Introduction

The Philippines offers an interesting case study on the impact of the Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA) agreement on business behavior, and one that offers lessons for similar newcomers to free trade agreements (FTAs) in the developing world. Compared to other countries in East Asia, the Philippines has placed more emphasis on outward orientation and ASEAN regional FTAs and less emphasis on bilateral agreements. Outward-oriented trade and investment policies have been a cornerstone of the country's industrialization strategy since the 1980s. Since the early 1990s, the Philippines has leaned toward a more regional approach to liberalization through membership in AFTA, and has subsequently relied heavily on ASEAN in negotiating FTAs. Between 2005 and 2009, the country implemented three ASEAN FTAs with major regional powers (the People's Republic of China [PRC], Japan, and the Republic of Korea [hereafter Korea]), and recently signed the ASEAN-Australia-New Zealand FTA and the ASEAN-India FTA (See Appendix 1 [ PDF 19.7KB | 1 page ] for a list of Philippine FTAs and their status). The country's only bilateral FTA—the Japan-Philippines Economic Partnership Agreement (JPEPA)—took four years to negotiate and two more years to take effect after it was signed in 2006.

While negotiating these FTAs consumed scarce time and resources, limited attention has been hitherto given to evaluating the impact of FTAs on business activity in the Philippines, particularly the impact of AFTA. Existing studies of the Philippines are mostly ex ante assessments of the macroeconomic effects of FTAs using computable general equilibrium models (Cororaton 2004; Kawasaki 2003; Urata and Kiyota 2003; Yasutake 2004) and some sectoral strength-weakness-opportunity-threat analyses (Tan 2004; Austria 2006; Costales 2008; Pineda and Tongco 2007). Ex post facto evaluation of FTAs has been difficult due to the lack of official published data (e.g., on the utilization of certificates of origin) and effective monitoring of the implementation of FTAs, particularly AFTA. Information on AFTA utilization rates from alternative data sources like firm surveys are also nonexistent.

To the best of the authors' knowledge, this is the first comprehensive firm-level study of the business impact of FTAs in the Philippines. Focusing on AFTA, which has a 15-year implementation history, and looking at other FTAs that were not yet in effect at the time of the survey but are beginning to draw the interest of firms, this study combines descriptive analysis of firm-level data with econometric analysis, where appropriate. It attempts to address three important questions: (i) Do firms use AFTA and why?; (ii) What impedes firms from using either AFTA or other FTAs?; and (iii) What can be done to improve FTA use at the firm level in the future? The study addresses the first question by examining patterns of AFTA use at the industry level and conducting a probit analysis of the determinants of AFTA use. It deals with the second question by ranking what nonusers of FTAs regard as major impediments to use. Issues covered include information, margins of preference, and rules of origin (ROO). This is complemented by a more detailed analysis of ROO issues, which are some of the most contested issues relating to FTAs in East Asia. Accordingly, the analysis of ROO examines the efficiency of origin administration, the possible effect of improvements to the AFTA ROO system in particular, and the perceived impact of multiple ROO in overlapping FTAs. Finally, these findings, along with an examination of the demands for institutional support, provide insights on the third question regarding improving FTA use in the Philippines.

An enterprise survey was conducted in the Philippines between May and November 2008 on 155 randomly selected firms from the transport equipment (36 firms), processed foods (43 firms), and electronics (76 firms) sectors exporting manufactured goods (see Appendix 2 [ PDF 21.4KB | 1 page ] for the sampling methodology). The sample covers firms of different geographical locations, sizes, types of ownership, and sectors. The three sectors were selected for the study in view of their importance in the Philippine economy and the fact that they are priority integration sectors for ASEAN. Together, the three sectors account for around 73% of total Philippine exports, with electronics accounting for a staggering 63% of total exports, machinery and transport equipment for 5%, and processed foods for 4% (see Appendix 3 for the Philippines' export profile with current FTA partners).

By way of background, Section 2 provides a brief overview of Philippine trade and investment policies. Sections 3–6 present an analysis of the firm survey findings on AFTA usage and future use of other FTAs, impediments to the use of FTAs in general, specific ROO issues, and the adequacy of FTA support. Section 7 concludes with a summary of the findings and policy suggestions.

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