A Unified Industry and Trade Policy for Inclusive Growth By Adrian S. Cristobal Jr. Department of Trade and Industry Trade and Development for Inclusive Growth I. For policy makers, practitioners and experts, how to make trade policy and agreements serve a country s developmental goals (in our case, inclusive growth), has always been a challenge. Taking stock of our country s economic situation in 2010-2011, seeing the growth in Asia and Southeast Asia, witnessing the rapid rise of global and regional supply chains, and the proliferation of free trade agreements, we came up with three fundamental observations. First, Philippine businesses and industries had access to a huge market of hundreds of millions of consumers through various free trade agreements (FTAs); but, they didn t know it. The Philippines had free trade agreements with the other 9 member states of the Association of Southeast Asian Nations (ASEAN) that s a market of over 600 million people. As early as 2010, 98% of tariff lines were at 0 duty among ASEAN member states 1 The Philippines also had, through ASEAN, free trade agreements with China, Japan, Korea, Australia, New Zealand, and later on, with India. That gave us market access to another 2.9 billion market. 2 The combined market of ASEAN and its trading partners is at 3.5 billion. 3 However, the business sector didn't know about these agreements. Our exporters and importers had no idea about them, or if they did, how to use them, 1 A Blueprint for Growth ASEAN Economic Community 2015: Progress and Key Achievements, ASEAN Secretariat, page 10. http://www.asean.org/storage/images/2015/november/aec-page/aec-2015-progress-and- Key-Achievements.pdf. 2 World Economic Indicators, 2014. The World Bank Group. Figure represents the combined total population of China, Japan, South Korea, Australia and New Zealand and India. 3 World Economic Indicators, 2014. The World Bank Group. Figure represents the combined total population of ASEAN (including PH), China, Japan, South Korea, Australia and New Zealand, and India. Page 1 of 9
with their complicated Rules of Origin (ROO) forms to fill up and other processes to follow. By exporters, we refer to the micro, small, medium enterprises (MSMEs), which constitute 98% of our enterprises. In other words, only the big companies and multinationals that can afford to pay lawyers and brokers were utilizing these agreements. Second, there was a widespread perception or belief that trade liberalization went too fast, too soon, leaving our industries and businesses vulnerable to the onslaught of imported products. In that period of transition towards liberalization, government was nowhere to be found. Where were the safety nets, the capacity building programs, the policy reforms and so on? It was apparent that the country s trade policy was at odds with the needs and the state of industries. 4 Then the ruckus over the Philippines-Japan Economic Partnership Agreement (PJEPA), our first and only bilateral FTA, reaching the dockets of the Supreme Court didn t help the cause of liberalization. Third, there was difficulty getting industry data to help shape trade policy positions to support complex negotiations. Although empirical research was available in the past, it was limited and there was just no clear or discernable policy direction for industry except, it seemed, what the market dictated. Moreover, negotiating more trade agreements without solid empirical research and practical sense, much less a grasp of national direction or priorities for industries to develop, was not the way to go. Given these observations, it came as no surprise why there was no strong constituency economic, political or popular- to support trade policy and agreements. Sure, we had free trade agreements, giving us wide market access to potentially hundreds of millions, and even billions of consumers, but only a select few who had the resources, knew about them and used them; not the multitude of MSMEs. 4 See The Philippine Economy: Development, Policies, and Challenges edited by Arsenio Balisacan and Hal Hill, Oxford University Press, 2003. Page 2 of 9
Yes, these trade agreements offered varied sources of raw materials and parts to Philippine industries so they could be competitive, but there was no visible support from government in the form of complementary policies and concrete programs. Indeed, with markedly improved economic performance in 2010 and 2011, we needed to sustain economic growth over the long haul to lift our people out of poverty, which necessarily includes negotiating more bilateral or regional trade agreements if we are to keep up with our competitors (Vietnam has dozens of bilateral FTAs 5, including with the European Union and the Transpacific Partnership Agreement). But our own domestic industries and MSMEs felt rudderless in the rough seas of globalization. II. It was clear that although the existing trade