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PH lags behind neighbors in trade performance

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PH lags behind neighbors in trade performance

(First of two parts)

Despite the promise of economic integration, the Philippines does not benefit from global trade as much as its counterparts in the Association of Southeast Asian Nations (Asean).

According to officials of the Department of Trade and Industry (DTI), the country’s so-called trade reliance—which measures how much of an influence international trade has on the domestic economy—has been on a decline in the past years. Asean peers, on the other hand, have become more trade reliant.

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The implications of this trend —whether this is a cause for worry or not—depend on whom you ask. Nevertheless, this comes at a time when more emphasis has been placed on increasing trade cooperation with the rest of Asean, a 10-member state bloc that celebrates its 50th founding anniversary this year with the Philippines playing host.

How then will the country stand to benefit from stronger trade ties with Asean countries, when the Philippines has been less reliant on global trade to begin with?

Strong domestic market

Philippine trade has been less reliant on the global market in 2016 compared to nearly a decade ago. This is according to DTI Assistant Secretary Rafaelita Aldaba, who has written extensively on the topic of the Asean Economic Community (AEC) in relation to the Philippines even before she took one of the top DTI posts.

“In terms of trade openness, the Philippines has not been as open to trade as our Asean neighbors,” she said in an interview with the Inquirer. “In fact, our trade openness declined from 105 percent in 2000 to 62 percent in 2016 while Singapore had 318 percent; Thailand, 123 percent; Vietnam, 185 percent, and Malaysia, 128 percent.”

Trade openness, or trade reliance, is measured by getting the ratio of the country’s total trade—which accounts for the sum of imports and exports— to its gross domestic product (GDP). Since it’s a ratio, such variable could decrease if GDP increases, officials said.

“We have not been able to expand our exports substantially,” Aldaba said, when asked for the factors behind the drop in trade openness. “Of course, there was the global slowdown after the financial crisis [in 2008].”

Vietnam, however, sprung back even despite the financial crisis. The Asean neighbor, Aldaba said, still managed to increase its trade openness from 103 percent in 2000 to 184.7 percent in 2016.

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At least two national development plans have painted the stark contrast between the growth of the national economy and the expansion of the country’s exports in the past years.

“By most measures, the Philippines lags behind its neighbors in export performance,” read the Philippine Export Development Plan (PEDP) 2015-2017, which reviews and sets out the direction of the country’s export strategies.

According to the PEDP document, Philippine exports grew slower than its Asean peers from 2006 to 2013, expanding only at 4.6 percent annually, compared to Vietnam’s 17.9 percent, Indonesia’s 9 percent and Thailand’s 9.2 percent.

Moreover, it said that Philippine export volume in 2013 accounted for just over a quarter of Thailand’s, half of Vietnam’s and a third of Indonesia’s. Exports also “contributed much less” to national income compared to the exports of other Asean economies to their respective national incomes.

On the other hand, the country’s gross domestic product (GDP)—which reflects finished goods and services produced in the Philippines—has been growing steadily.

According to the Philippine Development Plan (PDP) 2017-2022, the country’s GDP grew at an average 6.1 percent from 2010 to 2016, marking the fastest 6-year moving average since 1978, even though this still fell behind government expectations. The outlook for growth has been positive to the extent that the government sees the Philippines becoming “an upper middle income country by 2022.”

Safe from the worst

Sergio R. Ortiz-Luis Jr., president of the Philippine Exporters Confederation Inc., only sees one advantage in having a declining trade reliance: When the market falls, the Philippines wouldn’t, or at least not fall as bad.

But even then, this is not something to be celebrated.

“The only advantage they say is that when there is a problem [in the export market], some people would say, fortunately, we did not rely on exports. That’s the only bright side I see here, but everybody wants to improve their exports,” he told the Inquirer in a mix of English and Filipino.

In other words, the only bright side is that the Philippines is spared from the worst-case scenario of another crisis in the global market. This, however, also means that the country would not benefit as much as others when the market is growing.

“Obviously, this is not good in the sense that everybody else has prospered on trade,” he said, noting that the Philippines has been depending on overseas remittances and business process outsourcing (BPO) companies for growth instead. Without the two, “we couldn’t keep up. We’d be left behind,” he said.

Experts note that a country’s exposure to external economic shocks depends on the reliance on exports in general because export earnings finance imports, which then contribute to investment and growth.

