PHL economy may fare worse with RCEP — experts

by By Jenina P. Ibañez, Reporter and Denise A. Valdez, Senior Reporter, BusinessWorld, 2 Dec 2020

THE recently signed 15-country mega trade deal could worsen a post-pandemic Philippine economy, some analysts said, as a potential surge in imports could upset the balance of trade.

A study done by United Nations Conference on Trade and Development Senior Economist Rashmi Banga found that imports could increase by around $600 million a year, while exports are only projected to increase by $4.3 million.

Products that may see a potential increase in imports include motorcycles, plastic, military weapons, and some types of motor vehicles and garments.

Signed on Nov. 15 after eight years of negotiations, the Regional Comprehensive Economic Partnership (RCEP) is a trade pact that includes China, Australia, New Zealand, Japan, South Korea and all 10 member countries of the Association of Southeast Asian Nations (ASEAN), which account for around a third of the global population and economy. India had opted out of the agreement, citing the risk posed by imports to its domestic industries.

The projected import surge is lower than Ms. Banga’s initial assessment of more than $900 million, after the Philippines placed several industries including rice, in a “sensitive list” that excludes them from tariff reduction commitments.

Ms. Banga, in an online video interview, pushed back against arguments that RCEP would significantly increase Philippine market access to other countries.

The Philippines already has free trade agreements with countries under RCEP. She said this means its market access would not likely increase unless all countries bring down their own sensitive lists, a move that would then cause import surges that could hurt Philippine industry.

“We are going through multiple crises right now — it’s a health crisis, economic crisis, climate change crisis. And then there’s going to be globalization. So this may not be the ideal time for a country to look for trade liberalization,” she said.

“I think the priority of the government should be to save their domestic financial resources, use tariffs to increase revenue and regulate the imports of luxury items. You need the resources for more productive investments, for taking care of your own citizens at this time of crisis.”

The Trade department has been promoting the deal as a market access advantage. Products like garments, automotive parts, and agricultural products such as canned food and preserved fruit stand to benefit, Trade Assistant Secretary Allan B. Gepty said in a recent statement.

But Ms. Banga said that China and Japan will likely benefit from the deal, while Southeast Asian economies like the Philippines, Indonesia, Thailand, and Vietnam could face negative balance of trade.

As the Philippines will share the same preferential trade access with China as it enters the deal, she said countries are more likely to favor efficient producers.

“Philippine exports are actually going down within ASEAN countries because they are importing more from China than from the Philippines. So the existing exports of the Philippines also decline. RCEP is not really increasing your market access,” Ms. Banga said.

“Exports to China actually goes down post-RCEP because China will then start importing from other more efficient producers like Japan and Australia.”

But Mr. Gepty said that a bulk of the goods that will be imported at reduced tariffs are raw materials and intermediate goods, which means that Philippine manufacturers will be able to buy them at cheaper rates.

“On exports, definitely, it will further increase because other than the fact that you now have enhanced market access to almost 50% of your export market, but also under very simplified rules, exporting products will become efficient,” he said in English and Filipino at a press conference.

‘MODERN’ TRADE

Calling the deal a modern free trade agreement, the Trade department highlighted how the agreement would be unique from other deals, including an intellectual property chapter and a common “rules of origin,” which means it simplifies the regulations identifying if products are “made in” a country.

Supporters of equitable trade campaign Trade Justice Pilipinas, however, said in a press conference that stricter intellectual property (IP) rules could limit Philippine medicines access, although Focus on the Global South Philippine Head Joseph Purugganan later admitted in a television interview that the released rules are not as strict as they had anticipated.

Sentro ng mga Nagkakaisang Progresibong Manggagawa President Joshua Mata in the same press conference called on the Trade department to release their cost-benefit analysis and clarify potential risks to local jobs.

“We don’t believe that this (deal) can actually turn the tables around in terms of trade at a time where there is no global demand precisely because we are all still reeling from COVID-19,” he said in English and Filipino.

“Why not use the moment to talk about the possible implications openly?”

Ms. Banga also said that the unified rules of origin are hard to implement and likely to have minimal benefit.

The Trade department has said the intellectual property chapter assures flexibility and streamlines IP protection procedures, which would benefit Filipino inventions.

Trade Secretary Ramon M. Lopez had said the deal will further broaden Philippine trade and investment, transparency, and regional supply chains. He has not yet responded to requests for their cost-benefit analysis.

POTENTIAL BENEFITS

Yet for some, RCEP is good news, because it is seen as a way to recover from the Sino-US trade war and the economic slump brought by the coronavirus pandemic.

“Country of origin rules have been eased and simplified further under RCEP, from separate bilateral deals, allowing more goods to be eligible for much lower tariff rates even if inputs come from multiple sources from other RCEP member countries,” Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said in a Nov. 18 text message to BusinessWorld.

While noting that RCEP is “really nothing new” for the Philippines in terms of trade agreements with some countries, such as China and Japan, Mr. Ricafort said there is still much to gain from the rest of the signatories.

