Philippine fallout

What about the Philippines?

President Duterte said in a recent speech his government is “deeply concerned” about
the US-China trade war, which is “creating uncertainty and tension.”
By contrast, Bangko Sentral Governor Ben Diokno said the trade war is “totally out of
the picture” where Philippine growth is concerned.
There may be a silver lining in all this uncertainty. A recent study by the ADB or Asian
Development Bank shows that ASEAN countries – including ours – may, in fact, see boosted
incomes and exports as a result of the trade war (Figure 2).
Potential impact on ASEAN of the US-China trade war
Percent change of GDP and exports as a result of bilateral escalation of trade conflict (i.e., added
25% tariffs on all bilateral US-China imports).

Country GDP EXPORT

VIETNAM 2.2 7.3

CAMBODIA 1.1 6.6

MALAYSIA 0.5 1.9

LAOS 0.4 1.3

THAILAND 0.3 1.1

PHILIPPINES 0.2 1.6

BRUNEI 0.1 0.2

INDONESIA 0.1 0.8

SINGAPORE 0.1 0.2

Source: ADB (2018) "The impact of trade conflict on developing Asia"  Get the data

The reason is that the US – instead of importing from China – will choose to import from
firms located in other countries unaffected by the new tariffs. Firms in ASEAN countries might
receive orders from the US, thus allowing them to expand their domestic operations.

This so-called “trade redirection” will be apparent in many sectors, especially electronics
and optical equipment, textiles and garments, and chemicals.
 Whether the Philippines can cash in on this depends on our ability to promote domestic
manufacturing investments and attract foreign investors seeking refuge from the trade war.
Sadly, our competitiveness in the region leaves much to be desired, what with lingering
uncertainties about the Trabaho bill (which wants to make it harder for investors to enjoy
various incentives) and the endo bill (which, although well-meaning, some economists fear,
might turn off prospective investors).
More than a year since it passed, the Ease of Doing Business law has also yet to have
implementing rules and regulations. 
Another missed opportunity?
There are enough threats to Philippine economic growth without the escalating US-China
trade tensions.
Exports could be our saving grace. If somehow we can quickly lower the costs of doing
business, beef up our competitiveness, and promote enough export-oriented manufacturers, the
US-China trade war could – however counter intuitively – turn into a blessing in disguise.
As the trade war  escalates between the US and China – the world’s two largest economies – their  trade
partners are becoming increasingly wary. The timing could not be more ominous for the  Philippines,
one of the world’s fastest-growing economies, a long-time ally of the United States  trying to bolster its
economic ties with China.

China and the US currently represent the largest and third-largest trade partners of the Philippines
respectively, while the US, Hong Kong and mainland China form the country’s top three export markets,
and China and the US constitute the largest and fourth-largest sources of its imports. The Philippines is
already experiencing high inflation and is still in the early stages of addressing its decades-
old infrastructure deficit, so the trade war casts a long shadow over the country’s prospects. It is an
active player in the increasingly integrated global supply and production chains through which goods
bound for external markets like the US and China pass. There is potential for the trade war to disrupt
this, inflicting collateral damage on national economies in the chain.

A total of 16.9 per cent of Philippine exports form part of China’s value chain, among the highest
percentage in Southeast Asia. However, these only account for about 3.2 per cent of its GDP. In
contrast, Malaysia and Singapore have higher exposure, at 7.3 per cent and 5.7 per cent respectively.
Migrant Filipino workers in export-oriented factories in Taiwan, South Korea and Japan  who churn out
intermediate or final goods destined for China, America or third-party markets may also be affected.
Being less dependent on exports could give the country some breathing space, but its relatively high
volume may eventually hurt it.
That said, there are also opportunities, in the form of trade diversification. With its young demography,
burgeoning middle class, proficient manpower and increased investment in infrastructure, the
Philippines has potential: it has emerged as the world’s top investment destination this year.

As such, the country can position itself to attract Chinese enterprises producing goods for the US, as well
as American firms producing for the huge China market. Increasing labour costs on the Chinese
mainland and the Philippines’ proximity to lucrative Asian markets can buttress its credentials as an
alternative manufacturing hub. The country can also serve as an alternative supplier of goods (for
example, fruits, fisheries and electronics) to both the US and China.

Socioeconomic Planning Secretary Ernesto Pernia has said a full-blown trade war would have a positive
net effect on the Philippines, claiming that the country would gain millions of dollars in exports to the
US, mainly electronic goods, if the trade war intensifies. This would alleviate the potential loss of
imports from China.

Economic woes could hurt Duterte but government remains upbeat

In spite of the trade war, investment in the Philippines grew in the second quarter of 2018.
Manufacturing received the most investment, followed by construction. The US is the third-largest
prospective investor after Indonesia and Japan, with a 4-billion-peso (US$74 million) pledge, accounting
for 12.9 per cent of total approved investments.

China, on the other hand, is looking for local partners to develop its first industrial estate in the country,
which it says would be larger than its eight existing sites in Southeast Asia.

Efforts to boost the nation’s competitiveness can enhance its position. Tax reform and President Rodrigo
Duterte’s “build, build, build” programme for infrastructure will go a long way in enticing foreign and
domestic capital. This ambitious programme will help address traffic congestion and logistical
constraints, generate jobs and spread development.

Last May, Duterte also signed the Ease of Doing Business Act, meant to cut bureaucratic red tape and
streamline procedures for business applications. China Telecom and AT&T are among the foreign
companies interested in becoming the country’s third telcoms player, breaking the prevailing duopoly
and improving services.

World leaders must stand firm on trade after ‘poison pill’ pact

The trade war will greatly affect electronics, which amount to more than half of Philippine export
revenue and nearly a quarter of its import bill, based on July 2018 figures.

American electronics companies producing goods in the Philippines that feed into China’s value chain
and are eventually exported to the US and elsewhere may be hurt by the trade war.

Texas Instruments, one of the world’s largest producers of semiconductor chips, has production facilities
in Baguio and the Clark Freeport and Special Economic Zone. Moog, another US company that has also
set up shop in Baguio, is involved in the design and production of precision instruments with
applications in the aerospace and industrial machinery sectors.

Such companies may feel the heat, as electronics were among the primary class of goods subject to
higher tariffs by both the US and China.