Trade deals insulate PHL from effects of trade war – Business Mirror

Thanks to “alliances” already forged—which come in the form of free-trade agreements (FTA) and preferential access to key markets—the Philippines appears to be insulated from the impact of a United States-China trade war.

National Economic and Development Authority (Neda) Officer in Charge and Undersecretary for Planning and Policy Rosemarie G. Edillon told the BusinessMirror the effects of the escalating trade tussle between the two economic superpowers would be muted by the good ties Manila has with both Beijing and Washington.

For instance, Edillon said the US Generalized System of Preferences (GSP) that gives certain Philippine products preferential access to the American market has been extended to December 31, 2020, following the signing of the US Consolidated Appropriations Act last month.

The GSP covers about 18 percent of Philippine exports to the US, including nonalcoholic beverages, electrical machinery and equipment parts, or about $1.5 billion worth of exports in 2017.

“Our GSP with the US has been extended until 2020. We have good ties with China. [But] we need to diversify products and markets,” Edillon said.

The Philippines also enjoys preferential access to European markets via the European Union’s own GSP scheme and the recently ratified FTA with the European Free Trade Association composed of Iceland, Liechtenstein, Norway and Switzerland.

Former Tariff Commission Chairman George Manzano the Philippines is also insulated because of its membership in the Asean, which has an existing FTA with China.

“If everyone decides to increase their tariffs, if it provokes a chain reaction, of course, if you’re a member of an FTA, you’re insulated. The FTA will keep their markets open for you,” Manzano told the BusinessMirror.

Even the World Bank recognizes the importance of alliances, like regional trade agreements, in the face of the impending trade war.

In a news briefing via video conference on Thursday, World Bank Chief Economist for the East Asia and the Pacific (EAP) Sudhir Shetty said these trade agreements include the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

“Our argument there is that one of the ways this region can somewhat insulate itself from some of the broader uncertainties around trade policy in the global arena, including what we were just talking about, the threat of a possible trade war between the US and China, would be to deepen integration within existing, within the region itself, as well as with other partners, and it’s with that regard that the RCEP, as well as the possible broadening of the CPTPP to include other countries, could have some protection,” Shetty said.

“If a trade war were to arise, obviously it would not be good news for poverty for the reason that it would not be good for growth for the region,” he added.

Growth in developing EAP is expected to remain strong and reach 6.3 percent in 2018; 6.1 percent in 2019; and 6 percent in 2020. Excluding China, the EAP region is forecast to grow by 5.4 percent this year and 5.3 percent in 2019 and 2020.

In the Asean, growth is seen to reach 5.4 percent this year until 2020. In the Philippines, the World Bank forecasts a growth of 6.7 in 2018 and 2019, and 6.6 percent in 2020.

However, Shetty said these growth estimates are threatened by “heightened uncertainty” caused by the trade war between the US and China, which could “reverse the recent recovery in global trade growth” and “undermine prospects” of the region, which has been considered a major growth driver of the global economy.

The World Bank official added that the trade war can even “flame the fans of protectionism in advanced economies.”

Edillion said that, while the Philippines is not part of the CPTPP, the country is very active in the RCEP negotiations.

As of February, Trade Undersecretary Ceferino S. Rodolfo Jr. said difficulties in concluding the RCEP stemmed from complications among the six non-Asean negotiating countries: Australia, China, India, Japan, New Zealand and South Korea.

Rodolfo said some of these countries do not have existing bilateral FTA with each other yet, and this slows down the whole process of finalizing the RCEP.

“On the RCEP and CPTPP, I think the idea is we should actively participate in cooperation agreements, and we are,” Edillon said. “We are in the process of negotiating RCEP. I’m not aware of initiatives regarding CPTPP.”

Manzano said there is no indication yet whether China will be increasing tariffs only on products coming from the US or from all countries it trades with, including the Philippines.

If the tariff increase will be imposed on all countries, the impact would depend on the products that will be affected. There will also be spillover effects, Manzano added, since most of the country’s exports are not finished goods and may still go through China for value adding before they are sold in markets like the US.

Monetary policy

Apart from the trade war, Shetty warned that the tightening of monetary policy in countries like the US will also make it imperative for central banks in the EAP region to increase interest rates.

For the Philippines, Shetty said, this is especially important given the risk of rising inflation. The country’s inflation in March was 4.3 percent, bringing the average inflation rate in the first quarter to 3.8 percent.

This is already near the upper end of the Bangko Sentral ng Pilipinas’s inflation target of 2 percent to 4 percent this year until 2022.

“If this monetary tightening would be faster than currently anticipated, it could exacerbate vulnerability that may have built up in the financial sectors in these economies, as well as lead to capital outflows,” Shetty said.

“In the Philippines, I think, I would just like to reinforce this with a point, which is, we are beginning to see inflation rising in the Philippines, and that would bolster the case for tightening of monetary policy,” he added.

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