PRESS RELEASE: “Two Elephants at War: Will We Be Trampled?”

The Ayala-UPSE Economic Forum entitled, “Two Elephants at War: Will We Be Trampled?” was held last May 7 at the UP School of Economics Auditorium, UP Campus, Diliman, Quezon City.

Dr. Maria Socorro Gochoco-Bautista, Professor at the UPSE, presented findings from her joint research with Dr. Ma. Joy Abrenica, Professor at the UPSE, and Ricardo Rafael S. Guzman, MA candidate at the UPSE, on the potential effects of the US-China trade war on the Philippines. Dr. Fukunari Kimura, Chief Economist of the Economic Research and Institute for ASEAN and East Asia (ERIA) and Professor of Economics at Keio University in Tokyo, provided his remarks and comments on the presentation. Meanwhile, Dr. Ceferino Rodolfo, Undersecretary at the Department of Trade and Industry (DTI), provided inputs on the country’s trade and industrialization policy.

The study presented by Dr. Gochoco-Bautista examined the potential effects of the “trade war” between the United States and China. Using a Ricardian, multi-sector, multi-country model due to Caliendo and Parro (2014), simulations were conducted on the effect of changes in tariffs on welfare effects, measured as the sum of volume of trade and terms of trade effects on the Philippines under different scenarios. These scenarios include: (1) unilateral tariff imposition by the US, (2) retaliatory actions by China and other countries, which is the current impasse, and (3) a future scenario wherein the US raises tariffs on certain goods from 10% to 25% and other countries retaliate.

The results show net negative effects on the Philippines in all scenarios simulated. The Philippines’ volume of trade declines by a large amount and drives the negative net welfare effect even as the Philippines’ terms of trade also deteriorate. The large decline in the volume of trade is largely due to the contribution of the US in reducing global trade, reflecting the large country effect of US demand following tariff increases. The Philippines’ main export sectors, namely, electrical equipment, food products, and motor vehicles contributing the most to the decline in the volume of trade. The negative welfare effect for the Philippines is larger in magnitude than that experienced under any scenario by the US but is smaller than that suffered by China. The same is true in the case of other developing countries including those in ASEAN with the exception of Singapore. In terms of changes in the direction of trade, the Philippines’ share of imports from China increases while that from the US declines., as the price of Philippine imports from the US exhibits a large increase. The share of Philippine exports going to the US increases while that to China falls, as the decline in Philippine export prices to the US is larger than the decline in Philippine export prices to China. It does not appear likely that the Philippines will be the likely supplier of US imports due to trade redirection as it does not appear to have a comparative advantage in its main exports—while the price of Philippine exports exhibit a large decline, its volume of trade also declines, not compatible with a shift in sourcing of US imports from the Philippines a result of tariffs on US imports from China. The Philippines will not likely be drawn to trade more with its ASEAN neighbors either, as the share of exports to and imports from ASEAN is predicted to fall slightly as a result of the trade war.

Developing countries such as the Philippines are therefore not spared from the deleterious effects of the trade war, which may even be larger, in relative terms, than those experienced by at least one of the protagonists. Negotiating tariff concessions with a view of improving access to markets will not be sufficient to shield the Philippines from adverse welfare effects, even in the case of a limited trade war, given the global decline in trade volumes, creating adverse welfare effects for everyone. These results provide impetus for small countries to collectively try to mediate the tussle.

Dr. Kimura echoed these sentiments, noting that the study provided a much more realistic depiction vital in understanding the issue. First, the results and underlying assumptions were reasonable, based on comparisons with other trade models. Second, in the midst of the trade war, global value chains may not only carry negative trade effects on net, but also result in global investment slowdown as expansion plans of firms engaged in international production networks succumb to heightened uncertainty. He warned that further policy uncertainty, such as taking on sides in the conflict, could only worsen negative investment shocks.

Dr. Kimura went on to discuss the various ways through which the rule-based trading regime of the World Trade Organization (WTO) is under attack, why multilateralism should be prioritized while fostering regional trading arrangements, and future prospects as regards continued anti-trade policies even if the trade war is resolved. He emphasized that East Asia has long been benefiting economically from the WTO’s rule-based multilateral trading regime, particularly by attracting investments linked to international production networks. It is therefore to the benefit of the countries in the region that a proactive stance be taken in preventing the weakening of the rule-based trading regime.

Usec. Rodolfo presented the government’s trade strategy, emphasizing that this is driven by the country’s industrialization policy. The government aims to deepen and expand local value-chains by banking on the growing domestic market, both in terms of population and income. Trade policy will focus on regional integration efforts such as the lowering of tariffs and trade facilitation through the Regional Comprehensive Economic Partnership (RCEP) with its ASEAN neighbors. The country is also eyeing participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Both RCEP and CPTPP will support the country’s participation in global value chains. Greatest local value addition will center on basic industries with existing deep capabilities, and those with wide networks of supplying industries. These include areas covered by the government’s investment priorities plan (IPP) and infrastructure programs.

In the context of the trade war, the government aims to widen access to the major markets, hence the drive for Generalized System of Preferences (GSPs) and bilateral free trade agreements (FTAs), as well as more collaborative and cooperation-based platforms such as bilateral joint economic committees (JECs). On the multilateral front, the country aims to actively monitor and ensure compliance of key trading partners with WTO rules, and make use of available remedies in the WTO if warranted.

The trade policies shared by Usec. Rodolfo find resonance with the research findings presented by Dr. Gochoco-Bautista, as well as the insights shared by Dr. Kimura. The forum made it clear that a small developing economy such as the Philippines, which is engaged in world trade and reliant on investment flows, will not be exempt from the effects of the trade war. These will be, on balance, negative. Multilateralism remains the first-best policy even a small country should promote in the midst of the trade tussle. Other avenues such as regional trade agreements remain stopgap measures in the face of still weakening multilateralism, providing some sort of anchor for trade and investment in a globalized world.