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Philippine Trade and Investment Policies Analysis

Over the last few decades, the Philippines has implemented major trade and investment policy changes aimed at economic liberalization and opening up the economy. These changes were meant to boost economic growth, competitiveness, and productivity according to economic theory. However, the changes have not yet resulted in major economic development. The country needs to address diversifying exports and increasing the impact of foreign production networks on technical advancement in the economy.

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Jim Carlo Chiong
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15 views2 pages

Philippine Trade and Investment Policies Analysis

Over the last few decades, the Philippines has implemented major trade and investment policy changes aimed at economic liberalization and opening up the economy. These changes were meant to boost economic growth, competitiveness, and productivity according to economic theory. However, the changes have not yet resulted in major economic development. The country needs to address diversifying exports and increasing the impact of foreign production networks on technical advancement in the economy.

Uploaded by

Jim Carlo Chiong
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Over the last three decades, the government has introduced major trade and investment policy

changes aimed at opening up the economy. It has also adopted an outward-oriented industrialization
approach encouraging global exports. According to economic theory, liberalization boosts economic
growth, encourages competitiveness, improves production by efficient capital use, and boosts
productivity. More industrial growth translates to more employment and higher wages. Lower
manufacturing costs result from increased efficiency and productivity, which leads to lower prices. Any
of the promised incentives have been implemented as a part of the changes. However, they have not
resulted in a major shift in economic development until now.

Dating back into history, the Philippine economy did not begin from scratch in the nineteenth
century. The previous Age of Transshipment dated back to pre-Hispanic times, and it resulted in a period
of administrative union and territorial consolidation that laid the foundations for the growth of national
consciousness during the centuries it was in operation. In fact, plans and attempts to reform the
monopolistic system of the galleon trade arose in the eighteenth century. They sowed the seeds of
potential innovations at this time: foreign merchants arrived in Manila; local merchants were allowed to
move to other Asian ports; native export trading was boosted; and local textile manufacturing was
promoted.

After the Philippines' liberation, industrialization has become a significant development target.
Trade and expenditure strategies were used to achieve this aim. In its search for industrialization, the
nation has passed through many trade and investment policy regimes. In favor of the country's inward-
looking import-substitution industrialization strategy, trade and investment policies were extremely
restrictive and protectionist from the 1950s to the 1970s. The primary economic tools used to shield
domestic industries from international competition were high tariffs and import restrictions.
Simultaneously, the exchange rate was grossly overvalued. Tax allowances, tax credits, and tax
deductions, on the other hand, were used as investment incentives. The security pattern was strongly
asymmetrical, with high protection for finishing/assembly operations and low protection for raw
materials, intermediate products, and capital goods manufacturing. This harmed resource distribution
productivity by promoting import-competing manufacturing sectors over exports and agriculture, as well
as industrial products over capital and intermediate goods. As a result, an imperfectly dynamic market
system with unrealized scale economies and weak economic efficiency emerged.

Since 1981, the country has been steadily lowering tariffs through the Tariff Reform Program
(TRP), with the aim of reducing total tariff security and dispersion of tariff protection within and through
sectors and industries. The reform was aimed at increasing capital distribution effectiveness, achieving
global productivity, and preserving economic development.

The Senate approved the country's entrance into the WTO in 1994. More than just market entry,
the World Trade Organization (WTO) membership supports the nation in terms of fair competition, as
well as the global trading system's openness, stability, and predictability. Other than this, the Philippines
joined other organizations and cooperatives that help them to sustain and develop their world trading
such as the Asia – Pacific Economic Cooperation (APEC) in 2002, and ASEAN Free Trade Area (AFTA)
established in 1992.

In conclusion, the country's experience over the last two decades has shown that having the
most out of foreign trade is no longer just a matter of moving away from primary product exports and
toward manufacturing exports. The key is to improve the current production and trading patterns so
that more of the profitable practices that generate trade are carried out at home. Furthermore, being a
part of a labor-intensive supply chain would not inherently imply a spillover of the technologies needed
to advance up the production chain. This might stymie the growth of domestic production potential,
restricting the industry's long-term competitiveness.

