Great on paper, hard to execute
TODAY via ABS-CBN
Monday, February 7, 2005
Great on paper, hard to execute
The Philippines is cautiously optimistic about free trade with the United States.
By RODERICK T. DE LA CRUZ
TODAY Reporter
Economists are cautiously optimistic about the prospects of a bilateral free-trade agreement (FTA) between Manila and Washington. Government negotiators, on the other hand, are more reserved when disclosing information to the public for reasons they only know.
Details of which industry will reap benefits from such a trade accord are treated confidentially. This is understandable, on the one hand, considering that the country, would want to keep its bargaining power when negotiations start. But it is at the same time uncalled for in the sense that whatever they have to bargain for will have a tremendous impact on local industries.
As a policy guide, a trade official said that before entering into an FTA, the Philippines should first review the list of all the sectors and industries that stand to gain or lose under the proposed agreement. However, trade negotiators are tempted to keep such information until actual negotiations take place.
In a recent discussion on the prospects for a Philippines-US FTA organized by the Philippine Institute for Development Studies (PIDS), Romeo G. Borillo, the country’s trade representative in Washington D.C., refused to divulge details of the proposed agreement. Nor did he say which between the Philippines and the US will gain more from such a trade accord.
What is clear, according to Borillo, is that the Philippines has yet to adopt a framework under which the proposed FTA shall proceed. This is a problem that two economists claimed would derail the government’s efforts to forge separate FTAs with various countries.
What it means
Two countries are said to be engaged in an FTA when they allow their products and services to leave and enter their ports freely, meaning without tariffs or restrictions. An FTA removes the barriers in the flow of commodities and human services between two or more countries
This sounds good in concept, but extremely difficult to implement, if the country’s legal framework is to be considered. Apart from restricting foreign ownership of land, the Philippine Constitution mandates the 60 percent-40 percent joint ownership of businesses in key sectors, with Filipino nationals enjoying the bigger share. The law also prevents foreigners from practicing professions in the Philippines.
Dr. Erlinda Medalla, a researcher at the PIDS, claimed that both the United States and the Philippines view FTAs as significant trade policy vehicles.
The US, for one, has at least five bilateral FTAs in force with Canada, Mexico, Jordan, Chile and Singapore. It has also initiated the US-Central America Free Trade Agreement and the Free Trade Agreement of the Americas.
On its part, the Philippines has started bilateral FTA negotiations with Japan and regional negotiations as part of the Association of Southeast Asian Nations with China, Japan, South Korea and India.
However, the Philippines has yet to adopt a systematic framework that would govern its negotiations for FTAs with other countries, according to two economic analysts.
The United States remains the largest market of Philippine products, although the American market’s share in the country’s total exports has been on the decline since 2001. The Philippines exported some $11.365 billion worth of merchandise goods to the US in 2000. The figure significantly went down to $8.678 billion in 2002.
Risks of exclusionIn a paper titled “Aftermath of World Trade Organization in Cancun: Bilateral Free Trade Areas,” economists from the University of Asia and the Pacific (UA&P) noted that several Asian countries are already negotiating with the US for a bilateral FTA, following the collapse of the WTO talks in Mexico.
UA&P economists John Lawrence V. Avila, George N. Manzano and Michael Lynch said that under these proposed agreements, products from a US trading partner would enjoy zero or very low duty when their products enter the US market. “In this sense, their export products acquire enhanced competitiveness at the expense, obviously, of other exporting countries,” the economists added.
They warned by negotiating for FTAs with the US, other Asian countries could displace the Philippines from the list of major trading partners of the world’s largest economy. Among the Asian countries that are seeking bilateral accords with the US and other nations are Singapore, Taiwan, Thailand, Indonesia, Japan and South Korea.
“The new FTA established by the US with Singapore and the possibility of more FTAs with countries such as Thailand, Indonesia and Australia pose a threat to the Philippine economy, especially the export sector. New and potential FTAs could result in trade diversion, where the US reduces its imports of certain Philippine goods in favor of the products of its bilateral FTA partners,” they said.
An analysis made by the UA&P economists shows that 18 products from the Philippines are vulnerable to trade diversion once the US signs separate FTAs with other Asian countries that export the same products as those of the Philippines. These products include fresh or preserved fish, tinned or prepared fish, preserved fruits, honey and sugar, crude vegetable materials, fixed vegetable oil, wood, pottery, office machines, electric power machine switch, electrical machinery, telecom equipment, electric machine, furniture, travel goods and handbags, clothes, watches and clocks and other manufactured goods.
