Swapping Goods: The costs and potentials of a PHL-US bilateral free trade

OPPORTUNITY knocks only once and Trade Undersecretary Ceferino S. Rodolfo Jr. wants to tap on the door of the world’s second largest trader: the United States.

OPPORTUNITY knocks only once and Trade Undersecretary Ceferino S. Rodolfo Jr. wants to tap on the door of the world’s second largest trader: the United States.

“This is how it is: all governments muscle in global trade what is beneficial to their [respective] country,” Rodolfo said after a five-second pause. “For us, we’re also taking advantage.”

The trade official can’t be blamed for saying this, as the rattling of the trade saber by the US against the world’s largest merchandise trader, China, ended with a whimper.

Nonetheless, it’s a tough question for Rodolfo: Should the Philippines bargain free trade with the US at a time when Washington is enacting protectionist measures here and there?

Whether his belief doing so will work to the country’s advantage remains to be seen. What is certain, however, is that there is now no stopping the Philippines and the US from ironing out a bilateral free-trade agreement (FTA).

Rodolfo said the primary objective of any FTA is to provide preferential duty rates for domestic exporters. This applies to the trade deal being worked out by Manila and Washington.

“Our objective really in all FTAs is to provide an FTA cover for our exporters. It has two areas: trade and investments. From the trade perspective, [it is] to provide an FTA cover to our exporters to ensure that they will not be competitively excluded from any major market by way of less preferential tariffs,” Rodolfo told the BusinessMirror. “That really is our basic objective even before.”

Trans-Pacific Partnership

TALK of an FTA between the two Asia-Pacific economies was reactivated by President Rodrigo R. Duterte and President Donald J. Trump in November of last year.

In a bilateral meeting that lasted for over 40 minutes, Duterte conveyed to Trump his desire to arrange an FTA with the US, which the White House leader reportedly vowed to study.

Now the Philippines tops the US’s list of preferred terrain for a bilateral trade agreement, US Trade Representative Robert E. Lighthizer said in a congressional hearing in July.

And why not, Rodolfo said, given the country’s longstanding aspiration to forge an FTA with a traditional ally. The only difference now, he pointed out, was that the US is determined to give it a go on a bilateral level, unlike before when it was bugging the Philippines to enlist in the Trans-Pacific Partnership (TPP)—now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership—which Trump subsequently decided to abandon.

“For the longest time the US has always been telling us to join the TPP, but with that change in strategy of the US we found an opportunity [to reactivate the possibility of an FTA],” the trade official said. “We said let us try again for the bilateral.”

Asia’s triumvirate

THE US is a major economic and security partner of the Philippines. It has always been one of the country’s top export markets and largest import origins.

Last year total trade between the two economies amounted to $17.4 billion, according to data from the Philippine Statistics Authority (PSA).

In 2017, Philippine exports to the US amounted to $9.66 billion. These were composed of semiconductor devices ($743.97 million), digital monolithic integrated circuits ($691.77 million) and ignition wiring sets ($554.06 million). Top agricultural exports were coconut oil ($553.33 million), pineapples ($132.7 million), raw cane sugar ($130.25 million) and desiccated coconut ($92.66 million).

On the other hand, Manila imported $7.78 billion of goods from Washington, topped by digital monolithic integrated circuits ($775.96 million), oil-cake ($659.35 million) and wheat and meslin ($628.53 million). Last year the US was the country’s second top export destination behind Japan and fourth largest import source behind China, Japan and South Korea.

Ten years ago, however, it was a totally different picture. The US in 2008 was the Philippines’s top export market and largest import origin with a total trade value of $15.4 billion.

The last time the US was listed as the country’s top export destination was in 2009, and the last time it became the largest import source was in 2012. From 2013 onward East Asia’s triumvirate took over Philippine ports and markets.

Liberalized market

RODOLFO said about 75 percent of Philippine exports currently enter the US market duty-free either by most favored nation (MFN) rates or under the Generalized System of Preferences (GSP).

According to Rodolfo, the Philippines still has around 20 percent to 25 percent that are not zero.

“Those are the critical products because those are labor intensive,” he added. “You have the garments, which the US levies the highest.”

Rodolfo further explained that tariffs on garments can be substantial, probably 15 percent to 20 percent.

“You also have the wiring harness, but that is just taxed 5 percent. You have the seaweeds and carrageenan, wrist watches and some coconut-based products.”

Further, Rodolfo believes an FTA with the US could enlarge the country’s export pie.

