar exports decreased by 61% in 1986 and since then, the amount of exports have fluctuated. The lowest level of exportation was in 2001 which amounted to 56,730 tons only; the highest was in 1985 which amounted to 571,600 tons. Probably, this slowing down in the market of sugar internationally was due to the changing taste of 31

our importers. Substitutes like beet sugar have been arising and according to past studies, this has been a big competitor of sugar cane. Despite the fluctuations in sugar exports, the Philippines has been producing sugar at an increasing level. From 17,542,100 metric tons in 1985, the country produced 22,917,700 metric tons in 2005. The highest level was experienced in 2004 when 6% more than the previous years production was produced. Sugar is sold more cheaply in the international market. As shown in the table, the world price is cheaper than the domestic price despite the fact that we are the producer of this product. In both markets, the sugar was most expensive in 1995; it reached US$547 per ton in the domestic market while in the world market it was US$395.8 per ton. However, in the domestic market, sugar was cheapest in 1986 that cost only at US$232.85 per ton while in the world market it was cheapest in 1985 at US$90 per ton only. Using SPSS, the regression equation for sugar is: Y= 4594.910-83.044X2-7.143X3-0.182X4-0.341X5 +.00807X6 t= (1.941) (-1.800) (-2.861) (-.318) (-.807) (.012) (.755) (.432) (1.017) (.325) R2 = .249

p-value= (.071) (.092) where:

Y is the balance of trade in sugar X2 is the tariff rate for sugar X3 is the exchange rate (P/$) X4 world price of sugar ($/ton) X5 is the domestic price of sugar (P/ton) X6 is the domestic production of sugar (in thousand tons)

32

From the regression equation, we can see that as the tariff rate increases by 1%, the balance of trade for sugar decreases by 83.044 thousand tons, holding other variables constant. Looking at it in another way, it states that if we reduce the tariff rate, the Philippine sugar exports will increase. This implies two contradicting ideas. First, tariff reduction has a positive effect to exporters. If we liberalize, other member countries of negotiations in trade liberalization are expected to follow and this may lessen the burden of exports of sugar. But the second idea says that tariff reduction is useless because we learned in the review of related literature that the Philippines is facing a rapid competition in sugar in the world market. Sugar substitutes emerged and now being supported by the former importers of sugar. Another explanatory variable in the model is the exchange rate of export. It has a coefficient of -7.143 which means that a P1 increase in the exchange rate of the US$ will result to a decrease in the balance of trade of sugar by 7.143 thousand tons, other variables being held constant. Also, the world price of sugar shows a coefficient of -0.182 indicating that as the world price of sugar increases by $1 per ton, the balance of trade of sugar decreases by 0.182 thousand tons, holding all other variables constant. Another explanatory variable is the domestic price of sugar which explains that, holding all other variables constant, P1 per ton increase in the domestic price of sugar will result to 0.341 thousand tons decrease in the balance of trade of sugar. Lastly, as the quantity of domestic production of sugar increases by 1 thousand tons, the balance of trade of sugar would increase by 0.00807 thousand tons, all other variables being held constant. In a 5% level of significance, we got significant value for the variable exchange rate which means that it is a sufficient variable to explain the balance of trade for sugar. In the model, we

33

are confident that we are only to commit an error of 5%. We obtained an adjusted R squared value of .249, telling us that the model, given its variables, was able to explain 24.9% of the phenomena balance of trade for sugar, there are other variables to explain it such as weather, etc.

