Opening up retail trade

One of our readers, Justin Jose, sent an email that opens a discussion on one of the key economic reforms by way of legislative action that the Philippine government has been pushing for. Before weighing in on the issue, here is Justin’s letter:

“I was wondering if you are familiar with the issue of our government’s move to open up local retail to foreigners for a paltry investment due to lobbying from foreigner business chambers of commerce. Our PRA (Philippine Retailers Association) is too weak to fight this.

“This will kill a lot of local retailers/businessmen as they can’t compete with the bigger foreign retailers, and also their foreign principals who can now come in direct to our market and dispense with their local partners who have built the market for them.

“Our retailers will soon have to join the OFW if deprived of retail opportunities in their home country. Retail is how most entrepreneurs earn their first million, and then go on to develop and grow larger businesses like real estate, e.g., Mr. Sy of SM.

“Our country is a consumption driven economy. How can it be beneficial to our country if retail profits will flow out to foreign companies, instead of being a source of capital formation for our own country?”

Liberalization vs protectionism

The issue of retail trade liberalization continues to raise concern in the country for fear of disfavoring and edging out existing Filipino-owned micro, small, and medium-sized enterprises (MSMEs) with the entry of foreign retailers.

This discussion has been around ever since globalization and the lowering of tariff barriers found its way in international trade meetings, which could have been before 1947 when the first General Agreement on Tariffs and Trade (GATT) was agreed on.

The push for a more open economy, which would further break down the country’s protectionist paranoia, was at its most aggressive behavior during the Ramos government when a slew of laws designed to liberalize trade sectors was initiated.

Among such initiatives was the Retail Trade Liberalization Act, signed into law in 2000. This had, however, failed to bring in foreign investments in the retail trade sector because of generally unattractive terms. Potential investors were turned off by high equity and capitalization requirements.

Two decades later, the government is now at the cusp of implementing changes that it hopes would attract a better share of foreign direct investments (FDI) in the retail sector.

The urgency for this is encapsulated in a Congressional study that showed that the Philippines captured only a 0.63 percent share in FDI going into the ASEAN wholesale and retail sectors from 2014 to 2018. Economists also have long pointed out that a more open economy helps spur economic growth.

Protecting MSMEs

As expected, what remains under contention in relaxing the provisions of the 2000 Retail Trade Law would be in the details, particularly that which concerns protecting the estimated 400,000 MSMEs in the local retail sector that could be affected.

The Senate version of the bill drastically lowers the minimum paid-up capital to $300,000, while the House version is even lower at $200,000. The Senate version also seeks a reduced per store investment requirement to $150,000, while the House version would totally remove the requirement.

The Philippine Competitive Commission (PCC) has weighed in on the discussion, saying that the new proposed minimum paid-in capitalizations would be favorable to spurring competition in the retail trade sector as long as other measures are in place to help existing MSMEs transition to the new competitive environment.

Especially with the pandemic-induced lockdowns, MSMEs have been severely weakened by reduced consumer demand. Without a corresponding government program to prop up the health of our small retailers, allowing foreign retailers to come in at this time could be lethal.

Improving retailing

Should lawmakers be able to come up with an ideal mix of protective and liberalized policies, the local retail sector stands to benefit immensely from the influx of new ideas on how to improve retailing in the country, especially in the realm of digital commerce.

With more than 110 million Filipinos driving one of the biggest consumer economies in the ASEAN, the Philippines could do well to learn from foreign retail investors who look at improved supply chain networks to deliver their goods to the local and global markets.

Our MSMEs can also benefit by maximizing efficiencies from improved infrastructure and transport systems. There will be plenty of growth opportunities for consolidators or wholesalers who will be able to supply produce to big retailers.

While there is criticism that foreign companies will only repatriate earnings that should have been earned by our MSMEs, this could be a myopic view if we neglect to think that FDIs may introduce efficiencies that will allow our local products to become part of global supply chains.

Aside from improving segments of the local value network and contributing to economic growth, improvements in retailing could mean lower prices of goods for Filipinos, thus stretching the purchasing power of the peso to allow families to allocate savings to improving their quality of life.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.