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Philippines INTERNATIONAL ECONOMIC RELATIONS
International Trade
At independence in 1946, the Philippines was an agricultural
nation tied closely to its erstwhile colonizer, the United
States. This was most clearly observed in trade relations between
the two countries. In 1950 the value of the Philippines' ten
principal exports--all but one being agricultural or mineral
products in raw or minimally processed form--added up to 85
percent of the country's exports. For the first twenty-five years
of independence, the structure of export trade remained
relatively constant.
The direction of trade, however, did not remain constant. In
1949, 80 percent of total Philippine trade was with the United
States. Thereafter, the United States portion declined as that of
Japan rose. In 1970 the two countries' share was approximately 40
percent each, the United States slightly more, and Japan slightly
less. The pattern of import trade was similar, if not as
concentrated. The United States share of Philippine imports
declined more rapidly than Japan's share rose, so that by 1970
the two countries accounted for about 60 percent of total
Philippine imports. After 1970 Philippine exporters began to find
new markets, and on the import side the dramatic increases in
petroleum prices shifted shares in value terms, if not in volume.
In 1988 the United States accounted for 27 percent of total
Philippine trade, Japan for 19 percent.
At the time of independence and as a requirement for
receiving war reconstruction assistance from the United States,
the Philippine government agreed to a number of items that, in
effect, kept the Philippines closely linked to the United States
economy and protected American business interests in the
Philippines. Manila promised not to change its (overvalued)
exchange rate from the prewar parity of P2 to the dollar, or to
impose tariffs on imports from the United States without the
consent of the president of the United States. By 1949 the
situation had become untenable. Imports greatly surpassed the sum
of exports and the inflow of dollar aid, and a regime of import
and foreign-exchange controls was initiated, which remained in
place until the early 1960s.
The controls initially reduced the inflow of goods
dramatically. Between 1949 and 1950, imports fell by almost 40
percent to US$342 million and surpassed the 1949 level in only
one year during the 1950s. Being constrained, imports of goods
and nonfactor services as a proportion of GNP declined during the
1950s, ending the decade at 10.6 percent, about the same
percentage as that of exports. By the late 1950s, however,
exchange controls had begun to lose their effectiveness as most
available foreign exchange was committed for required imports. A
tariff law was passed in 1957, and, from 1960 to early 1962,
import and exchange controls were phased out. Exports and imports
increased rapidly. By 1965 the import to GNP ratio was more than
17 percent. Another acceleration of imports occurred in the early
1970s, this time raising the import to GNP ratio to around 25
percent, the level at which it remained into the 1990s. Imports
in the 1970s were increasingly being financed by external debt
rather than by exports.
The composition of imports evolved after independence as
industrial development occurred and commercial policy was
modified. In 1949, about 37 percent of imports were consumer
goods. This proportion declined to around 20 percent during the
exchange-and-import control period of the 1950s. By the late
1960s, consumer imports had been largely replaced by domestic
production. Imports of machinery and equipment increased,
however, as the country engaged in industrialization, from around
10 percent in the early 1950s to double that by the mid-1960s. As
a result of the surge in petroleum prices in the 1970s, the
import share of both consumer and capital goods fell somewhat,
but their relative magnitudes remained the same.
No matter the trade regime, the Philippines had difficulty in
generating sufficient exports to pay for its imports. In the
forty years from 1950 through 1990, the trade balance was
positive in only two years: 1963 and 1973. For a few years after
major devaluations in 1962 and 1970, the current account was in
surplus, but then it too turned negative. Excessive imports
remained a problem in the late 1980s. Between 1986 and 1989, the
negative trade balance increased tenfold from US$202 million to
US$2.6 billion (see
table 13, Appendix).
In 1990 weaker world prices for Philippine exports, higher
production costs, and a slowdown in the economies of the
Philippines' major trading partners restrained export growth to
only slightly more than 4 percent. Increasing petroleum prices
and heavy importation of capital goods, including
power-generating equipment, helped push imports up almost 17
percent, resulting in a 50 percent jump in the trade deficit to
more than US$4 billion. Reducing the drain on foreign exchange
has became a major government priority.
A number of factors contributed to the rather dismal trade
history of the Philippines. The country's
terms of trade (see Glossary)
have fallen for most of the period since 1950, so that
in the late 1980s, a given quantity of exports could buy only 55
percent of the volume of imports that it could buy in the early
1950s. A second factor was the persistent overvaluation of the
exchange rate. The peso was devalued a number of times falling
from a pre-independence value of P2 to the dollar to P28 in May
1990. The adjustments, however, had not stimulated exports or
curtailed imports sufficiently to bring the two in line with one
another.
A third consideration was the country's trade and industrial
policies, including tariff protection and investment incentives.
Many economists have argued that these policies favorably
affected import-substitution industries to the detriment of
export industries. In the 1970s, the implementation of an export-
incentives program and the opening of an export-processing zone
at Mariveles on the Bataan Peninsula reduced the biases somewhat.
The export of manufactures (e.g., electronic components,
garments, handicrafts, chemicals, furniture, and footwear)
increased rapidly. Additional export-processing zones were
constructed in Baguio City and on Mactan Island near Cebu City.
During the 1970s and early 1980s, nontraditional exports (i.e.,
commodities not among the ten largest traditional exports) grew
at a rate twice that of total exports. Their share of total
exports increased from 8.3 percent in 1970 to 61.7 percent in
1985. At the same time that nontraditional exports were booming,
falling raw material prices adversely affected the value of
traditional exports.
In 1988 the value of nontraditional exports was US$5.4
billion, 75 percent of the total. The most important, electrical
and electronic equipment and garments, earned US$1.5 billion and
US$1.3 billion, respectively. Both of these product groups,
however, had high import content. Domestic value added was no
more than 20 percent of the export value of electronic components
and probably no more than twice that in the garment industry.
Another rapidly growing export item was seafood, particularly
shrimps and prawns, which earned US$307 million in 1988.
The World Bank and the IMF as well as many Philippine
economists had long advocated reduction of the level of tariff
protection and elimination of import controls. Those in the
business community who were engaged in import-substitution
manufacturing activities, however, opposed reductions. They
feared that they could not successfully compete if tariff
barriers were lowered.
In the early 1980s, the Philippine government reached
agreement with the World Bank to reduce tariffs by about
one-third and to lift import restrictions on some 3,000 items
over a five- to six-year period. The bank, in turn, provided the
Philippines with a financial sector loan of US$150 million and a
structural adjustment loan for US$200 million, to provide
balance-of-payments relief while the tariff wall was reduced.
Approximately two-thirds of the changes had been enacted when the
program ground to a halt in the wake of the economic and
political crisis that followed the August 1983 assassination of
former Senator Benigno Aquino.
In an October 1986 accord with the IMF, the Aquino government
agreed to liberalize import controls and to eliminate
quantitative barriers on 1,232 products by the end of 1986. The
target was accomplished for all but 303 products, of which 180
were intermediate and capital goods. Agreement was reached to
extend the deadline until May 1988 on those products. The
liberalizing impact was reduced in some cases, however, by
tariffs being erected as quantitative controls came down.
A tariff revision scheme was put forth again in June 1990 by
Secretary of Finance Jesus Estanislao. After an intracabinet
struggle, Aquino signed Executive Order 413 on July 19, 1990,
implementing the policy. The tariff structure was to be
simplified by reducing the number of rates to four, ranging from
3 percent to 30 percent. However, in August 1990, business groups
successfully persuaded Aquino to delay the tariff reform package
for six months.
Data as of June 1991
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