He said if the Philippines can strike a deal eliminating tariffs on all products, then local manufacturers can expand their offering to supply a liberalized US market.

Preferential treatment

IT is a sound move for Manila to seek an FTA and not rely solely on the GSP, argued John D. Forbes, senior advisor of the American Chamber of Commerce of the Philippines (AmCham). He said the Philippines, like any other GSP beneficiary, could lose its preferential treatment for a number of reasons.

“The GSP is not permanent. The US Congress must reauthorize the program, and there have often been periods when it ended before being continued by passage of a reauthorization law,” Forbes said in an e-mail to the BusinessMirror. “Also, countries benefitting from the GSP may lose it for several reasons. One is when the country has been classified as a higher-income or upper middle-income country by the World Bank for three consecutive years.”

Under the Philippine Development Plan 2017-2022, this administration is targeting to develop the Philippines into an upper middle-income country by 2022.

Moreover, Socioeconomic Planning Undersecretary Rosemarie G. Edillon in April said this goal could be achieved as early as next year. If this be the case, Forbes said, “the Philippines could lose GSP status in 2022.”

Last year the US imported $21.2 billion of products from 121 countries and territories under the GSP, the Office of the US Trade Representative (USTR) reported. Its top purchases were motor vehicle parts ($1.3 billion), ferroalloys ($769 million), precious metal jewelry ($749 million), monumental or building stone ($552 million) and rubber tires ($475 million).

Too risky

THE Philippines exported $1.5 billion of goods to the US under the GSP last year, making it the sixth largest beneficiary of the trade privilege behind India ($5.6 billion), Thailand ($4.2 billion), Brazil ($2.5 billion), Indonesia ($2 billion) and Turkey ($1.7 billion). In computations made by the BusinessMirror, GSP products accounted for 15.52 percent of the country’s total exports to the US in the previous year.

Former Tariff Commissioner George N. Manzano surmised this could be one reason Manila is working out a trade deal with Washington. Goods covered by the GSP make up a significant chunk of the country’s export pie; losing the trade privilege without an FTA to cover up for it is just too risky to ignore.

“From the point of view of the Philippines—although with Trump we never know—in theory it [FTA] basically provides us an insurance to market access [because] if we have an FTA, then [the US] could not increase their tariffs,” Manzano told the BusinessMirror.

Further, he said the US government has the prerogative to strip a beneficiary of its GSP status at any given time, even if it has yet to reach upper middle-income level. This is opposed to an FTA whose terms are agreed on and observed by two or more parties.

“Whereas if you have an FTA it will be zero, [and] you have certainty that it will always be duty-free if that is what is negotiated [under trade in goods]. The GSP is temporary whereas an FTA is more or less should be considered more permanent,” Manzano explained.

Uncertain future

THE Philippines has deeper motives in seeking a bilateral trade agreement with the US. Global trade is facing an uncertain future and the country has to study its cards, strategize its moves and play the best possible hand.

Rodolfo argued an FTA could mean more than just duty-free trading with the US. He said the Philippines can utilize it to reduce imports from trading partners it has deficits with, particularly China, in a bid to balance its trade sheet.

Last year the country imported $17.46 billion of goods from China, more than double the $8.01 billion of products it exported to the economic giant, according to PSA figures.

“If we can divert some of our imports from other countries to the US and in the process gain preferential market access to the US, then it is a way for us to improve our trade balance,” Rodolfo said. “Say, for instance, instead of 100 percent importing this certain good from this country, we can slash it to 90 percent [and reallocate the] 10 percent to the US.”

He added because of a trade surplus, Manila can afford to increase its imports from Washington. That’s a “win-win situation” for the two parties—the Philippines gaining additional market access and reducing trade deficit, the US improving its exports, Rodolfo said.

American vehicles

FORBES, on the other hand, posited Filipinos will have more options to choose from if American goods are permitted to infiltrate duty-free the domestic market. Two products the US intends to bring to the Philippines in large numbers are automobiles and motorcycles.

Washington has long lamented the tariffs Manila slaps on finished vehicles, which do not apply to car imports from Japan and Association of Southeast Asian Nations (Asean) member-states. In its 2018 National Trade Estimate Report on Foreign Trade Barriers, the USTR took note of preferential treatments that Japan and Asean countries enjoy through a regional and bilateral FTA, respectively.

