Free Trade
Cutting Deals
The stalling of the Doha Round of multilateral trade negotiations under the World Trade Organization has triggered the holding of alternative talks for bilateral and regional free trade agreements.
One such effort is the trade and investment framework agreement (TIFA) hammered out in Kuala Lumpur on 25 August by the 10 member-states of the ASEAN and the United States. The pact aims to bring down nontariff barriers between the U.S. and its fourth-largest regional trading partner. The agreement calls for the creation of a Joint Council on Trade and Investment to implement the work plan. The TIFA also involves the development of an ASEAN Single Window to facilitate the flow of goods among ASEAN nations and between ASEAN and the U.S. Trade-related sanitary and phytosanitary standards, as well as pharmaceutical regulatory issues, are also covered by the cooperation agreement.
ASEAN has also pursued talks on FTAs with China, India, South Korea, Japan, Australia, and New Zealand. ASEAN already has an Early Harvest Program with China (on agricultural tariff cuts by this year), and it has also reached a Comprehensive Economic Cooperation Agreement with India.
ASEAN itself has set up the ASEAN Free Trade Area, where the ultimate objective is tariff cuts on goods by 2010. This is to pave the way for greater cooperation, an integrated economic community, and a borderless region by 2020. By 2010, China and ASEAN are projected to be the world’s largest free trade area.
On its own, the Philippines has an existing TIFA with the U.S. However, until last year, the government was not pushing for an FTA with the U.S. because it was wary of the possible effect of such an agreement on Philippine agriculture. In fact, the Philippine Institute for Development Studies even urged the government to observe prudence in pursuing a free trade deal with the U.S., while at the same time identifying sectors that can benefit from such an arrangement.
However, now that the U.S. already has an FTA with Singapore and is negotiating for similar arrangements with Malaysia and Thailand, the government fears that the Philippines could be left behind. It now wants negotiations for a phased-in, rather than a comprehensive, free trade agreement with the U.S., possibly focusing on the garments sector for a start. An FTA on garments has to be in place before the U.S. lifts quota restrictions on China in 2008.
The conclusion of an economic partnership agreement with Japan in early September has also bolstered the Philippine appetite for FTAs. The Japan agreement could be followed by a free trade deal with the EU.
Investments Code Revisions
Incentives vs. Revenues
The debate on how much incentives should be granted to investors in a new “Consolidated Investments and Incentives Code” continues. Senate Bill 2411, sponsored by ways and means committee chairman Senator Ralph Recto, seeks to rationalize fiscal incentives by repealing 36 laws and provision of laws, particularly the Omnibus Investments Code of 1997.
The proposed law, now pending second reading, seeks the merger of the Board of Investments and the Philippine Economic Zone into the Philippine Investment Promotion Administration. It provides for preferential treatment via more superior incentives to registered export enterprises. Registered domestic enterprises (located in the 30 poorest provinces) will also be entitled to a preferential tax rate of 15% of taxable income, net operating loss carryover, and accelerated depreciation. Foreign nationals who invest at least US$150,000 shall be granted an investor’s visa. The bill honors the reduced tax rates on dividends, interests, and royalties enjoyed by foreign nationals under registration certificates with the BOI.
The Department of Finance originally proposed to repeal 40 special incentive laws to save the government P10.9 billion. In 2004, the government lost P282.8 billion from the grant of fiscal incentives, more than enough to cover the fiscal deficit for that period. It now plans to use revenue gains or savings from the rationalization of fiscal incentives for infrastructure and education projects.
However, direct exporters complain that the Senate measure removes incentives for indirect exporters and requires a larger investment for small and medium enterprises. Should the measure become a law, exporters will also shoulder VAT on raw material imports, but will be refunded upon certification of their exports.
Meanwhile, the Joint Foreign Chambers in the Philippines has said its members were not consulted by Senator Recto’s committee regarding the removal of the annual Investments Priorities Plan and income tax holidays in the proposed measeure. The foreign chambers supported House Bill 3295, the lower house’s counterpart that was approved in January 2005, with exceptions.
| Signals |
 The country’s gross international reserves rose to another record high in end-August at US$21.4 billion, which is equivalent to 4.3 months’ worth of imports of goods and payments of services and income.
 The national government’s outstanding debt rose 2.8% to P3.99 trillion in end-June from P3.89 trillion a year ago. Domestic debt grew 6.2% to P2.16 trillion from P2.03 trillion. On the other hand, foreign debt increased 1.0% to P1.84 trillion from P1.86 trillion.
Net inflow of foreign portfolio investments dropped 48.7% to US$1.02 billion in January to August from US$1.99 billion a year ago. As inflows of foreign portfolio investments dipped 3.8% to US$4.21 billion from US$4.37 billion, outflows rose 33.8% to US$3.19 billion from US$2.38 billion.
Merchandise imports grew 9.6% to US$29.0 billion in January to July from US$26.5 billion a year ago. Imports of electronic products, however, expanded at only 4.7% to US$13.3 billion from US$12.7 billion. On the other hand, imports of mineral fuels and lubricants increased 41.0% to US$4.8 billion from US$3.4 billion.
The volume of production in manufacturing continued to shrink in January to July, declining 8.5% from a 1.0% uptick a year ago. Net sales in manufacturing also shrunk 4.1% from a 2.2% drop last year.
The country’s unemployment rate worsened to 8.0% in July from 7.7% a year ago. Likewise, the ranks of jobless Filipinos rose to 2.9 million from 2.7 million. On the other hand, the ranks of the employed grew to 33.3 million from 32.5 million.
Overseas Filipino worker remittances went up 15.8% to US$7.0 billion in January to July from US$6.0 billion a year ago. The bulk of these inflows came from the U.S., Saudi Arabia, Italy, United Kingdom, Japan, Hong Kong, and United Arab Emirates. Those from Canada, Taiwan, and Singapore posted remarkable growths of 190.7%, 53.3%, and 22.7%, respectively.
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