THE trade war between the United States and China has now entered a new phase, and economies reliant on their supply chain like the Philippines can become collateral damage. This has prompted Manila to find a way to shield the country from the repercussions of a US-China showdown.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo revealed one of the country’s strategies to survive the face-off between the US and China in a news briefing last week. Guinigundo said forging bilateral free-trade agreements (FTA) with key economic partners, such as South Korea, will secure for the Philippines markets for its products in the face of a collapsing multilateral trading system.
For Trade Assistant Secretary Allen B. Gepty, this is a sound strategy considering the fact that South Koreans know the Philippines more than any other nationality in the world. More and more Filipinos are also becoming fascinated with Korean culture and cuisine as evidenced by the mushrooming of restaurants offering samgyeopsal, a popular Korean dish.
The Philippines and South Korea, which fought side by side during the Korean War, currently enjoy a strong bilateral relationship. The Philippines was the first Asian country to respond to the call of the United Nations Security Council to deploy forces to the Korean Peninsula during Korea’s hour of need. The government sent the Philippine Expeditionary Forces to Korea composed of five Battalion Combat Teams.
In the economic front, Seoul continues to help the Philippines via official development assistance (ODA). Also, South Koreans were the country’s top visitors last year, according to data from the Department of Trade and Industry. A total of 1.58 million South Koreans visited the archipelago in 2018. They accounted for 22.28 percent of total tourist arrivals.
South Korea’s record as top tourist market for the Philippines earned it recognition from the Department of Tourism the “Visit the Philippines Award” at the recent culminating activity of Mission: PHL, the BusinessMirror Envoys&Expats Awards, the first and only recognition awards for the country’s development partners.
The same trend of South Korea topping arrivals in the Philippines was seen in 2016 and 2017, when tourists from the East Asian country totaled 1.47 million and 1.6 million, respectively. Gepty said this is one compelling reason to negotiate an FTA: the existence of respectable people-to-people relations.
“They are the number-one tourists in the country, [and] they have a lot of products now being marketed here in the Philippines,” Gepty explained.
Aspirations
South Korea has been one of the Philippines’ most significant trading partners in recent years. Merchandise trade between the two economies posted a compounded annual growth rate (CAGR) of 15.7 percent between 2014 and 2018.
Last year bilateral trade improved by an annualized rate of 7.11 percent to $13.7 billion, from $12.79 billion, according to figures from the Philippine Statistics Authority (PSA).
The Philippines mainly exports industrial products, including electronic parts and manufactures, and farm goods, such as bananas, to South Korea. However, latest PSA data reported shipments are generally on a decline the past five years.
Exports to South Korea last year fell 41.33 percent to $2.54 billion, from $4.33 billion in 2017, on double-digit contraction in shipments of electronics and manufactures.
Banana exports jumped to 203,692 metric tons (MT), with a value of $203.69 million, from 176,555 MT, valued at $176.55 million. Overall, shipments to South Korea recorded a contraction of 0.2 percent in CAGR from 2014 to 2018, according to government computations.
This was coupled with a surge of 21.7 percent in imports from Seoul during the same period, as imports last year increased 31.91 percent to $11.16 billion, from $8.46 billion in 2017.
Manila’s trade deficit with Seoul more than doubled to $8.62 billion, from $4.13 billion. Gepty, who is also the government’s lead negotiator in talks with South Korea, is hoping an FTA will reduce the trade gap.
“Among others, we cannot really discard the fact that when it comes to FTA, market access is one interest that we have to pursue, particularly for those products of interest that we have,” Gepty said in an interview with the BusinessMirror.
“These products would include agricultural products, [as well as] tropical fruits. More than the agricultural goods, we have also other industrial products that we can push also to the South Korean market,” he added.
Senen M. Perlada, director of the DTI’s Export Marketing Bureau, said the Philippines will push for the elimination of both tariff and nontariff measures on farm exports in FTA negotiations with South Korea.
“Among other export interests, we would like South Korea to further open their market for Philippine agricultural products. In particular, we would like to make the bilaterals a venue to manifest our strong interest for South Korea to lower—if not eliminate—tariffs on banana exports, mango exports, processed fruit products, such as mango purees, and other fruit purees,” Perlada told the BusinessMirror.
“Also, the nontariff measures on these products and other agricultural products [must be removed],” he added.
Gepty also said the trade deal could pave the way for more South Korean orders of products from the regions. He argued that local craft and furniture makers “will have a good platform to market their products” if an FTA is concluded with Seoul.
“Also, we have a lot of products, especially furniture, that are made from the regions, and an FTA could enhance their export opportunities to South Korea,” the trade executive explained.
