SOCIAL SCIENCE 5: ECONOMICS

FOREIGN ECONOMIC POLICIES | LG 4.1

At the end of this lesson, the students will be able to:

1. explain concepts of Foreign Economic Policy; and
2. apply the macroeconomic policies in the Philippine context.
Suggested Time: 1 min | Actual Time Spent: ____min(s)

In this module, we will examine select foreign economic policies. Before you explore these
policies, read the satire below written by French Economist Frédéric Bastiat in 1845 and analyze what
economic issue is he trying to address.

The Candlemakers’ Petition

"We (French candlemakers) are suffering from the ruinous competition of a foreign
rival who apparently works under conditions so far superior to our own for the production
of light that he is flooding the domestic market with it at an incredibly low price; for the
moment he appears, our sales cease, all the consumers turn to him, and a branch of French
industry whose ramifications are innumerable is all at once reduced to complete
stagnation. This rival, which is none other than the sun…
We ask you to be so good as to pass a law requiring the closing of all windows,
dormers, skylights, inside and outside shutters, curtains, casements, bull's-eyes, deadlights,
and blinds — in short, all openings, holes, chinks, and fissures through which the light of
the sun is wont to enter houses, to the detriment of the fair industries with which, we are
proud to say, we have endowed the country, a country that cannot, without betraying
ingratitude, abandon us today to so unequal a combat…”

~excerpt from the Candlemakers’ Petition written

by French economist Frédéric Bastiat (1845)
*You can read the full petition: http://www.stephenhicks.org/wp-content/uploads/2013/03/BastiatF-Candlemakers-Petition-1845.pdf

Now, what do you think are the issues reflected in this petition? Who is the candlemakers’ rival,
“the sun”? What does he mean when the candlemakers are asking for a law that will close the windows,
dormers, skylights, shutters, curtains…? Does he prefer a country with no external light source like the
sun or is there a greater issue which he is targeting through this satire?
Suggested Time: 4 min | Actual Time Spent: ____min(s)

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 The Candlemakers’ Petition is a well-known letter of Frédéric Bastiat (1845) to satirize
proposals for protectionism. In his satire, candlemakers and the French lighting industry are calling for
the French government to protect them from unfair competition of an overseas power, “the sun”. The
candlemakers pointed that their domestic economy will benefit when the sun is blocked like an
increasing consumption of products will result to the increased production of other products in their
country. However, Frédéric Bastiat countered these benefits by citing the advantages that the country
can gain through free trade and competition e.g. consumers will be able to get a hold of cheaper products
from foreign countries. Today, these calls for protectionism or for free trade still exist. There are some
who advocate for “Buy Pinoy” to support local manufacturers and businesses. Yet, there are some who
prefer buying goods from China and the U.S. due to different reasons. Thus, in this module, we will
look at select foreign economic policies and its economic benefits.

Free Trade and No-Trade

Let us try to analyze a hypothetical case involving the clothing market of the Philippines. First,
we assume that the Philippine clothing market is relatively small compared to the world economic
market and thus cannot affect the world prices of clothes. The figure below shows the demand and
supply curves for clothing in the Philippines. The demand curve for clothes of Filipinos is drawn as D
while the supply curve is drawn as S. We also assume that the price of clothes is at ₱100 per unit as
determined by the world market.

Figure 1. Domestic Demand and Supply and World Supply of Clothing in the Philippines

~Image adopted from Samuelson and Nordhaus (2011)

The No-Trade Equilibrium

Assume that no-trade exists, the Philippine market equilibrium for clothes will lie in the
intersection of its domestic demand and supply, point A. At this point, the price of clothes in the country
will be relatively high at ₱200.00 per unit, and the local producers will be able to meet all the demand.

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The Free Trade Equilibrium

Let us now assume that the Philippine clothing market opened itself to international trade. The
price of clothes in the country must be equal to the world price (₱100.00 per unit) with the non-existence
of tariffs, quotas, and transport costs (Samuelson & Nordhaus, 2011). The lower price can be explained
by the behavior of entrepreneurs to seek clothes with cheaper price outside of the country and would
later sell these clothes to countries where clothes are more expensive; the rest of the world will export
clothes to the Philippines. Once that trade fully adjusts to demand and supply, the price of clothes in
the Philippines would be equal to the world price.
Also, the horizontal line at the figure above at ₱100.00 represents the supply curve for imports.
It is perfectly elastic (horizontal) since the Philippine demand for clothes is too small in affecting the
world price (Samuelson & Nordhaus, 2011).
When trade opens, imported clothes flow into the country decreasing the price to the world
price at ₱100.00 per unit. At ₱100.00 per unit, domestic producers will supply 100 units of clothes
(curve BC). However, consumers would want to buy 100 units more. This difference will be the amount
of clothes which will be imported (denoted by curve CE) to satisfy domestic demand at ₱100.00 per
unit. This explains the reduction of price due to international trade.
Lastly, the direction of trade is determined using the prices in the no-trade equilibrium. If the
equilibrium price in the no-trade situation in the Philippines is higher compared to the world price, the
goods will flow in the country. The general rule is: “products flow uphill from low-price regions to
high-price regions under free trade” (Samuelson & Nordhaus, 2011).

Protectionism and Barriers to Trade

There are some instances when governments need to raise its revenues and protect its domestic
industries. These can be achieved through protectionist policies like the imposition of tariffs and quotas
to international trade. Protectionism is defined as any policy by the State to protect its local industries
against competition from imports (most common are tariffs and quotas) (Samuelson and Nordhaus,
2011).