policies and agreements helped boost trade and investments the PJEPA especially with Japan - there was a need to truly align it with industry policy. But such an alignment would have to take place within a liberalized trading regime brought about by WTO agreement and commitments as well as our ASEAN FTAs. Moreover, for trade to become an effective tool for development the task of government had to go beyond policymaking and execution. Marketing and promoting the trade agreements became necessary to increase their use by, and relevance to, the business sector, especially the MSMEs. Ensuring that MSMEs benefit from trade policies will contribute to inclusive growth as well as build a political constituency for trade. In sum, we needed a Unified Industry and Trade Policy Strategy for Inclusive Growth. But, this would mean revisiting and reviving what became a bad word to the dominant economic thinking (or ideology, if you will): industrial policy. A New Industrial Policy In February of 2012, the DTI-BOI launched the Industry Development Program (IDP) to build industry competitiveness through industry roadmaps crafted and executed in partnership with the private sector. 5 Vietnam currently has 9 FTAs with the following: AFTA, AANZFTA, AIFTA, AJCEPA, ACFTA, AKFTA, Chile, Japan, and Korea. It is waiting for the EIF of its FTA with TPP, EU, and the Customs Union of Russia, Belarus, and Kazakhstan. Negotiations for an FTA with Hong Kong, EFTA, Israel and RCEP are also ongoing. Page 3 of 9
The new industrial policy is not about increasing protection or granting income tax holidays or imposing complex regulations against competitors to promote domestic industries. With globalization and evolution of global value chains as production models, these policy tools of the past had to be relegated to the dustbin of history. It is about a more pro-active government that acts as a facilitator and coordinator in addressing the most binding constraints to growth and innovation. A New Industrial Policy is driven by three major strategies: first, are the horizontal reform measures (those that affect industries in general) to address high cost of power, shipping, logistics, and weak infrastructure, streamlining complicated regulations to improve ease of doing business, and attracting more investments; second, are the vertical measures (or affects a particular sector) that address gaps in the supply chain, domestic market expansion to serve as platform for exports, Human Resource and Development (HRD) and skills training, MSME development, and innovation; and third, governance coordination mechanism, that serve as venues for coordinating and monitoring roadmap implementation. Since the launch of Industry Roadmap Project in 2012, we now have more than 40 industry competitive roadmaps that provide the state of the industry, vision, and goals for the next decade, with projections and plans that identify supply chain gaps and constraints. 6 Our Investments Priorities Plan (IPP) for 2014-2016 is designed to address the binding constraints to the growth and development of our industries. It also identifies needed government support- fiscal and non-fiscal to those sectors that have high potential for increasing productivity and generating more quality jobs for our people. 6 As of December 2015, 32 roadmaps have already been completed. These are: manufacturing, automotive, automotive parts, electric vehicles, aerospace, motorcycle, cement, cement tiles, mass housing, iron and steel, copper and copper products, electronics, furniture, paper, rubber products, biodiesel, natural health products, chemicals, petrochemicals, plastics, metalcasting, tool and die, IT-BPM, retirement, shipbuilding, IC design, health care services, printing, book publishing, processed fruits dried mango, processed shrimp/prawns and seaweeds/carrageenan. Fifteen roadmaps are under development. These are: coco coir, bamboo, jewelry, creative industries, mineral processing, footwear, garments, textiles, Christmas décor, gifts and housewares, processed fishery products, processed meat, chocolate confectioneries/tablea, condiments/mixes, and services. Page 4 of 9
Among the preferred activities listed in our IPP are: manufacturing, agribusiness and fishery, services, economic and low-cost housing, hospitals, energy, public infrastructure and logistics, and public-private partnership (PPP) projects. Because of these industry roadmaps, the government was able to put together and launch in 2013 the Manufacturing Resurgence Program. The MRP harnesses all government programs and projects such as physical infrastructure, research and development, testing facilities, technical skills training, marketing and promotions that would directly support manufacturing and coordinates their execution under the Industry Development Council with the leadership of the DTI and BOI. What are GVCs? Over the last decades, the global production