RP-US Free Trade Agreement

Copyright © 2009 by Chester B Cabalza. All Rights Reserved.

Introduction

Three years ago, celebrating the 60 years of the Philippines-United States Friendship and the Centennial of Filipino Migration to Hawaii and the United States, President Gloria Arroyo’s visit to Honolulu on 17 September 2006 underscored enduring bilateral ties as she stated, “…the Philippine-American relations is at its closest and most vibrant in more than a decade”.

But the apparent love-hate relations between the two allies has constantly been redefined and solidified through the past six decades, from such collaborative efforts as their common stand in the great ideological struggle of the Cold War period to their important cooperation in the war against terrorism in the 21st century to the spirit of free enterprise; the continuing promotion of important economic linkages even as today’s world witnesses the intense competition in a globalizing world.

It is a fact that today we are all functioning in a world fundamentally characterized by objects in motion. There is a tremendous mobility brought about by globalization where immense flood of capital, ideas, labor, profits and technology are rapidly moving across the four bounds of the earth.

Cognizant of the improving bilateral relations of the Philippines-United States, the Free Trade Agreement (FTA) is viewed as a strategy that should be carefully crafted, negotiated and implemented. The Philippine government should especially work on leveling the playing field to cushion the possible negative impact to affected sectors (Medalla & Balboa, 2006).

Rationale

This article shall look back and scrutinize the past RP-US economic relations that apparently have declined over the years after the Americans withdrew its largest military bases in the Philippines. And now as a result of the changing conditions in the world market and increasing regional integration and global competition, trade arrangements have become a part of economic and development strategies of each nation-state. Furthermore, the study shall explore the issues, challenges and prospects in forging an FTA between the Philippines and the United States and future trends in trade particularly the business process outsourcings (BPO).

Nevertheless, in the ASEAN region, Singapore has already signed for Free Trade Agreement (FTA) with the United States. Similarly, an US-Thailand FTA is in the process of negotiation. The Philippines is eyeing to be the next. With this kind of economic arrangements in the region, a domino effect might transform Philippine economic engagement with the United States. To put it more aptly, will future FTAs among Southeast Asian countries adopt the US-Singapore FTA (USSFTA) template? Furthermore, will an FTA more likely enhance RP-US bilateral relations in the future?

Since the September 11 terrorist attack, it seems that the United States has a strong strategic vision on how to define the evolving security landscape for the Philippines and Southeast Asia. Indeed, security has inevitable effects and impacts on the commercial ties of the United States to its oldest ally in Asia, the Philippines. In this view, is security issue more highlighted than trade and commerce?

Definition of Terms

Free Trade Agreement is seen as an opportunity to eliminate tariffs and quantitative controls and freedom from US farm programs, which have distorting effects on prices (Medalla & Balboa, 2006). An FTA is expected to pave way for preferential access for exports to the US market for garments and textile products, especially that it has to face growing competition from China’s similar exports. Furthermore, bilateral economic partnerships are expected to spur “forced efficiency” effect that will induce efficiency and productivity gains and to restructure the economy to improve the domestic supply chain (Naya, 2005:5).

Frameworks of Analyses

The author shall use the frameworks of trade liberalization in the current trends of globalization by looking at Thomas Friedman’s arguments in outsourcing and offshoring that has allowed companies to split service and manufacturing activities into components, with each component performed in most efficient, cost-effective way. Also it will look at new regionalism and export theory frameworks to analyze the impacts of current bilateral trade of the Philippines and the United States.

The new regionalism theory (Eul-Soo Pang: 2003) incorporates trade creation opportunities for state and non-state actors, but also highlights the interaction between trade and flows of foreign direct investments (FDI) and foreign portfolio investment (FPI). Transnational production systems, cross-border financing, and access to world market are new factors in play. It builds new safety net for a country’s external economy.

On other hand, export theory suggests that exports are important for growth and this has been determined even in the case of Asian countries. This approach is in line with the standard theoretical contention that the growth often reflect one, or a combination of, several factors such as a greater degree of competitiveness, achieving scale of economies, improved technology, higher production according to a country’s comparative advantage and greater market outreach (Clemes, Arifa and Gani: 2003).

