“With guarded optimism…”
This is how the Philippine government views the United States (US) government’s “Liberation Day” tariff rates of 17% on Philippine exports to the US – a “strategic opportunity” to further strengthen US-Philippine trade relations. This initial reaction is quite telling of the government’s stance of being consistently subordinated to the interests and demands of the US economy.
The Philippine government has taken a simplistic view of the tariff imposition, interpreting the country’s relatively lower tariff rate compared to its Southeast Asian neighbors as an economic opportunity. It hopes that US and other foreign firms will locate in the Philippines – rather than to China or neighboring countries – to take advantage of the comparatively lower US tariffs on exports from the Philippines.
The Marcos Jr administration is still mulling over its exact course of action. However, if the course it takes is anywhere in the direction of negotiating a free trade agreement (FTA) with zero tariffs between the US and the Philippines as already floated, this will serve the interests of the US instead of protecting the Filipino people. The 10 FTAs and various World Trade Organization (WTO) agreements the country entered into in the last 30 years have degraded domestic agriculture and worsened Filipino deindustrialization.
The Philippines has the second lowest US tariffs in the region after Singapore’s 10% tariff rate. Days after the initial pronouncement, Trump suspended the reciprocal tariff rates for 90 days – presumably until after hearing what the Philippines and other countries are willing to offer to avoid high US tariffs. For the moment, all countries except China are still subjected to a 10% baseline tariff. Average US tariffs on China, US’s biggest rival, now stand at 135% taking all US measures since 2018 into consideration.
The 90-day pause in the decision is no reason for the Philippines to be optimistic. Instead of using this to come up with a new strategy for the rapidly changing global economy, it is still looking outward for the country’s development. The government should look inwardly at the domestic economy and seriously consider how to strengthen local agriculture and Filipino industries. It is overdue and, if anything, more urgent than ever to reorient the country’s decades-old foreign capital-dependent, export-oriented and import-dependent economic framework. This has failed to deliver genuine broad-based prosperity and has only driven the national economy into deeper crises.
A lopsided, unequal relationship
Despite the declaration of nominal independence in 1946, the Philippine economy has remained closely tied to the US. The preferential treatment for American trade and investment with the Parity Amendment of the Constitution in 1946, Bell Trade Act of 1946, and Laurel-Langley Agreement of 1955 were the foundations of the Philippines’ neocolonial alignment with the US.
The Philippines and the US have signed more than 100 treaties, conventions, and agreements on military and economic strategic partnerships. In the area of trade, the 1989 bilateral Trade and Investment Framework Agreement (TIFA) established a framework for deepening relations between the two countries. The US dominates two major trade blocs that the Philippines is part of: the Asia-Pacific Economic Cooperation (APEC) and the WTO. More recently, the US launched the Indo-Pacific Economic Framework for Prosperity (IPEF) aimed at deepening economic cooperation across the region, although its prospects under Trump remain unclear.
US-PH trade has grown tremendously. Total trade, or the sum of exports and imports, has grown from US$532 million in 1962 to US$16.8 billion in 2020 to US$20.3 billion in 2024.
The US is the Philippine’s top export destination with exports valued at US$12.1 billion in 2024. The majority of these are of electronic products, valued at US$6.4 billion. This is followed by ignition wiring sets and other wiring sets used in vehicles, aircrafts, and ships (US$755 million) and other manufactured goods (US$693 million). Coconut oil (US$559 million) is also a major commodity exported to the US.
On the other hand, the US only ranks fifth as a source of imports for the Philippines at US$8.2 billion in 2024. Reflecting the country’s role as a segment in global supply chains, the top import from the US was of electronic products (US$2.6 billion). The US is however also a major source of agricultural products including feeding stuff for animals (US$1.4 billion), cereals and cereal preparations (US$838 million), and other food and live animals (US$384 million).
With more exports to the US than imports from it, the Philippines consequently has a US$4 billion trade surplus with the US. From the perspective of the US, this is a trade deficit with the Philippines and is one of the premises for computing the 17% reciprocal tariff rate.
But how much of reported Philippine exports to the US are actually made by Filipinos? Electronic products make up the majority of exports to the US but how much is actually produced by Filipino firms?
The world electronics manufacturing market is worth US$1.7 trillion. However, the main contribution of the Philippines to this is as the location of foreign cogs in the industry’s global supply chains – specifically, the 482 foreign-owned electronics and semiconductors manufacturing businesses in the country’s export processing zones (EPZs) benefiting from generous tax incentives, duty-free imports, cheap labor and other privileges. The US wants to develop its semiconductor industry though so, to minimize disruptions to this, Trump’s reciprocal tariff order exempts semiconductor products.
