Dr. Yap is president, while Dr. Medalla and Dr. Aldaba are senior research fellows of the Philippine Institute for Development Studies (PIDS). This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, October 29, 2007 edition, pages S1/4 and S1/5.

While the World Trade Organization’s (WTO’s) multilateral negotiations have come to a standstill, bilateral and regional agreements have emerged, as both developed and underdeveloped countries pursue efforts to deepen economic integration. The spread of these trade agreements is creating a new international economic order where the world is being integrated into a single economic entity. As the Philippines attempts to participate in these efforts, do we turn away from our first economic partnership with Japan?

Studies show that the proposed Japan-Philippines Economic Partnership Agreement (JPEPA) would lead to a positive impact on our gross domestic product (GDP) ranging from 0.1 to 3%. Declining prices and rising incomes will reduce poverty with more than 200,000 persons moving up the poverty line, even under very limiting assumptions. In terms of market concessions, almost 95% of Philippine industrial and agricultural exports will face zero duties immediately from the implementation date. In industrial goods there will be immediate tariff elimination on almost all products particularly electrical and electronic appliances and their parts, auto parts, textiles and apparel. These industries are characterized by production networks where production processes are fragmented into stages and located in different countries, resulting in huge intra-industry trade. Through JPEPA, our industries can benefit from Japan’s globalizing corporate activities and participate in their international production networks.

In the automotive industry, for instance, the development of the auto parts sector is necessary to strengthen our domestic auto assemblers. Currently our auto parts sector which is largely composed of small and medium enterprises (SMEs) is weak and underdeveloped due to lack of capital and technology. As a result, assemblers must import 90% of their inputs, which makes them uncompetitive. Through Japanese foreign direct investment (FDI) inflows to the parts sector, technology can be transferred via joint venture activities. JPEPA can boost the growth and competitiveness of both parts makers and assemblers

In agriculture, several products will benefit from either immediate or gradual elimination of tariffs or the implementation of tariff rate quotas (TRQs) where in-quota tariffs could decline to zero. Products that will benefit include shrimps, crabs and prawns, bananas, pineapples, mangoes, cane molasses, chicken, and tuna—of which the Philippines is already a major exporter. The agriculture and fishery sector remains a sensitive issue for Japan, with certain products such as rice, wheat, milk and cream, beef, pork, herrings, sardines, mackerel and other fish being excluded from the JPEPA. Sugar, also sensitive for Japan, will be renegotiated four years after the agreement has been implemented. TRQ will be implemented on some agricultural items sensitive to Japan, such as small pineapples less than 900 grams, chicken meat, muscovado sugar and sausages.

JPEPA broke new ground with the inclusion for the first time of “movement of natural persons”, which would require changes in Japan’s immigration laws and tightly protected labor market. Japan’s agreements with Singapore, Mexico, Malaysia and Thailand did not get the same scope and level of access. Indonesia was able to secure the same privileges, partly because Indonesia is an energy supplier and energy security is important to Japan. Considering Japanese sensitivity in its labor policy, the Philippines got a good deal. The Japan Ministry of Health, Labor and Welfare announced that it would need up to a total of 1.56 million health workers by 2014. Given the Philippines’ competitiveness, it is expected to lead the deployment of nurses and caregivers to Japan. Without JPEPA this doo would have been closed to the Philippines.

Japan will also invest in training Filipinos in the Philippines and will accept more IT workers, mechanical engineers, and other professionals in Japan. This provision is of
paramount importance to us because it provides a venue for technology transfer and cooperation in human resource development to improve the competitiveness of our workers.

With more stability and certainty in the business environment, JPEPA would have a positive effect on FDI. Market liberalization, trade facilitation, more transparent investment rules, and enhanced cooperation under the JPEPA will reduce the cost of doing business, leading to an improved investment climate. Currently, investment leads show projected FDI inflows from Japan amounting to PhP365 billion, which can generate 211,000 jobs in various sectors. Tsuneishi Shipbuildiing announced that it would invest 22 billion yen in three years. Sumitomo Metal is conducting feasibility studies and intends to invest more than US$1 billion in a joint venture with Taganito Corporation. Toyota Motors also announced its investment plan of PhP5.6 billion. All these indicate high expectations for the Philippines, with JPEPA boosting this momentum and sending signals to Japanese investors to revalue the investment climate and opportunities in the Philippines.

In exchange for the goods concessions that Japan gave, the Philippines would lower its tariffs on steel and automotive products by 2010. Note that most of our industrial products already have low tariffs, with rates ranging from free to 3%. However, for sensitive sectors such as steel, TRQs will be imposed. For the automotive industry, gradual tariff will be pursued and for automotive products assembled in the country, no tariff reductions will be implemented, and negotiations will be held in 2009. For second-hand vehicles, the Philippines is allowed to impose import duties. Moreover, used vehicles are banned under EO (Executive Order) 156.

In services, the Philippines adopted a positive approach subject to standstill obligations requiring both contracting parties to maintain the status quo of the existing rules and regulations. These sectors include computer and related services; rental and leasing without operators relating to ships, energy distribution, telecommunication; advertising; mining services; commercial banking; educational services; hospital services; hotels; travel agencies; and maritime transport.

The industrial adjustment costs associated with the implementation of JPEPA are perceived to be low. Major business and labor groups have openly supported JPEPA. There are hardly any industries that would be negatively affected by the market opening, due to the complementarity of our trade. Prior to the JPEPA, close to 84% of our imports already come in at the 0-3% tariff range.

As regards costs to the bureaucracy, these will be minimal since many of the required reforms under the JPEPA are also the same reforms we are pursuing, even without JPEPA. The cooperation elements in JPEPA would buttress these efforts and complement the necessary capacity building. Cooperation initiatives would entail government counterpart funding, and these initiatives would be limited by our own domestic absorptive capacity. However, we could start small using a more focused approach, beginning with our priority areas for cooperation.

In terms of foregone revenues, the Tariff Commission estimate amounted to about Ph3.7-4.2 billion. Note, however, that this is expected to more than offset by the benefits and tax revenue gains from increased economic activity resulting from the partnership.

Over all, the perceived costs of JPEPA are minimal and clearly offset by the benefits arising from the increase in income, reduction in poverty and improved investment climate.