Trade and economic development, 1898-1941

The Philippine economy began to move in sync with the rhythm of the American economy after it was acquired from Spain in 1898.

This was a consequence of the free trade policies adopted by the United States between its own economic market and its new colony. Instantly, the country became part of the American economy’s reach, benefiting also its own economic interests.

“Free trade, or colonial preferential trade.” The only barrier in a world of free trade is geography – distance. In those days, distance was a natural trade impediment. Transport costs worked both ways, for exports and imports. Transport increases the cost of goods sold.

As the colonial master, American policy made the Philippines into an extension of its own market. By treating the new colony as a foreign territory, however, US trade policy would govern its colonial ward through a system of tariff preferences.

For the first 10 years as agreed in the Treaty of Paris of 1898, Spain was allowed to have the same trading rights as those of the Unites States when entering the Philippines, so that American control of trade was not total.

Philippine trade in 1899 was valued at $34 million. Its main trading partners were the United Kingdom, United States, Spain and China. By 1940, total trade amounted to $251 million, with the United States controlling 75 percent of total trade.

When preferential trade was first proposed on tobacco and sugar in 1905, fears about competition from Philippine exports were aired. (See my Crossroads, “US trade, economic policy toward the Philippines in the 1900s,” May 1, 2019, Philippine Star.)

By 1909, the policy of free trade was put into effect more generally. Following concerns about competition of low-cost goods produced in the Philippines, quantitative quotas were placed on sugar and tobacco products, but the quotas chosen were generous enough to induce further growth of the export industry.

In 1913, all quantitative quotas were abolished, creating virtual free trade between the Philippines and the US.

This policy would remain until 1934. In that year, as a consequence of the Great Depression, some trade barriers in the form of quotas and export taxes and processing taxes were introduced to hold off the growth of some major Philippine exports into the US.

Further developments would still continue the growth of Philippine exports, although constrained by some barriers. Some of these barriers were in the form of taxes that were collected on the export products.

However, as in the case of the processing tax collected on coconut oil imported into the US, the proceeds were deposited in escrow for the credit and future use of the Philippine government. While the measure harmed the Philippine export, the money was to be reverted back for Philippine use in the future.

“Effects of free trade policy on Philippine development.” The Philippine economy grew along a path of export-driven growth, led by major agricultural products that the country had developed competitive advantage to develop.

Sugar, coconut and abaca products became the leading agricultural industries that produced major export gains for the country. Derivatives of these products expanded the gains in the sectors, even though in relatively raw forms they had succeeded to enlarge their market positions.

Although all these products had export markets during the late 19th century under the Spanish regime, these sectors experienced rapid gains in market, focused mainly on sales in the US market.

The farm areas devoted to these commercial crops expanded across parts of the country over time, creating pockets of export industry sources of agricultural productivity.

For instance, hectarage of land planted to sugar in 1912-1914 was 169 thousand hectares but by 1936-1938 was 245 thousand, with yield rising from 1.84 to 4.12 metric tons per hectare.

Similar expansions were observed for coconut and for abaca plantings.

Geographically, these agricultural lands were distributed across the islands, hence expanding economic development. For sugar, plantings were made mainly in the Visayas (Negros, Panay) and in Luzon (Southern Luzon, Pampanga); for coconut (the Bicol region, Leyte and Samar, and Mindanao); and similarly for abaca.

Although these were basically agricultural crops, their further processing of these products into marketable goods as raw materials also involved some degree of industrial processing, even though relatively involving low technology.

Sugar refining, coconut oil refining and the making of rope involved some degree of processing that encouraged some degree of industrial sophistication. Investments in these stages of export developments attracted not only the local businesses but also American investments. To a degree, American investments went into these industries that sold exports to the United States.

The impact of these market developments was to induce land use for productive activities because of the growth of demand for exports. The supply response in the country would have the effect of putting Filipino farmers in productive agricultural activities as well as in the associated processing industries for these products prior to export.

The period was a time of growing population. Throughout this period, the Philippines was experiencing growing national output, growing export volume even as the population was growing, and an increasing relative rise of export income as a percent of overall output.

The period was also one of the most turbulent in world history. Even though the First World War brought great added demand for Philippine exports, the period that followed until the opening of the war in the Pacific that engulfed both the US and the Philippines (World War II, in 1941), was one of great turbulence as well as depressed economic conditions.

Yet, during this period, even as the US suffered economically from the Great Depression, and the Philippines followed suit and suffered as well, Philippine economic performance in exports was less severe that that experienced by other developing countries.

The reason for this was that the free trade with the United States – which was a preferential trade over other suppliers of competing exports to the United States, which were subject to American tariffs – gave Philippine suppliers the competitive edge in selling to the US market.

References: Ponciano S. Intal, Jr., Essays on Philippine Colonial Economy, De la Salle University Press, 2003; Shirley. Jenkins, American Economic Policy Toward the Philippines, Stanford University Press, 1954.

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