The rice tarrification debate is well-anchored in economic research, but there is still scope for additional work. This study fills this gap in the literature by investigating those impacts for rice market participants including farmers, consumers, traders, policymakers, and government agencies in Indonesia and Malaysia using the IRRI Global Rice Model based in a partial equilibrium framework.
The decades-long policy of the Philippine government in maintaining domestic rice prices above international prices was concluded in March 2019 through the enactment of the Rice Tariffication Law (RTL, Republic Act No. 11203). The policy reform has abandoned the quantitative restrictions on imports, replacing them with ad valorem tariffs to finally comply with the principles and rules of the World Trade Organization (WTO). Tariffication is generally regarded as a move towards trade liberalization, as well as stabilizing both world and domestic prices.
The policy reform abandoned the quantitative restrictions on imports that have been in place for more than thirty years, replacing them with ad valorem tariffs to finally comply with the principles and rules of WTO. Another important aspect of the reform was the elimination of the role of the National Food Authority (NFA) in rice imports. For many years, the NFA had a monopoly on the importation of rice, and more recently, it issued a limited number of import licenses to private traders.
The NFA has long been considered a source of huge inefficiencies and inappropriate interventions in markets. The RTL opened up the market to private sector traders, eliminating the de facto market power exercised by the NFA for decades. The role of the NFA is now limited to maintaining food security rice stocks procured from Philippine farmers.
The RTL had replaced the quantitative restrictions on rice imports with applied tariff rates as follows: (i) in- and out-quota tariff of 35% for rice imports originating from the Association of Southeast Asian Nations (ASEAN) member states, (ii) in-quota tariff of 40% for rice imports originating from non-ASEAN WTO member states within the minimum access volume (MAV) of 350,000 metric tons, (iii) out-quota tariff of 50% for imports originating from non-ASEAN WTO member states above the MAV, and (iv) bound tariff rate of 180% for imports from non-ASEAN countries above 350 thousand tons.
Yet trade liberalization may result in both winners and losers in each country. Indeed, the recently enacted RTL in the Philippines has generated two types of lower price effects, those in which consumers would enjoy increasing purchasing power, and those in which farmers would face declining income. An example of the former is the micro-simulation study that found that poor households benefit from lower rice prices with the poorest quintiles gaining the most. In contrast they found that rice net sellers are the main losers with a decline in welfare of 7.7%.
These opposing welfare effects corroborate the ongoing debates on how rice tarrification would affect food security and poverty. Some policymakers, prominent groups of farmers and a few members of academia have criticized the reform on the grounds that by reducing paddy price, it would impoverish small rice growers who are already close to the poverty line and vulnerable to market and other shocks.
Other stakeholders have pointed out the risk for the national food security of raising the import dependence, becoming more exposed and vulnerable to shocks in the international rice market. Proponents of the RTL argue that the losses to rice farmers are small relative to the gains to consumers and the country as a whole. They further pointed out that the tariff revenue can be used to support farmers with rural investments.
The rice tarrification debate is well-anchored in economic research, but there is still scope for additional work. Some authors have focused on only one importing country in analyzing the effect of rice tariffication. A more complete analysis would examine other countries that are contemplating a reform of their rice price policy.
This indicates the necessity of undertaking empirical study that includes major rice importing countries to assess the potentially strong implications of rice trade policy reforms for rice market participants including farmers, consumers, traders, policy makers and government agencies.
This study fills this gap in the literature by investigating those impacts in Indonesia and Malaysia using the IRRI Global Rice Model based in a partial equilibrium framework. These two countries are among the world’s top rice importers, collectively accounting for about 4 to 5% of the world’s imports, and hence they play an important role in Southeast Asian rice markets.
In this paper, we have analyzed the impacts of the hypothetical rice tariffication in Indonesia and Malaysia. We have assessed the potentially strong implications for rice market participants including farmers, consumers, traders, policy makers, and government agencies. We used the IRRI Global Rice Model based on a partial equilibrium framework to investigate those impacts
As expected, the simulation results indicate that the reform would lead to a sharp increase in imports of 941 thousand tons (or 84.8%) in Indonesia and 1,192 thousand tons (or 11.4%) in Malaysia in 2021 and remain high in the following years. Rice exporters in Vietnam and Thailand would be the primary beneficiaries.
The additional supply of foreign rice in the domestic market would drive both farm prices and retail prices %) down in the short run. This pattern is largely consistent across the various regions of the country indicating price integration of the rice market. These prices would remain below the baseline levels.
The large and persistent decline in retail prices explains the substantial increase in rice consumption that would primarily benefit the poorest consumers to access the main food staple. We also estimate the fall in total inflation due to lower rice prices at 0.3% (Indonesia) and 0.4% (Malaysia) in 2021 and less over time. Lower inflation would also benefit the poor.
We also show that the reform of the rice sector in Indonesia and Malaysia would lead to a slight increase in the world price and influence an increase in the domestic prices of most South and South East Asian countries. In terms of policy options, it is important to offset the short term effect of lower price for producers especially the small ones through safety net mechanisms in order to ensure the efficacy of such a liberalization process.
Those policies might include immediate cash or income support to affected rice farmers, price support and other agricultural input subsidies. While rice tariffication is largely pro-poor consumers, policy makers would need to use the substantial additional tariff revenue to help rice growers. A share of these funds could be used to help potentially competitive rice growers to increase their productivity and modernize their rice production through higher yielding varieties, adequate use of inputs, and mechanization.
For those farmers that could not become competitive for structural or other reasons, government support would be needed to help them shift to other higher-value crops.
Rice trade policy reforms represent an opportunity for the structural transformation of the sector. Hence, accompanying measures for sector modernization are required and they include but are not limited to better varieties, labor productivity-enhancing investments, and marketing strategies.
Additionally, the reform would have heterogeneous effects across the regions as well as farmer categories. This points to the need for more refined studies to identify better targeting of policy measures.
Read the paper:
Valera HG, Yamano T, Pede V, and Balié J. (2021) Potential trade policy reforms in Southeast Asian rice markets: Domestic and international impacts. Selected paper prepared for presentation at the 2021 Agricultural & Applied Economics Association Annual Meeting, Austin, TX, 1-3 August
