Expanding economic opportunities is a natural response to an entity’s self-preservation, one often leading to a search beyond domestic confines in cooperation with foreign players, or international trade, as it is called. Unplug the stabilizers a.k.a government intervention, it becomes a free trade agreement (FTA).
A modern update to the laissez-faire approach, an FTA allows economies to import and export goods and services with minimal tariffs or without.
This would easily translate into greater market access, which Department of Trade and Industry (DTI) Undersecretary Allan B. Gepty underscores as a must in today’s robust global economy.
“Free trade agreements are very important in maintaining our economic relations with various trading partners because, basically, through these free trade agreements, our stakeholders — particularly exporters and also our investors located here in the Philippines — will have access to bigger markets under a preferential arrangement,” Gepty said.
Through FTAs, manufacturers get to focus on increasing specialization in goods they are efficient at while consumers benefit from lower prices of imported goods, which further opens a wider variety of options to choose from due to reduced or eliminated tariff rates mandated by a preferential agreement.
As of late, the country has 10 FTAs, most of which are anchored on ASEAN partnerships, Gepty said.
Two are bilateral agreements with Japan via the Philippines-Japan Economic Partnership Agreement (PJEPA) and the PH-EFTA with the European Union (EU), consisting of Iceland, Liechtenstein, Norway and Switzerland, which has recently been revived after a seven-year delay.
The third is the Philippine-South Korea FTA, which awaits ratification.
Predictability, stability
In all areas of trade, access is valuable as it presents a vast array of opportunities, from information to socio-economic networks and opens endless possibilities. Access brings predictability and stability — into the market.
“When you talk about market access, it includes goods, services and investment. On the aspect of goods, this is the one that we are talking about or this is the one generally known by the general public so we export goods, we import goods under zero tariff or reduced tariff and it will be facilitated. The other component of market access is services. So in services, there are many sectors and sub-sectors wherein our professionals, our service suppliers, or even businesses, are allowed to provide services in other economies or other countries and the delivery of services can be in different modes that include delivering services from your country to another country or that you will go to other countries to also obtain their services,” Gepty expounded.
“And then of course we have the investments where we have to encourage and promote also investment so that’s for the market access,” he added.
To regulate and monitor business activities in FTAs, rules and disciplines come into play, which provides stability and predictability in the business, as well as protection against unfair trade practices.
Gepty asserted that “if you’re an investor if you see that a country has an FTA, your mindset is that ‘it’s okay to locate in that country because their set of rules are stable.”
“Meaning, even if there is a change in administration, they could not just simply change the rules because you have committed that in a treaty or international agreement.”
Mind the gap
Free trade talks between the European Free Trade Association (EFTA) and the Philippines officially started in 2016, right at the cusp of the Aquino administration’s turnover to its successor, former President Rodrigo Duterte.
Subsequent negotiations continued the following year, only to suffer a delay due to the suspension of dialogue in the midst of allegations of human rights issues and extrajudicial killings (EJK) in the conduct of the signature war on drugs.
Negotiations with EFTA only resumed last week, Gepty said, noting that it acts as the first round of talks as the coverage of the agreement “has been substantially changed already.”
Although the association did not conduct official communication regarding the cancellation of free trade talks, Gepty stressed that they remain in touch with the Philippines over the monitoring and maintenance of the latter’s European Union (EU) Generalized System of Preference Plus (EU GSP+).
The EU GSP+, according to DTI’s website, is “a special incentive arrangement for sustainable development and good governance in the form of zero duties.”
The unilateral preference imposes a tariff-free mandate on 6,274 products (66 percent) produced in Europe.
Since its application in 2014, the Philippines has seen favorable growth in the exportation sector made possible by the market access to the EU.
Statistics from 2020 show that of the 6.2 billion euros worth of total exports, items covered by GSP+ raked in 2.1 billion euros in revenue.
GSP+ preferences, on the other hand, were equivalent to 1.6 billion euros or 26 percent of total exports.
Gepty also shared that DTI reached out to the European Parliament and the European Council in Brussels, Belgium, last week during the PH-EFTA negotiations.