The economists warned that there is at least one country that poses a threat to the competitiveness of Philippine exports to the US. “Of the 18 products that the Philippines exports to the US significantly, there is at least one prospective bilateral partner of the US that poses a competitive threat,” they said.
They noted that of the 18 products vulnerable to trade diversion, the Philippines competes in 16 products with Thailand, 10 with Indonesia and six with Singapore.
For this, they challenged the government to seriously consider adopting an FTA with the US. “It is for the benefit of the Philippine economy if policymakers could devise a strategy in response to the US-led trend of bilateral FTA formation in the world. . . or else the country will have to bear the cost of doing nothing. For the Philippines, forging an FTA with the US is certainly an option worth considering today,” they said.
“Nonparticipation stifles the competition environment, prevents firms from reaching economies of scale in production, and limits trade expansion that a trade agreement may make possible,” they added.
The benefits
Among the perceived benefits of forging an FTA with other countries, the UA&P economists said, are attracting more foreign investment, promoting economic reforms and deflecting domestic protectionist pressures.
“This will boost the image of the developing economy as a dynamic one thereby enhancing its standing in the international community,” they said. The UA&P economists also claimed that a bilateral FTA would boost domestic consumption. “In general, the economic benefit of free trade lies largely in greater consumption possibilities and realignment of resources toward the efficient sectors. As tariffs are lifted, more imports enter the country and as domestic prices tumble as a consequence, greater consumption is possible. In the end there are more goods, of greater variety and cheaper than under a tariff regime,” they explained.
More than anything, an RP-US FTA is seen to relax the rules on the deployment of the overseas Filipino workers, or OFWs, in the US. Data cited by the PIDS show that there were only 18,854 OFWs in the US from 1998 to 2002. The number comprised only 0.58 percent of total OFWs worldwide.
In 2003, the number of OFWs in the US fell by 9.7 percent due to more restrictive policies in the entry of foreigners in the US mainland. An RP-US FTA is believed to significantly increase the number of Filipinos employed in the world’s biggest economy.
There are around 1.4 million Filipinos living in the US, comprising the second-largest immigrant group next to the Mexicans. It is estimated that some 40,000 Filipinos apply for emigrant status in the US annually.
Industry winners
Although the head of the now defunct Garments and Textile Export Board (GTEB) refused to disclose whether the garments industry will recover under the proposed FTA, economists said the proposed FTA will most likely provide market access to local garments and other Philippine exports.
The market access list would most likely include agricultural products, electronics, information technology, professional and business services, telecommunication, financial transfers and a horde of other sectors.
In her analysis of the potentials from a RP-US FTA, Marissa Paderon said the liberalization of agriculture between the two markets would have the following positive effects: a stable market for Philippines agricultural exports, market access for goods not produced locally, elimination of trade barriers and efficiency in the agricultural sector. Among the negative effects, however, would be the influx of agricultural imports.
The Philippines, however, is advised to revisit the US domestic policies on food trade, including its US Bioterrorism Act and other high food standards that have to be met by Filipino exporters.
On the inclusion of textiles in the FTA, the positive effects cited are expanded market for Philippine exports of textile and apparel, economic efficiency, welfare and consumer protection and lower trade barriers. On the opposite side, the negative effects would be increased vulnerability of the textile industry and stiff competition between local and American garment companies.
In terms of technical assistance, the US-Asean Business Council has identified in the US-Philippines Framework Agreement the following areas for cooperative undertaking: intellectual property, biotechnology, training, trade-related standards and conformance issues, and e-commerce and international airport/cargo hub.
WTO first
The option of forging separate bilateral FTAs with various countries, however, could put the Philippines at a tighter disadvantage than it presently is under the World Trade Organization (WTO), government negotiators and economic experts admitted.
“There is no such a thing as a level playing field in bilateral negotiations,” former ambassador and trade secretary Cesar Bautista said. Bautista, who now serves as chairman and president of Unilever Philippines, claimed that the best chance of developing countries for a balanced international trade is through the WTO, a multilateral trading system comprised of 148 economies.While acknowledging that countries today are more interested in bilateral talks, Bautista insisted that bilateral or even regional agreements couldn’t replace the multilateral trading system espoused by the WTO. He argued that the Doha Development Agenda, which was tackled in Cancun, Mexico last September, would be beneficial to both developed and developing nations, if this could only be implemented.
The Doha round was supposed to be concluded by January 1, 2005. Except that the fifth WTO ministerial conference collapsed in Cancun, as developed and developing countries clashed over the issues of export subsidy in agriculture and the so-called Singapore issues.
