Domestic demand key to insulating Philippines from US trade risks

The Philippines needs to boost domestic demand to insulate its economy from a potential setback on multilateralism, which is likely to happen if Donald J. Trump returns to power in the United States, according to economists.

“It’s not only the Philippines which will be adversely affected should the US pivot away from multilateralism, something of a certainty under a Trump presidency,” Diwa C. Guinigundo, country analyst for the Philippines of GlobalSource Partners, said in an e-mail.

The United States’ trading partners “will suffer from the consequences of a fundamentally closed trading system — higher tariffs will actually reduce US imports and growth, while its trading partners will have compressed markets, lower trading gains and economic growth,” he said.

Mr. Trump, the Republican candidate, faces Democratic rival and Vice-President Kamala Harris in the Nov. 5 presidential elections.

If he wins, Mr. Trump has said he will impose a 10% tariff on imports from all countries and 60% tariff on imports from China.

Philippine Finance Secretary Ralph G. Recto last week said a potential Trump presidency poses risks to global growth as increased protectionism could weaken global trade.

“We are concerned that there will be a setback on multilateralism, particularly in trade as well… We know that the driver of global growth is more trade. So, that is a concern,” Mr. Recto said at a briefing of the Intergovernmental Group of Twenty-Four (G24) Board of Governors in Washington, D.C. on Oct. 22.

Mr. Recto said the Philippines is counting on its relationship with the US to encourage firms to do more offshoring to the Philippines.

“If the US adopts a more protectionist stance, the Philippines, as a net exporter with a USD 2.3-billion trade surplus in goods trade with the US in 2023, could be negatively affected,” George N. Manzano, who teaches trade at the University of Asia and the Pacific, said in an e-mail.

“An across-the-board tariff increase by the US would adversely impact Philippine exports.”

But Mr. Manzano said it is an advantage for the Philippines that electronic products account for a huge chunk of its exports to the US, thanks in large part to a 1990s World Trade Organization (WTO) agreement that eliminated all import duties on many information technology products.

“Approximately 67% of the Philippines’ goods trade with the US in 2023 was in the electronics sector, which currently benefits from duty-free access, likely due to the Information Technology Agreement (ITA) under the WTO,” he said.

Electronic products accounted for 52.9% of the country’s total exports in August, with total earnings of USD 3.57 billion, according to the statistics agency.

The United States was the top destination of Philippine-made goods in August with an export value of USD 1.22 billion, accounting for 18.1% of the total. This was followed by Hong Kong (USD 942.56 million), Japan (USD 935.33 million), People’s Republic of China (USD 849.38 million), and Republic of Korea (USD 332.64 million).

Impact on BPO sector

“The Philippines could likely be more affected in the business process outsourcing (BPO) area considering our comparative advantage in this sector relative to other Southeast Asian countries,” said Mr. Guinigundo, a former central bank deputy governor.

The IT and Business Process Association of the Philippines (IBPAP) is aiming to generate USD 38 billion in revenues and increase the headcount to 1.82 million this year. The group is targeting to generate as much USD 59 billion and employ 2.5 million by 2028.

However, the IT-BPM sector is under pressure due to a talent and skills gap, rising operating costs, and increased global competition.

Fitch Solutions’ BMI unit said earlier this month that the Philippine BPO sector is at a disadvantage amid the growing shift to artificial intelligence, noting a possible reshoring of call centers to “even developed economies cost effectively.”

“This is no win-win situation. Everybody would ultimately lose,” Mr. Guinigundo said, “China’s retaliatory response could in fact worsen this scenario.”

Mr. Trump’s recent policy remarks, including his famous America first policy and an emphasis on burden sharing, have stoked concerns that Washington could adopt an inward-looking and an isolationist approach.

During his presidency, Mr. Trump withdrew from various global institutions including the Paris Climate Agreement and the Trans-Pacific Partnership.

On the economic front, Mr. Trump has been citing the need to raise tariffs for the US to usher in an era of “manufacturing renaissance.”