Given the above, two issues must be addressed: the need to diversify exports; and how to
increase the effect of the country's involvement in foreign production networks on the economy. To
begin with, diversification of exports eliminates the country's export reliance on Transnational
Corporations' decisions. As a result, the country's sovereignty in formulating policies and plans that
prioritize national strengths and priorities is increased. Second, technical advancement is essential for
the country's presence in foreign production networks to have a greater economic effect. Exports from
the country must progress from low-skill, labor-intensive manufacturing to high-skill, high-value-added
manufacturing.

Both diversification of exports and technical development, on the other hand, necessitate
decent infrastructure. It's likely that the sort of foreign direct investment (FDI) that the country is
receiving is a function of the country's infrastructure. Lack of good infrastructure, especially
transportation, ports, and electricity, restricts FDI to industries with weak ties to the rest of the
economy, as infrastructure increases production costs, rendering industries unable to compete in the
export market.

Given the emergence of bilateral and regional trade agreements, the global trading structure is
becoming more multi-tiered rather than multilateral. The modern world brings with it new issues and
solutions. The government's dilemma is determining how best to pursue those opportunities while still
addressing the obstacles.

Common questions

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The Philippine economy's foundation extends back to pre-Hispanic times with the Age of Transshipment, which initiated a period of administrative union and territorial consolidation. This laid the groundwork for national consciousness growth. Additionally, in the eighteenth century, plans to reform the monopolistic galleon trade began, which allowed foreign merchants to enter Manila, boosted local export trading, and promoted local textile manufacturing .

Historically, reforms of the galleon trade introduced elements of foreign trade and competition in the Philippines. By allowing foreign merchants into Manila and promoting local manufacturing, seeds for modern trade liberalization began to sprout. These early reforms correlate with today's efforts to open the economy through policy changes aimed at boosting competitiveness and productivity, reflecting a continuity in the philosophy of economic openness .

Diversification of exports is essential as it reduces the Philippines' reliance on Transnational Corporations' decisions. This enhances the country's economic sovereignty, allowing the formulation of policies and planning that align with national strengths and priorities. Diversifying exports helps the country to prioritize its interests rather than being subordinate to external corporate agendas .

Membership in the World Trade Organization (WTO) has supported the Philippines by promoting fair competition and ensuring global trading system openness, stability, and predictability. Additionally, joining organizations like APEC and AFTA has facilitated the Philippines' sustained development in world trading by fostering cooperation and reducing trade barriers in the region .

According to economic theory, the liberalization of trade and investment policies is expected to boost economic growth by encouraging competitiveness, improving production efficiency, and boosting productivity. This is supposed to result in more industrial growth, which translates to more employment opportunities and higher wages . However, despite these policy changes over the last three decades, there has not been a major shift in economic development in the Philippines .

The multi-tiered global trading structure presents challenges such as increased complexity in managing bilateral and regional trade agreements. These require precise strategies to navigate overlapping obligations and opportunities while ensuring national priorities are met. The government faces the task of pursuing these opportunities effectively while tackling obstacles by integrating robust policy frameworks and enhancing infrastructure to bolster competitiveness .

Participation in labor-intensive supply chains does not guarantee the technology spillover required to climb up the production chain. This limitation may hinder domestic production potential by not diffusing the advanced technologies needed for upgrading manufacturing capabilities, thus restricting long-term industry competitiveness in the global market .

Infrastructure is pivotal in attracting FDI as it influences the kind of investments the country receives. Poor infrastructure, particularly in transportation, ports, and electricity, increases production costs and limits FDI to sectors poorly integrated into the rest of the economy. Hence, infrastructure deficiencies render industries non-competitive in the export market by raising costs, which impacts overall economic growth negatively .

From the 1950s to the 1970s, the Philippines employed high tariffs and import restrictions to protect domestic industries while the exchange rate was overvalued. This protection was highly asymmetrical, offering high protection for finishing/assembly operations and low protection for raw materials, intermediate products, and capital goods manufacturing. This led to reduced resource distribution productivity as it favored import-competing manufacturing sectors over exports and agriculture, creating an inefficient market system with unrealized scale economies .

The Tariff Reform Program (TRP) initiated in 1981 aimed to bolster economic development by reducing tariff protection and its dispersion across sectors. By doing so, the TRP sought to enhance the effectiveness of capital distribution, increase global productivity, and maintain economic development, ultimately fostering a more competitive and equitable economic environment .

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