The Philippines government has confirmed that it will phase out import tariffs on vehicles imported from Japan from 2010, as part of the Japan Philippine Economic Partnership Agreement (JPEPA), writes Tony Pugliese. 

Japan, which is by far the Philippines' largest export market, pushed hard for the elimination of automotive import tariffs in the ongoing bilateral free trade negotiations between the two countries. It is also holding bilateral free trade agreement (FTA) talks with all major economies in South-East Asia.

The Philippines and Japan are expected to put the final touches to the JPEPA in September and ratify the agreement by the end of the year. By 2010, there will be little or no import tariffs on goods traded between the two countries, inevitably providing a major boost to bilateral trade. But the Philippines will likely come under growing pressure from other trading partners for similar access to its market.

As a hugely capital-intensive industry, the automotive sector will be particularly affected by the agreement.

Mr Elmer Hernandez, director of the country's Board of Investment (BOI) and deeply involved in the JPEPA negotiations, confirmed that his government has decided to implement a gradual tariff reduction programme on cars with engines smaller than 3-litres, to allow time for the domestic industry to adjust.

If the agreement is put into effect at the end of the year, tariffs on passenger cars with engines smaller than 3-litres will be reduced from the current 30% to 29% next year, falling further to 26% in 2007; 23% in 2008; 20% in 2009; and eliminated entirely in 2010. Import tariffs on larger passenger cars, currently at 35%, would be eliminated suddenly and completely in 2010.

The implications of the tariff cuts are significant, with sources within the Philippine domestic automobile industry unofficially acknowledging that much of the current vehicle assembly industry will be threatened by the agreement. With vehicle sales forecast at best at 95,000 units this year, the vehicle industry simply does not have the economies of scale to compete with imports. The future of the country's automotive industry "may lie in component production" - admitted one source.

Ford Philippines, the only company with a significant vehicle export programme in the country and the sole participant in the BOI's Automotive Exports Program (AEP),  has lobbied strongly against the tariff cuts as it feels it would jeopardize its investment programme. It exports the Escape and Tribute SUVs and the Focus passenger car neighbouring Thailand and Indonesia. Earlier this year, the company expanded its parts operations as part of a US$50m investment programme to boost export production.

Toyota Motor Philippines (TMP) is more supportive of the tariff programme, however. Company spokesman Mr Ariel de Jesus confirmed that TMP supports "efforts to find a common and acceptable formula for a gradual tariff reduction for vehicles with displacements below 3.0L, since this concerns models which are being locally assembled or produced in the country". Currently, TMP assembles the Camry, the Corolla Altis and Innova.  "Gradual tariff reductions would provide enough time for local assemblers to prepare for zero tariffs in 2010".

Tony Pugliese