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The Philippines

For the Philippines, caught between the US and China, trade war is an opportunity to move up the value chain

Lucio Blanco Pitlo III says the trade war may see mixed results for Manila, with some sectors actually gaining, but it should still be a sign that the Philippines needs to diversify and make higher-quality goods

PUBLISHED : Tuesday, 16 October, 2018, 9:30am
UPDATED : Tuesday, 16 October, 2018, 3:06pm

As the trade war escalates between the US and China – the world’s two largest economies – their trade partners are becoming increasingly wary. The timing could not be more ominous for the Philippines, one of the world’s fastest-growing economies, a long-time ally of the United States trying to bolster its economic ties with China.

China and the US currently represent the largest and third-largest trade partners of the Philippines respectively, while the US, Hong Kong and mainland China form the country’s top three export markets, and China and the US constitute the largest and fourth-largest sources of its imports.

The Philippines is already experiencing high inflation and is still in the early stages of addressing its decades-old infrastructure deficit, so the trade war casts a long shadow over the country’s prospects. It is an active player in the increasingly integrated global supply and production chains through which goods bound for external markets like the US and China pass. There is potential for the trade war to disrupt this, inflicting collateral damage on national economies in the chain.

A total of 16.9 per cent of Philippine exports form part of China’s value chain, among the highest percentage in Southeast Asia. However, these only account for about 3.2 per cent of its GDP. In contrast, Malaysia and Singapore have higher exposure, at 7.3 per cent and 5.7 per cent respectively.

Migrant Filipino workers in export-oriented factories in Taiwan, South Korea and Japan who churn out intermediate or final goods destined for China, America or third-party markets may also be affected. Being less dependent on exports could give the country some breathing space, but its relatively high volume may eventually hurt it.

That said, there are also opportunities, in the form of trade diversification. With its young demography, burgeoning middle class, proficient manpower and increased investment in infrastructure, the Philippines has potential: it has emerged as the world’s top investment destination this year.

As such, the country can position itself to attract Chinese enterprises producing goods for the US, as well as American firms producing for the huge China market. Increasing labour costs on the Chinese mainland and the Philippines’ proximity to lucrative Asian markets can buttress its credentials as an alternative manufacturing hub. The country can also serve as an alternative supplier of goods (for example, fruits, fisheries and electronics) to both the US and China.

Socioeconomic Planning Secretary Ernesto Pernia has said a full-blown trade war would have a positive net effect on the Philippines, claiming that the country would gain millions of dollars in exports to the US, mainly electronic goods, if the trade war intensifies. This would alleviate the potential loss of imports from China.

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In spite of the trade war, investment in the Philippines grew in the second quarter of 2018. Manufacturing received the most investment, followed by construction. The US is the third-largest prospective investor after Indonesia and Japan, with a 4-billion-peso (US$74 million) pledge, accounting for 12.9 per cent of total approved investments.

China, on the other hand, is looking for local partners to develop its first industrial estate in the country, which it says would be larger than its eight existing sites in Southeast Asia.

Efforts to boost the nation’s competitiveness can enhance its position. Tax reform and President Rodrigo Duterte’s “build, build, build” programme for infrastructure will go a long way in enticing foreign and domestic capital. This ambitious programme will help address traffic congestion and logistical constraints, generate jobs and spread development.

Last May, Duterte also signed the Ease of Doing Business Act, meant to cut bureaucratic red tape and streamline procedures for business applications. China Telecom and AT&T are among the foreign companies interested in becoming the country’s third telcoms player, breaking the prevailing duopoly and improving services.

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The trade war will greatly affect electronics, which amount to more than half of Philippine export revenue and nearly a quarter of its import bill, based on July 2018 figures.

American electronics companies producing goods in the Philippines that feed into China’s value chain and are eventually exported to the US and elsewhere may be hurt by the trade war.

Texas Instruments, one of the world’s largest producers of semiconductor chips, has production facilities in Baguio and the Clark Freeport and Special Economic Zone. Moog, another US company that has also set up shop in Baguio, is involved in the design and production of precision instruments with applications in the aerospace and industrial machinery sectors.

Such companies may feel the heat, as electronics were among the primary class of goods subject to higher tariffs by both the US and China.

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Rising protectionism and attempts to roll back globalisation are worrying trends, but they are realities the Philippines must accept. Indeed, trade wars may force competing economies to turn more inward and self-reliant; the US is reviving manufacturing while China is hastening reform.

Thus, instead of being a spectator, the Philippines should take the trade war as a call to action. While stopgap measures can be implemented, cushioning the country from adversity requires resolute long-term action. Diversifying trade and investment partners is one way to mitigate risks.

The trade war highlights the importance of moving up the value chain. Building infrastructure, improving logistics, investment in human capital development and maximising technology transfer will enhance the Philippines’ competitiveness. Implementing critical policy reforms, such as easing the foreign ownership cap in certain target sectors, is also important.

Finally, as the country’s trade increasingly integrates with Asean and Northeast Asia (China, Japan, Korea and Taiwan), deepening ties with regional neighbours becomes imperative.

Lucio Blanco Pitlo III is a research fellow at the Asia-Pacific Pathways to Progress Foundation, a lecturer on Chinese Studies at Ateneo de Manila University and contributing editor (reviews) for the Asian Politics & Policy Journal. He also sits on the Board of the Philippine Association for China Studies