BSP: Economy will weather trade row

BSP: Economy will weather trade row | Daily Tribune

The country is in a favorable economic position despite the global trade disruptions, particularly the US reciprocal tariffs under the Trump administration.

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. highlighted low inflation as a policy lever. The notably low inflation rate of 1.4 percent in April 2025, well within the BSP’s target range of two percent to four percent provides the BSP with significant flexibility to adjust monetary policy, specifically by lowering interest rates.

Lower rates reduce borrowing costs, which can stimulate investment, consumption and overall economic growth.

This is particularly critical in a global environment marked by trade shocks, as it allows the Philippines to cushion domestic economic activity against external pressures.

Low inflation is a rare advantage in times of global economic uncertainty. Many economies face inflationary pressures from supply chain disruptions or trade barriers, which limit the central banks’ ability to ease monetary policy without risking price stability.

Easing inflation positions it to pursue growth-oriented policies, such as cutting interest rates, without immediate concerns about overheating the economy. This could attract both domestic and foreign investment, particularly in sectors tied to global value chains.

BSP’s ability to lower interest rates reflects a stable macroeconomic environment, likely supported by prudent fiscal management, a resilient domestic market and favorable supply-side conditions such as stable food and energy prices.

However, the BSP said it must remain vigilant, as trade shocks could disrupt these conditions, potentially pushing up import costs and inflation in the future.

Trade shocks’ strong impact

Trade shocks, such as high and unpredictable tariffs proposed by the Trump administration, disrupt global trade patterns, increase costs and fragment supply chains. Unlike supply shocks, which may be temporary, like natural disasters or commodity price spikes, trade shocks can have long-lasting effects by reshaping trade relationships and eroding economic gains.

Tariffs, particularly the reciprocal type, raise the cost of imports and exports, disrupt established trade flows, and create uncertainty for businesses.

For a country like the Philippines, which relies heavily on exports and integration into global value chains, such shocks could reduce export competitiveness and disrupt foreign direct investment. Remolona’s warning that trade shocks can “erode decades of hard-won progress” points to the risk of losing gains in poverty reduction, industrial development and economic diversification.

The Philippines has made strides in integrating into global value chains, particularly in electronics, business process outsourcing (BPO) and manufacturing.

High tariffs from major trading partners, such as the US, however, could reduce demand for exports or increase input costs for industries that rely on imported materials.

The BSP’s emphasis on navigating these challenges suggests a proactive approach to mitigating risks through policy coordination.

Navigating reciprocal tariffs

A policy forum themed “Seizing the Shift: Navigating Trump’s Reciprocal Tariffs” reflected concerns about high and unpredictable tariffs, a policy associated with the Trump administration’s trade agenda. These tariffs aim to protect US industries but can disrupt global trade by increasing costs and prompting retaliatory measures from other countries.

US tariffs could accelerate the reconfiguration of global supply chains, prompting countries and companies to diversify their reliance away from specific markets.

For the Philippines, this presents both risks and opportunities. While reduced access to the US market could harm exporters, it may also encourage diversification into other markets such as ASEAN, China, or the EU.

The country benefits from a young, skilled, and English-speaking workforce, a strategic geographic location, and participation in trade agreements such as the Regional Comprehensive Economic Partnership (RCEP).

These advantages position the Philippines to attract investment in sectors like electronics, IT-BPM (business process management) and renewable energy.

Vulnerable domestic sectors include those heavily reliant on US markets, such as electronics (which account for about 60 percent of Philippine exports and garments).

High-potential sectors include IT-BPM, renewable energy, and agribusiness, which could benefit from diversification and technological advancements.

The forum emphasized the need for coordinated strategies to enhance the Philippines’ integration into global value chains.

Such could involve trade diversification, investment in infrastructure, and policies to boost competitiveness, such as reducing energy costs or streamlining regulations.

The focus on Trump’s tariffs highlights the Philippines’ vulnerability to US policy shifts, given that the US is a major trading partner accounting for approximately 15 percent of exports in recent years.

However, it also underscores an opportunity to pivot toward other markets and strengthen domestic resilience. The presence of government, industry, and academic stakeholders at the forum suggests a collaborative approach to crafting policies that balance short-term mitigation with long-term growth.

The forum’s emphasis on “strategic and coordinated policy responses” indicates a multi-pronged approach to addressing trade shocks.

The country’s ability to navigate global trade shocks is bolstered by its strong macroeconomic fundamentals.

Recent data suggests the Philippines has maintained robust growth, projected at 6 percent to 6.5 percent for 2025, driven by domestic consumption, remittances and investment.

Overseas Filipino workers contribute about 9 percent of gross domestic product (GDP), providing a stable source of foreign exchange and supporting domestic demand.