Conclusion

The Philippines is an outward-oriented Asian developing economy that is experimenting with FTAs as a trade policy instrument. The country has had 15 years of experience with AFTA and is participating in a burst of FTA activity, led by ASEAN and a bilateral FTA with Japan. Underlining a greater regional orientation in its trade pattern, the share of Philippine exports destined for ASEAN economies has increased significantly since the early 1990s. While this trend may be indicative of an "AFTA effect," little is known about patterns, determinants, and impediments to AFTA use in the Philippines and this study attempts to remedy this gap in the literature.

Firms in the Philippines use AFTA more than was expected based on previous studies and may start considering other FTAs as they explore new export markets. About 20% of the firms surveyed reported using or having used AFTA, with firms in the transport sector using AFTA the most. The high margins of preference accorded to transport products and the successful implementation of the AICO scheme are possible reasons for the higher utilization rate in transport relative to other sectors. As firms eye new export markets and business opportunities, other FTAs (e.g., the ASEAN-PRC FTA and JPEPA) are beginning to draw the interest of firms. Accordingly, the overall FTA utilization rate among sample firms seems set to double to 41% in the future. Firms in the food sector are boldly considering new and emerging markets and may increasingly turn to FTAs for support. AFTA users perceive net benefits from the regional agreement, in particular cheaper intermediate inputs due to preferential tariffs and increased export sales to regional markets. Econometric testing suggests that the probability of using AFTA at the firm level increases with firm age, domestic ownership, awareness of FTAs, and membership in the automotive industry.

While the use of FTAs is set to double in the future, 80% of firms still do not use such agreements, citing several noteworthy obstacles. Dealing with these impediments to nonusers could lead to even higher potential use of FTAs in the future. Nonusers of FTAs—including AFTA—indicated that a lack of information was the most significant impediment to FTA use in the Philippines. Other impediments to use include the availability of EPZ incentive schemes, delays in origin administration, rent-seeking behavior, and nontariff barriers in partner country markets. Strikingly, the majority of the sample firms (73%) did not think that multiple ROO in overlapping Asian FTAs significantly added to business costs (at present). As the number of Asian FTAs multiplies in the future, however, steps will need to be taken at the regional and national levels to minimize the potential noodle bowl problem. In the Philippines, residual procedural issues with respect to exporting and applying for origin certificates need addressing. Firms further suggested that there is room for improvement in the AFTA ROO system (e.g., lower regional value added content and the introduction of self-certification mechanisms). Harmonization, adoption of a coequal rule, and cumulation are also important factors across Asian FTAs.

The evidence suggests that there is a case for better mainstreaming of FTAs into Philippine national trade policy and for improving support services to firms. More generally, the examination of enterprise perceptions of the institutional support system in the Philippines revealed an excess demand for a range of support services (e.g., information-based, technology-based, and SME extension services) to enable firms to use FTAs more effectively in the future.

From these findings, the study offers the following key lessons and suggestions for the Philippines and other developing countries that are beginning to adopt FTAs as part of their trade and development strategies:

• Information is the key to effective FTA implementation. The important role of complete and up-to-date information on FTAs cannot be overemphasized. Trade officials rely on information in making policy decisions and in negotiating FTAs. Businesses also require equivalent information—throughout the FTA life cycle from the proposal and negotiation stages to implementation—to fully benefit from FTAs. Improving data collection, particularly on the use of FTAs, would be useful in assessing the overall effectiveness of FTAs.
• Awareness, consultation, and training are crucial. Broad-based consultations (before and during FTA negotiations) help address the concerns of all stakeholders. Consultations also help firms to foresee and assess the potential gains from FTAs and to change their business plans, if need be. While reaching out to all firms could prove to be difficult, innovative and cost-effective methods of disseminating information on FTAs could be explored as a means of increasing awareness (e.g., use of FTA portals, creation of an FTA experts pool, and highlighting success stories from other firms). Seminars and other forms of training could also be expanded (from providing basic information to laying down step-by-step procedures) and tailored to each type of industry or sector in order to be more relevant to firms. SMEs, in particular, may require further interaction and resources beyond consultations to increase their likelihood of using FTAs.
• Simplicity is a powerful incentive to firms to adopt FTAs. The probable savings from using FTAs are sometimes disregarded by firms because the process of availing themselves of FTA preferences tends to be complicated. A simpler ROO regime—e.g., with harmonized tariff classification and origin rules, alternative rules, standardized and streamlined procedures, self-certification features, a one-stop-shop export documentation facility—would promote the use of FTAs among firms.
• SME-focused FTA outreach is needed. SMEs require assistance in enhancing their export performance and product diversification and in analyzing trends in international demand. Enabling small firms to restructure, set marketing priorities, and, eventually, increase their foothold in the newer, more dynamic markets with which the Philippines has negotiated FTAs, will encourage use.
• Supporting mechanisms are essential. Learning to export under FTAs involves acquiring the requisite technological capabilities to meet world-class price, quality, and delivery standards. Within or outside the FTA framework, government support for technology and skills upgrading is essential in improving overall firm-level competitiveness. Support for NTM surveillance, trade finance, and the use of EDIs have proven to be essential. Also, in view of the high AFTA usage rates in the transport sector, other sectors could explore the possibility of adopting similar AICO-type arrangements for AFTA and other FTAs.
• Broader systemic adjustments are important complements to FTA-specific improvements. Beyond tariffs and ROO, recurring problems such as rent-seeking behavior, inefficiencies, and inadequate transport and logistical infrastructure should also be taken into consideration. To be effective tools for business, FTAs must achieve their objectives of promoting growth when they are embedded in wider programs of economic reforms.

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