Policy Background and Export Trends

This section reviews the Philippines' trade and investment policy history and examines trends in Philippine export performance, with a particular focus on the shift in trade patterns from traditional markets to ASEAN and other regional markets.

2.1 Evolution of the Philippines' Trade and Investment Strategy

A variety of trade and investment episodes have influenced the country's industrialization process (National Economic Development Authority [NEDA] 2004) (see Table 1 [ PDF 25KB | 1 page ] for a summary). From the 1950s to the 1970s, the Philippines pursued restrictive and protectionist policies as part of its then inward-looking, import-substituting industrialization strategy. This period was characterized by protective tariffs, foreign exchange control measures, and capital market interventions, which shielded domestic industries from foreign competition.¹ After an initial spurt, the inward-looking strategy soon reached its limits due to a relatively small domestic market. The protectionist regime resulted in inefficient domestic industries, competitiveness issues, and shallow growth, prompting the government to rethink and restructure its industrial policy.

In order to promote more efficient and globally competitive industries, the country started to adopt a unilateral, outward-oriented liberalization strategy. From 1980 onward, initial reforms were focused on tariff reduction and import liberalization programs.² Further efforts to liberalize and support the export industry included the Philippines' accession to the World Trade Organization (WTO) and the implementation of the Export Development Act, both in 1995. While these resulted in improved export performance, the share of manufacturing value-added in gross domestic product, as well as the country's growth rate, is still relatively low.³ Nevertheless, simulations suggest that reductions in tariff rates between 1994 and 2000 generally reduced poverty (see Cororaton and Cockburn 2007).

Following the signing of its first regional FTA, AFTA, in 1992, the Philippines' increasing outward orientation was complemented by a regional focus. Along with FTAs with the PRC, Korea, and Japan, implemented through the ASEAN channel, the Philippines has signed FTAs with Australia, New Zealand, and India. The country also recently became party to a bilateral FTA with Japan (Philippine Exporters Confederation [Philexport] 2007b; Senate of the Philippines, Senate Economic Planning Office 2007). In addition, the Philippines signed a trade and investment framework agreement⁴ with the United States (US) in 1989 and has agreed to various types of bilateral trade, investment treaties, and memoranda of understanding with more than 35 countries. Today, the country has a multi-track approach to liberalization—unilateral, regional, and bilateral.⁵

Alongside trade reforms, major investment reforms were also undertaken in the early 1990s, including, of particular importance, the enactment of the Foreign Investment Liberalization Act and the Special Economic Zone Act. These reforms attracted substantial foreign direct investment (FDI) in manufacturing and underscored the contribution of foreign-owned firms (particularly multinational corporations [MNCs]) in increasing output as well as in linking the Philippines to global and regional production networks. With the objective of establishing the Philippines as a production base (particularly in the auto and electronics sectors), the country has participated in both the ASEAN Industrial Cooperation (AICO) scheme (discussed in Section 3) and the Information Technology Agreement (ITA) through the WTO.⁶

2.2 Tariff, Trade, and Investment Profile

Tariff structure. Although tariff reforms have undergone some recalibrations and reversals over the years (WTO 2005), overall tariffs were gradually liberalized to a simple average applied most-favored-nation (MFN) tariff rate of 6.3% by 2008 (see Table 2 [ PDF 19.8KB | 1 page ] for selected rates). This rate is already low by developing country standards. Electronic inputs are mostly duty free, with an average MFN tariff rate of 3.8% for electrical machinery (WTO 2009. Dispersion has also fallen, with most items within the 0–10% tariff range and only four items at the 60–65% tariff level (down from 53 items in 2000) (Philippine Tariff Commission 2009).

MFN and AFTA Liberalization. Following the signing of AFTA in 1992, the Common Effective Preferential Tariff (CEPT) scheme with ASEAN member countries was implemented a year later (Philexport 2007a; Balboa, Medalla, and Yap 2007). AFTA's objective was to increase ASEAN's competitive edge as an integrated production base in overseas markets and the CEPT scheme's aim was to reduce intraregional tariffs to 0–5% on 99% of tariff lines by 2010 for ASEAN-6 countries, including the Philippines. Barriers to international and intra-ASEAN trade gradually fell over time. Average applied MFN tariffs for the Philippines fell from 12.1% to 6.3% between 1997 and 2008. Furthermore, as part of the CEPT arrangement, the Philippines liberalized its economy to its ASEAN trading partners more rapidly than to the rest of the world. The average CEPT rate for exports from the rest of ASEAN to the Philippines fell from 9.1% to 3.7% between 1997 and 2003 and is expected to further reduce to negligible rates by 2010. Likewise, Philippine exports to ASEAN economies have enjoyed lower preferential tariffs over time. For instance, average tariffs for ASEAN-6 economies fell from around 6% to 0.8% between 1997 and 2008.