On the other hand, Ms. Harris, the Democratic candidate, has vowed to “strengthen, not abdicate” America’s “global leadership.”

“The president of the United States must not look at the world through the narrow lens of ideology, petty partisanship, or as an instrument for their own ambitions,” read a recent X post by Ms. Harris, who is expected to uphold the Biden government’s strategy of cementing a network of US allies and partners to confront shared challenges.

Mr. Marcos has pursued closer ties with the United States amid China’s intrusions into Philippine waters, giving it access to four more military bases under the 2014 Enhanced Defense Cooperation Agreement.

US-Philippine ties on the economic front have also reached new highs, with a business delegation led by US Commerce Secretary Gina Raimondo in March vowing to help the Philippines set up a wafer fabrication plant and double the number of its semiconductor plants.

Weeks later, the US announced a plan to put up an economic corridor on the main island of Luzon, following a trilateral meeting among Mr. Marcos, Mr. Biden, and Japanese Prime Minister Fumio Kishida.

The project, a “key deliverable” under the Partnership for Global Infrastructure and Investment component of the US-led Indo-Pacific Economic Framework, will be pursued by Washington with the help of Japan.

Mr. Manzano said the US would likely be compelled to step up its ties with Asia-Pacific countries “to keep pace with the increasing influence of China in the Southeast Asian region.”

“The US will continue to deepen its relationship with the Philippines. President Marcos is inclined to deal more with the US than with China given the developments in the West Philippine Sea,” he said.

A report by Moody’s Analytics in July said the Asia-Pacific region faces the risk of an abrupt shift in US trade policy in case of a Republican sweep in the US presidential election.

But it expects “minimal retaliation” from the Philippines against potentially higher US tariffs given its strong defense ties with Washington.

Among Asia-Pacific economies, Moody’s said only China is likely to retaliate considering its ongoing trade with the US since 2018, when Mr. Trump slapped investment controls and tariffs on hundreds of billions of dollars’ worth of Chinese products due mainly to alleged unfair trade practices by Beijing.

Mr. Guinigundo said amid the trade risks, the Philippines needs to prioritize boosting domestic demand and enhancing trade with the ASEAN+3, which includes Japan, China and South Korea.

“Two things which may not completely offset possible trade shocks: one is to promote domestic demand, and two is to further stimulate our trade in both goods and services with our ASEAN+3 partners.”

Mr. Guinigundo said promoting domestic demand is anchored on lower inflation and higher economic growth driven by personal consumption and investments.

“The latest prognosis is quite positive because price movements have started to ease while GDP (gross domestic product) growth may be as targeted — between 6% and 7%,” he said.

He noted the Philippines has improved trade ties with its neighbors.

“Expanding the liberalized list and lowering tariffs can help in this direction,” he added. “Moreover, higher intra-ASEAN+3 financial linkages could further stimulate regional trade.”

Should there be a shift in US trade and foreign policies, Mr. Guinigundo said Manila should continue to improve its investment climate “to ensure private US business will continue to increase their stake here.”

“Trump’s public policy could restrict international trade only to a certain extent. If the Philippines is able to convince US businessmen and investors that the Philippines is good for business in the long term, they will and they will come,” he said.

“Let’s continue to ensure there is good governance here, corruption is under control, there is rule of law and respect for property rights and ease of doing business,” he added.

Meanwhile, Leonardo A. Lanzona, who teaches economics at the Ateneo de Manila University, said the Philippines is unlikely to suffer much from a potential protectionist trade policy in the US because the Southeast Asian nation has not benefited significantly from free trade.

“Trade works well if institutions are also reformed to encourage competition and greater efficiency. None of these has happened, resulting in a moribund manufacturing sector,” he said in an e-mail.

“Industries and elite power continued to drain the economy of its energy and vigor. Whether or not Trump wins, the overseas Filipino workers will remain our saving grace.” – Kyle Aristophere T. Atienza, Reporter