Attracting capital
On top of market access agenda, the government is hoping a trade deal will also lead to more capital inflows from South Korea. PSA data showed approved investments from the East Asian country have been rapidly declining since peaking to P23.16 billion in 2015.
On an annual basis, South Korean investments slumped 30.35 percent to P16.13 billion in 2016, crashed 79.1 percent to P3.37 billion in 2017 and plunged 44.21 percent to P1.88 billion last year.
“If there is one thing that is very important in an FTA, you can, in a way, create a more stable investment environment in the country, [which is] very vital. In other words, in terms of laws, rules, regulations, arrangements, you define that,” Gepty said.
He added negotiating parties can agree on investment areas they intend to prioritize to boost capital exchange.
Board of Investments (BOI) data reported the highest funded South Korean projects approved by the investment body between 2014 and 2018 were mostly in the utilities sector. Seoul has a 35-percent share in the first phase and 100-percent share in the second phase of the P5.78-billion 48-megawatt solar power project of Del Sol Energy CGS Inc. in General Santos City.
Moreover, it has 40-percent equity in the P11.64-billion, 160-megawatt solar power development of El Elyon Power Plant Philippines Inc. in Sarangani.
It also has a 20-percent share in the P8.37-billion Bulacan Bulk Water Supply Project of Luzon Clean Water Development Corp. under the concession agreement with the Metropolitan Waterworks and Sewerage System. The project generated an estimated 1,089 jobs—the highest among South Korean investments approved by the BOI over the past five years.
Interests
In expanding South Korea’s portfolio in the Philippines, Trade Undersecretary Ceferino S. Rodolfo said the government is amenable to providing tax incentives to developers of electric vehicle infrastructure, such as charging stations.
In an interview with reporters in April, Rodolfo said South Korea has many e-vehicle brands that are respected in the industry, and manufacturers might be interested in producing them in the Philippines. In exchange, the government is willing to develop the market and put up the infrastructure for e-vehicles.
“If, say, we will help you develop the market and infrastructure for electric vehicles here, would you be able to assemble [them] here? In particular, we are interested in electric motors. [We are also interested in] batteries because we have nickel and copper wires,” Rodolfo explained.
The government can provide tax holidays and incentives for developers of e-vehicle infrastructure, such as charging stations. Further, it is open to reducing tariffs on automotive inputs needed in the production of parts and assembly of units.
“We can include in the IPP [Investment Priorities Plan] the putting up of charging stations, as well as other infrastructure. If they say [they] could probably make [the Philippines] as assembly center but they need lower tariff rates on particular e-vehicle parts, we are open to that. We really need to be more practical, and examine line by line what it is they need,” Rodolfo said.
These compromises on tariff and incentives can be discussed in formal FTA negotiations. According to Gepty, Manila can capitalize on its young labor force to attract more research and development cooperation with Seoul.
“That is one important consideration in this FTA. We want to come up with an FTA that will also address and enhance the collaboration of the two countries when it comes to research and development, innovation and other technological development. With our young, dynamic and highly skilled work force, definitely, we can be competitive in these areas,” the trade negotiator argued.
Managing expectations
However, lawyer Anthony A. Abad of Abad Alcantara and Associates pointed out that the government has to prove in FTA talks that it can manage and protect large investments, especially with what happened to Hanjin Heavy Industries and Construction Philippines Inc. The ship builder in January sought help from the courts, after struggling to pay $412 million in loans to five domestic banks.
“Hanjin shipyard was a Korean corporation, and the biggest foreign investor in the Subic Bay Freeport Zone,” Abad said in an e-mail to the BusinessMirror.
“Its corporate bankruptcy is the largest bankruptcy ever recorded in the Philippines. Thus, we present a risk profile to Korean investors with respect to large investments based on our track record, and it is expected that a decline [in capital inflow] would occur,” he added.
It is safe to assume then, Abad said, that South Korea will ask for investor protection terms in an FTA, such as fair compensation in cases of expropriation, mandatory investor-state dispute settlement, as well as a general push toward keeping the dispute resolution mechanism away from Philippine control.
“What the Philippines should then focus on is to mitigate these investor protection terms to ensure that the Philippines is still adequately able to protect its own rights, while at the same time assuring that foreign investor rights can be protected. In addition, the Philippines should push to make it easier for free movement of investors and investments in the country,” Abad put forward.
In spite of the financial trouble Hanjin ran into, Abad said the Philippines remains to be an attractive destination for South Korean investments.
“[Last year] Hyundai Motor Co. signed a letter of intent exploring the possibility of opening a vehicle assembly plant in the Philippines. Proper incentives and investor protection provisions will increase the likelihood of the same pushing through,” the trade expert said.
Labor provision
Another provision the Philippines is eyeing to put on the table in FTA negotiations with South Korea is trade in services, Gepty told the BusinessMirror.