Coconut

Table 6. Coconut Export (desiccated and oil), Domestic Production, Domestic Prices 1985 to 2005
year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Mean export (dessic) 000Tons 64.752 67.893 95.155 88.078 94.517 75.341 80.834 85.295 93.417 75.108 73.126 71.102 76.87 79.26 76.276 76.992 80.696 106.973 106.798 105.829 125.54 85.7072381 export (oil) 000Tons 650.605 1249.448 1031.213 792.88 763.489 1134.541 839.89 882.226 859.2 848.756 1340.41 792.652 1080.16 1178.777 478.709 1036.454 1418.158 944.661 1186.355 959.4 900 969.904 Total Dom. Prod. 000MT 12827.8 14334.9 13730.5 12481.8 11810.4 11940.4 11290.9 11404.9 11328.4 11207 12183.1 11368.1 13182.5 11597.6 12504 10755.7 11227.1 14068.5 14294.2 14366.2 14824.6 12510.88571 Dom. Price copra ($/ton) 145.2706338 84.98722735 177.0772524 216.4728222 214.7168594 122.4152192 171.6062935 242.4841772 188.1639982 259.3440122 286.4420063 352.3992322 275.708917 278.4622967 326.4569366 154.8844658 108.4299345 179.6278579 196.3518715 287.6692699 251.2993526 215.2509827

Source: a. Bureau of Agricultural Statistics b. National Statistical Coordination Board c. Philippine Coconut Industry

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The sixth table shows the data on volume of exports and the domestic production of coconut in the Philippines for the years 1985 to 2005. The domestic price is also shown in the table. Among the coconut products, two commodities were included in the data for exports: desiccated coconuts and coconut oil. Like banana and sugar, coconut always has a positive balance of trade because we are an exporter of this product and we do not import it. The main concern now is its performance in the international market whether our coconut export is increasing or not. Desiccated coconut and coconut oil are only two among the many products generated from coconut. However, oil gets the higher market demand than desiccated coconut, maybe because it is more useful in consumption. The highest level of export of desiccated coconut was in 2002 amounting to 106.973 thousand tons and it was lowest in 1985 at 64.752 thousand tons. For coconut oil, the highest level was in 2001 with a volume of 1418.158 thousand tons while the lowest was in 1985 which amounted to 650.405 thousand tons only. Coconut plants are not like rice, corn, banana and sugar. It is not planted every year or every season. Therefore the numbers of bearing trees that produce coconut products every year does not vary largely. For 1985 to 2005, the highest production was 14824.6

thousand tons in 2005 compared to the lowest level of production which is 10755.7 thousand tons in 2000. The average price of coconut in the Philippines is US$215 per ton every year. In 1986, desiccated coconut reached its lowest price at only US$84 per ton while in 1996, it reached its highest price at around US$352 per ton.

35

The regression equation for coconut is: Y= 48326.328+429.526X2-49459.2X3+47256.631X4-3.416X5-15.107X6 t= (.404) (-.143) (-.475) (.641) (.452) (.658) (.656) (.522) (-.056) (.956) R2 = .174

p-value= (.692) (.008) where:

Y is the balance of trade in coconut in the Philippines for the time series of 1985-2005 X2 is the tariff rate for coconut X3 is the exchange rate of export defined as the selling rate (P/$) X4 is the exchange rate of import defined as the buying rate (P/$) X5 is the domestic price of coconut ($/ton) X6 is the quantity of production (in thousand tons)

The coefficient on tariff rate for coconut is 429.526. It indicates that when tariff increases by 1%, balance of trade of coconut increases by 429.526 thousand ton, other variables being held constant. Obtaining a value of -49459.2 for the variable exchange rate of export tells us that, holding other variables constant, as the exchange rate of export increases byP1 per dollar, the balance of trade of coconut decreases by 49459.2 thousand tons. While a 1% increase in the exchange rate of import leads to the balance of trade of coconut to increase by 47256.631 as shown in the regression equation, ceteris paribus. Another variable, domestic price of coconut has a coefficient of -3.416, saying to us that the balance of trade of coconut will decrease by 3.416 thousand tons when the domestic price of coconut increases by $1 per ton, holding all other variables constant. Lastly, as the quantity of production of coconut increase by 1 thousand ton, the balance of trade of coconut will decrease by 15.107 thousand tons, ceteris paribus. It shows that the model, whit its variables, shows a value of .174 for the adjusted R square. It follows that 17.4%

