Rebooting the economy and a Free Trade Agreement with Canada

THE CORNER ORACLE - Andrew J. Masigan (The Philippine Star) - September 2, 2020 - 12:00am

The country is in the midst of its worst economic crisis since World War 2. Thus far, two thirds of all micro, small and medium enterprises (MSMEs) have either closed or significantly downsized. This should alarm us all since MSMEs comprise 98.57 percent of all business establishments in the country. They account for 71 percent of employment and 25 percent of export earnings. Collectively, they contribute 39 percent to GDP.

No surprise, the annihilation of MSMEs has pushed 19.5 million Filipinos to unemployment in the last seven months alone. Our people are facing hunger and the situation is worsening.

Economists estimate that it will take P2 trillion to stimulate the economy to its former vitality. A number of stimulus packages are pending in Congress – the P1.3-trillion ARISE Bill, the P1.5-trillion CURES bill, the GUIDE Act and FIST Act, all of which have yet to be enacted. What was approved, however, was the P165.5-billion rescue fund from Bayanihan 2. Unfortunately, the amounts of Bayanihan 1 and 2 are too small to make a significant impact on the economy. Without a big-ticket stimulus package, the economy is seen to contract by 8 percent to 11 percent this year and our recovery will be long and slow.

It will take at least two years to rebuild our damaged economy. Challenging as it may seem, this period of flux is where opportunity lies. As we reboot and rebuild, we can finally fix what is fundamentally wrong with the economy.

See,  our economy stands on weak foundations despite having grown steadily in decades past. Ours is an economy where 72 percent of economic activity is driven by private and government consumption. We operate with a weak manufacturing base and subsistence agriculture. This has made us dependent on imports for the majority of our needs.

Our imports have always outweighed our exports and in normal circumstances, this would have resulted to a current account crisis. Thankfully, OFW remittances, tourism revenues and foreign direct investments (FDI) filled the gap.

But this is no longer the case in the post-COVID world. More than 600,000 OFWs have been repatriated and remittances are on nosedive. Tourism dollars have dried up as with FDI’s (FDI’s have been declining since 2017).

So we find ourselves in a conundrum. While our imports continue to rise, we have lost much of our sources of income to pay for them. We are faced with the prospect of an ever widening current account deficit. We will need to fill the gap by borrowing more, increasing taxes or depleting our forex reserves. A widening current account deficit will rapidly deteriorate our economic fundamentals and cap our ability to grow. It is a toxic combination that will bring us back to being the sick man of Asia.

As we reboot the economy, we should purposely restructure it from one that is consumer-led to one that is production lead.

Restructuring the economy is a complex process that involves making conditions more conducive for investments, doing business, manufacturing and navigating the logistics chain. Done right, a shift towards a production-led economy translates to jobs, forex earnings, tax revenues and a rise in consumer demand. It is the silver bullet that promises to restore the vibrancy of the economy and set her on a path of sustained growth for decades to come. It is a tried and proven formula.

Timely is the initiative of Canada to establish a Free Trade Agreement (FTA) with ASEAN. Engaging in this FTA will give the Philippines the kickstart it needs for its long journey towards restructuring the economy.

For those unaware, an FTA is an agreement among countries wherein tariffs, trade barriers (including non-tariff measures) and investments are relaxed and/or liberalized. The Philippines has existing FTAs with ASEAN; Japan and Switzerland-Norway-Iceland and Liechtenstein. Our membership in ASEAN has also put in effect an FTA between the Philippines and China, Australia, New Zealand, India and South Korea.

Canada is the 10th largest global economy whose needs align with the products we produce. In fact, the Philippines already enjoys a trade surplus with Canada from our exports of goods and services. This surplus amounted to US$771 million last year.

A joint study conducted by ASEAN and Canada shows that should an FTA materialize, Philippine exports of manufactured goods will grow by a whopping 35 percent while primary goods (eg. metals and ores) will rise by 8.8 percent. An FTA will allow us to export more coconut oil, apparel, footwear, leather and rubber products as we move forward. Exports of service, like business processes, will likewise expand by 9.6 percent.

An FTA opens the way for large-scale employers like Telus, Sunlife and Manulife to set up shop in the Philippines. Hundreds of thousands of jobs can be created. Studies further show that with liberalized investment conditions, we can expect an influx of Canadian companies involved in animation, entertainment, engineering and software design – the very areas Filipinos are competent in. Filipino startups will benefit too, since Canada is home to the world’s largest institutional investors.

Canada has existing FTA agreements with 51 countries around the world. Not only will an FTA with Canada integrate Philippine-made products and components to Canadian supply chains, it will also incentivize non-Canadian companies, especially those leaving China, to set up factories in the Philippines if only to gain access to the Canadian market and her 51 FTA partners. Through Canada, we get to widen our export markets and lessen our dependence on China.

An FTA will be a win for the Philippines in financial terms and in job generation. The Philippines stands to gain an economic windfall of US$7.5 billion on the first year alone, to increase as trade and investment relations broaden.

On the flipside, not to pursue an FTA with Canada will be disastrous for us. Another FTA called the Comprehensive Progressive Trans Pacific Partnership (CPTPP) includes Vietnam, Malaysia, Singapore and Brunei. These countries already enjoy FTA relations with Canada and are reaping the benefits in the realms of trade, investments and job generation. Unless the Philippines levels the playing field, we will miss out on this economic bonanza.

The coronavirus has wrought havoc on the economy and has left us no choice but to reboot and rebuild. Let us use this crisis to our advantage. A pivot to a production-driven economy, assisted by an FTA with Canada, will hasten our recovery and ultimately make us a stronger republic.  The President and his cabinet should commit to both initiatives.  If we do, we will look at this crisis a decade from now and count it as a godsend.

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