Assistant Agriculture Secretary Segfredo R. Serrano, the head of the Task Force on WTO Agreement on Agriculture Renegotiations, admitted that negotiations for a bilateral FTA are more strenuous than the WTO talks. “Mas ipitan ang labanan sa bilateral [The negotiation is more confrontational at the bilateral level],” he said. “It is harder and more detailed.”
Serrano said larger economies, which have more resources and bigger budgets for technical negotiations, enjoy the advantage in the bilateral talks. “It is hard to imagine that the US would treat the Philippines as its smaller brother in the negotiation,” he said.
He said that under bilateral FTAs, the Philippines has to discuss different issues with all of its trading partners. “How many bilateral agreements do we need to sign then?”
Law experts claimed that the basic theory of free-trade areas does not seem to provide a sound basis for support for an RP-US FTA. They mentioned the following reasons:
– The very nature of FTA is discriminatory;
– Welfare effects may or may not be enhancing for the member country; and
– FTA can result in trade diversion.
Spaghetti bowl effect
In their paper titled “Exploring the Philippine FTA Policy Options,” the PIDS’ Medalla and Dorothea C. Lazaro, however, warned that the government has no concrete strategies or deliberate policies toward FTAs yet.
“The Philippines appears to be more of a passive negotiator or participant in FTAs. This position is not necessarily disadvantageous since there are potential risks in engaging in FTAs,” they explained.But they warned that in the long run, “not having a systematic framework in FTA negotiations would result in what Jagdish Bhagwati refers to as the spaghetti bowl effect.”
In describing the spaghetti bowl effect, Bhagwati, a famous modern-day economist from the Columbia University, warned that bilateral FTAs could create regulatory complexity and confusion in trade policy, particularly in the administration of overlapping, contradictory, and mind-bogglingly complicated rules of origin requirements.
Medalla and Lazaro said that while there is no template for an ideal FTA strategy, the country should at least be able to have a clear objective with respect to the elements of an FTA, the scope and institutional framework, the assurance that the FTA is a mechanism toward achieving a stronger purpose, and the criteria for choosing a partner to the FTA.
Also, the two researchers said the government must map out industry-by-industry adjustment and competitiveness strategies with industry leaders in order to maximize the potentials of the FTA and manage the challenges of integration of economies.
“Another important task for the government, apart from determining what the country wants, is the identification specifically of its sensitive products. Prior to the start of the negotiation, there must already be a classification of what products are negotiable and nonnegotiable,” they said.
Other possible issues that the government needs to address would be in services liberalization, they added. Attention should also be given to the so-called enhancing features of new-age FTAs, including rules on investments, competition policy, government procurement, transparency and trade facilitation measures.
Policy guides
In another paper, Medalla said the Philippines’ efforts in forging an FTA with the US should be guided by its own reform objectives touching on global competitiveness, sustainable growth, resource allocation efficiency and poverty reduction.
Bilateral FTA negotiations, he stressed, are expected to be kept within the principles of multilateralism. Among the reasons being considered for pursuing a bilateral approach are to use it as a testing ground, as a step to multilateralism or as a defensive mechanism. However, among the potential risks mentioned to a bilateral approach are trade diversion, resource diversion and political diversion.
The Philippines would also do well if it would consider the 17 principal negotiating objectives of the US. These are trade barriers and distortions, trade in services, foreign investment, intellectual property, transparency, anticorruption, improvement of WTO and multilateral trade agreements, regulatory practices, electronic commerce, reciprocal trade in agriculture, labor and the environment, dispute settlement and enforcement, WTO extended negotiations, trade remedy laws, border taxes, textile negotiations, and worst forms of child labor.
Also, economists also cited the need to look deeper into three major challenges in the FTA negotiation: political challenges, bilateral agreements and specific legal issues, and political and security relations issues.
Among the specific and trade-related issues cited are labor dispute settlement, e-commerce, trade remedies, intellectual property rights, environmental protection, open skies agreement, dual citizenship and competition policy.
At the same time, the PIDS also proposed a Global Trade Analysis Project to determine quantitatively sectoral impact of the proposed FTA on agriculture, garments, electronics, IT, outsourcing and back office operations, cross-border services, and even movement of persons.In their recommendation, international law experts Jemy Gatdula, Ever Higuit and Raffy Madarang advised the Philippine government to avoid being bound to any treaty obligation under the proposed FTA.
More than anything, economists cited the need to improve the country’s competitive edge, if it is to compete and trade directly with the world’s most competitive economy.
This would only be possible by upgrading the technical skills of Filipinos, improving the level of education in the country, developing the country’s infrastructure and logistics systems, reducing the cost of production in the country, and stabilizing the economy.
Without these factors in place, economists said the Philippines would be at the losing end of trade cooperation or competition with the US, or with any country in general.