“We went to Brussels to engage with various business organizations in Europe, basically advocating or lobbying that we resume the FTA talks because we cannot just rely on the EU GSP plus, [which] is unilateral. And there are certain limits. Also, we want a more stable and predictable platform by which our stakeholders can engage with the EU because if we are disqualified from the EU GSP Plus, then you can just imagine the impact of our stakeholders or exporters availing of this preferential agreement in the EU market, so it’s a well-coordinated effort not just from the Department of Trade and Industry (DTI) but other agencies also,” the International Trade Group chief said.
Gepty, however, lamented the possibility of the country losing its beneficial status if it advances to an upper middle-income status by next year, as per current projections. It is effective only when a state maintains the said status for three consecutive years.
“The effect is that our exporters like our tuna industry, farmers, coconut producers, and garments industry exporters to the EU market, they will now be imposed positive tariff rates. So, the result is that their products will no longer be competitive. That’s why if you analyze it, this FTA with the EU is really important. We’re working on a very tight schedule or time frame because we have to make sure that before we are out of the EU GSP Plus as the country’s economic status is raised, the FTA is effective because if not then there will be a gap or a disruption in our trade.”
However, the Philippines’ encounter with FTAs — and its first development gap — can be traced to 1994, upon its accession into the World Trade Organization through The Marrakesh Agreement Establishing the World Trade Organization, replacing the General Agreement on Tariffs and Trade (GATT) of 1947.
“When we did that, there were many divergent (entities). Of course, for some reason, they would prepare a more inclusive economic policy where you really have to use the word ‘protectionist’ when it comes to your local industries, so foreign competition won’t come in. So, that’s one view,” Gepty explained.
The DTI undersecretary referred to the Doha Round of 2006, the long-dormant talks that fell apart over export competition, domestic support, and market access, affecting mostly the United States, the EU, Brazil, India, Australia, and Japan, countries collectively known as the G-6, a core group comprising the largest EU members.
Constitutional question
Gepty revealed that the Philippines, too, had a fair share of difficulties concerning its membership in the WTO, which was heavily debated then in public and the senate.
In the context of the Philippine-Japan Economic Partnership Agreement (PJEPA), Gepty recalled that it was initially intensely objected to, reaching a point where it was questioned in the Supreme Court.
“The decision of that only came out, if I’m not mistaken, this January. So, it took time to resolve that case. But at least it’s good to see that our FTA with Japan was declared constitutional by the Supreme Court,” he said.
This step comes in conflict with the Pro-Filipino stance of constitutional provisions such as in foreign ownership, in which a 60-40 equity is implemented under the Foreign Investment Act; 60 percent should be owned by a Filipino citizen whereas the 40 percent is designated to a foreign investor.
Enter an FTA, the dynamic is dictated by one principle: the Non-discriminatory Principle, which houses the National Treatment Principle and the Most-favored Nation Principle.
“Now when you enter into a free trade agreement, one principle is what you call the National Treatment. Basically, it says that if you grant a favor privilege advantage to your own national, then that favor privilege advantage must be unconditionally and immediately extended also to other nationalities, so there’s no discrimination. Now when you say Most-favored Nation is when you grant favor preference or advantage to one national — a foreign national,” Gepty explained.
In other words, the policies required by the agreement lean unconstitutional compared to the nationalistic nature of domestic ownership laws.
“The Supreme Court studied that very carefully and they correlated that also with the other provisions of the constitution. According to the Supreme Court, while it is true that there are many provisions under the constitution that are considered Pro-Filipino or favor a domestic industry, it doesn’t mean that our economic policy is closed or we have opted to be an isolationist when it comes to trade and investment because we remain, and there is a policy that we have to embrace — also open market.”
An enduring partnership
DTI announced their upcoming FTA closing with UAE this week for the Comprehensive Economic Partnership Agreement (CEPA), which is expected to come around by the end of the month or in the first week of November.
The CEPA was designed to increase the entry of export goods and services to the UAE, “generate more investments from UAE, and create more opportunities for professionals and service providers.” The bilateral agreement made its first progress last 2 December 2023 upon the signage of its Terms of Reference.
Gepty expressed that the FTA with UAE is an important deliverable that marks the celebration of the Philippines’ 50th anniversary with the oil giant as a longtime diplomatic partner.
“This is very important, and for our kababayans, the overseas Filipino workers in the UAE. We have many professionals who have placed a trail or have set a mark in UAE, practicing their profession. So we also want this FTA to provide more opportunities for them,” he said.
