Protectionism in US to hit PH BPO sector the most

While the escalating trade tensions between the United States and China would unlikely make a big dent on the Philippine economy in the near term, its potential long-term damage would not only result in job losses in the booming business process outsourcing (BPO) industry but also stunt the manufacturing sector’s growth.

“The trade war between the US and China so far appears to have had a small negative impact on most of the region, although some countries, most notably Vietnam, look to be benefiting as US demand has shifted away from China towards alternative suppliers,” Capital Economics senior Asia economist Gareth Leather said in a June 26 report titled “Winners and losers from the trade war.”

But on the downside, higher US tariffs slapped on Chinese products were already sharply pulling down exports of neighboring Asian countries to China, the London-based think tank said.

Also, the shift in the US’ policy veering away from free trade may spill over to other Asian countries with which the United States currently has wider bilateral trade deficits, such as South Korea, Taiwan and Vietnam, it added.

Capital Economics warned that “if rising US protectionism eventually led to a global trade war, the region’s most open economies like Malaysia and Singapore could be tipped into recession.”

In the case of the Philippines, it would help that its economy has been less dependent on external trade, such that alongside Malaysia, Singapore and Thailand, Capital Economics expects the net effect of the trade war thus far to shed only 0.1-0.2 percent from these four countries’ respective gross domestic products (GDP) growth.

Capital Economics also said further policy easing in countries like the Philippines, India, Indonesia, Malaysia and South Korea would help cushion the blow of US-China trade tensions.

“Most governments in the region have loosened fiscal policy over the past year to help offset the drag from weak export demand. The strong fiscal position of most countries in the region means policy could be loosened further. An escalation of the trade war would increase the likelihood of further monetary policy easing,” it said.

Amid easing inflation, the Bangko Sentral ng Pilipinas (BSP) had cut key interest rates by 25 basis points (bps) so far this year, and the market expected more cuts to reverse last year’s hikes totaling 175 bps as the increase in consumer prices soared to a 10-year high.

However, while the near-term impact of a full-blown global trade war—mostly aimed at keeping jobs within the United States—on the Philippine economy would be negligible, its bigger impact would likely inflict damage on two of the country’s major industries—BPO and manufacturing.

“The Philippines would be the biggest loser if Trump followed through on his threat to punish American companies that outsource jobs abroad. The Philippines has a thriving business process and IT outsourcing sector, which last year brought in revenues equivalent to around 10 percent of GDP,” Capital Economics said.

Also, “it would be much harder for poorer Asian economies such as Vietnam, Philippines, India and Indonesia to emulate the success of some of the region’s richest economies such as Taiwan and South Korea, where openness to trade has been key to their success in moving up the value chain, developing globally competitive manufacturing sectors and achieving high standards of living,” according to Capital Economics.