Philippine Trade Overview

The Philippine Trade Strategy

● Philippines’ economic development thrust is inclusive growth - (localizing economic
development) inclusive growth requires the participation of the community
○ Economics
○ Society
○ Governance

Economic conditions…
● Growth in Gross Domestic Product is 6.3% in 2015.
● GDP Components:
○ Service Sector is 7.4%
○ Industry is 6.8% only from 9.1%
○ Agriculture is 4.2%

Other economic indicators

● Inflation
○ Change of price in goods and products
○ 1.4% (oil and basic commodities)
○ Other factors (supply and demand problem & disasters)
○ Main driver of inflation is basic commodities, elections, value of money, and oil.
● Energy
○ Crude oil is declining by 18.2%
○ What is the problem, OPEC?
○ Prices in power decreased
○ Water prices increased
● Labor and Employment
○ Lowest unemployment rate
○ Record posted 5.7%
○ Check on policies and government strategies
● Value of Money
○ Value of peso is consistently weak
○ Attributed to the recovery of dollar
○ Attributed to financial conditions in Asia
● How about trade?
○ We focus first on exports
○ Export performance is falling by 3.9 (around 4 billion USD of income)
■ Electronics and related products
■ Semi-conductors
■ Machinery and transport-related equipment
■ Other manufactures
● Problem: How about agriculture?
● Recipients of Phl exports
 ○ Japan
○ United States of America
○ Hong Kong
○ China
○ Singapore
■ Issue: how about regional blocks?

Challenges:
● Too much concentrations of revenues from (few) goods and services
● Too much reliance on (very) few markers (at the global arena)
● Losing trade competitiveness
● The idea of inclusive growth

International Trade: Definitions

● Trade as exchange, interchange, or barter
● The commercial transaction or exchange that occurs between two or more countries
● The exchange of capital, goods, and services across international borders or territories
● Trade involves the use of international currency(ies) and to obtain this, one has to go
through some procedures.

International Trade: Some Dynamics

● International trade represents a significant share of Net National Product and Gross
Domestic Product
● Industrialization, advanced transportation, globalization, multinational corporations, and
outsourcing
● The motivation and the behavior of parties involved in a trade do not change
fundamentally regardless of whether trade is across a border or not.
● “International trade” refers to the exchange of goods and services that take place across
international boundaries
● Trade can be unilateral or bilateral and multilateral

International Trade: Some Reasons

● Opportunity cost
● Comparative advantage
● Factor endowment
● Absolute advantage
● Competition
● Capital: access or returns
● Economic and Social Development

A country has a comparative advantage in a good if it produces the good at lower opportunity
cost that other countries
Countries can gain from trade if each exports the goods in which it has a comparative
advantage

Now we apply the tools of welfare economics to see where these gains come from and who
gets them.

The small economy assumption

Price taker - is a price mechanism that does not affect supply and demand despite the amount
of price imposed on a product.

Autarky - a condition in which there is no trade, there is no international engagement (no export,
no import)

International trade theories

● Fundamental questions in International Trade

○ Why does international trade take place?
○ What determines which country should export a particular good and which
country should import it?
○ Who gains from such trade?

Why do nations trade?

● Nations are different
○ Unequal distribution of national resources
○ Difference in technology
○ Cost advantages:
■ Cost of production for the same product differs among different locations
■ Better explained by the theories of absolute advantage and comparative
advantage
○ Different preferences:
■ Americans prefer basmati rice grown in india
■ Due to different income levels
● To achieve economies of scale in production
○ New trade theory

Why study trade theory?

● Talks about benefits of international trades
○ Theories show why countries should trade for products/ services

Free trade is a situation where a government does not influence international trade through
quotas and tariffs.
Free trade is considered to be fair trade because what is free is supposed to be fair.