The RP-US Trade Relations from Post-Cold War to Post 9/11

According to a Filipino economist G.F. Sicat, for most of the first 60 years of the 20th century, the Philippine trade policy was governed by the colonial authorities in Washington D.C. Since World War II, the bilateral trade and investment cooperation had become somehow dynamic dimension of RP-US engagement. The United States believes that the Philippines’ sustainable economic development will make it a stronger ally. But the Philippines insist that the US engagement in the country should be comprehensive, covering both security and economic development dimensions.

From 1974-1984, the overall trade balance was still favorable to the Philippines. But the Philippines did no longer imports US consumer goods, but instead, imports have shifted to capital goods and raw materials.

In terms of investments, American products have become household names in the Philippines (e.g. Coca-Cola, Marlboro, Tang, Colgate). These names are such familiar parts of the Philippine scene that the Filipino cannot be blamed for thinking the US firms continue to dominate our economy that time. Hence, the sudden rise of Japan as an economic power in Asia-Pacific rivaled the huge investments of the US to the Philippines. Hence, Japanese products (e.g. Sony, Toyota, Canon, Fuji) have also entered Filipino consciousness during those periods and still have stronger product recalls even today.

Meanwhile, the US share in Philippines trade has declined since post-EDSA I, but it still accounts for at least 18 percent of Philippine Exports (valued at US$7 million) and 19 percent of Philippine Imports (valued at US$8 million) in 2004. Hence, the Philippines was a recepient of Php3.6 billion of Foreign Direct Investments (FDI) from the United States. Prior to 2002, United States was the top foreign direct investor in the country.

The US is still the leading destination of Overseas Filipino Workers (OFW). From 1998-2002, around 18,854 OFWs were documented to have worked in the US. Remittances amounting to US$4.18 billion was recorded in 2003 alone. However, in the past two years, OFWs destined to US declined to –9.7 percent due to more restrictive entry in the US especially in the aftermath of the September 11 terrorist attack in 2001 (Medalla & Balboa: 2006).

Hence, economic and trade relations with the United States as aptly described by President Gloria Macapagal Arroyo has been “elevated to a level of maturity”, anchored on the mutual recognition of sovereign equality and on mutual respect. In her words on the occasion of DFA Foundation Day on 24 July 2004, she stated:


“The Philippines and the United States have centuries-old bonds, tightened by a common political tradition, by world wars fought together, by tens of thousands of brave soldiers dying in the battlefield of freedom. That is a relationship between two peoples. No President can break that bond because it is held together by a permanent history. Our partnership for a better world is stronger than ever.”

In 2005, total RP-US trade amounted to US$16.5 billion. The US investments in the country for the last two years were mostly in Information Technology (IT) and IT-enabled businesses (e.g. Call Centers, Business Process Outsourcing, and Software Development). American investors are also active in mining, banking, insurance, power, oil exploration, and information technology.

According to Dennis Arnold he stated that the FDI in this phase is represented by the continuing relocation of production. FDI inflows to individual ASEAN members vary considerably, and although absolute amounts of FDI have stabilized since 2000 following the Asian Financial Crisis. Meanwhile, FDI inflows dropped in Southeast Asia from US$27.7 billion in 1997 to US$14 billion in 2002.

Meanwhile an interview with Ma. Carolina Apostol , she says that bilateral trade and investment cooperation is dynamic between RP-US relations. In 2006, two-way RP-US trade amounted to US$16.99 billion. In other words, the Philippines experienced trade surplus with the United States. She adds that the US remains to be the country’s number one trading partner as a top export market and top import source of the Philippines last year.

Today, the US economy is currently twice the size of Japan, the world’s second largest economy. The US is the preferred destination for scientifically trained foreign workers, and popular destination for foreign firms with China as its main rival. It attracts more than 1/3 of world’s inflow of direct investments. The US expenditure in R&D nearly equalled those of the next seven richest countries combined.


