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

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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). Thus the agricultural sector should be given special

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

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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.

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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.

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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.

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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.

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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

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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

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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

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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

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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

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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

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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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Conceptual Framework

Exchange

Rate

Price

World priceDomestic price Tariff Rate

Balance of TradeFrom 1985 to 2005

(rice, corn, sugar, coconut, banana andcoffee)

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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.

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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 (%)

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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 exportsfor 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 Rice Corn Banana Sugar Coffee Coconut

1985 50 50 50 50 50 50

1986 50 20 50 50 50 50

1987 50 20 50 50 50 50

1988 50 20 50 50 50 50

1989 50 20 50 50 50 50

1990 50 20 50 50 50 50

1991 50 20 50 50 45 50

1992 50 20 50 50 40 50

1993 50 20 50 50 35 50

1994 50 20 50 50 30 50

1995 50 20 50 50 50 50

1996 50 3 30 50 50 30

1997 50 3 30 50 45 30

1998 50 3 20 50 45 20

1999 50 3 20 50 45 20

2000 50 3 20 50 45 20

2001 50 3 15 50 45 15

2002 50 3 10 50 40 10

2003 50 3 7 50 35 7

2004 50 0 5 48 30 5

2005 50 0 3 48 30 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

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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

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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 WorldPrice, 1985 to 2005

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Year Export Import BOT Dom. Prod. Dom. Price World price

unit ('000MT) 000ton ('000MT) ('000MT) US$/Ton US$/Ton

1985 0.06 538.15 -538.09 8805.6 334.1224578 216

1986 0.02 2.06 -2.04 9246.8 299.6659462 211

1987 111.59 0.03 111.56 8539.9 272.4265421 230

1988 0.01 181.41 -181.4 8971 318.537859 301

1989 16 219.765 -203.765 9458.8 313.7815049 320

1990 0 592.73 -592.73 9319.4 358.1472291 287

1991 10.01 0.06 9.95 9673.3 332.2356385 313

1992 35.1 0.64 34.46 9128.9 375 2871993 0 201.605 -201.605 9434.2 403.2620081 270

1994 0 0.16 -0.16 10538.1 462.6239512 268

1995 0 263.248 -263.248 10540.6 589.3416928 321

1996 0 862.38 -862.38 11283.6 667.56238 339

1997 0 722.397 -722.397 11269 576.6996925 303

1998 0.04 2414 -2413.96 8554.8 428.7826516 304

1999 0.29 834.378 -834.088 11786.6 450.2320784 248

2000 0.22 638.78 -638.56 12389.4 406.5431251 202

2001 0.01 808.23 -808.22 12954.9 347.5672266 173

2002 0 1187.67 -1187.67 13270.7 355.5460101 192

2003 0.15 886.47 -886.32 13499.9 340.2688682 198

2004 0.11 1001.11 -1001 14496.8 342.4804757 238

2005 0 1822.2 -1822.2 14603 381.6905261 286

Mean 8.2671429 627.49871 -619.23157 10845.96667 397.9294221 262.238095

Source: a. Bureau of Agricultural Statisticsb. National Food Authorityc. 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

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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)

p-value= (.795) (.000) (.231) (.133) (.010) R2= .645

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 WorldPrice, 1985 to 2005

Year Export Import BOT Dom. Prod. Dom. Price Dom. Price WorldPrice

('000MT) ('000MT) ('000MT) ('000MT) yellow(US$/MT) white(US$/MT) US$/MT

1985 0.277 281.178 -280.9 3862.8 192.0800603 176.4769181 116

1986 0.014 0.159 -0.145 4090.7 170.956966 149.3417174 95

1987 0.025 55.814 -55.789 4278.1 178.0502043 160.5370695 90

1988 0.075 25.172 -25.097 4428 186.0906717 148.1129836 108

1989 0.08 172.263 -172.18 4522.2 205.9623094 210.1092015 126

1990 0.091 344.21 -344.12 4853.9 198.5111663 194.375517 114

1991 1.85 0.3 1.55 4654.9 160.9952433 154.7749726 107

1992 0.04 0.6 -0.56 4618.9 237.3417722 209.2563291 104

1993 17.39 0.64 16.75 4797.9 224.0760138 188.1639982 101

1994 0.05 0.89 -0.84 4519.2 213.5774218 226.5446224 107

1995 0.07 208.02 -207.95 4128.5 242.9467085 278.9968652 123

1996 0.23 402.34 -402.11 4151.3 284.0690979 307.8694818 165

1997 0.37 302.96 -302.59 4332.4 263.4096344 242.2275367 117.1

1998 0.17 462.12 -461.95 3823.2 175.7023164 175.7023164 1021999 0.08 149.46 -149.38 4584.6 214.5435792 183.084064 75.33

