Curing trade deficits requires holistic economic rebalancing

By Rene E. Ofreneo, Businessmirror, 23 Jan 2020

In December last year, BOI Executive Director Ma. Corazon Dichosa called the attention of the nation on an “alarming” development – Philippine trade deficit has been growing. In 2014-2018, the deficit averaged 76.54 percent and reached $47 billion in 2018 alone. In simple language, the country is a net importer of goods. The good Director warned that such a pattern of development is simply unsustainable.

It is. No country can be a net importer all the time. And yet, economists keep repeating, the Philippines’ annual growth has been fuelled largely by consumption. How is this possible? We keep consuming without producing the goods needed by the country? The puzzle is solved by the 10 million plus national heroes and heroines – the overseas Filipino workers (OFWs), who have been remitting over $35 billion a year, in pure cash. These remittances have been supplemented by the country’s earnings from the call center-BPO sector and from the annual borrowings arranged by the finance officials.

The problem is that we live in an increasingly volatile and unpredictable world. There is an eerie calm in the Middle East after the weak Iranian response to the American killing of General Qassem Soleimani. But foreign analysts expect more conflagration in the Gulf Area, a conflagration that might result in a mass return migration for some three million OFWs. There is also rising xenophobia in many migration destination countries.

The other economic savior of the Philippines, call center-BPO sector, is also being buffeted by the rapid advances in technology such as the rise of the chat-bots and automated do-it-yourself gadgets. Growth in the sector has been in a plateau since 2017. More and more countries such as Vietnam are also participating in the global service offshoring industry, giving India and the Philippines stiffer competition.

The point is that one cannot be complacent in the face of the threats facing the country’s two major life savers. This is indeed the time for an honest-to-goodness reassessment of economic policy directions and institute measures to promote a more balanced economic structure. In this regard, the BOI mentioned two major policy targets:

One, balancing trade with the major sources of imports: China, South Korea, Indonesia, and Thailand. We agree. As we have argued in the past, the best economic assistance that China can offer to the Philippines is a balancing of its trade relations with the latter. China accounts for one-third of the total trade deficit. China is also one reason for the collapse of a number of Philippine industries, from the 1980s onward. Think of the Filipino shoe, plastic and various light industries.

China, as a reliable economic partner, has also been questioned by many Filipinos. China’s loan and investment contracts in relation to a number of power, water and infrastructure projects have been denounced as onerous and one-sided. China also responded to the Philippines’ new policy of greater economic openness to its neighbor by exporting Chinese construction materials for the country’s build-build-build program, such as steel and sending tens of thousands of Chinese workers and managers to Metro Manila and select provinces as “pogo” workers. No real balancing with China.

The other declared goal of the BOI is “robust industrialization policy”, which means enhancing the country’s capacity to export more and import less. In support of this, the BOI is suggesting increased Philippine participation in the global value chains (GVCs), deeper engagement in the emerging fair trade agreements (FTAs) such as the Regional Comprehensive Economic Partnership (RCEP), and imposition of remedies such as higher tariffs on certain products being dumped by certain exporting countries such as Vietnam.

We fully agree with the need for “robust” industrialization policy. But robustness cannot happen by simply increasing Philippine participation in the GVCs and in the emerging FTAs. Factory Asia, led by China and enabled by the system of GVCs developed by the multinationals (MNCs), is now in crisis due to advances in automation and robotization (reducing incentives for the outsourcing of labor-intensive processes) and the rise of industrial protectionism (as mirrored in Trump’s America First). Also, unlike South Korea and Malaysia, the Philippines has been trapped in the low and middle levels of the GVC system because of its poor industrial base and absence/neglect of “Industrial Policy” in the past; on the other hand, it is increasingly unable to compete with new but low-cost participants in the GVC system such as Cambodia.

And why are there no Philippine-initiated GVCs that can conquer both the domestic and export markets? The point is that there is limited opportunity in the GVC system that is fracturing due to the factors mentioned above. The BOI’s industrial visioning energy is better spent on the development of industries with higher growth potentials, such as industries to meet the basic needs of 110 million Filipino consumers and those that can support the build-build-build program (for example, revival of the integrated steel industry in Mindanao). In the case of the build-build-build program, it is ironic that Phinma, once upon a time a leader in organizing basic industries in the 1960s-1970s such as the cement industry, is now doing large-scale importation of Vietnamese cement for the government’s build-build-build program.

Also, there is a proposal of the Philippine Navy for the government takeover of the bankrupt Hanjin shipyard and its transformation into a Philippine ship-building industry catering to the needs of the Navy and the Philippine shipping industry. What is the BOI’s stand on this?

As to the application of tariff remedies on imported goods, why have the government’s economic managers opposed the proposal of the farmer organizations for trade remedies against the surge of rice imports last year? These imports, estimated to be around three million tons, made the Philippines the world’s leading rice importer once more, per data surveillance by the US Department of Agriculture. These imports also made the lives of millions of Filipino palay farmers miserable, as palay prices went down to as low as P7 to P11 a kilo in various provinces, way below the production cost of P12 a kilo.

Clearly, a more holistic re-assessment of industrial and agricultural policy options are needed in order to restore industrial “robustness” and attain trade balance for the country. Such a re-assessment should get out of the old simplistic development paradigm of the EOI neo-liberal economists – export-or-perish paradigm based on labor-intensive (read: low-level) participation in the GVC system of MNCs. After five decades, the EOI program still has not delivered its promises: higher industrial development for the country and better welfare for the Filipino people.