Trade gap
DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - September 14, 2018 - 12:00am

In his television appearance last Tuesday, the only thing President Duterte said about the economic crisis we face today is that his economic managers are taking care of it. After he ridiculously blamed President Trump for our country’s high inflation rate, I do not blame Mr. Duterte for feeling insecure to say anything more about the economy.

High inflation is in the headlines, but a more basic and bigger problem we have is the trade gap. In very simple terms, we are buying more from abroad than we are able to sell to them.

This is not sustainable because we are constantly depleting our international reserves. We use dollars to pay for the goods we buy abroad. We need to earn those dollars by being able to sell our products abroad.

We should earn as much as we spend, as in any ordinary household. Better yet, we should be like China… earning exceedingly more dollars from selling goods  to the world economy than they are spending on purchases from abroad.

Latest data from the Philippine Statistics Authority reveal that on a cumulative basis, we now have a $22.5 billion deficit in our balance of trade, 72.3 percent bigger than the $13.05 billion trade gap recorded same time last year. This is one big reason the value of the peso is depreciating.

Our country’s trade deficit expanded 10.9 percent Month-on-Month to $3.55 billion in July vs June’s $3.20 billion. Merchandise exports sales decreased (-2.8 percent) to $38.74 billion from $39.87 billion in July 2017, while imports increased by +15.7 percent to $61.23 billion from $52.92 billion in July 2017.

Former economic planning secretary Cielito Habito said the growing trade deficit is alarming. There are also no quick fixes to such a fundamental problem. Contrary to what current economic managers are saying, the depreciating peso is not helping us export more.

Outbound manufactured goods showed a very disappointing 0.3 percent growth to $4.89 billion. Electronic products rose by 5.2 percent to $3.28 billion but electronic exports have a large import component with labor constituting our local value added.

Exports of agro-based products have also dropped by 5.4 percent to $386.10 million. This includes coffee, cacao, mango. Meanwhile, July imports continued to have double-digit growth which cannot just be explained by BBB which has barely started.

The trade gap affects our current account, one of the indicators analysts look at to assess our economy’s health. The current account tracks short-term transactions such as export and import of goods and services. These have a real impact on income, output, and employment levels of a country.

I recall an export promotion initiative in the past that adopted the slogan Export or Die. The more positive variant of that is what China has done: Export and be Rich.

Unfortunately for us, we haven’t been successful in our export drives. We have been dependent on exports with special treatment like sugar to the US or garments to developed countries that give us preferential treatment.

We don’t even take care of coconut, a major agri export, the way the Malaysians take care of palm oil. Of course we are losing the battle for market share.

We haven’t been able to identify and develop a product we are really good at and have competitive advantage in, meaning we can do it better than anyone else. The Thais are even beating us selling patis in the US.

Our manufacturers, because of protectionism, didn’t care to be competitive in the export market. They make big money selling high to the local market.

We belatedly realized we have to compete with our neighbors. And competing in ASEAN also meant offering generous investment incentives.

The investors in our economic zones are saying they need the incentives to compensate for the higher cost of doing business here. Now that we want to rationalize our system of granting incentives, threats of moving on to Vietnam or some other ASEAN country may frustrate reform.

The threats are for real. Competition for foreign investment is fierce in our region. Without foreign manufacturers in our special export zones, our exports of manufactured products will be even lower. Jobs will be lost and our trade gap will be even worse.

They have us where it hurts. Indeed, if locally manufactured products cannot compete with imported products in our domestic market, how can we expect to export anything?

In the case of Nestle’s three-in-one coffee product that couldn’t compete with Kopiko from Indonesia, the solution of our agriculture secretary, in his desire to support our coffee farmers, is to give Nestle protection in terms of a safeguard duty.

This means Kopiko will be slapped a tax that will make it artificially more expensive and make the higher cost of Nestle competitive. The Filipino consumer will again bear the higher cost, as in the case of rice protection.

Why are we unable to address the roadblocks to manufacturing competitiveness? Thailand, and now Vietnam, are countries we were once competitive with but no longer.

I want to offer again a suggestion I made in this column years ago. Let us choose a fairly large island, lease it out to Singapore’s Temasek for development into an export processing zone.

The island will have different rules from the rest of the country. It will be insulated from Filipino politicians. Singapore will be allowed to use its formula in export zones it developed and managed in Vietnam and other countries.

Or maybe, we can let them develop Subic into a productive economic zone we envisioned it to be. It is now in a sorry state, exploited by politicians and their friends.

We need to do this experiment to reassure ourselves that the problem lies not in our being Filipinos, but in the politics that govern our economic decisions.

In the meantime, be ready for the consequences of the widening trade gap on the exchange rate, inflation, and overall deterioration in the quality of our lives.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

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