This is also the reason why export-led growth, without safety nets such as market diversity, could expose countries to more risks as opposed to economies that rely on domestic demand.

Ortiz-Luis said this would partly explain why the Philippine economy still managed to hit a 6.8-percent growth last year even though the country’s exports fell 2.4 percent in 2016 compared to the year before.

Growth could have been more, however. Citing “empirical experience,” he said every 3- to 4-percent growth in exports translates to a percentage point growth in GDP.

‘Bright side’

Less trade reliance is not necessarily a bad thing, according to Trade Undersecretary Ceferino Rodolfo, echoing the comments of Ortiz-Luis who spoke in a separate interview.

Instead, Rodolfo said a declining trade reliance could also mean that the country has been relying more on its domestic market as opposed to the global trade community.

Other countries in the Asean, like Singapore for example, have smaller domestic markets, which drive them to rely on the global market more, and thus, resulting in a higher level of trade reliance, he said.

“When you have a high trade reliance, you grow faster whenever the global market is on an upswing. But if the global market falls, like in the case of the 1997 financial crisis, they would also be affected. But, if you notice, the Philippines is very stable because we have a strong domestic market,” he told the Inquirer.

In the same breath, he also said it would still be good to improve trade openness. “Imagine if you could also boost the trade sector in addition to the domestic market,” he said.

“What’s happening right now is that our domestic market is getting stronger, that’s why the ratio [in terms of trade reliance] is dropping. There was a time the ratio was high because of low domestic growth,” he explained.

However, a strong domestic demand is just one of a few ways that a country could brace itself from the impact of another financial crisis, according to a 2011 report by the United Nations Development Programme (UNDP).

In UNDP’s “Towards Human Resilience” report, it recommended other policy options to address this, such as to diversify exports and diversify market destinations —options which the Philippines has been trying to pursue but with little success.

According to the latest Philippine Development Plan, the country’s exports remain concentrated on a few products and a few trading partners, namely Japan, the European Union, China and the United States.

In 2016, the Philippine Statistics Authority (PSA) reported that the countries mentioned above were still the Philippines’ top trading partners. China—which the Duterte administration has been courting despite a divisive territorial dispute—topped the list with 15.5 percent of total trade, albeit a trade deficit with the Philippines importing more than twice than it exports.

Exports remain to be largely accounted for by electronics as well. In terms of merchandise exports, electronic products, which are historically the country’s biggest exports, accounted for more than half of total export revenues in 2016. The next top export commodities were other manufactured goods, accounting for only 6.7 percent.

Not enough attention

Ortiz-Luis, who is also part of the country’s Export Development Council, said that not enough attention was being provided to exports, dismissing most government efforts as a form of “lip service.”

He said the national government normally allotted a smaller cut in the budget for DTI, which translated to less impact in terms of implementing trade policies. Both this year and 2018, DTI was one of the least funded line departments.

According to the People’s Budget 2017 prepared by the Department of Budget and Management [DBM], DTI was allotted only P4.83 billion, slightly higher than the P4.3 billion in 2016. Total national budget for this year is pegged at P3.35 trillion.

For 2018, the government is proposing to increase it to P6.74 billion. Overall national budget is proposed at P3.77 trillion.

Of these figures, Ortiz-Luis said that a large chunk of the budget went to salaries and administrative costs, leaving only a small share for actual policies. He added that this was a concern given that a number of important agencies are attached to DTI.

He raised concerns over the small share of DTI, while the government’s conditional cash transfer program—which Ortiz-Luis has reservations about—is proposed to have P89.4 billion in 2018, an increase from P78.2 billion in 2017.

“You cannot reap what you do not plant,” he said. “Policy-wise, budget-wise, there is no attention to exports. At most, we just hope for the best, unlike our neighbors who really go out of their way.”

DTI’s budget, which is instrumental in reaching inclusive growth through entrepreneurship, shrinks when compared to other agencies as well.

The Philippine National Police, for example, which has received criticisms for corruption and brutality under the bloody drug war, is proposed to have P131.5 billion next year, an 18-percent increase from its budget in 2017.

“What do you expect?” Ortiz-Luis pointed out, commenting on how limited government action has been in addressing concerns in the country’s exports.

(To be continued)

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TAGS: Association of Southeast Asian Nations (Asean), Business
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