Aside from the CEPT scheme, the Philippines is also party to ASEAN agreements on its 11 priority integration sectors (which include agro-based products, automotives, and electronics); investment area; mutual recognition; industrial cooperation scheme; and trade facilitation. The firm-level results in Section 3 will shed light on the impact of AFTA on Philippine business.

Export profile. Trade liberalization efforts have changed the food sector's output structure, largely benefiting labor-intensive and competitive industries (Dueñas-Caparas 2007). Since 1980, exports of commodity goods have shifted from traditional products (such as coconut, sugar, forest products, mineral products, fruits and vegetables, abaca, and tobacco) to nontraditional exports (specifically industrial manufactures), which accounted for 73% of total merchandise exports in 2006. The share of electronics—primarily semiconductors and data processing machines—was almost three quarters of total exports, while machinery and transport equipment, consumer manufactures, and food processing products contributed almost 10% of total exports.

The country's heavy reliance on electronics has raised serious concerns in light of the global recession, weakening demand for imported electronic products abroad, rising power costs and crude oil prices, and the sector's need for innovation (Philippine products in the electronics sector generally have low value-added and high import content). Primarily due to the slowdown in the US market, two of the country's biggest information technology companies—Texas Instruments Philippines and Intel Corp.⁷—announced either the closure of their manufacturing plants or thousands of layoffs in the Philippines in early 2009.

Trade and investment trends with FTA partners. Increased regional liberalization in ASEAN has coincided with a shift in the Philippines' exports toward its existing FTA partners (particularly in ASEAN and its Northeast Asian neighbors) and away from traditional markets like the US and the European Union (EU). Figure 1 [ PDF 20.2KB | 1 page ] and Appendix 3 [ PDF 21.9KB | 1 page ] provide data on Philippine exports, broken down by current and future FTA markets. Highlighting the importance of AFTA, the Philippines' exports to ASEAN countries grew at an impressive rate of 20.4% per year in 1992–2008 and the share of ASEAN in its total exports reached 16.6% in 2008. The effect on Philippine exports of ASEAN+1 FTAs with its Northeast Asian neighbors is also becoming evident. Particularly impressive have been Philippine exports to the PRC, which have grown by 36.6% per year and now account for a quarter of the country's exports, despite worries of competitive threats from cheap imports (Palanca 2004). While exports to Korea still remain small (3% of exports), they have nearly doubled since 1992. Meanwhile, exports to the US—the Philippines' largest trading partner in the 1980s and early 1990s—have contracted by more than two-thirds over the same period to 12.8% of total exports. By comparison, exports to Japan have remained relatively unchanged due to preferential market access via the bilateral FTA with Japan and the ASEAN-Japan FTA.

This rapid intraregional growth in trade has created new markets for consumer goods from Philippine firms, as well opportunities to participate in robust regional production (e.g., shipping intermediate goods to the PRC for further processing). Similar positive export trends can be seen with other new and potential FTA partners, such as Australia, New Zealand, and India. Overall, this structural shift suggests a link to the growth of regional production networks, increased participation of firms in exporting, and increased FTA activity.

Increasing inward investment from FTA partners is also evident. Available data suggests that the growth of net FDI from FTA partners, particularly from Japan, is particularly noteworthy. Overall, the net equity share of the Philippines' current FTA partners increased from 19.6% in 2000–2001 to 39.4% in 2007–2009 (Bangko Sentral ng Pilipinas 2009). In terms of value, total net equity from FTA partners has increased from 370.7 million to 977.6 million US dollar (US$), with most investments being in the manufacturing sector. Continued adjustment through technology transfer and the creation of backward linkages is needed to sustain the investments from the country's FTA partners (Aldaba 2008a).

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