36

of the phenomena, balance of trade for coconut is explained by the model. There are other variables that can be added to this model to explain the phenomena. Coffee Table 7 summarizes the coffee export, import, BOT, domestic production and domestic prices in the Philippines from 1985 to 2005. By looking at the table, we could see how the coffee industry performed through the years. Table 7. Coffee Export, Import, BOT Domestic Production, Domestic Prices (Arabica, excelsa and robusta) 1985 to 2005
Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Mean Export ('000MT) 30.6 42.6 16.5 26.5 25 9.1 4.63 1.39 0.72 4.1 4.42 0.49 0.54 0.71 0.21 0.27 0.16 0.41 1.15 1.81 0.56 1995 Import ('000MT) 0 0 0 0 0 0 0 40 20 20 50 0 2890 12533 4852 12736 7693 23647 25009 9799 78128 8448.4 BOT Dom. Prod. Dom. Price ('000MT) ('000MT) excelsa (US$/MT) 30.6 137.3 1226.729797 42.6 145.3 1522.892513 16.5 140.1 1406.8885 26.5 141.9 1417.517209 25 155.9 981.8919043 9.1 134.1 738.2133995 4.63 133.4 744.2371021 -38.61 142.1 798.6550633 -19.28 134.2 806.8980997 -15.9 132.6 805.4919908 -45.58 134 1396.159875 0.49 119 2233.78119 -2889.46 130 1288.691493 -12532.29 12.2 1323.311976 -4851.79 117.4 1514.698298 -12735.73 107.557 754.975978 -7692.84 112.271 525.3923192 -23646.59 107.1 651.736728 -25007.85 106.4 720.8865585 -9797.19 102.9 656.480619 -78127.44 105.8 642.6552384 -8440.244 121.5013 1055.151707 Dom. Price arabica (US$/MT) 1399.978478 1692.375712 1725.043783 1607.405649 1650.923835 1087.675765 1221.36846 917.3259494 1759.688763 1689.93135 2036.833856 2025.335893 1665.527844 1303.597831 1473.182053 950.8121711 779.9069474 860.2612414 948.1043491 956.1510353 1116.257865 1374.651849 Dom. Price robusta (US$/MT) 1346.712579 1725.781096 1366.024518 1395.205317 929.364604 767.9900744 853.6406879 796.2816456 790.8125094 1634.630053 2185.344828 1542.418426 1427.058422 1365.943815 1312.532233 728.6662091 517.9007965 482.6522444 619.1777765 614.2079243 1120.117288

Sources: a. Bureau of Agricultural Statistics b. National Statistical Coordination Board c. International Coffee Organization Coffee is the good with the second largest consumption in terms of quantity in the world, next to oil. The Philippines has the capability to produce this good. As shown in

37

the table above, we were a net exporter of coffee until the early 90s but became a net importer by the late 90s up to 2005. This might be due to a decreasing level of production and/or an increasing level of consumption. The level production of coffee in the Philippines decreased from 137,300 tons in 1985 to 105,800 tons in 2005. In 2001, we exported the lowest volume of coffee amounting to 160 tons only. We imported the highest level in 2005 at a volume of 78128 thousand tons. The price of three varieties of coffee, namely: Excelsa, Arabica and Robusta are shown in table 7. In general, Arabica is the most expensive coffee among the three with an average price of US$1375 per ton every year. The prices of coffee were highest in 1995 for Arabica and Robusta.

We got a regression equation for coffee which is: Y= 48326.328+429.526X2-49459.2X3+47256.631X4-3.416X5-15.107X6+1.577X7 t= (1.176) (.756) (-3.149) (.007) (3.094) (.008) (-.306) (.764) (-.973) (.347) (.129) (.899) R2=.576

p-value=(.259) (.462) where:

Y is the balance of trade in coffee X2 is the tariff rate for coffee X3 is the exchange rate of export defined as the selling rate (P/$) X4 is the exchange rate of import defined as the buying rate (P/$) X5 is the domestic price of excelsa ($/ton) X6 is the domestic price of arabica ($/ton) X7 is the domestic price of robusta ($/ton)

