Philippines: Part of international economic integration

The Philippines’s extensive economic integration at a regional and global level has been an important factor in the country’s economic revival over the past years.

As one of 10 members of the Asean Economic Community (AEC), which was launched on the December 31, 2015, the country stands to benefit from access to a single market of over 600 million consumers and an increasingly integrated regional economy, including the free movement of skilled workers and products. The Philippines is also party to a number of agreements that aim to support AEC realization, including the Asean Trade in Goods Agreement, the Asean Framework Agreement on Services and the Asean Comprehensive Investment Agreement. By April 2016, the Philippines had achieved a 92.1-percent implementation rate of commitments under AEC, which translates to 466 of 506 commitments in absolute terms.

While the Philippines has much to gain, AEC also puts pressure on the country to become an integral part of the regional value chain, rather than losing out to more well-established and productive hubs in the group, especially in the manufacturing and agriculture sectors. A possible brain drain of skilled workers due to the comparatively higher skill level of the Philippine work force compared to other countries in Asean has also featured high on the list of priorities in discussions on the possible disadvantages of AEC membership. Despite these concerns, membership in the AEC offers a unique opportunity for the Philippines to increase its competitiveness at a global level and market itself as the gateway to Asean for foreign investors.

It also represents an opportunity for the Philippines to increase its share of foreign direct investment (FDI) coming into the region. Although levels of FDI have grown in the past years, the Philippines continues to account for a disproportionately small percentage of total FDI flowing into the region. Specifically, in 2015 net FDI inflows to the Philippines reached $5.7 billion, equivalent to 5.8 percent of GDP and just 4.8 percent of net FDI inflows to the region.

Collectively, the European Union member-states were the largest source of incoming FDI to the Philippines in 2015. Other top countries of origin for FDI inflows in 2015 were the United States, the Netherlands, Japan, the United Kingdom and Singapore.

The sectors that received the biggest proportion of FDI were manufacturing, financial services and insurance, real estate, wholesale and retail trade and construction activities.

The low numbers of foreign investment inflow show that there a more aggressive drive to improve the country’s attractiveness as an investment destination is still needed, including the liberalization of key economic sectors.  Nonetheless, it is also acknowledged that there have been noteworthy efforts in the past years by the government to improve the country’s competitiveness.

The Department of Trade and Industry has put in place a Comprehensive National Industrial Strategy and 30 industry road maps, including the Comprehensive Automotive Resurgence Strategy (CARS). The CARS was signed by former President Gloria Macapagal-Aquino on May 29, 2015, and set out parameters for the subsidization of manufacturing of up to three vehicle models with the objective to attract new investment in the automotive manufacturing sector.

The Philippines’s international economic integration is greatly benefited by its participation in bilateral and international initiatives. In addition to its membership in Asean, and subsequently in the AEC, the Philippines is highly integrated at a regional and global level through membership in international organizations and partnerships, such as the World Trade Organization, International Monetary Fund, World Customs Organization, World Bank, Group of 77, Group of 24 and the Asia-Pacific Economic Cooperation (Apec), which it hosted in 2015.

The hosting of Apec was largely hailed as a success and did much for the Philippines in terms of bringing the opportunities it offers to the forefront of global interest. Apec also marked the launch of important initiatives for the Philippine economic fabric, and most especially for  micro, small and medium enterprises (MSMEs), such as the Boracay Action Agenda for MSMEs. In line with its membership in international bodies, the Philippines has largely committed to using international standards and practices. However, there still remain areas, especially at an implementation and enforcement level, where further improvements are needed to meet the country’s international commitments and facilitate trade and market access.

The Philippines’s global economic integration is further strengthened through its free-trade agreement (FTA) with third countries. The Philippines has an FTA with Japan, the Japan-Philippines Economic Partnership Agreement and also concluded an FTA with the European Free Trade Association group of countries earlier this year. The Philippines is also party to the Asean FTA, the Asean-Australia-New Zealand FTA, the Asean-China FTA, the Asean-India FTA, the Asean-Japan Comprehensive Economic Partnership Agreement and the Asean-Korea FTA. The Philippines is not one of the 12 countries to initially form part of the Trans-Pacific Partnership although it is considering accession at a later stage. It is also part of the negotiations for a Regional Comprehensive Economic Partnership and the Asean-Hong Kong FTA. Most important for European business, it is currently in the process of negotiations for an EU-Philippines FTA, after scoping was concluded at the end of 2015, and the first round of negotiations took place in May 2016; the second round will hopefully commence soon.