“That is a possibility [inclusion of trade in services provision] because it will be a comprehensive agreement not just limited to trade in goods. It will cover investments, so we might have trade in services, too,” Gepty explained.
Former Tariff Commissioner George N. Manzano said a deal on services will relax requirements and streamline procedures for Filipinos applying for work in South Korea. With a services agreement in hand, the East Asian country could become a labor haven for Manila’s young work force, especially to those who specialize in the fields of research and innovation.
Data from the Department of Foreign Affairs reported there are at least 70,085 Filipinos working in South Korea as of 2017.
“Our negotiators can put that on the table. They could ask the South Korean government to relax requirements for a working visa to allow easier entry for our laborers under a trade in services provision in the agreement,” Manzano said in an interview with the BusinessMirror.
Further, a deal on services will provide investors with a more stable and predictable business environment, according to Gepty, as they can easily tap the labor markets of both the Philippines and South Korea under a liberalized services regime.
“That is one of our primary objectives in this FTA. From the perspective of any businessman for that matter, anybody who wants to invest in a particular country, they want a certain degree of stability and predictability,” Gepty said.
Havens
Abad has another agenda in mind. If South Korea could be a labor haven for Filipinos, he thinks the Philippines could be a retirement haven for South Koreans.
“The Philippines should likewise actively try to negotiate for ease of movement in persons and travel and tourism promotion. The Philippines still remains a top tourist destination for most Koreans, with a reliably high travel volume for tourism purposes. This is a potentially growth industry, for example, with respect to the retirement visa and retirement home industry,” Abad explained.
Turning the country into a retirement place for South Koreans will be beneficial to the Philippine Retirement Authority (PRA), as it seeks to increase the number of foreign retirees here to 80,000 by 2020. Data from the PRA showed there are at least 53,355 foreign retirees in the Philippines as of 2017.
Most of the foreign retirees are from China, South Korea, Taiwan, India, Japan, the United States and Australia.
“Improvements in free movement of people would encourage not only more Koreans to pursue retirement in the Philippines, but also for these retirees to consider investing their savings in MSMEs [micro, small and medium enterprises] in the Philippines. Hence, considerations of ease of movement for those seeking retirement visas would be very beneficial,” Abad said.
Foreign retirees can apply for a special resident retiree’s visa (SRRV) offered by the PRA.
The SRRV is a special non-immigrant visa for foreigners who intend to make the Philippines their retirement home or investment destination. Benefits of obtaining an SRRV include indefinite stay with multiple entry and exit privileges; exemption from certain taxes and travel permits; and entitlement to health benefits, among others.
Warning
However, think tank IBON Foundation warned the government to tread carefully in negotiating an FTA with South Korea.
In a statement sent to the BusinessMirror, IBON said a trade deal could restrict the country’s policy space by legally preventing economic development programs supporting and protecting local industries. Liberalization of investment areas, it added, could hamper the development of several sectors, including agriculture.
“The government’s framework in these deals is rapid and comprehensive liberalization and strong rights for foreign investors at the expense of government regulation in the public interest,” IBON said.
“This globalization framework is, however, outdated and proven unable to deliver broad-based and sustainable economic progress. Nearly four decades of trade and investment liberalization has weakened local agriculture and industries, limited job creation, repressed incomes and worsened poverty,” it claimed.
IBON called on the government to pursue first an economic agenda that will enhance local industries before negotiating bilateral and multilateral FTAs.
The Philippines at present only has one bilateral trade deal, the Philippines-Japan Economic Partnership Agreement (PJepa), which entered into force in 2008. However, as a member of the Association of Southeast Asian Nations (Asean), it has market access to China, South Korea, India, Australia and New Zealand.
The Philippines also has an FTA with the European Free Trade Association, made up of Iceland, Liechtenstein, Norway and Switzerland, and preferential tariff schemes to the US and the European Union.
‘Best effort’
The government is completing domestic procedures, mostly consultations with stakeholders, before sitting on the negotiating table with Seoul’s trade officials. The agenda is clear for Trade Secretary Ramon M. Lopez: this trade deal should provide local players, particularly farmers, greater market access to South Korea.
Both parties agreed to do their best to conclude negotiations by November, in time for the commemorative summit between the Asean and South Korea.
As for Gepty, who will lead the Philippine delegation, it will be fairly easy to make the pitch on the negotiating table. He said trading partners are expected to have an interest in the Philippines, especially since it is one of the fastest-growing economies in the region.
And this can be dangled in FTA talks.
“There are a lot of positive developments now in the country in terms of investments, infrastructure and manufacturing that you would expect any trading partner to have an interest in the Philippines. That could be one of the reasons we are one of the emerging economies,” Gepty said.
Image credits: Skypixel | Dreamstime.com