Chapter 3 - Trading Conditions

Foreign Trade | The Opportunities
Packaging and Labeling | Negotiating a Deal | Distributon Selling and Pricing

Traditionally within the distribution chain it is the stocking distributors that import consumer goods for resale to retailers. Capital equipment imports usually go through local agents before reaching their local buyers. Here, local agents serve a major role in selling the foreign product or winning a project. Often such agents are also equipped to handle after-sales service support.

With the Asian economic crisis of 1997, many importers have switched from being stocking distributors to becoming indentors. Stocking distributors are bound by a contract to buy and sell a prescribed number of items as stated in their agreement with the foreign supplier while indentors act only as a broker between the supplier and the end-user.

Advertising and product promotion is as vital to commercial success in the Philippines as it is elsewhere. There are about 200 advertising agencies in Manila that promote their clients products in over 40 national daily newspapers, seven major TV stations, and 530 radio stations. In 1997 alone, advertising expenses totaled US$700 million. Major advertising agencies often subcontract to local agents for specialized services but often demand extended payment conditions from subcontractors. In many reported instances, the primary contractor will delay payment of subcontractor of at least 120 days from date of payment by the client.

Increasingly specialized public relations firms are being retained to handle a range of "consumer relations" issues from event management to crisis management.

Filipino buyers often buy on price and consider the price of the product as the most important factor in making a purchase decision. Often, even for contracts written in pesos, the final import price will be pegged to the US dollar.

Consumer product markup typically ranges from 10% to 30% from wholesale distributor to retailer while an import agent's commission ranges from 5% to 15%. Outside of Manila product mark-up can often increase considerably to account for the higher distribution costs.

Distributors explain that these rates allow them to recover expenses incurred in importing the equipment - import duties, value added taxes, discounts to customers, commissions to company-employed agents and independent provincial dealers, warehousing fees, shipping charges (some are charged to the importer), and other Bureau of Customs fees.

Kickbacks are often involved as well but these are usually not discussed and foreigners are better not to enquire too deeply.

In recent times, and with the depreciation of the peso against the US dollar, foreign products - and particularly goods from America and other countries that are tied to the US currency - have become increasingly expensive in the local market although in many instances importers and others within the supply chain have been forced to shave their margins.

Importers are increasingly demanding longer-term credits. For example, U.S. suppliers are being asked to extend a 60-day term to 120 days, or a 90-day term to 180 days so that importers can also extend similar longer credit terms to their clients.

The recent strength of the US and European currencies does of course offer a window of opportunity for suppliers from other countries with more competitive currencies to obtain a foothold in the market. Unfortunately in many instances such suppliers have been slow to take advantage of the situation.

Methods of Payment

Since 1992, the Central Bank of the Philippines (BSP) has increasingly liberalized the acceptable modes of payment for exports and imports under a succession of new regulations, provided that the commodities to be exported or imported are not classified as "prohibited" or "regulated" (the latter requiring special clearance from the appropriate government agencies).

For monitoring purposes, the BSP requires the pre-registration of imports under Documents Against Acceptance (D/A) and Open Account (O/A) arrangements before an importer can obtain the required foreign exchange from the banking system for payment.

Export payment terms vary from Cash in Advance to Open Account. Commercial banks may sell foreign exchange to service payments for imports under the following arrangement without prior Central Bank approval: direct remittance, letters of credit, documents against acceptance (D/A), open account (O/A), and documents against payment (D/P).

Other arrangements not involving payments using foreign exchange are allowed without the need for prior Central Bank approval. These include self-funded (no-dollar) imports, which are funded from an importer's own foreign currency deposit accounts, or those sent by suppliers abroad for which no payment in foreign exchange will be made as well as importations on consignment basis. These refer to importations by export producers of raw materials and accessories/supplies from foreign suppliers abroad for the manufacture or processing of products destined for export to said foreign suppliers/buyers.

Trade Financing

While export assistance programs are supposed to be phased out under WTO arrangements, a number of programs still operate to assist overseas companies that want to export their product to the Philippines and elsewhere. Many local companies use the facilities of the U.S. Eximbank to purchase American equipment they need. Exim also offers matching credit to help U.S. exporters compete against other countries' mixed credit packages. Exim's current exposure in the Philippines is about $2.3 billion.

Other countries offer similar schemes.

Exporters can avail of various Exim loan, loan guarantee and export credit insurance programs. The U.S. Embassy's Economic and Commercial section serves as Eximbank's liaisons in the Philippines.

The U.S. Department of Agriculture (USDA) has recently allocated $100 million in export credit guarantees for the Philippines for purchase of agricultural products under the GSM-102 program. This program guarantees payments due from foreign banks. The loan period is up to three years and the guarantee covers 98% of principal due from foreign banks. The program covers a wide range of agricultural commodities.

The Asian Development Bank (ADB), the World Bank, the U.S. Trade & Development Agency (TDA) and Overseas Private Investment Corporation (OPIC) also provide funding for a wide range of projects. Both the ADB and the International Finance Corporation (IFC), which is part of the World Bank group, make financing available directly to private enterprises without government guarantee.