38

For the analysis on the agricultural product, coffee, the independent variables tariff, exchange rate of export and import, and domestic price of excelsa, arabica and robusta are used. What we got in the regression model shows that an increase in the tariff by 1% leads to an increase in the balance of trade for coffee increases by 429.526 thousand tons, holding other variables constant. Another explanatory variable, exchange rate of export, shows that, holding other variables constant, balance of trade of coffee will decrease by 49459.2 thousand tons when exchange rate of export increases by P1 per dollar. Also, when the exchange rate of import increases by P1 per dollar, balance of trade of coffee increases by 47256.631 thousand tons, other variables being held constant. For excelsa, when the domestic price of this kind of coffee increases by $1 per ton, balance of trade of coffee would decrease by 3.416 thousand tons, ceteris paribus. For arabica, as domestic price of this kind of coffee increases by $1 per ton, the balance of trade of coffee decreases by 15.107 thousand tons, ceteris paribus. And for robusta, when the domestic price of this kind of coffee increases by $1 per ton, the balance of trade of coffee would increase by 10577 thousand tons, ceteris paribus. We got significant value for the variable exchange rate of export and exchange rate of import and obtained an adjusted R squared value of .576 which tells us that the model was able to explain 57.6% of the balance of trade for coffee. Moreover, F-test shows that the independent variables used are collectively significant to explain the BOT of coffee.

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Chapter V
Summary and Conclusion

Upon looking at the BOT of the Philippines in rice, corn, banana, sugar, coffee and coconut within 1985 to 2005 period, we found the ff: 1. The Philippines is a net importer of rice, corn and coffee. We depend on imports of these goods to support domestic demand. The domestic demand for corn is not satisfied by the local production, therefore we end up importing. 2. The Philippines is a net importer of banana, coconut and sugar. it does not import these goods. 3. For coffee, the Philippines was a net exporter of this product before 1996, but became a net importer beginning 1997. 4. The second objective of this study has been difficult to meet due to unavailability of the data. However, given that the Philippines is a small nation, our countrys share to the world market is also minimal. We saw that the country may continue producing banana, coconut and sugar to contribute more in the world market. Although we are competing with huge nations, we still have comparative advantage as long as there are countries to import our products like in the case of corn, sugar and coconut. 5. In general, the policies employed by the government to implement tariff reduction have been successful. From a very high tariff rate at 50% in 1985, five of the six products that we studied have been reduced to a lower tariff rate. By 2005, corn has a zero tariff rate, banana at 3%, sugar at 48%, coffee at 30% and coconut at

40

5% while rice remained at 50%. This reduction in tariff rate is a product of trade liberalization which resulted into two opposite effects. On the one hand, it is good because it carries the welfare of the consumers since more goods are competing in the market, thus we are able to choose from a wide range and at a lower price. On the other hand, the market liberalization harms the domestic industries because we are not able to produce products that can compete internationally which results to more importations and discouragement to our farmers. 6. Other than tariff rates, the level of production, exchange rate, world price and domestic price were used to explain the BOT of the six products. Although, not all of these variables affected the BOT of each product significantly, some of them are able to explain a lot. Exchange rate significantly affects the BOT of rice, banana, sugar and coffee. The level of domestic production was also found to affect BOT. However, prices were not found to be so important in determining the BOT of these six products. The regression model was able to explain the balance of trade of rice, banana and coffee using the independent variables and found to be collectively significant using F-test.

Recommendation

Trade liberalization is now a trend globally. The Philippines is adapting to this trend to achieve economic development. After the result of this study, we suggest that the government policies should also focus on improving the competence of domestic producers before totally engaging in trade liberalization. We should keep on improving

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the production of crops that gives our country a comparative advantage in the world market. Those crops that we produce insufficiently should also be given attention especially rice which is our staple food. We should not let our farmers be discouraged in producing rice or other crops just because the imported products are cheaper than those they can offer. This study has determined some of the important variables that affect the BOT of the Philippines on the six products that we used, yet not all of them showed significant values to provide complete explanation. In this case, this study could further be

improved by adding more explanatory variables like weather conditions which is not included in this study.

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