What are the repercussions for the domestic economy of the US’s tariff hikes? In terms of first order effects, not all Philippine exports will be subject to the new tariffs because Trump’s reciprocal tariff order exempts semiconductors, automobiles and automotive parts, steel and aluminum and other products deemed important for its reindustrialization. The most affected will be minority Philippine export products to the US like textiles and apparel, coconut oil, fruits and vegetables, and other agricultural products.
But there are second order effects beyond this which no one can really know yet because this depends on what the final tariffs will be, how long they will be in place, the countermeasures other countries take, other foreign economic policy measures of the Trump administration, and many other factors. The tariff hikes cannot be looked at in a vacuum because the global economic disruptions underway will affect global growth, trade and investments, inflation and interest rates, and even overseas remittances.
Making a bad thing worse
The reaction of the Philippine government aggravates the impact of the Trump administration’s disruptive economic measures. The economic managers fail to grasp the global policy shifts underway and are being extremely short-sighted and mechanically textbook in their response.
The Marcos Jr government is being naive in its blind faith in free trade and defeatist in its eagerness to seal a deal with the US government. Its offering to lower Philippine tariffs even more is counterproductive because the country already has among the lowest tariffs in the world. The 6% simple Most Favored Nation (MFN) applied average tariff rate – 9.6% for agricultural products and 5.5% for non-agricultural products – is lower than the 8.7% global average in 2024. These low tariffs are among the reasons for Philippine manufacturing falling to its smallest share of gross domestic product (GDP) in 75 years and agriculture to its smallest in the country’s history.
The Philippines is already the ninth largest market of US agricultural exports and other related products. The US is meanwhile the single largest country source of our agricultural imports, with a value of US$3.6 billion in 2023. Lowering tariffs on US products will just flood the local market with cheap imports of US food products, which will hurt local farmers and food manufacturers.
The Trump administration is starting a trade war yet instead of preparing and strengthening the local economy, the administration is bending over backwards to give the US the open markets that it wants while it hypocritically closes itself off.
The Marcos Jr administration is recklessly joining a race-to-the-bottom just to get US approval – starting with offering lower tariff rates but also with cheaper wages, repressed labor, incentives for foreign firms, and other pro-corporate but anti-development measures. Yet domestic industrialization cannot rely on US or other foreign locators who will just move their supply chains according to their profitability with little regard for Philippine national development.
The economic managers are oblivious to how, for instance, billions of dollars in foreign investment in the manufacturing sector especially for electronics exports has not developed a domestic industrial base. If anything, the share of manufacturing industry to GDP has fallen to just 17.6% which is the lowest since 1949. Already shrinking production is doomed to shrink and sink further as the US and other countries reorganize their global supply chains.
End of free market globalization
The global trend of growing protectionism started long before the Trump 2.0 administration’s sweeping tariff hikes. Countries around the world have passed 15,000 protectionist measures since 2017, led in large part by the US and China. This is a 441% increase in the implementation of protectionist policies.
The US alone had a 175% increase in such measures, followed by China with a 59% increase. Other major economies such as the United Kingdom, Japan, and Germany also contributed to this global shift. On the other hand, there were only 4,000 liberalizing measures recorded in the same period. These developments are clear signs of what lies ahead for the global capitalist economy.
The Philippines is among the countries still dogmatically insisting on liberalization. Consecutive governments until the current Marcos Jr administration stubbornly keep focusing on fast-tracking laws promoting more openness to foreign direct investment (FDI).
Yet global trade and investment have been weakening since the 2008-2009 global financial crisis, long before the Trump 2.0 policy shocks. Measured by their share in global GDP, annual global FDI inflows have been on a downward trend for the last 15 years. Likewise measured by their share in global GDP, world trade in goods and services has been basically stagnant for the last 15 years. These are just some of the manifestations of the worsening global economic crisis after decades of neoliberal economic policies.
Trump’s actions may seem absurd, or impulsive, yet they reflect a broader strategy by the world’s largest and most powerful economy to reshape the global economic order to surmount its crisis and reassert its hegemony.
The Philippines cannot control what other countries do but can take measures to make itself stronger and more independent. Amid uncontrollable global upheavals, it is urgent to shift to domestic-led and -oriented development. This can only come from creating a virtuous cycle of Filipino industrialization astride increased jobs and family incomes, initially spurred by agricultural and rural development.
Now is the moment for the Philippine government to start down the path of national industrialization and economic development. The country has the capacity to build a sovereign and self-reliant economy that will uphold people’s rights and welfare. This is where the Marcos Jr administration should place its faith and optimism.