“RCEP would still help strengthen further trade of the Philippines with the rest of the 15 other member countries in terms of increased exports and imports that lead to wider trade deficits, thereby helping increase economic growth,” he said.

He noted the inclusion of Japan, South Korea, Australia and New Zealand in the free trade agreement with ASEAN and China would lead to increased competition and imports, but the relatively lower costs of production and living in other ASEAN countries such as the Philippines may attract more investments.

“The improved economic and credit fundamentals of the Philippines with improved demographics, having the 12th biggest population in the world, would help make the country a compelling business destination and help attract more foreign investments into the Philippines,” Mr. Ricafort said.

Caesar B. Cororaton, research fellow at the Virginia Polytechnic Institute and State University, said that exports will increase every year, potentially reaching $214 million in four years. He added that gross domestic product (GDP) will rise as economic activity increases and consumer prices fall with the entry of cheaper goods.

“(China and Japan) will benefit, but the Philippines will not be left behind. We will be lifted as a group. If you’re not included, you’ll be left behind,” he said in an online interview.

“If you just focus on the Philippines, it’s small — income per capita is very small. How can your industry expand with a very minimum market?” he said.

According to Mr. Cororaton’s study, potential export growth will be seen in semiconductors, fruits and vegetables.

Electronics exporters believe that the deal will improve industry opportunities.

“It may not change much for top Philippine electronics export and import markets like China, Japan and South Korea, but I hope trade with Australia and New Zealand as well as some ASEAN countries increase,” Semiconductor and Electronics Industries in the Philippines, Inc. (SEIPI) President Danilo C. Lachica said in a mobile message.

Since the trade pact was signed, some companies can only surmise that RCEP will help their businesses, particularly those that either have operations overseas or are heavily engaged in exports and imports.

One of these is GT Capital Holdings, Inc., a Ty-led conglomerate which has interests in automotive through Toyota Motor Philippines (TMP), banking through Metropolitan Bank & Trust Co. (Metrobank), insurance through Philippine AXA Life Insurance Corp. (AXA Philippines) and property development through Federal Land, Inc.

“Upon our initial analysis of RCEP, we believe that several of its provisions benefit GT Capital’s automotive business, i.e. TMP, the most, as it is the subsidiary or component company that directly engages in international trade,” the investor relations department of GT Capital said in a Nov. 23 e-mail to BusinessWorld.

“However, Metrobank and AXA Philippines, which are our banking and insurance businesses respectively, may also benefit from RCEP’s new provisions on expanded access to financial services,” it added.

GT Capital cited that the “flow-through effects” of RCEP is expected to help its businesses through increased market demand. For example, it anticipates that lower import-export costs will drive up appetite for capital-building, therefore helping its Metrobank segment.

The company also does not fear any disruption in local production, noting it is “prepared to capitalize on expanded Philippine trade relations.”

“The tariffs provided in the RCEP are higher than other existing trade agreements like the ASEAN Trade in Goods Agreement, JPEPA (Japan-Philippines Economic Partnership Agreement) and ASEAN-China Free Trade Area,” Vince S. Socco, chairman of GT Capital Auto Dealership Holdings, said in the e-mail.

He noted that China-based automakers may introduce completely built-up cars because the previous trade agreement provides a 30% tariff on this category, against RCEPs 28% in five years.

“In general, the current market dynamics are not expected to be affected. The two models that Toyota assembles locally are the Vios, which has a displacement of 1.3 to 1.5 liters, and the Innova, which is not in the passenger car segment,” Mr. Socco said.

“Moreover, the Vios is registered under the CARS (Comprehensive Automotive Resurgence Strategy) program, enjoying additional production and investment incentives from the government,” he added.

Similarly, Aboitiz Equity Ventures, Inc. (AEV) focused on the positive effects of RCEP, particularly for its feeds business. AEV has interests in power, banking and food, among others.

“Our feeds business operates in nine countries with markets straddling both ASEAN and China. Our markets will surely benefit from modern, comprehensive, high-quality, and mutually beneficial economic partnerships, stimulating consumption in the region,” the company said in a Nov. 23 e-mail to BusinessWorld.

AEV’s feeds business has operations in the Philippines, Indonesia and Vietnam, and distributes products to Hong Kong, Vietnam, Myanmar, Thailand, Malaysia and Indonesia, based on the company’s 2019 annual report.

It also owns and controls the feeds company Gold Coin Management Holdings Ltd., which has subsidiaries in Singapore, China, Hong Kong, Indonesia, Malaysia, Vietnam, Thailand, Sri Lanka, Myanmar, Pakistan, Brunei and the Philippines.

“(RCEP) will certainly promote greater efficiencies in the sector, so it is good for all, especially for the consumer. However, there remain benefits to being close to your natural markets,” AEV said.

The agreement will be implemented after a ratification process, which could take up to two years.