Growth in ASEAN Region

Prior to the domino effects of the East Asian financial and economic crisis in 1997-1998, Southeast Asian countries have been the favorite hubs for many multinational-manufacturing companies. The ASEAN Five countries attracted considerable international attention primarily as a result of their phenomenal gross domestic product (GDP) growth rates. Much of the robust growth was driven by the rapid expansion of both the services and the manufacturing sectors. Similarly, the manufacturing sector has also expanded in several parts of developing as well as the developed world, although, at a slower pace than the services sector (Clemes, Arifa and Gani: 2003).

Japan at that time, as a proxy power of the US in the region and the second largest economy in the world, aimed to turn ASEAN into an integrated production base for Japanese production. Based from Walden Bello (1997) he said that prior to the 1997 Asian economic crisis, a massive influx of Japanese FDI with US$48 billion spread in ASEAN 5 countries. But the Plaza Accord of 1985 triggered further damage, because there was a pressure from the US which sought to reduce its gaping trade deficit with Japan by ‘cheapening’ its exports and making its imports from Japan more expensive in dollars in terms of US consumers.

During that period and even today, the US still plays a significant role in ASEAN’s economy. Being a world economic power, Southeast Asian markets are bandwagoning with the hegemonic power of the US. Albeit the Philippines, having the smallest volume of exports to the US can be inferred that its products are not competitive and attractive and US top exporters are from developed economies.

There are three major sectoral composition of ASEAN’s economies: agriculture, manufacturing and services. The figures below speak about the supremacy of the Philippines in 1970s in the manufacturing sector around that period, thus Singapore becoming a manufacturing powerhouse in 1980s that sustained the Lion City’s premiere position today as the leading economic power and the most duty free country in the region, followed by Thailand when it was chosen as the favorite manufacturing hub in the 1990s.

Over-expansion in the construction and services before achieving industrial maturity created a big dent to Indonesia’s, Malaysia’s and Thailand’s capacity to finance industrial and technology development. While the Philippines faced de-industralization even before the manufacturing sector had achieved adequate structural transformation. Unlike Singapore and other industralized countries, where the transition to services was achieved after extensive industrial deepening and productivity increments, accelerated expansion in construction and services (Embong and Rudolph, 2000).

In a deterrirtorialized world, increases in global exports have been largely concentrated between two sectoral outputs: exports of manufactures and exports of services. The growth of manufacturing and services in the last two decades in Southeast Asia and Northeast Asia have outpaced all other regions around the world.

The services sector is now becoming an increasingly important to the GDP of emerging economies in ASEAN. Hence, several factors are identified as contributory to the transformation of the service economy and among the salient features are: globalization, deregulation and privatization, and the advancement of technology. Currently, services represent approximately 25 percent of the world trade.

Meanwhile, in the Asia-Pacific region, the Philippines still lags behind with its neighbors based from the 2007 State of Philippine Competitiveness (see Table 8 on International Trade Performance) Based from the study of Asian Institute of Management (AIM), the Philippine business achieved strengths through the following conditions: it has the lowest cost of living in the region, ranked 14th in account balance, 17th in exports of goods, 19th in trade-to-GDP ratio and 21st in long-term unexployment. For its weaknesses, it ranks 59th in GDP per capita in the world, 58th in GDP (PPP) per capita, 55th in relocation of production, 54th in both consumer price inflation and employment.

As Thomas Friedman observes and few other economists (Clemes, Arifa and Gani: 2003) some service organizations in higher wage countries are beginning to outsource work at an increasing scale to those countries that have highly skilled labor available at lower charge-out rates. The increase in the growth of services sector has also triggered a growth in demand for a variety of manufactured goods such as computers, cell phones, digital scanners and optical linkages.

Security Dimension in the Totality of RP-US Relations

When the Amerians fled the Clark Air Field and Subic Naval Base, it became an emotionally charged issue that greatly affected the RP-US relations. The American penchant for overtly or covertly influencing the internal affairs is motivated primarily by strategic interest in these two bases. Hence each year, the base contribute, in terms of local spending, US$230 million to the Philippine economy. The Bases Agreement had direct expenditures covering the period 1985-1989 that can provide for US$900 million in potential economic benefits.

