Bulk of smuggled goods come from China: P2 trillion from 2010 – 2014

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Second of a two-part series

If you do your own supermarket shopping, are fond of electronic gadgets, like to look into Binondo shops, or if you build homes and buildings, it’s pretty obvious. In the last several years, there has been a tsunami of smuggled goods from President Aquino’s favorite country: the People’s Republic of China.

If he’s worried that the Chinese are reclaiming lands in plain view of our troops in Pag-Asa island, we should be more worried that they are reclaiming huge swathes of our economy, thanks to that kind of Yellow Corruption that still manages to mumble “Daang Matuwid” slogans even at this time.

The amounts involved, using the smuggling estimations I made using International Monetary Fund’s Direction of Trade Statistics (see my column on Wednesday), are staggering.

From just $5.7 billion in 2010, the value of smuggled products from China (including Hong Kong) doubled to $11.5 billion by 2014, an amount equivalent to smuggling from all countries in 2010.

During this Yellow Era so far, from 2010-2014, smuggling from China has amounted to $42.9 billion, accounting for 45 percent of the total undeclared goods of $94.4 billion in the period.

Red star over supermarkets and malls? Source: IMF DOTS
Red star over supermarkets and malls? Source: IMF DOTS

That means nearly P1.8 trillion in smuggled Chinese goods have flooded our market in the last five years without paying duties and taxes of P345 billion, just a bit bigger than the public works and highways department’s 2014 budget of P303 billion.

To give you an idea of how huge that P1.8 trillion is, SM’s 484 retail stores and supermarkets of every kind together have an annual sales of P200 billion. The amount of smuggled goods in the last five years would be equivalent to SM stores’ sales for ten years.

One reason for the rise in smuggled goods is obviously the sheer growth of our imports from China, which has made a global export push at a scale never before seen in the world.

With its relative proximity to us (unlike US or Europe which is on the other side of the globe) and with Chinese-Filipinos as “trade facilitators” who speak the exporters’ language, Chinese imports have grown at an average annual rage of 16 percent, compared to the 9 percent for imports from the entire world, and way above Japan’s 2 percent growth rate.

Especially with an incompetent government, and the most experienced grafters in government, our Customs machinery just hasn’t been able to cope with such a flood of imports.

China last year has become our biggest source of imports, accounting for 17 percent of the total, with US and Japan far behind, each with shares of just eight percent. It is certainly ironical – or outright dangerous – that the country with which we have the worst diplomatic relations is our biggest supplier of imported goods.

Can China afford to lose us as a market? Unfortunately, it looks that way.

Our imports from China make up just 1 percent of their total exports to the world. That should make our hot-headed nationalists advocating a boycott of China products pause a bit to weigh such move’s consequences if it succeeds. China can lose the Philippine market with the Beijing commissars hardly noticing it.
Even President Aquino, I would suggest, should study whether he should maintain his strident tirades against China.

However, while China accounts for 17 percent of our imports, its smuggled goods account for nearly half of total smuggling.

I’m afraid we have to risk being accused of being a bigot by pointing to the fact that our huge Chinese-Filipino trading class over a century have perfected the art of conniving with the Bureau of Customs to evade the taxes on duties on goods they import. It has not been coincidental that Chinatown is very close to the Manila international ports – and to the BOC offices.

Indeed in the past several years a Chinese-Filipino tycoon’s malls have phenomenally sprouted like mushrooms all over the archipelago, packed with goods from China.

More and more, I find that items I have to buy here are made – or assembled – in China or shipped from there, even the Apple computer I am using now, and even the garlic, ponkan, and apple I just had. That chain of stores selling cheap seemingly Japan products and a retail chain selling unbelievably cheap electronic products are packed with Chinese products.

China’s big edge is its economies of scale because of its huge domestic market, that most of its products’ marginal cost of production must have approached zero, with the products that reach our shores dirt cheap. This is because a Chinese factory that manages to sell 10 million cellphones has already recovered its investment and got its huge profits, with any additional units practically produced at nearly zero cost.
That we have a freezing cold (or is the appropriate term “hot”) diplomatic relations with China handicaps our country from curbing smuggling. Normally, if one country has become the largest source of smuggled goods, one move of the recipient country is to consult with the exporting nation to find out how smuggling can be curbed, for instance through a pre-shipment, at random, process of inspection and control. I doubt if China would help the Aquino government on that matter at this time.

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Here’s why smuggling has become so tempting both for Bureau of Customs people and traders.

It’s less because of the import tariffs which have been going down to even reach token levels a few years from now. It is because of the 12 percent value added tax, a bold move in 2004 made by former President Macapagal-Arroyo that explains much of our economic growth today, but which unfortunately had unintended consequences on smuggling.

A 40-foot van that has imported goods costing P1 million, using a duty rate of 6 percent (the weighted average rate for all goods, although a lot of common items have a duty of 15 percent) would be imposed a tariff of P60,000. Peanuts it seems, but its landed cost would be now P1,060,000. The 12 percent VAT duty would be applied on that, so the importer’s duty and tax costs would be P187,000.

If the importer’s bureau of customs accomplice, through the mountain of customs documents with unreadable entries, manages to value the shipment at a fourth of that or P250,000, his duty and taxes would amount to just P46,800. He gives the customs guy P50,000 and saves P90,000. Now imagine that the real guys responsible for our huge smuggling problem ship goods worth P100 million a month.

That Customs has perfected the art of misdeclaring and undervaluing shipments was demonstrated in a weird way when 55 containers declared as scrap plastic to be recycled by a manufacturer were found to be common household waste – from Canada. Even Canadians are doing it?

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