Tectonic shifts

When tectonic plates shift, the ground shakes. We saw these earth-shaking events twice this week.

The first one in Myanmar and the other in global trade after US President Donald Trump announced the broadest increase in tariffs.

Dubbed “discounted” reciprocal tariffs, which basically means “I will charge you the same rate you charge me,” the US will be applying a much higher tariff on goods entering their market.

This is unlike previous tariff threats that were applied on selected trading partners, particularly those with the highest trade surpluses with the US like China, Canada and Mexico.

This time, the tariff threat is applied to all trading partners, including the Philippines.

From a global perspective, the event is quite serious. Locally, we may not be pressing the panic button but outside our borders, the situation is dire.

Our ASEAN neighbors are very export-driven, while we are not, so with the increase in add-on charges (the tariffs) on all our goods when they reach US shores, we are likely to feel less GDP impact relative to them.

Having said that, there are three key second-round effects (meaning after the tariffs are in place) that can be expected.

Firstly, ASEAN is part of the global supply chain that will have to shift in response to the price shocks.

Our export businesses and the jobs in these industries may lose significant demand during this shift.

Secondly, Asia will have to find a replacement market for the supply that will be disrupted by the tariffs.

Supply will seek markets with low trade barriers and dump whatever excess capacity that is likely to be created by the trade policy.

The Philippines is a prime candidate for this, given our tariff commitments under ASEAN Free Trade. We may have to expect our imports to expand with super cheap products from Asia and other parts of the world. Some of the local industries will be facing stiff competition.

Thirdly, tariffs are expected to stoke inflation in the US. This means that the Federal Reserve will have to maintain a hawkish stance and an interest rate hikes (and not cuts) scenario is possible.

If the US Federal Reserve remains hawkish, then borrowing costs everywhere are likely to remain high as well.

Remember, the Bangko Sentral ng Pilipinas is still keeping an eye on the peso even if Philippine inflation is trending lower. Companies hoping to refinance maturing debt at lower rates will have to wait a bit longer. Possibly much longer.

There are other potential second (and third) round effects but because this is a serious and complex development, let us simplify and focus on assessing policy change.

We need to understand, though, that it is not all bad. There are also opportunities for the Philippines that may arise from the reciprocal tariffs, such as a transfer of some export capacity because we have a lower US tariff relative to our peers.

But there are also mixed effects such as a possible need to lower tariffs to meet US expectations. Hopefully, these are issues that can be highlighted in early discussions despite the distraction of the May elections.

Crazy is a usual description of the market with respect to the situation. While it may seem irrational, there is some argument for the decision to bring back the global trade order to a state with higher trade barriers. This is the topic for the second part of this series.