On the other hand, the Philippines attempted to charge rent for the bases instead of accepting “best effort” compensations; however the Americans steadfastly object to paying rent based from the US position on the following reasons:

1. the security of the region is a shared responsibility;
2. regional stability benefits the Philippines; and
3. the Philippine contribution resulting from two abovementioned reasons, to provide land on which the bases are established.

Cognizant of the relevant 1986 Constitution provisions and laws that guided the revitalized defense cooperation, both countries negotiated and concluded a Visiting Forces Agreement (VFA) in 1999. Among the many exercises, the better known is ‘Balikatan’, being the largest in scale and maximize the interoperability between the Armed Forces of the Philippines (AFP) and the US.

After the September 11, 2001 terrorist attack in the US, a revatalized defense cooperation was forged with the full support endowned by President Gloria Macapagal-Arroyo to President George W. Bush of the United States. With this kind of agreement, the US political-military/security assistance to the Philippines in 2005 amounted to US$103.7 million. Since 2002, the annual US Security Assistance (SA) extended to AFP is estimated at approximatelt US$72.15 million, broken down as follows: US$93.5 million in 2020; US$78.58 million in 2003; US$63.18 million in 2004; and US$53.37 million in 2005.

The messianic role and unilateralist position of the United States being the sole superpower in the world is currently externalized by looking at the safety of its citizens and the security of its terrirory. Since 9/11 it seems that the US has a strong strategic vision on how to define the evolving security landscape for the Philippines, Southeast Asia, and the world. According to an interview with US trade attache David Rovinsky, the US current obsession has been their security. Security has placed significant roles in their bilateral relations with various countries. Hence, under George W. Bush administration, they obviously allotted a huge budget in their defense and military.

But based on an interview with Ma. Corina Apostol , she deems that RP’s support to the US in terrorism then has helped strengthened RP’s commercial ties with the US. The hegemonic power of the US helped the Philippines gain more access to the US markets through certain grants and lower tariff treatment in trade.

Recently, the Philippines was once again placed on a compromising position pursuing its relationship with the United States. Firstly, when an OFW (Angelo dela Cruz) was set free from a terrorist group in Iraq and in return the Philippines withdrew its troops in the war-torn country of then Saddam Hussein that caused so muh criticism from the US but praises from the international community. Secondly, the accidental death of an American Peace Corp volunteer Julia Campbell in the famous Batad, Mt. Province. And thirdly, the imapct of the Nicole-Smith rape case, in which the Philippine government, in spite of the local court’s decision, decided to give the US Embassy custody over an American troop convicted of raping a Filipina.

USSFTA – A Model for Prospective RP-US Free Trade
Agreement

It is a pre-resquisite for the Americans to forge Free Trade Agreement (FTA) with different countries once these nation-states are members of the World Trade Organization (WTO) and have partnered with the Trade and Investments Framework Agreement (TIFA).

Singapore is the first and only country yet to have signed an FTA with the United States among the other member countries in Southeast Asia and Asia as a whole since the Philippines closed down the US naval and air stations in 1991. The United States-Singapore Free Trade Agreements (USSFTA) was a result of an economic and trade negotiation in 2003, that placed both countries advatageous with each other to increase their investments and trade. For the US, the FTA as an enterprise makes little economic sense; it has created an asymmetry of opportunities for the trade goods and services in favor of the city-state. And for Singapore, ‘survival’ has been the foremost preoccupation since independence and has been the city-state’s credo in its [economic] policy ( Eul-Song Pang: 2007).

Based from my personal interview with David Rovinsky, he thinks that Singapore model for future FTA with the Philippines and other Southeast Asian countries is not possible because of varying economic diversity in the region. Singapore has its own concerns, issues and vulnerabilities. Thus, considering the status of Singapore being the most duty-free country, an entrepot economy, and the second largest port in the world.

On the other hand, in my interview with Ma. Corina Apostol, she thinks that an FTA with the United States will surely be beneficial to the country and will certainly enhance RP-US relations. However, the US has set new conditionalities on trade, which have the effect of raising compliance standards for potential US FTA partners. This does not preclude the government from exploring ways on how negotiations for an FTA with the US may commence.

