Domestic demand key to insulating PHL from US trade risks

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US President Donald J. Trump wears a standard Filipino barong at a gala dinner marking ASEAN’s fiftieth anniversary in Manila, Philippines, Nov. 12, 2017. — REUTERS

By Kyle Aristophere T. Atienza, Reporter

THE PHILIPPINES must boost domestic demand to insulate its economy from a possible setback on multilateralism, which is more likely to occur if Donald J. Trump returns to power in the US, in line with economists.

“It’s not only the Philippines which can be adversely affected should the US pivot away from multilateralism, something of a certainty under a Trump presidency,” Diwa C. Guinigundo, country analyst for the Philippines of GlobalSource Partners, said in an e-mail.

America’ trading partners “will suffer from the results of a fundamentally closed trading system — higher tariffs will actually reduce US imports and growth, while its trading partners could have compressed markets, lower trading gains and economic growth,” he said.

Mr. Trump, the Republican candidate, faces Democratic rival and Vice-President Kamala Harris within the Nov. 5 presidential elections.

If he wins, Mr. Trump has said he’ll impose a ten% tariff on imports from all countries and 60% tariff on imports from China.

Philippine Finance Secretary Ralph G. Recto last week said a possible Trump presidency poses risks to global growth as increased protectionism could weaken global trade.

“We’re concerned that there can be a setback on multilateralism, particularly in trade as well… We all know that the motive force of world growth is more trade. So, that could be a concern,” Mr. Recto said at a briefing of the Intergovernmental Group of Twenty-4 (G24) Board of Governors in Washington, D.C. on Oct. 22.

Mr. Recto said the Philippines is counting on its relationship with the US to encourage firms to do more offshoring to the Philippines.

“If the US adopts a more protectionist stance, the Philippines, as a net exporter with a $2.3-billion trade surplus in goods trade with the US in 2023, could possibly be negatively affected,” George N. Manzano, who teaches trade on the University of Asia and the Pacific, said in an e-mail.

“An across-the-board tariff increase by the US would adversely impact Philippine exports.”

But Mr. Manzano said it is a bonus for the Philippines that electronic products account for an enormous chunk of its exports to the US, thanks largely to a Nineteen Nineties World Trade Organization (WTO) agreement that eliminated all import duties on many information technology products.

“Roughly 67% of the Philippines’ goods trade with the US in 2023 was within the electronics sector, which currently advantages from duty-free access, likely on account of the Information Technology Agreement (ITA) under the WTO,” he said.

Electronic products accounted for 52.9% of the country’s total exports in August, with total earnings of $3.57 billion, in line with the statistics agency.

America was the highest destination of Philippine-made goods in August with an export value of $1.22 billion, accounting for 18.1% of the overall. This was followed by Hong Kong ($942.56 million), Japan ($935.33 million), People’s Republic of China ($849.38 million), and Republic of Korea ($332.64 million).

IMPACT ON BPO SECTOR
“The Philippines could likely be more affected within the business process outsourcing (BPO) area considering our comparative advantage on this sector relative to other Southeast Asian countries,” said Mr. Guinigundo, a former central bank deputy governor.

The IT and Business Process Association of the Philippines (IBPAP) is aiming to generate $38 billion in revenues and increase the headcount to 1.82 million this 12 months. The group is targeting to generate as much $59 billion and employ 2.5 million by 2028.

Nevertheless, the IT-BPM sector is under pressure on account of a talent and skills gap, rising operating costs, and increased global competition.

Fitch Solutions’ BMI unit said earlier this month that the Philippine BPO sector is at an obstacle amid the growing shift to artificial intelligence, noting a possible reshoring of call centers to “even developed economies cost effectively.”

“This is not any win-win situation. Everybody would ultimately lose,” Mr. Guinigundo said, “China’s retaliatory response could in actual fact worsen this scenario.”

Mr. Trump’s recent policy remarks, including his famous America first policy and an emphasis on burden sharing, have stoked concerns that Washington could adopt an inward-looking and an isolationist approach.

During his presidency, Mr. Trump withdrew from various global institutions including the Paris Climate Agreement and the Trans-Pacific Partnership.