“The Philippines continues to apply high tariffs on finished automobiles and motorcycles, including a 30-percent tariff on passenger cars; tariffs of 20 percent to 30 percent on vehicles for the transport of goods; and tariffs of 15 percent to 20 percent on vehicles for the transport of persons, depending on vehicle weight,” the report read.

The report alleged that “new vehicle imports from Asean countries and Japan benefit from preferential tariffs under the Asean Free Trade Agreement and the Japan-Philippines Economic Partnership Agreement, respectively.”

“The Philippines continues to extend duty-free treatment to imports of capital equipment, spare parts and accessories by motor vehicle manufacturers and other enterprises registered with the Board of Investments,” the report added.

Forbes claimed a trade deal will allow Filipinos to purchase popular American vehicle brands at cheaper prices.

“With an FTA, Philippine car buyers will have more choices not only for the Big Three—Ford, Chrysler and General Motors—but also for US-made BMWs and Mercedes, [while] Philippine bikers could pay less for their US-made Harley-Davidson,” he said.

In exchange Forbes said the US could become a darling market for Philippine garment makers.

“Philippine exports of footwear and garments would increase if the current double-digit US tariff is eliminated, which would be great for Marikina [shoemakers] and lead to more firms investing in the Philippines in order to export to the US,” he argued.

Clothing and textiles are the fourth and fifth product groups with the highest import duties in the US, according to data from the World Trade Organization (WTO). Last year the US imposed an average MFN rate of 11.6 percent on clothing and 7.9 percent on textiles.

Cuts costs

AS the old adage goes, everything comes with a price.

Manzano warned the country will have to make the more drastic tariff cuts in FTA negotiations than the US. He said US tariffs are generally on the low—duty-free to 5 percent—leaving the Philippines much of the dirty work.

“In terms of trade in goods, I think we will have to adjust our tariffs more than the US [will have to]. Given the profile of our exports to the US, a significant portion of [it] already enters the US duty-free, but only a number of US products enter the Philippines duty-free,” he said.

Figures from the WTO’s World Tariff Profiles 2018 showed Manila still has five product groups that averaged double-digit tariffs last year. Animal products were slapped an average MFN rate of 20.5 percent; sugars and confectionery 18.9 percent; coffee and tea 15.7 percent; clothing 14.8 percent; and cereals and preparations 10.3 percent.

On the other hand, Washington has four import categories protected with high duties, namely, beverages and tobacco (18.6 percent); dairy products (18.3 percent); sugars and confectionery (15.7 percent); and clothing (11.6 percent). However, the US applied low tariffs on 16 of the 22 product groups, while the Philippines applied the same low tariffs on only nine.

Domestic factors

JOSE Enrique A. Africa, executive director of nongovernment IBON Foundation Inc., argued that reducing tariffs will not necessarily result in lower prices of goods in the market as this theory turns a blind eye to domestic factors.

However, what is certain is that the local agriculture sector will suffer from tighter, if not unfair, competition if the Philippines lifts import duties on American farm goods, he said. Africa added it will also expose the government’s neglect of its farmers.

“Agricultural imports from the US include products with no domestic substitutes, like wheat and soybeans, so tighter competition would not be an issue here,” Africa told the BusinessMirror. “It is different with imports of rice, corn, chicken and pork that are all produced locally.”

According to Africa, “tariff cuts on these products, which are heavily subsidized in the US, should theoretically lower consumer prices.”

“But whether this will actually substantially happen will depend on how local traders react,” he explained. “The more fundamental issue is actually the longstanding government neglect of agriculture—covering not just trade protection, but also production support—which underlies the sector’s lack of competitiveness.”

US protests

THE US has long been pushing for the liberalization of Philippine agriculture. In the same report on foreign trade barriers cited above, the USTR took a swipe at the country’s tariff and nontariff measures, including meat-handling regulations and import clearance.

“The Philippines maintains a two-tiered system for regulating the handling of frozen and freshly slaughtered meat for sale in local wet markets,” the report read. “Under this system, the Philippines imposes more burdensome requirements on the sale of frozen meat, which is primarily imported, than it does on the sale of freshly slaughtered meat, which is only from animals raised domestically.”

The US continues to press the Philippine government to remove unjustified requirements that treat frozen meat differently from fresh meat, according to the report.

The USTR also protested the Department of Agriculture requirement mandating importers to obtain a sanitary and phytosanitary permit before the shipment of any agricultural product and to transmit the permit to the exporter. “This requirement adds costs, complicates the timing of exports and prevents the rerouting to the Philippines of products intended for other markets but not sold there for commercial reasons,” the report added.