A tariff is a tax imposed on imported goods. There are two types of tariff.

1. Prohibitive tariff. A tariff which is too high aiming to absolutely discourage the importation
of goods.
2. Nonprohibitive tariff. A lower tariff that will lessen imports but will not kill it.

The impact of tariff is to increase the prices of imported goods, decrease the consumption of
imported goods, and increase the local production of the covered good.

On the other hand, limitations on the quantity of imported goods are referred as quota. The
qualitative effects of quotas are the same with tariffs. Prohibitive quotas aim to stop all imports.
However, the government may not earn revenue from quota.

In the country, some protectionist policies were set in place to protect the interest of the Filipino
people. For example, foreign investments and businesses in the country are regulated and controlled by
the Philippine government. A 60-40 equity rule was enacted through the Foreign Investment Act (R.A.
7042, 1991, amended by R.A. 8179, 1996) which states that foreign investors can only own a maximum
of 40% of select businesses in the country. The rest should be owned by a Filipino citizen.

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 Another example is the Rice Tariffication Law (R.A. 11203). This law liberalizes and allows
the importation of rice from previously placed quota on rice imports. In economics, this will
theoretically decrease the price of rice since the supply of rice in the country increases due to imports.
Also, a 35% tariff from ASEAN, 40% tariff for imports lower than 350,000 metric tons and 180% for
imports equal and above 350,000 metric tons from non-ASEAN countries will be imposed. The tariff
that is collected goes to a Rice Competitiveness Enhancement Fund (RCEF) which will be used for
irrigation, rice storage, and research and development initiatives in the rice sector. Also, if the tariff
from the importation of rice exceeds ten billion pesos, a portion will be given to local rice farmers as
direct financial assistance, and for other programs.

To know more about R.A. 11203, you might want to visit this site:
https://www.officialgazette.gov.ph/downloads/2019/02feb/20190214-RA-11203-RRD.pdf

Thinking Time! What do you think are the merits of protectionism? What do you think are the
implications of the Rice Tariffication Law to the welfare of Filipino farmers?

Suggested Time: 15 min | Actual Time Spent: ____min(s)

Non-Graded Activity
1. Identify an industry in the Philippines that may benefit from protectionist policies and explain why.
Use the rubrics below in answering the question.

Criteria Excellent (5 pts.) Satisfactory (3 pts.) Poor (1 pt.)

Content Context is well- There is an evidence of a The context is not

developed; Ideas are well-
supported and are
accurate and relevant.
developed context but
there is a need to add
more details for a strong
support.
clear. Ideas may have
questionable
factuality. Confusion
of the reader is a
possible outcome.

Organization of There is an evidence of Ideas are organized. Coherence between

Ideas clear, effective, graceful,
coherent transition of
ideas in the essay. The
organization aids the
reader to clearly and
easily understand the
connections of the ideas
to each other.
However, minimal
inclusions of irrelevant
ideas are evident. They
do not affect the essence
of the essay.
ideas is not evident.
The reader may find
difficulty in
understanding the
collective thought of
the essay.

Syntax The structure and the use Minimal distractions in Distractions in regard
of words, punctuations, regard to syntax are to syntax is very
and capitalizations in the present i.e. failure to evident. Wrong use of
capitalize a letter, misuse words, punctuations,

PSHS Social Science 5: Economics | Page 4 of 6

 sentence/s are correct and or lack of punctuations in
appropriate. a sentence, and
inappropriate wording.
But these distractions do
not affect the essence of
the essay.
and capitalizations
hinder the reader to
understand the
thought/s.

Credit: Sir Erin Dela Cruz, Soc Sci Teacher, PSHS Main Campus

Useful Link on the different forms of tariff in the country:

- https://ntrc.gov.ph/images/Publications/guide-to-philippine-taxes-2016/tariff-and-customs-
duties.pdf#:~:text=Tariff%20duties%20are%20levied%20on%20imported%20goods%20either,are%2
0imposed%2C%20generally%20in%20ad%20valorem%20form%2C%20

Suggested Time: 9 min | Actual Time Spent: ____min(s)

In summary, free trade policies induce lower prices of the goods being traded. However,
imports will rival to the goods produced domestically which sometimes surface issues of
unfair competition among local suppliers. Thus, to discourage the importation of goods and
protect local businesses, governments sometimes impose protectionist policies in the form of
quota and tariffs.

Still, how do we gain from trade? In the next learning guides, a thorough discussion of
how countries gain from trade will be presented.

Suggested Time: 1 min | Actual Time Spent: ____min(s)

References:
Bastiat, Frédéric (1845). The candlemakers’ petition. Retrieved from http://www.stephenhicks.org/wp-
content/uploads/2013/03/BastiatF-Candlemakers-Petition-1845.pdf

Mankiw, N. (2003). Principles of economics: Study Guide 3rd ed. Thomson.

Rice Tariffication Law, RA 11203. Retrieved from

https://www.officialgazette.gov.ph/downloads/2019/02feb/20190214-RA-11203-RRD.pdf

Samuelson, P. A, & Nordhaus, W. D. (2011). Economics. 19th ed. Boston: McGraw-Hill Irwin.

*Lay-out and Design of Learning Guide Credit: Nneka B. Evangelista, SS 5 Teacher, PSHS-
CALABARZON Campus

PSHS Social Science 5: Economics | Page 5 of 6

Prepared by: Ariel S. Barrias Reviewed by: Jefferson G Nuñeza
Position: SST-III Position: SST-IV
Campus: PSHS-CARC Campus: PSHS-SMC

PSHS Social Science 5: Economics | Page 6 of 6

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