On the economic front, Mr. Trump has been citing the necessity to raise tariffs for the US to usher in an era of “manufacturing renaissance.”

Alternatively, Ms. Harris, the Democratic candidate, has vowed to “strengthen, not abdicate” America’s “global leadership.”

“The president of the US must not take a look at the world through the narrow lens of ideology, petty partisanship, or as an instrument for their very own ambitions,” read a recent X post by Ms. Harris, who is anticipated to uphold the Biden government’s strategy of cementing a network of US allies and partners to confront shared challenges.

Mr. Marcos has pursued closer ties with the US amid China’s intrusions into Philippine waters, giving it access to 4 more military bases under the 2014 Enhanced Defense Cooperation Agreement.

US-Philippine ties on the economic front have also reached latest highs, with a business delegation led by US Commerce Secretary Gina Raimondo in March vowing to assist the Philippines arrange a wafer fabrication plant and double the variety of its semiconductor plants.

Weeks later, the US announced a plan to place up an economic corridor on the predominant island of Luzon, following a trilateral meeting amongst Mr. Marcos, Mr. Biden, and Japanese Prime Minister Fumio Kishida.

The project, a “key deliverable” under the Partnership for Global Infrastructure and Investment component of the US-led Indo-Pacific Economic Framework, can be pursued by Washington with the assistance of Japan.

Mr. Manzano said the US would likely be compelled to step up its ties with Asia-Pacific countries “to maintain pace with the increasing influence of China within the Southeast Asian region.”

“The US will proceed to deepen its relationship with the Philippines. President Marcos is inclined to deal more with the US than with China given the developments within the West Philippine Sea,” he said.

A report by Moody’s Analytics in July said the Asia-Pacific region faces the danger of an abrupt shift in US trade policy in case of a Republican sweep within the US presidential election.

But it surely expects “minimal retaliation” from the Philippines against potentially higher US tariffs given its strong defense ties with Washington.

Amongst Asia-Pacific economies, Moody’s said only China is more likely to retaliate considering its ongoing trade with the US since 2018, when Mr. Trump slapped investment controls and tariffs on lots of of billions of dollars’ value of Chinese products due mainly to alleged unfair trade practices by Beijing.

Mr. Guinigundo said amid the trade risks, the Philippines must prioritize boosting domestic demand and enhancing trade with the ASEAN+3, which incorporates Japan, China and South Korea.

“Two things which can not completely offset possible trade shocks: one is to advertise domestic demand, and two is to further stimulate our trade in each goods and services with our ASEAN+3 partners.”

Mr. Guinigundo said promoting domestic demand is anchored on lower inflation and better economic growth driven by personal consumption and investments.

“The most recent prognosis is sort of positive because price movements have began to ease while GDP (gross domestic product) growth could also be as targeted — between 6% and seven%,” he said.

He noted the Philippines has improved trade ties with its neighbors.

“Expanding the liberalized list and lowering tariffs will help on this direction,” he added. “Furthermore, higher intra-ASEAN+3 financial linkages could further stimulate regional trade.”

Should there be a shift in US trade and foreign policies, Mr. Guinigundo said Manila should proceed to enhance its investment climate “to make sure private US business will proceed to extend their stake here.”

“Trump’s public policy could restrict international trade only to a certain extent. If the Philippines is in a position to persuade US businessmen and investors that the Philippines is sweet for business in the long run, they’ll and they’ll come,” he said.

“Let’s proceed to make sure there may be good governance here, corruption is under control, there may be rule of law and respect for property rights and ease of doing business,” he added.

Meanwhile, Leonardo A. Lanzona, who teaches economics on the Ateneo de Manila University, said the Philippines is unlikely to suffer much from a possible protectionist trade policy within the US since the Southeast Asian nation has not benefited significantly from free trade.

“Trade works well if institutions are also reformed to encourage competition and greater efficiency. None of those has happened, leading to a moribund manufacturing sector,” he said in an e-mail.

“Industries and elite power continued to empty the economy of its energy and vigor. Whether or not Trump wins, the overseas Filipino staff will remain our saving grace.”

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