Labor and industrial relations expert Rene E. Ofreneo of the University of the Philippines agreed with Africa, and said an FTA with the US could spell the worst for local farmers and livestock raisers.

“I think the FTA will exacerbate agricultural problems of the Philippines, especially the producers of livestock and corn,” Ofreneo said in an e-mail to the BusinessMirror.

Right, audacity

MANZANO, on the other hand, doubted if the Philippines has the right—and the audacity—to tell the US in FTA talks to minimize its agriculture subsidies.

“I am not sure if the Philippines can tell the US to lift their subsidies on their farms, but in the WTO you can because you will speak together with many other countries that will request the US [to] have discipline when it comes to subsidy,” he said.

The best recourse then, the former tariff official put forward, is to negotiate “a more generous timetable on our behalf” to provide domestic agricultural workers the leeway to improve their productivity, as well as competitiveness. This could come in the form of gradual reduction of tariffs on farm and animal products.

“Either that or you need to have other ways in order to compensate or improve the productivity of our meat industry,” Manzano added.

Even if an FTA includes a provision on investments, Manzano said no US-based multinational will take an interest in the country’s agriculture sector.

“They [American firms] can invest in the Philippine meat industry, but I think their interest is simply to export made-in-the-US meat,” he explained.

Industrialization vision

FOR Africa, however, this dilemma on whether the local agriculture sector can keep up with US farm imports only uncovers the elephant in the room. He said the government should first work on a national economic development strategy that will improve the productivity and efficiency of farmers and manufacturers before seeking FTAs with economic giants.

“There are many potential gains from a good deal with the world’s largest economy. Export opportunities for Filipino producers could create jobs and foreign investments could give opportunities for local firms and be a source of new technologies to increase productivity,” he said.

“The problem is that the prerequisites for these to materialize are absent. Absent government support and amid premature liberalization, domestic agriculture and Filipino manufacturers are weak, so the export response is limited,” Africa added.

The IBON executive argued it is meaningless to talk of export gains from a bilateral trade agreement with Washington if Manila has no export capacity to begin with, made concrete by the gap between its import bill of $96.09 billion and export receipt of $68.71 billion last year.

“Before negotiating, the Philippines has to articulate a vision of national industrialization. This means developing Filipino industry that harnesses Philippine human and natural resources for national development and is not to be confused with foreign TNCs [transnational corporations] and manufacturers located in the country,” Africa concluded.

Tread cautiously

MANZANO warned Rodolfo and his team of negotiators to tread cautiously in FTA talks with the US government, especially with Trump at its helm. As the larger economy, he said the US will certainly push its weight around on the negotiating table.

“Trump wants to have bilateral [trade deals] because with a bilateral they can use their size,” Manzano said. “In general, they can use their size in order to get concessions that they want simply because they are a bigger buyer, a bigger market for us.”

The trade war could also be a factor why Washington is scanning the Asian terrain to look for favorable economies where it can locate some of its production facilities—a move which can benefit either the US or China, according to Manzano.

“If that is the case, then the Chinese investments can come to the Philippines, produce their products here and because you have an FTA they will ship their products [to the US] from the Philippines,” he said. “That is one way [to analyze it] if we have an FTA [with the US and] provided you satisfy what we call the rules of origin that the product should be made in the Philippines, then Chinese companies can use the Philippines as an export platform to the US.”

The trade specialist added, “it could also go the other way,” because “the US companies can come here and export to China,” which will also be duty-free, as the Philippines is covered by the Asean-China Free Trade Area.

No fear

“WE are not scared of the United States,” Rodolfo declared with a chuckle, as if to ask who is nowadays. “We are engaging the US [and] what we are doing is leveling the playing field for them because our tariffs on their products are still relatively high.”

The country’s top trade negotiator might soon find himself in Washington discussing a trade deal that could either be a boon or a bane for the Philippines. But until then he committed his team will consult all the relevant stakeholders, particularly farmers and laborers, in crafting the Philippine position on an FTA with the US.

“What is critical here is the consultation with stakeholders, with the labor sector,” Rodolfo said. “We must make sure all sectors are involved.”

Image Credits: Skypixel | Dreamstime.com

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Elijah Felice Rosales is a reporter for the news outfit covering trade and investments. He graduated with a degree of Bachelor of Arts Major in Literature from the De La Salle University.