landscape has witnessed significant changes with global value chains or GVCs becoming a dominant feature of international trade. GVCs entail the process of producing goods from raw materials to finished products being carried out wherever the necessary skills and materials are available at competitive cost and quality. With the emergence of GVCs, goods must now cross borders several times, first as inputs and then as final products. If you check the back of your Macbooks, Iphones, and Ipads, it does not say made in China; it states designed by Apple in California assembled in China from parts coming from Japan, Germany, France, Korea, etc. Most products are now actually Made in the World. The same is true for processed food and even for low-tech products like T-shirts whose production is also characterized by GVCs. Are we a part of the GVC phenomenon? Our goal in the CARS Program is to deepen our participation in the GVCs of automakers, right now we are the transmission hub of Toyota but we want to become a regional hub for a particular model in the future. For other industries, the Philippines supplies chocolate to Mars and mangoes to Costco. We also play a role in the electronics GVCs of MNCs like Texas Instruments, Amkor, Fujitsu Ten, Sunpower, Canon, Brother, Epson, Toshiba, Samsung, etc. IMI which started as an SME is now a MNC supplying to Bosch. In garments, Filipino manufacturers also play a role in the GVCs of large retail chains like Gap and Coach. Uniqlo is also eyeing the Philippines as a production site for its global retail network. Page 5 of 9
To succeed in international markets, countries must have both the capacity to import world class inputs and the capacity to export. In a GVC world, the view that exports are good and imports are bad and that market access is a concession in exchange for access to a partner s market is clearly self-defeating. Successful participation would depend on factors such as resource endowments, infrastructure, skilled labor, human capital, innovation, and other relevant domestic policies that our new industrial policy espouses. Both trade policy and complementary industrial policies are necessary for capturing value and upgrading within these value chains to ensure inclusive and sustainable growth and employment. CARS Program An excellent example of our new approach to industrial policy is the Comprehensive Automotive Resurgence Strategy (CARS) Program. CARS puts together various fiscal and non-fiscal incentives to boost the automotive industry with an eye on regional economic integration. The program is designed to reduce the Philippine automotive industry s cost handicap, relative to competitor car producing countries in the region, while at the same time increase its production level to a competitive scale. By providing automotive and auto parts makers with investment support to produce auto parts not currently manufactured in the Philippines, CARS aims to deliver the big push for the revitalization of the Philippine automotive and auto parts industries. Through CARS, we intend to become a full participant in the value chain of automotive manufacturing in the region. The resurgence of the Philippine automotive industry through the CARS Program is projected to generate 200,000 new jobs (most of them from MSMEs), bring in new investments worth US$ 1.2 billion, increase vehicle sales to US$ 9.2 billion and provide an additional 1.7% to GDP growth. With the new industry policy, and the CARS Program as an example, our trade policymakers and negotiators, knowing fully well of the government s priorities and industry situation and strategies, have the confidence and courage to negotiate free trade agreements. Page 6 of 9
International Trade Strategy On the international trade strategy, it was necessary to take steps that would enable Philippine businesses to take advantage of free trade agreements to create wealth and jobs as well as raise awareness and build a constituency for trade. To address the problem of low utilization of FTAs, we spearheaded a massive information campaign called Doing Business in Free Trade Areas (DBFTAs). We organized information and education seminars around the country about these FTAs. We brought along several key agencies with us, the Tariff Commission, the Bureau of Customs, and other government agencies and the embassies of our FTA partners. Since 2010, we have given 778 seminars around the country (about 155 a year or 13 sessions a month), reaching close to 90,000 participants. According to the ASEAN Secretariat monitoring reports, the Philippines had the largest improvements in FTA utilization in the region. If you go to General Santos, you will find a company that exports Pacific Salmon to Japan, Korea and other countries. The fresh salmon is imported from New Zealand duty free under the ASEAN-Australia-New Zealand Free Trade Agreement, processed and packaged in the Philippines, and exported to Japan and Korea also at duty free under ASEAN FTAs with these countries. In the Cordilleras, twenty-six coffee brands are currently being promoted. In 2013, 135 micro, small and medium enterprises were given assistance. Support given were in the form of equipment and packaging technology from DTI and DOST, as well as trainings in product branding and marketing to raise quality, standards and marketability of Cordillera coffee. The latter was done in coordination with external organizations such as the Japan International Cooperation Agency. At present, Cordillera coffee is being readied for export to Japan. 