Crossroads (Toward Philippine economic and social progress)
Philippine Star, 15 May 2019


The big economic news today is the failure of the US and China to end the trade war with an agreement. While initially there was widespread optimism about a deal in the works last week, a rude awakening came.

Assessing the sudden turn in negotiating the issues, President Trump warned that he would raise tariffs on Chinese imports from 10 percent to 25 percent if a deal did not go through.

No agreement, not yet. On Friday last week, the tariff increases threatened by Trump were put into effect, signaling the failure of an agreement. On Monday this week, China responded with counter-measures.

 In spite of the current escalation of the trade war, the failure to conclude a deal last week still ended on a conciliatory tone.

President Trump emphasized that President Xi of China and he have a good relationship even as he ordered more hearings on a further increase of punitive tariffs on a wider range of goods amounting to $300 billion from China.

Both sides of the negotiation have, thus, made clear that there is no breakdown in talks, but that continuing negotiations are taking place.

How long this will take until they make a great bargain is not clear. It could mean next month, or another year of uncertainty.

Critical issues. The US demands concrete legal actions on the protection of intellectual property and remedies concerning forced technology transfers to foreign investors and subsidies to state enterprises from China.

The US wants commitments in the form of specific laws to be adopted by China. For its part, China refuses to accept such approaches as infringing on its sovereignty and dignity. The promises of corrective actions through regulations, according to the US side, have not produced satisfactory outcomes in the past.

Thus, the two sides are still locked in horns and not yet ready to make a grand bargain.

Impact on emerging economies. While the impasse continues, the US-China trade war has brought greater turbulence to world trade. But it has also brought about changes and new foreign investments move to other emerging economies.

This has come about as a result of a number of converging forces. The rise of wages in China due to its rapid growth has made other countries with low cost labor also more competitive. China’s economy is growing larger and more sophisticated.

But the trade war contributes to the acceleration of regional industrialization in East Asia and elsewhere. Investment flows are facilitated by the continued trade war impasse.

It makes sense for foreign investments located in China (whether US, Japanese, Korean, European, Taiwanese, and even Chinese.) to look for alternative production bases as long as they can protect their access to the US market. This would mean simply shifting their “made in China” to “made in [another country].”

Reports of transfers and plans of transfers of location of factories in China to other country sites are rising. Thus, some countries are beginning to reap benefits as new sources of production for traded goods.

Among the countries that have been making strides in this direction are: India, Mexico, and, in Southeast Asia, Indonesia, Vietnam, Cambodia, and Thailand.

Any Philippine benefits? The Philippine economy is currently on a high growth path. This is the result of continued good macro fundamentals and the high expectations from public investments that are taking place in infrastructure.

However, it could further benefit from the conditions that are shaking industries and investments in the region. If only labor market policies had been more flexible in our country, we would make similar gains that Vietnam, Indonesia, and Cambodia are accruing.

It is poor timing that we are still engaged in the debate on the restructuring of the corporate tax system. This is the foundation for the country’s investment incentives system.

Congress still has to finally work on this aspect of the corporate tax reform program of the government. This debate has already held back the inflow of foreign direct investments at a time of high movements of capital in our region.

Finally, greater certainty must be placed on the overall foreign investment attraction program by the acting on amendment of the restrictive economic provisions in the constitution. These constitutional provisions have created a narrow path to the program of attracting foreign direct investments into the country.

Direct hits on US and Chinese economic interests. Two days after the new, higher punitive Trump tariffs from 10 percent to 25 percent of imports from China, the Chinese government responded with their own measures.

China has announced plans to set tariffs ranging from five percent to 25 percent on imports from the US amounting to around $60 billion, to take effect on June 1.

The escalating costs for both the US and China are clear. Higher costs are imposed on both economies, and the intensified trade war could only hurt them further.

Though the punitive tariffs are imposed on incoming goods at the importing country’s customs, the exporting countries suffer because their products are now higher in costs at the importing countries through tariffs.

Although the importer pays the tariffs, such costs could hurt the seller (that is, the exporting country producer). But such costs could also be passed on to the final buyers, who are the consumers.

In short, both exporting and importing countries are losers through the higher cost burdens they assume. How significant that burden would be depends on the nature of demand and supply conditions.

Aside from the immediate costs, there are collateral influences on the rest of the economies of both countries. They disturb (1) the volume and volatility of transactions in the stock markets; (2) capital flows and investments; (3) domestic politics; and (4) domestic growth of output.