The Pacific and Beyond: The Philippines and the TPP

Posted on Posted in 2014-2015
By Dom Ranises

The Trans-Pacific Partnership (TPP) is a free-trade agreement (FTA) currently being negotiated between twelve Asia-Pacific nations. It is a trade deal so massive; it encompasses more than 25% of global trade and 40% of global gross domestic product (GDP), stretching from Vietnam to the United States. Noting the potential geographical shift in trade, several other nations have expressed an interest in joining the TPP. One of these nations is the Philippines. But can the potential advantages that propel others to enter the TPP benefit the Philippines as well?

The seal of silence

Shrouded in secrecy, very little is known about the TPP. Most data comes from examining existing US FTA’s and leaked drafts of documents. Though US Trade Representative Ron Kirk defended the secrecy as necessary to “preserve negotiating strength,” the TPP has continually come under fire from civic, political and business groups from different nations. Thus, given the confidentiality, it is difficult to determine any in-depth benefits for the Philippines in joining the talks.

However, it is reasonable to assume that the TPP will include provisions common to most FTA’s (including zero/near-zero import tax) as well as controversial “next-generation issues” like environmental protection and strict intellectual property rights. But discussion on future Philippine participation has centered on a few main issues: whether Philippine exports can remain competitive in a “free trade” environment, what kind of effect trade liberalization will have on domestic economic reform and the need for legislative overhauls to accommodate the TPP and its provisions.

A mile behind

The participation of the Philippines in the TPP is expected to cause improvements in cultural, technological, and wealth exchange as well as an estimated $22.1 billion in additional income by 2025. Filipino firms will also be able to secure their supply chains with access to internationally sourced raw material at zero or near-zero tariffs.

Trade has always been about competition and this is no less true in international trade. For example, Nation A trades a certain good with Nation B. Nation C also trades the same good with B. But if C suddenly overhauls its export system to become more efficient, then C’s goods become cheaper than A’s and, naturally, A will lose out as B’s consumers buy C’s products instead.

In the case of the TPP, the Philippines is Nation A. Faced with stiff competition from current TPP members and future members such as Indonesia, Malaysia, and Vietnam, Philippine exports are at a clear disadvantage. Philippine production sectors (manufacturing, agriculture, mining, etc.) are centered on cheap labor instead of technological innovation, while a poorly-developed science sector, weak regulation as well as a slow judicial process illustrate that the Philippines isn’t exactly the poster-boy of efficiency.

Structural weakness is not the only factor in Philippine industry inefficiency. The laws intended to protect local business, or the lack of them, hamper progress as well. For one, the obvious absence of a comprehensive competition law such as antitrust laws or a central competition authority seriously threatens the country’s ability to curb manipulative and monopolistic behavior. But the problem goes deeper than that, deep enough that without a painful overhaul of the legal system, the Philippines will be disqualified from joining the TPP talks on technicalities alone.

Founded on faultlines

The Philippine Constitution of 1987 is the legal framework from which all Philippine laws have been established. But what if the Constitution is built on ideals that directly impede economic development? What if it’s these same provisions that bar the Philippines from joining the TPP?

The TPP is not an average FTA. While most FTA’s are minimalist, seeking only a mutual reduction in tariff rates, the TPP is a “next generation” FTA, one that hopes to harmonize numerous policies across a dozen nations including policies that allow both local and foreign companies to compete on the same levels as domestic markets.

Critics point to the legal limitations on foreign participation in Filipino industries, especially the 60/40 provision in Section 10 of the Constitution, in which Filipinos must own at least 60% of a company or corporation before said corporation can do business in the country. Originally intended to safeguard the assets of Filipinos in a time of economic fragility, it now serves as an unappealing remnant of transitional legislation. Media companies require even stricter regulation and must be completely owned by Filipino citizens.

These same legal restrictions are also blamed for low and erratic foreign direct investment (FDI) growth rates in the Philippines relative to other ASEAN nations. Less revenue from FDI limits important monetary, technological, and cultural exchanges. By limiting foreign funding, potentially profitable industries such as telecommunications were left undercapitalized because locals simply did not have to the funds to develop the industry to optimum efficiency. This contributed to the country’s sluggish growth after the Marcos regime.

Thus, given what foreigners and locals would see as near-sighted business restrictions that create what foreigners would see as an unequal playing field as well as a non-business-friendly environment, it is unlikely that the Philippines will attain TPP membership anytime soon.

Reform, reform, reform

In essence, though trade liberalization can benefit any economy, the true benefits can only be reaped through domestic economic reform (DFAT 2011a). In spite of progress, the Philippines must push forward with business-friendly reforms to reduce red tape for international businesses and create inclusive growth. This way, the dream of a sustainable Philippine trade industry can be achieved. To demonstrate, the Philippine ease-of-doing-business rank (an important index for foreign investors) is at 108 (an improvement from 133 in 2013), just a little better than Indonesia (120) but far behind Thailand (18) and Malaysia (6).

Most importantly, before any realistic talk of the TPP regarding the Philippines can ensue, the country must undergo a long, intensive legislative review to revamp its laws to accommodate changing business trends and possible TPP membership.

With the TPP negotiations in their end-phase, it is too late for the Philippines to contribute meaningfully to the TPP’s provisions. Since the TPP is too massive and important to ignore, the Philippines must waste no time in reforming its out-of-date laws for the benefit of its people and the future of its national welfare.

Sources
1.) Obradovic, Leigh. The Role of Bilateral and Regional Trade Agreements in the Modernization of Taxation and Revenue Policy in Developing Economies. Web. Ret. July 20, 2014.
2.) Australian Government’s 2011 Trade Policy Statement
3.) Makati Business Club. TPP, the (Secret) Deal of the Century? Web. Ret. July 20, 2014

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