Export is much more aggressively implemented during mercantilist era rather than imports
absolute advantage
● There is international benefit from trade
○ Everyone is better off without making anyone worse off
● When one country can produce a unit of good with less cost than another country, the
first country has an absolute advantage in producing that good

comparative advantage
● Nations can still gain from trade even without an absolute advantage
● Facilitator - difference in opportunity cost
● A country has comparative advantage in producing good if the opportunity cost of
producing that good in terms of other goods is lower in that country compared to other
countries

Ricardian model - an overview

● Illustrates the potential benefits from trade
● Trade leads to international specialization
● With labour as the only factor, it moves from relatively less efficient industries to relative
more efficient industries

Gains from trade

● International trade brings in efficiency in production and consumption, and
● It provides a market for goods and services

The heckscher-ohlin model

- Cause of trade
● International difference in labour productivity - ricardian view
● Differences in countries resources - h-o model
- Also called Factor-proportions theory - because it discusses:
● The proportions in which different factors of production are available in different
countries, and
● The proportion in which they are used in producing different goods.

The leontief paradox

● H-o theory, one of the most influential theoretical ideas in international economics
● Makes few simplifying assumptions than ricardo’s theory
● H-O theory has been subject to many empirical tests and most raised questions about its
validity

Michael Porter’s Theory on Competitive Advantage

● There are four factors that will make you competitive
○ U learn to specialize - because u learn ur craft -
○ You need to maximize available raw materials in your own country rather than
importing from other countries
○ You need to identify your niche by expanding your reach
 ○ We cannot forget to innovate

AFTA (ASEAN Free Trade Area)

● Common Effective Preferencial Tariff
○ Requires that tariff rates levied on a wide range of products traded with the
region be reduced to no more than five percent. Quantitative restrictions and
non-tariff barriers are to be eliminated. Although originally scheduled to be
realized by 2008, the target of a free trade agreement
● Rule-based Trade Arrangements
○ ASEAN has adopted a dispute settlement mechanism covering all economic
agreements. This establishes a mechanism for resolving any problem arising
from the implementation of any economic agreement in ASEAN. The provision
on emergency measures under the CEPT Agreement has been strengthened to
make it consistent with the WTO Agreement on Safeguard.
● Ultimate target of AFTA
○ The ultimate target of AFTA is to eliminate all import duties.
○ The ASEAN leaders have agreed to eliminate all import duties by 2010 for the six
original members of ASEAN and by 2015 for the new members
○ Increase ASEANs competitive edge as a production base in the world market
through the elimination, WITHIN ASEAN, of tariffs, and non-tariff barriers, and
attract more foreign direct investment to ASEAN.

External economic linkages

● ASEAN-CHINA Free Trade Area
○ The leaders of ASEAN and China considered the report of the ASEAN China
Expert Group on Economic Cooperation, set up upon the suggestion by Chinese
Premier Zhu Rongji, at their meeting in Singapore. They endorsed the proposal
for a framework on Economic Cooperation and agreed to establish an ASEAN-
China FTA within ten years, with special and differential treatment and flexibility
for the newer ASEAN members. The agreement would also provide for an “early
harvest” of benefits.
● ASEAN-JAPAN FTA
○ To promote the expansion of trade and investment between ASEAN and Japan,
the leaders have endorsed the forging of a closer economic partnership. A group
of experts
● ASEA-ROK FTA
● AFTA-CER

ASEAN Economic Community Blueprint

EU and the Philippines

● In the last years, such relation is deeply rooted and has broadened and deepened.
● Late 1970s: Commencement of talks between Europe and the ASEAN
 ● 1980s: Formalized by virtue of the signature of an EC cooperation agreement with the
ASEAN
● EC Cooperation Agreement: Primary legal framework for the Philippines and EU
relations for many years
● Present: The European Union is considered a strong economic partner of the
Philippines.

Generalized Scheme of Preferences (GSP)

● Was formulated in 1971
● There are two important dimensions of the GSP:
○ Non-reciprocal arrangement and
○ An enabling clause under the Tokyo of the General Agreement on Tariffs and
Trade (GATT)
● There are three different methods of GSP:
○ First, is the standard or general arrangement,
○ Second, is the special incentive arrangement for sustainable development and
good governance (GSP=)
○ Third, is the everything but arms
● The advantages of GSP
○ It helps the developing countries to expand its trade relations
○ Provides developing countries tariff discounts for around 66% percent of EU tariff
lines
○ However, the disadvantages of the GSP is that developing countries may be
more dependent.
○ The current GSP program covers the period 2014-2023
●

Leapfrogging Trade through Innovation and Collaboration