Smuggling is killing shoe, garments, textile industries

Third of four parts

MARIKINA CITY — As a young boy, Vic Sabiniano never had to worry about spending money even if his family was poor. If his pockets were empty, all he had to do was go to any neighborhood shoe factory in Marikina and offer to help — for a fee, of course.

“Almost every household was into shoemaking,” recalls Sabiniano. By the time he was a teenager, he was a shoemaker himself. He was already so good at assembling shoes at 18 that he began dreaming of having his own shoe factory. He had no doubt he was going to make it — just like many of his townmates — and he was able to convince his father to mortgage their house to finance his dream.

His company, Tambuli Shoes, became a huge success. Sabiniano was even able to send himself to college, buy several pieces of property and, years later, set up two more shoe factories. At the time, Sabiniano recounts, some of the biggest department stores in the country were among his clients, each ordering 6,000 pairs of shoes a year.

Today, however, orders are hard to come by. Just like hundreds of other shoe company owners here, Sabiniano, only 42, has had to lay off many of his workers while one of his factories has already ceased operations. Shoemakers here are one in saying technical smugglers have done in their industry. While some of these misdeclare or misclassify their goods, the smugglers who resort to undervaluing imports may be the most guilty of putting the local shoe industry — and other industries for that matter — practically at death’s door.

When importers undervalue their goods, they pay taxes and duties much lower than what they should really be charged, thereby enabling them to sell the items cheap. If the items already cost less than the local versions to start with, there would be no chance for the Philippine goods to beat their prices at the market.

Tariffs and duties are imposed on imports not only to generate revenues for the government, but also to control the entry of products from abroad and give local goods some leverage in the market. Trade liberalization has taken place in recent years in part to discourage smuggling, but some sly traders have instead used the policy and the sheer massive volume of shipments it has encouraged to sneak in tons of undervalued goods.

Although the Samahan ng Magsasapatos ng Pilipinas (SMP), of which Sabiniano is president, is seething over technical smugglers, it nevertheless blames the Bureau of Customs for allowing the importation of “grossly undervalued footwear” from China in the first place.

While the average importation value of leather shoes in 1997 was valued at $12.65 a pair, the corresponding value in 2002 was only $0.76, notes the SMB. The industry association estimates that the government loses an average of P30 billion in terms of uncollected duties and taxes annually because of this type of technical smuggling. Sabiniano even says that is a conservative figure, with the amount going up to as much as P70 billion if “more realistic values” are applied.

The impact here in Marikina, meanwhile, has been this: in 1994, the city had a total of 104,799 jobs in 513 registered manufacturers. By 2003, only 42,311 jobs and 188 registered shoemakers were left. Shoe production went down from almost 15 million pairs in 1993 to six million pairs in 2003. Between 1999 and 2003 alone, close to 61 percent of registered shoe companies closed while the number of people employed by the industry declined by more than 50 percent.

“The trouble with (Chinese) shoes is that China is overproducing them,” says academic and Fair Trade Alliance executive director Rene Ofreneo, in a paper on smuggling. “Thus not only are the shoes undervalued, they are sold locally at giveaway prices because they are surplus shoes being dumped in the domestic Philippine market — like the wag-wag and ukay-ukay garments coming from China and other neighboring countries.”

Industry organizations and Customs insiders say importers can easily undervalue their shipments because of how the Bureau of Customs applies the concept of the transaction value, which is the basis for computing tariffs. Transaction value, according to Republic Act 8181, is “the price actually paid or payable for the goods when sold for export to the Philippines.” In many cases, say bureau insiders and businessmen alike, the customs bureau does not question whatever transaction value is presented, although it can and does at times impose more reasonable values.

Customs “just accepts (any transaction value) without validating,” says one businessman. Yet it can arrive at a more accurate and fair value if it wants to, he says, citing his own experience in importing a product that he had bought at a discounted price of $2.50 a kilo. Customs, he says, balked and assessed the dutiable value as $3.30. The businessman admits this was “the real value,” except that his supplier had given him a special price.

With the enactment of RA 8181, transaction value effectively replaced the home consumption value — the value or price declared in the consular, commercial, trade, or sales invoice — as the basis for computing the dutiable value of an imported commodity. According to the FTA, one of the advantages of using the home consumption value is that “it’s much closer to the value of the goods being imported compared to the ‘agreed’ valuation by the importer-exporter.”

Put more simply, it was less prone to manipulation by greedy businessmen who may ask suppliers abroad to put on the commercial invoice a lower amount than what they were actually paid. Economist Nonoy Oplas, though, says that what drives importers to cheat on their declared import values and volumes is “corruption and harassment at the customs area.”

Many industry organizations agree with that observation, although they also say the customs bureau tends to be passive when presented with questionable transaction values. Textile industry insiders for instance complain that import valuation for yarn is as low as $0.54 per kilogram. The valuation for fabrics is ridiculously low at $0.19 per kilo while it is $0.12 a kilo for garments.