Companies seeking to use these facilities to import from the USA should contact the commercial section of the US Embassy

Avoidance and Settlement of Commercial Issues

Exporters and importers need to have contracts and agreements executed in the Philippines if they want Philippine laws to govern the interpretation of these documents. The employment or retention of a local lawyer or accountant is recommended for any company that plans to establish an office in the country. If practicable such people should be included on the board of directors.

Professionals can also facilitate additional paper works and transactions with government offices involved.

It is also important for foreigners to consider and understand the major Philippine laws affecting trading. Among the more important codes are the anti-monopoly law, which seeks to encourage fair and free competition; the Intellectual Property Law (R.A. 8293), which governs the copying and stealing of intellectual property rights. IP laws are discussed further in Chapter 9.

The use of a business name or trademark in the Philippines that has been previously registered with the Department of Trade cannot be used by anybody else as provided for under the Business Name and Trademark law.

The use of Filipino dummies to comply with the citizenship requirement is prohibited under the Anti-Dummy Law.

The country also implements a Labor Code, which provides workers the right to organize and bargain collectively. Chapter 7 discusses the Labor Code and general labor issues.

Tariffs and Trade Barriers

While the Philippine market is considered open, the government still implements tariffs and other trade practices that serve to restrict the entry of a number of products. However, there is a gradual reduction on tariff rates imposed on imports as the country commits itself to the ideals of the World Trade Organization (WTO).

Under the comprehensive tariff reform program, as elaborated in Executive Orders (E.O.) 264 and 288, a two-tiered scheme of applied tariffs of 3 percent will be imposed for raw materials and 10 percent for finished products by January 2003, and a uniform 5% tariff rate by January 2004.

The program gradually lowers applied duty rates on nearly all items. Quantitative restrictions (QRs) on "sensitive" agricultural products (except rice) were replaced with tariff rate quotas. In 1990, the average nominal tariff was placed at 27.84 percent. This went down to 13.43 percent in 1997 and 11.24 percent in 1998. It is programmed to fall to 10.21 percent eventually.

Fourteen tariff lines of agricultural commodities (at the 4-digit HS level) are currently subject to Minimum Access Volume (MAV) Tariff-Rate Quotas (TRQs), established as a result of the Uruguay Round. Products covered by these TRQs include live animals, fresh and chilled beef, pork, poultry meat, goat meat, potatoes, coffee, corn, and sugar. The National Food Authority, a government entity, is the sole importer of rice and continues to be involved in imports of corn.

Certain items remain subject to import regulation, including: narcotic drugs; firearms and ammunition; used clothing and rags; toy firearms; sodium cyanide; chlorofluorocarbon and other ozone-depleting substances; penicillin/derivatives; coal/derivatives; color reproduction machines; chemicals for the manufacture of explosives; pesticides; used motor vehicles; and used tires.

Excise taxes are also imposed on imported distilled spirits and automotive vehicles.

Customs Valuations

The Bureau of Customs generally uses the export value of a product as the basis for computing dutiable value in accordance with Customs Administrative Order (CAO) No. 2-96. Export value is considered to be the cost that the same or identical product attracts if it is freely offered for sale in the principal export markets of the source country. If the export value cannot be ascertained, the value may be imputed on the basis of one or other of the following: cost at country of manufacturer or origin, third country cost, or finally the domestic wholesale selling price.

Many imports valued at over $500 are permitted entry only when accompanied by a "Clean Report of Findings," issued by SGS. Refrigerated products are exempt. Certain goods require pre-shipment inspection in the country of export. The pre-shipment inspection requirement extends to exports to certain operations in free-trade zones.

The Philippines is scheduled to bring its Customs Code into line with the ASEAN Harmonized Coding System by late 2002.

WTO Issues

The Philippines has committed itself to the World Trade Organization (WTO), In line with this commitment, the Philippines is moving towards two applied duty rates by the year 2003 for all items except sensitive agricultural products (three percent for raw materials and intermediate goods, and 10 percent for finished products), and a uniform five percent rate by 2004.

Despite this commitment there are periodic calls within Congress to renegotiate tariff reductions and market access arrangements claiming that Filipino companies will be adversely affected by the new rules.

As a result of tariff-rate quota commitments made in the Uruguay Round, the government has begun issuing Minimum Access Volume (MAV) certificates which allow holders to import a limited amount of certain agricultural products at substantially reduced duties. The Government issues MAV certificates for imports of cattle, swine, sheep and goats, poultry, beef, pork, sheep and goat meat, poultry meat, fresh potatoes, coffee, corn and sugar.

The Philippines is also a member of the Asia Pacific Economic Cooperation (APEC), which seeks to establish a free trade area in the Asian Pacific region by 2020. It also observes its commitment to the Asean Free Trade Area (AFTA) which calls for a common effective preferential tariff (CEPT) among the ten member-states of 0-5% by the year 2003.



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