2000 0.25 446.43 -446.18 4511.104 193.7771677 180.9654541 73.92

2001 0.15 171.77 -171.62 4525 181.3737087 144.3103856 75

2002 0.35 278.24 -277.89 4319.3 173.9656755 153.6599176 90

2003 0.15 48.9 -48.75 4615.6 159.164017 146.8920251 110

2004 0.13 91.442 -91.312 5413.4 181.62929 180.1963173 110

2005 0.05 57.75 -57.7 5253.2 172.8822832 174.5235707 100

Mean 1.04248 166.698 -165.66 4489.724 200.5288242 189.8152983 105.20714

Source:a. Bureau of Agricultural Statisticsb. National Food Authorityc. 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

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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) (2.583) (.178) (-.918)

p-value= (.140) (.802) (.310) (.759) (.022) (.861) (.374) R2 = .210

where:

Y is the balance of trade in corn

X2 is the tariff rate of corn (%)


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

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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

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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 Export Q of prod. Dom. Price World price

000MT 000MT US$/MT US$/MT

1985 789.251 3127.1 56.671688 19.54

1986 855.743 3192.6 56.690902 20.36

1987 774.983 3157.4 50.642148 21.14

1988 866.793 3067.3 85.449798 21.45

1989 851.047 3190.3 86.163203 22.06

1990 839.779 2913.3 96.774194 22.43

1991 941.842 2951.1 110.50128 21.37

1992 821.737 3059.2 116.29747 21.751993 1153.471 3153.5 114.46955 21.78

1994 1155.187 3200.8 144.54615 23.13

1995 1213.411 3499.1 140.18417 24.22

1996 1252.196 3311.8 158.25336 23.03

1997 1143.336 3773.8 145.71233 23

1998 1149.552 3492.6 101.03499 21.58

1999 1319.632 4570.6 130.54409 18.34

2000 1599.92 4929.57 91.798216 17.86

2001 2129.309 5059.36 82.850327 19.09

2002 1684.986 5274.8 89.960365 19.56

2003 1829.384 5369 94.271211 14.68

2004 1797.343 5631.2 106.66691 15.24

2005 2024.321 6298.2 119.49485 15.29

Mean 1247.296 3915.363333 103.76082 20.32857143

Source:a. Bureau of Agricultural Satisticsb. 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) (.114) (.839)

p-value= (.914) (.856) (.005) (.911) (.414) R2 = .852

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


X4 world price of banana ($/ton)

X5 is the domestic price of banana (P/ton)

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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

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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 2005Year Export (raw) Dom. Prod. Dom. Price World Price000MT 000MT US$/MT US$/MT

1985 571.6 17542.1 255.03067 90.30837004

1986 222 14831.1 232.85518 129.9559471

1987 162.9 13797 318.15528 149.7797357

1988 142.6 17275 391.64491 229.0748899

1989 210.3 21424.8 399.02318 279.7356828

1990 247 18666.9 378.41191 279.7356828

1991 274.14 21824.5 360.40981 301.9823789

1992 208.06 21801.9 354.03481 279.0748899

1993 324.19 22915.1 296.64821 273.5682819

1994 182.11 24695.2 362.31884 322.0264317

1995 153.21 17774.4 547.02194 395.814978

1996 317.7 23142.2 522.07294 383.4801762

1997 197.82 22273.1 410.31773 318.9427313

1998 184.8 17333.4 366.6831 272.246696

1999 142.53 23777.8 401.23775 216.0792952

2000 138.6 21223.438 322.58065 200.4405286

2001 56.73 21708.722 336.92138 2502002 88.68 21417.3 344.80739 233.2599119

2003 145.335 23978.4 309.03107 221.5859031

2004 229.627 25579.2 269.57799 225.7709251

2005 300 22917.7 310.75043 274.6696035

Mean 214.282476 20757.10762 356.64453 253.6920495

Source:Bureau of Agricultural StatisticsNational 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

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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) (1.017)

p-value= (.071) (.092) (.012) (.755) (.432) (.325) R2 = .249

where:

Y is the balance of trade in sugar

X2 is the tariff rate for sugar


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)

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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