“Instead of a scale of increasing value due to additional processing cost and losses due to processing wastes,” they note, “these value are accepted by the Bureau of Customs because they are considered as transaction values under the WTO (World Trade Organization).”

Local tire manufacturers have also noticed that tires are “coming in with prices below material cost.” In a letter dated April 12, 2004, the Tire Manufacturers Association of the Philippines complained to then Customs Commissioner Antonio Bernardo that tires from Indonesia had declared the same customs values for the last six years. The association requested that the bureau “adjust the values of these imported tires to (an) acceptable level.”

Observe the textile industry insiders: “In other countries….goods that are of questionable values are immediately confiscated by their governments and exporters are required to justify the values they use.” This has yet to be done by Customs, they say, even if such acts are clear violations of the law, making the goods subject to seizure.

Aside from undervaluing their goods, some technical smugglers resort to misdeclaration and misclassification of the products they bring in. Misdeclaration takes place when an importer uses a product description outside the appropriate chapter heading under the Tariff and Customs Code. An example is when an importer declares on his import entry that he is bringing in apparel on his import entry when in fact what is shipped in are tires. Both are subject to different tariffs.

Misclassification, meanwhile, is the use of another tariff line within the same chapter heading. This happens when an importer declares, says, slippers when his shipment consists of leather shoes. Again, the tariffs are different.

Yet case upon case documented by various manufacturing and agricultural sectors show that such irregular transactions are cleared by Customs.

The Federation of Philippine Industries (FPI), for instance, says it had become common practice in recent years for garment importers to pass off their shipments as “sacks and bags.” Customs import entries themselves show that in 2001 and January to March 2002, imports declared as sacks and bags were found to consist mostly of garments.

In 2001, only nine percent of 12.33 million kilograms of shipments declared as sacks and bags turned out to be sacks while the rest were garments. From January to March 2002, only five percent of the registered 1.416 million kilograms of sacks and bags were actually sacks; again, the rest were garments. These items were declared at only $0.20 to $0.23 per kilogram instead of per piece, significantly bringing down the dutiable value. The estimated losses in volume and quantity were 2.69 million kilos and $3.575 million, respectively.

The FPI notes that these “spurious transactions were all cleared” at the port of Manila and the Manila International Container Port (MICP), where the import entries misdeclaring garments as sacks and bags were filed. The federation also compiled a list of the top 100 producers of sacks and bags in the Philippines as of August 2002, and pointed out, “With the availability of the said products locally, do these importers have to resort to importation of sacks and bags?”

This practice of misclassifying garment shipments had been going on for a long time. Although it has been uncovered by members of the local textile industry, there are fears that it is still ongoing. “These nefarious activities of the importers and brokers with the help of their cohorts inside the Bureau should be stopped,” said the FPI in a report to President Arroyo.

All these have been happening even if the Philippine Chamber of Commerce has fielded technical experts, also known as industry commodity experts or ICEs, in specific ports to help curb smuggling. The ICEs, who may work full- or part-time depending on their sector’s financial state, lend their expertise in detecting undervaluation, misclassification, and misdeclaration of specific goods covered by their respective industries.

Import entries are supposed to pass through them for verification; if they detect undervaluation, they can recommend an acceptable duty. It is still Customs, however, that decides how much the importer should pay in taxes and duties, and the ICEs as a rule have no way of knowing how much was actually paid.

Fielding an ICE may also be difficult if the industry is already in its death throes. The textile industry, for instance, is barely alive. Before smuggling became rampant, one had only to go to Baclaran to buy cheap locally made garments, the bulk of which was supplied by garment makers in Taytay, Rizal. Today Baclaran is still full of cheap garments, but most of these are from China; visitors to Taytay, meanwhile, no longer hear the steady hum of sewing machines.

In 2000, the volume of smuggled yarn, fabrics, and garments was placed at 151,000 metric tons, or 51 percent of the estimated 300,000 metrics tons imported into the country (based on a per capita consumption of four kilograms for an estimated total population of 75 million). Ironically, says an industry veteran, the Philippines once exported fabrics in high volumes. “Textile used to be the highest foreign exchange earner in the Philippines,” he says.

Today, of the 33 member mills that the Textile Mills Association used to have, only seven are left. In the last two years, 11 have closed shop because, like the rest that had previously folded up, “they could not compete with the illegitimate imported textile goods that do not pay VAT [value-added tax] and tariff,” said the association in an official statement.

Largely because of technical smuggling, the industry that used to employ more than two million people now has only about a million left. If smuggling remains unabated, that figure may just get smaller.

Textile and garment manufacturing is labor-intensive. For a P10,000 investment, say industry insiders, one can already buy a second-hand machine and employ two people to work on two shifts and another two to do other tasks such as cutting, sewing buttons, and ironing. If only the textile industry were not ailing, they say, it could easily contribute to the efforts to meet President Arroyo’s target of creating 10 million jobs by the end of her term, says an industry insider.