7 To deepen our knowledge and analysis of the impact of trade agreements on our economy, we organized a network of policy research institutions and individuals to provide us with commissioned studies. The Philippine Institute of Development Studies (PIDS) was tapped to lead this consortium composed of the University of the Philippines School of Economics, University of Asia and the Pacific, De La Salle University and others. 7 DTI Regional Profiles CAR. Page 7 of 9
We established a consultative mechanism that engaged regularly and proactively with stakeholders concerning our policy positions and negotiation strategy. We called this One Country, One Voice. And for government policy makers and negotiators, we intensified training and capacity building in partnership with development partners. In 2014, we were ready to take the bold step of conducting scoping exercises with the European Free Trade Association (EFTA) and European Union (EU) as part of Europe strategy. Now -two years later- we are about to conclude a trade agreement with EFTA and start formal negotiations with EU in the second quarter of this year. While negotiating with EFTA and EU, we also pursued successfully our application for Generalised Scheme of Preferences (GSP) plus status, which grants us duty free access to the EU market of 2/3 of their product tariff lines, that's 6274 tariff lines. Already we have seen about 27% increase of our exports to EU. We expect about 200,000 jobs from GSP plus. IV. What else needs to be done to help ensure that trade contributes to inclusive growth? Our thrust is to put the interests of MSMEs front and center of trade policymaking and execution. Rather than an afterthought, MSMES must be the primary target of trade opportunities. Trade Facilitation Trade facilitation is on top of our trade policy strategy and advocacy. Our trade policy includes advocating for simpler customs rules and regulations, more transparency in government work, less red tape and primary consideration of MSMEs. In fact, last year when we hosted APEC, we pushed for the Boracay Action Agenda to Globalize MSMEs. Adopted by the 21 member economies of APEC, the bora agenda includes measures for transparency of customs rules and processes, an APEC trade repository, simplification and waivers of ROO procedures, promoting e-commerce platforms, and other concrete reforms to enable MSMEs to participate in International trade. Page 8 of 9
In the same spirit and thrust, the government approved the WTO Trade Facilitation Agreement, seeing its potential to reduce the costs of trading by more than 15% with the implementation of similar measures and more agreed to by APEC members. 8 We are also a strong advocate of MSMEs in ASEAN, playing an instrumental role in including their interests in AEC post 2015. E-commerce A game changer for MSMEs is e-commerce. A trading platform like Alibaba enabled millions of MSMEs to engage in trade, thus lifting hundreds millions of people out of poverty in China. Domestically, we launched the e commerce roadmap last month to build the capacities of MSMEs for e commerce trade. Our goals are: to contribute 25 percent to our Gross Domestic Product (GDP) by 2020; to unlock the doors to a virtual market of approximately 3.37 billion internet users worldwide, 1.62 billion in Asia, and 47.13 million in the Philippines; and finally to engage 100,000 MSMEs by 2020. V. We have laid a solid foundation to make trade relevant to development, and particularly to inclusive growth. The fundamental element and principles are in place: a trade policy agenda aligned with industry policy and MSME priorities; a strong collaborative partnership with the private sector and stakeholders through the industry Roadmaps and consultative mechanisms; a sustained outreach information and education program about trade agreements to empower MSMEs to participate in trade; a deliberate and conscious effort to put MSMEs front and center of our policymaking, and a more confident and courageous trade policy. There s still lot of work to be done, but now, we can confidently say that we do have a Unified Industry and Trade Policy for Inclusive Growth. - END - 8 WTO Trade Facilitation Agreement. https://www.wto.org/english/thewto_e/20y_e/wto_tradefacilitation_e.pdf Page 9 of 9