Amid growing global protectionism worldwide, the Senate mechanically ratified yesterday the Republic of Korea-Philippines Free Trade Agreement (FTA). This continues a bad policy habit that started with the country’s first trade agreement in 1993, accelerated with the World Trade Organization (WTO) since 1995, and which has already produced 10 other bilateral and regional FTAs.
The new deal is not just oblivious to growing protectionism led by the United States (US) and China which are already among the most advanced industrial powers. It is also blind to how over 30 years of FTAs and 30 years of promises of competitiveness and development have instead resulted in manufacturing falling to its smallest share of the economy in 75 years and agriculture to its smallest in the country’s history. Trade deficits are also at historic highs, whether by value or measured as a share of gross domestic product (GDP).
For Korea
Old globalization habits die hard. It’s ironic that the Marcos Jr administration imagines that the economy will develop by entering into an FTA with South Korea whose industrial take-off in the 1960s and 1970s was spearheaded by heavy protection of then nascent or non-existent steel, shipbuilding, auto, electronics and chemicals industries. South Korea’s world class industries today were built on protectionist foundations – reason enough for the Philippine government and our economic managers to radically rethink the country’s obsolete free market globalization policies.
Free trade will always benefit the strong or at least those who are taking decisive efforts to overcome their weakness. The proposed FTA will disproportionately benefit South Korea whose industries have an overwhelming competitive advantage over the Philippines.
We might see increased exports of agricultural products like bananas, pineapples and other fruits to South Korea but the overall benefit of this is limited because these products don’t really have significant value addition to the Philippine economy. Increased agricultural products also don’t make the economy more productive as increased Filipino-made industrial exports would.
We might also see increased investments to the extent that the removal of tariffs on industrial goods incentivizes South Korean firms to deepen segments of their regional production lines in the country. South Korean investors will benefit from our cheap labor, generous incentives for locators, and subsidized infrastructure. This is again however of limited gain because import-dependent export-oriented foreign investment enclaves historically have low value addition to the Philippine economy.
Such investments have to be more embedded in the local economy to contribute to broader national industrial development. For this to happen there has to be much more significant protection and support for Filipino industrialization, like South Korea did for their fledgling industries in the 1960s and 1970s.
Unfortunately, the standard FTA template has prohibitions on performance requirements on foreign investment which are precisely what are needed to ensure contributions to long-term domestic industrial development. In contrast, South Korea heavily used joint ventures and regulations for technology transfer, local content, trade balancing and others to ensure long-term benefits for its economy.
Our economic managers really have to be more discriminating in assessing the quality and impact of foreign investment. Aggregate investment figures or immediate jobs and exports generated are actually crude indicators. It would be more meaningful to look at contributions to improving domestic science and technology, to increasing the number of Filipino enterprises producing goods with high technology content, and to expanding the links among local enterprises.
PH last
The Marcos Jr administration’s entry into the FTA without a real strategy for national industrialization will be a policy step backward. Taken alongside the country’s other FTAs, it further restricts our industrial policy space. They will stop any small, medium or even large Filipino industrial enterprises from emerging.
The transformation of the Philippines to a modern industrial economy starts with the government explicitly adopting a policy of Filipino industrialization. This means choosing from the complete menu of policy measures needed to support Filipino industry spanning trade protection, industrial financing, fiscal incentives, research and development support, export subsidies, government procurement, state-owned enterprises and FDI performance requirements. There’s something wrong when it’s foreign locators that benefit the most from government subsidies and support.
As with FTAs in general, the proposed FTA with South Korea is merely a tool and can only benefit the Philippines if there are also robust complementary measures according to a comprehensive long-term strategy for national industrialization. Without strong industrial policies, any seeming gains for instance from some uptick in agricultural exports will in the grand scheme of things be marginal and limited.
The Philippines and South Korea actually had a trade deal as early as in 1961 with provisions on non-discrimination and even for preferential treatment. South Korea has become an industrial powerhouse since then while the Philippines has the third smallest manufacturing sector in Southeast Asia, measured as its share of the economy.
The most important policy difference is that South Korea since then implemented decades of protectionist industrial policy, while the Philippines since then implemented decades of free market globalization and reckless liberalization.
Filipino first
It’s long overdue for the government to be more honest and candid that the last three decades of 10 FTAs aside from many WTO agreements did not benefit the country. Instead, it has ratified its 11th FTA and is studying entering 12 more.
Not many know that the highly-engineered K-pop juggernaut of today is built on protectionist foundations. In the late 1990s, the Korean Ministry of Culture set up a department focused on K-pop which directed millions of dollars in financial, facilities, training and other support for the industry as well as regulated the entertainment sector to nurture local talent.
Filipino girl group BINI is at least unafraid to go into battle with music and manner that includes distinctly Filipino elements. In contrast, all the Marcos Jr government and its unashamedly neoliberal economic team can do is blindly repeat obsolete globalization arguments, keep opening up the economy, and gaslight the people into thinking that our competitiveness is improving. ###
