What is the DTI’s safeguard duty and how will it affect new imported cars?

Published January 5, 2021, 4:22 PM

by Inigo Roces

Just a few days ago, the Department of Trade and Industry announced the imposition of a safeguard duty or tariff on imported cars in response to a petition made by the Philippine Metalworkers Alliance (PMA).

The provisional safeguard duty will be in the form of a cash bond amounting to P70,000/unit for imported passenger cars and P110,000/unit imported for light commercial vehicles (LCV). The Bureau of Customs (BOC) will collect the duties for 200 days while the Tariff Commission (TC) studies the situation to determine a more permanent solution.

The safeguard duty is meant to create a more competitive environment for locally-made vehicles that use Philippine metal products by imposing a penalty on vehicle distributors for every vehicle imported.

So how will this affect the consumer? We go through some common questions you may have.

Will this increase the price of cars?

This will increase the price of completely built-up (CBU) imported cars, and possibly some completely knocked-down (CKD) locally-assembled cars. In essence, any vehicle that does not use Philippine metal products in its assembly may be subject to this duty.

While the duty is meant to penalize the vehicle brands for relying on imports, it’s hard to say if the tariff will be passed on to the consumer. Consumer group, Laban Konsyumer Inc. (LKI), argues that the duty must be fully absorbed by the car brand.

A PhP70,000 duty will be imposed on each imported passenger car (e.g. Honda City, Hyundai Kona, Geely Coolray) and PhP110,000 duty on each imported LCV (e.g. Toyota Fortuner, Ford Everest, Mitsubishi Montero Sport).

Which cars are exempt?

For now, we’re sure of the exemption of a handful of vehicles that are fully-assembled in the country with components made from Philippine metal products. It’s a very short list populated by only five vehicles. These are the Toyota Vios and Innova, Mitsubishi Mirage G4 and L300, and Nissan Almera.

Locally assembled cars like the Foton LCVs as well as Hyundai’s H350 van are made with CKD kits. These typically include body panels and other metal parts that have been prefabricated abroad. However, if the two companies use a significant amount of Philippine metal products in their assembly, they may be exempted as well.

In its official Department Administrative Order (DAO), the DTI has listed a few exemptions to the duty, which include some LCVs from Indonesia, Malaysia, China, and South Korea. Special purpose vehicles like ambulances are also exempted.

We cannot definitively say which vehicles are exempted as it depends on various ASEAN, Korean, and Chinese tariff agreements and stipulations upon which they are imported under.

However, passenger cars and LCVs from Thailand — which constitute the bulk of the top-selling vehicles in the country — may be subject to duties.

All other vehicles imported from the USA, Germany, UK, and Japan may also be subject to the duty.

When will this take effect?

The duty is said to take effect starting sometime between Jan. 20 and Jan 25, 2021. This will affect vehicles arriving in the country from that day forward for 200 days.

Many car brands, however, keep several months’ worth of inventory. As such, if the duty will be passed on to the consumer, the price increase may be felt anywhere from three to six months after by consumers. It may be less for popular segments like small crossovers, MPVs, and 7-seater SUVs.

Why is this being imposed?

The Philippine auto industry’s reliance on imported vehicles has been growing over the past years. According to the DTI, up to 70% of passenger cars sold between 2014 to 2018 were imported while only 22-25% were locally assembled. Light commercial vehicle sales, which encompass everything from pickups and SUVs to small trucks, were composed of 93% imported versus just 7% in 2018.

Locally-assembled vehicles are made with Philippine metal products. Yet with a growing number of imported vehicles to choose from, fewer and fewer Filipinos are buying them. This results in lower demand for locally-made cars and Philippine metal, which in turn is hurting the Philippine metal industry.

Even before the nationwide lockdown, Honda Cars Philippines ceased local assembly and production of the City and BR-V, citing low consumer demand. In 2019, Isuzu ceased local production of the D-Max pickup citing more competitive pricing from other countries.

The drop in local production has not only resulted in job losses by those directly employed by Honda and Isuzu, but has also adversely affected their suppliers, some of whom are members of the Philippine metal industry which supplies body, chassis, and other components for local vehicle production.

Is this permanent?

For now, it is only for 200 days while the while the Tariff Commission studies the situation to determine a more permanent solution. The agency may agree with the DTI or may decide on another measure.

Both the Chamber of Automotive Manufacturers of the Philippines Inc. (CAMPI) and Association of Vehicle Importers and Distributors (AVID), which are composed of the country’s top automotive brands have released statements strongly opposing the imposition and will likely want to dialogue with the DTI regarding the issue.

We’ll know more in the coming days and weeks regarding this issue.

Can the DTI do this?

The DTI has imposed a safeguard duty in the past against other imports to protect Philippine industries. Currently, there is a safeguard duty on imported cement, now going on three years. This was imposed in order to protect local cement products.

Naturally, duties like these may not be seen favorably by the countries producing these imported vehicles. However, in some cases, they have their own safeguard duties against imported vehicles as well.

Why can’t we build more cars locally?

Deciding to build a car in particular country takes decades of planning and negotiating with the government in order to satisfy a number of concerns and needs.

Building cars locally requires significant investment from an auto manufacturer, often amounting in the billions. Besides the significant investment, the vehicle to be built must also prove to be popular in the market or region in order to justify the cost and hopefully recuperate it in the long run, often over years or decades. Finally, the country must also be favorable to invest in, with a stable economy, tempting tax and investment incentives, as well as a rich source of skilled labor and raw materials. Most importantly, it must also be more cost efficient to assemble a car in a particular country than to simply have it imported.