After a year of ever-increasing tariffs, United States (US) President Donald Trump’s trade war with China has both superpowers losing. As observed by the International Monetary Fund (IMF), the tension caused a decline in exports between the two countries, with US trade partners quick to take China’s place in the market.
Given Southeast Asia’s rapid success, close proximity with China, and well-received reputation among multinational corporations, the region should expect gains from the trade conflict before peaking in 2021. The IMF, for instance, recorded that when China withheld almost USD 850 million worth of imports in 2018, the loss was nearly earned back by an increase in imports from Mexico. Trade conflict examples like this illustrate the opportunity for Southeast Asia to leverage its success through what the Asian Development Bank (ADB) calls “trade redirection.”
Spillover from high tariffs
According to a July 2019 study conducted by US commercial real estate firm Jones Lang Lasalle, American manufacturing firms in China are likely to relocate operations to Southeast Asia. This is largely due to increasing labor costs in China, which is reinforced by US-imposed tariffs on the Mainland. Investors find the region attractive due to competitive labor costs, lower trade tariffs, and its large and growing consumer market.
In fact, the ADB has predicted that the worst outcomes of the trade war can still boost the Association of Southeast Asian Nations’ (ASEAN) manufacturing sector. Moreover, the ADB also posited that the ASEAN Gross Domestic Product (GDP) will still increase by 0.4% or USD 9 billion should the trade conflict scenario turn dire. ADB uses a “worse-case” scenario example of the US imposing tariffs on global trade of automobiles and auto parts to further illustrate this point. Simulating the tariff impositions, the ADB found that countries whose supply chains were heavily linked to China and the US would suffer due to falling imports and rising costs. Being the second biggest exporter of car parts to the US, China would then leave a huge gap in the market, should they withdraw.
Department of Trade and Industry (DTI) Secretary Ramon Lopez has thus stated that the US-China trade war is “an opportunity for the Philippines to attract more export-oriented manufacturing foreign direct investments (FDI).”
The Philippine response
Why, then, does the Philippines seem to gain very little from the flow of investments into the region despite the aforementioned advantages? ADB statistics show that as of December 2018, Philippine GDP only grew by 0.2%. It is the second-lowest rate increase relative to ASEAN and was a far cry from Vietnam’s 2.2% and Cambodia’s 1.1% growth rates.
Ateneo International Economics professor Marissa Paderon, PhD argued that “we were so good during the last administration because we instituted a lot of reforms.” The Aquino administration committed to improving infrastructure as well as development in the agricultural sector, thus securing confidence in the country’s governance. This, consequently, drew in enough investors for FDIs to grow by 54% in 2011.
Paderon added that the current administration’s economic reforms make investors reluctant due to a lack of incentives and stability in the local business environment. “We tend to reverse our policies, which is the reason why we cannot take off,” she said. It is paramount to explore various ways by which the Philippines can acquire more foreign investments. Paderon surmises that the government must follow Vietnam and Malaysia’s lead, noting that the Philippines started losing some of its markets to the former in 2015, and how the latter was excellent in attracting FDI.
Vietnam’s investment on infrastructure, particularly into electricity and internet connection, greatly helped attract foreign investments. Its educational system was strengthened as well, thereby producing educated technicians and laborers and exhibiting stability. Moreover, manufacturing costs in the Philippines are considerably higher, which explains why Vietnam is winning some of our manufacturing markets. As for Malaysia, its Eleventh Malaysia Plan continues to ensure economic and social welfare.
Paderon thus maintained that “investments are really important in terms of long-run economic growth.” The aforementioned countries heavily invested on internal development and Paderon insisted that “the Philippines must go beyond trade policy and into legislative measures” as well. This means developing legislation that caters to domestic concerns such as education, infrastructure, and stability.
The price of progress
Due to the lack of legislative measures ensuring domestic security, existing and potential foreign investors have become wary of the prospect of losing their tax incentives. This specifically concerns the perpetual 5% tax on gross income and zero duties on importation of capital, as stated in the Corporate Income Tax Incentives Rationalization Act (Citira) bill.
These tax incentives are granted by the country’s Investment Promotion Agencies (IPA). Recently, the Philippine Economic Zone Authority (PEZA)—which directly employs more than a million Filipinos and has brought in FDI worth Php 891 billion from 2015 to 2018—has been the most vocal Citira-resistant IPA.
Philippine Ecozones Association President Francisco Zaldarriaga stressed that removing PEZA’s incentives would make the Philippines a less attractive investment destination, thus putting a considerable amount of jobs at risk. Paderon confirmed that such a loss may prompt the exit of foreign investors because these very incentives are what influenced foreign investors to enter the country in the first place.
However, the House’s Ways and Means Committee Chair Joey Salceda negated this, saying that “once [the foreign investors] read the law, they will stay…[they are only exhibiting] ideological resistance to change.” On PEZA’s exemption, Salceda added that “there is no circumstance or condition that makes PEZA locators sui generis (i.e., one of a kind).”
On the concern of unemployment, Department of Finance Undersecretary Karl Chua emphasized that “there is no threat of job destruction or loss.” Instead, he posed that about 1.5 million jobs are likely to be created due to the decrease of corporate income tax from 30% to 20%. Investors that had fled the previously high tax rates will be enticed to return.
Inciting certainty and stability
The Senate’s Ways and Means Chair Pia Cayetano acknowledged the tension between public and private stakeholders, whose interests tend to conflict with one another, and stated that Citira’s legislation requires looking for “that sweet spot, [so] that the Filipino people…[will] have something to gain…[from] the investors that are bringing their business in the country.”
Salceda concurred with Cayetano, saying, “we can never perfect legislation, but one thing is sure: It is bad to prolong the business uncertainty and the best thing to do is to approve [Citira] and allow investors to decide on that basis.”
Consequently, lawmakers and economic teams must continue to conduct a thorough and timely examination of the Citira bill’s provisions. Extensive data on the bill may help lawmakers strike a careful balance for all relevant and concerned stakeholders.
In other words, the focus must shift from trade regulation to improving domestic factors that could ease the doing of business in the country. Doing so calls for political will, long-term planning, and collaboration across government agencies.
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