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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 Prices1985 to 2005

year export (dessic) export (oil) Total Dom. Prod. Dom. Price

000Tons 000Tons 000MT copra ($/ton)1985 64.752 650.605 12827.8 145.2706338

1986 67.893 1249.448 14334.9 84.98722735

1987 95.155 1031.213 13730.5 177.0772524

1988 88.078 792.88 12481.8 216.4728222

1989 94.517 763.489 11810.4 214.7168594

1990 75.341 1134.541 11940.4 122.4152192

1991 80.834 839.89 11290.9 171.6062935

1992 85.295 882.226 11404.9 242.4841772

1993 93.417 859.2 11328.4 188.1639982

1994 75.108 848.756 11207 259.3440122

1995 73.126 1340.41 12183.1 286.4420063

1996 71.102 792.652 11368.1 352.3992322

1997 76.87 1080.16 13182.5 275.708917

1998 79.26 1178.777 11597.6 278.4622967

1999 76.276 478.709 12504 326.4569366

2000 76.992 1036.454 10755.7 154.8844658

2001 80.696 1418.158 11227.1 108.4299345

2002 106.973 944.661 14068.5 179.6278579

2003 106.798 1186.355 14294.2 196.3518715

2004 105.829 959.4 14366.2 287.6692699

2005 125.54 900 14824.6 251.2993526

Mean 85.7072381 969.904 12510.88571 215.2509827

Source:a. Bureau of Agricultural Statisticsb. National Statistical Coordination Boardc. 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.

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The regression equation for coconut is:

Y= 48326.328+429.526X2-49459.2X3+47256.631X4-3.416X5-15.107X6

t= (.404) (-.143) (-.475) (.452) (.656) (-.056)

p-value= (.692) (.008) (.641) (.658) (.522) (.956) R2 = .174

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



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%

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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 Export Import BOT Dom. Prod. Dom. Price Dom. Price Dom. Price

('000MT) ('000MT) ('000MT) ('000MT) excelsa (US$/MT) arabica (US$/MT) robusta (US$/MT)

1985 30.6 0 30.6 137.3 1226.729797 1399.978478 1346.712579

1986 42.6 0 42.6 145.3 1522.892513 1692.375712 1725.781096

1987 16.5 0 16.5 140.1 1406.8885 1725.043783 1366.0245181988 26.5 0 26.5 141.9 1417.517209 1607.405649 1395.205317

1989 25 0 25 155.9 981.8919043 1650.923835 929.364604

1990 9.1 0 9.1 134.1 738.2133995 1087.675765 767.9900744

1991 4.63 0 4.63 133.4 744.2371021 1221.36846 853.6406879

1992 1.39 40 -38.61 142.1 798.6550633 917.3259494 796.2816456

1993 0.72 20 -19.28 134.2 806.8980997 1759.688763 790.8125094

1994 4.1 20 -15.9 132.6 805.4919908 1689.93135 1634.630053

1995 4.42 50 -45.58 134 1396.159875 2036.833856 2185.344828

1996 0.49 0 0.49 119 2233.78119 2025.335893 1542.418426

1997 0.54 2890 -2889.46 130 1288.691493 1665.527844 1427.058422

1998 0.71 12533 -12532.29 12.2 1323.311976 1303.597831 1365.943815

1999 0.21 4852 -4851.79 117.4 1514.698298 1473.182053 1312.532233

2000 0.27 12736 -12735.73 107.557 754.975978 950.8121711 728.6662091

2001 0.16 7693 -7692.84 112.271 525.3923192 779.9069474 517.9007965

2002 0.41 23647 -23646.59 107.1 651.736728 860.2612414 482.6522444

2003 1.15 25009 -25007.85 106.4 720.8865585 948.1043491 619.1777765

2004 1.81 9799 -9797.19 102.9 656.480619 956.1510353 614.2079243

2005 0.56 78128 -78127.44 105.8 642.6552384 1116.257865

Mean 1995 8448.4 -8440.244 121.5013 1055.151707 1374.651849 1120.117288

Sources:a. Bureau of Agricultural Statistics

b. National Statistical Coordination Boardc. 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

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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) (3.094) (-.306) (-.973) (.129)

p-value=(.259) (.462) (.007) (.008) (.764) (.347) (.899) R2=.576

where:

Y is the balance of trade in coffee

X2 is the tariff rate for coffee



X5 is the domestic price of excelsa ($/ton)

X6 is the domestic price of arabica ($/ton)

X7 is the domestic price of robusta ($/ton)

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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

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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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Documents

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