Furthermore, based from the study of the PIDS (2006), Singapore is the most free trade country in Asia Pacific. The city-state guarantees zero tariff in all US goods. On the other hand, US goods entering Singapore will have a zero tariff in 10-year period at the same time Singapore will consider the same treatment. In terms of services, trade liberalization will be best considered. Hence, the lion city can put this policy aptly by stating, “Singapore will treat you as a services supplier like your own services”. Hence, Singapore can guarantee duty free on all US products.

Thailand, Malaysia, the Philippines, Indonesia, Korea, Taiwan and Vietnam are eyeing to be the next countries to forge an FTA with the US. But In August 2006 the US offered to consider an FTA with ASEAN.

In the case of Thailand, David Rovinsky alludes that the US ceased its negotiation on FTA with the Thai government after the recent coup in Bangkok. The US engages talks only with democratic countries. Although, it is unfortunate that the negotiation is nearing to its final agreement. What will happen on December 23 is still anticipated.

Rovinsky believes that in the case of the Philippines, USSFTA is not possible and would not be a good model for future engagement of FTA with the US. He thinks that US-Chile FTA model is best considered especially on issues of agricultural sector. While Chile has many agricultural issues, it ended up having an FTA with the largest economic power in the world, the United States.

Accodring to the Philippine Institute for Development Studies (2006), they see more positive prospects in engaging an FTA with the US. Expected benefits would strengthen linkages with American business sector, improvement of employment opportunities, improvement of the economic image of the Philippines, become an instrument for technology transfer, enhancement of trade and investment, and creation of national policies on the movement of the people. On the other hand, there are also disadvantages, like the issue of national treatment in which case the Philippines would only serve the “most favored nation treatment”.

The Philippine government should especially work on leveling off the playing field to cushion negative impacts to affected sectors like the Information and Communication Technology (ICT) and weak Philippine financial sectors.

Furthermore, David Rovinsky looks at the viability of the business process outsourcing (BPO) sector in the Philippines in which American businesses see much potential investsments (e.g. Texas Instrument have invested over a billion dollars in Clark, prefering the Philippines than China and Vietnam).

Official Development Assistance (ODA) in the Philippines through the US Agency for International Development (USAID)

Based from the figures released by the USAID through George T Kurina’s New Book of World Rankings, RP is only ranked 17th as a recipient of US economic aid from 1946-1981 and even lower 19th as a recipient of US military aid from 1946-1980. Only in 2005, USAID funding level to the Philippines stood at US$111.071 million and in 2006, a total of US$69.973M (and an additional US$20M). Through development interventions of the USAID, the US has given assistance in the Philippines totaling to more than US$5 billion in more than four decades, in the following program areas: market reforms and good governance, population, health and nutrition; energy and environmental resource management; and economic transformation in Mindanao in support of the peace process.

Conclusion

Some observers say that the Philippines cannot free itself from such an unequal relationship with the US, because the Philippines is arguably, a weak state. International Relations scholars have argued that we are living in a unipolar world when the Cold War ended in 1991, with the US as the only remaining superpower. It has enough influence to determine how the rest of the world will live. US scholars argued, on the other hand, that there has been misconception about how the US exercises its power and that it is not true that US supremacy or unipolarity is the defining feature on international relations today. Amidst all the contending theories and observations as to how the US uses its power, it is quite obvious that the US has a profound influence over the Philippines’ political, cultural and economic life.

According to the Philippine Institute for Development Studies (2006), the prospective RP-US FTA is a potentially controversial development policy option for the Philippines. There is a need to continue conducting in-depth studies on identified sectors and areas for negotiations. It is suggested that a coalition which will oversee preparations and negotiations for an RP-US FTA be formed. At the sectoral level, several studies also reveal that an FTA could be used as a platform to advance policies that would enhance competitiveness of local industries. Lastly, PIDS concluded, it should be emphasized that an FTA with the Americans, or any other country, is not an end in itself, but a means towards achieving our development goals and towards integrating the economy in the rapid global trading environment.

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Key Informants

Ma Corina R. Apostol
Principal Assistant
US Division
Office of American Affairs
Department of Foreign Affairs

David J. Rovinsky
Second Secretary
Economic Section
American Embassy Manila