Asia’s Next Tiger

posted by
on June 19, 2012

President Aquino’s anti-corruption program is just what the Philippines economy needs.

Once considered the most promising economy in Asia after Japan, the Philippines has fallen far behind Southeast Asia’s nimble, export-led economies. But things are finally looking up. Tired of being scorned as “the sick man of Asia,” President Benigno Aquino III asserts: The Philippines is now “open for real business.”

Judging by some very visible changes, Aquino, who has been in office for two years, isn’t engaging in wishful thinking. Manila’s luxury hotels are crawling with Asian, American, and European investors in search of opportunity. And the city’s skyline, a symbol of its past as a home to slow-moving domestic oligarchs, is now dotted with cranes. Foreign direct investment is on track to triple this year, while GDP growth is expected to rise from 3.7 percent last year to a respectable 5 percent in 2012. Karen Ward, a London-based analyst for HSBC bank, speculates that the Philippines, now the world’s 43rd largest economy, could be the 16th largest by 2050.

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Trade aficionados may be treated to some positive spin concerning the Trans-Pacific Partnership negotiations on the sidelines of the forthcoming G-20 Summit, which will be held in Los Cabos, Mexico on June 18-19. President Barack Obama and Mexico’s president, Felipe Calderon, seem to be ready to announce that Mexico will join the TPP talks. There is a possibility — not considered a probability, as this article went to press — that Canada and Japan would also be invited to join the negotiations. More likely, Obama will say that while both Tokyo and Ottawa are not quite ready to participate, they are making progress and he looks forward to welcoming them into the TPP talks as soon as they are ready, hopefully by the end of this year. The White House spinmeisters will portray whatever happens in Los Cabos as another illustration that the US continues to exercise leadership aimed at expanding trade flows in the fastest-growing part of the world. It is safe to predict that there will be repeated references to the exciting TPP success story from candidate Obama until the Nov. 6 presidential election.

[As this article went to press, all that seemed clear was that the White House was positioned to welcome the Mexicans into the TPP next week, or at least before Mexico’s presidential elections on July 1. Much thought in the administration seemed to be focused on how to explain the inevitable awkward questions as to why Canada, like Mexico a Nafta member, would be excluded. White House economic adviser Michael Froman was believed prepared to play a blame game, portraying the Canadians (and Japanese) as lacking the political will to negotiate a fast-moving, high-standard 21st century TPP deal. At a recent appearance before an audience of Washington insiders convened by the influential Center for Strategic and International Studies, Froman spoke of trade “tensions” with both Ottawa and Tokyo, but (unconvincingly) denied that any decision to keep them out had been made. A spokeswoman for U.S. Trade Representative Ron Kirk declined to comment. There there also seemed to be quite a bit of intense behind-the-scenes high-level jockeying going on this week, raising the possibility that Prime Minister Stephen Harper and Japanese PM Yoshihiko Noda were perhaps privately-but-firmly going to take Obama to the mat over their TPP accession — hoping to avoid their humiliation in Los Cabos. Of course, both the Canadians and Japanese have been widely criticized for foot-dragging on trade liberalization in recent years. Still, the buzz around town has focused on the question as to whether the Obama White House really has earned the right to decide whether other countries can be trusted to deliver on enhanced market-opening moves. Especially in the TPP context, a perceived American negotiating intransigence is widely believed to explain why the TPP negotiations are not on track to be concluded this year, as previously promised.]

Regardless of how the issue of possible TPP participation involving the Mexicans, Canadians and Japanese plays out at the G-20 Summit, or perhaps soon thereafter, there are some fundamental concerns about where the TPP process is heading that haven’t received the public attention they seem to deserve. Serious diplomatic observers say privately that while the U.S. is moving to strengthen its military and security ties throughout Asia, they worry that America’s economic influence in the region could be on the decline.

Let’s take a closer look at why the worries about the U.S. approach to the TPP is raising such geo-political concerns.

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Instead of giving trade preferences to Philippine textiles, Obama should cut tariffs across the board.

Philippine President Benigno Aquino III visited Washington last week with two objectives. One, reaffirming bilateral security ties, was a success. But on Mr. Aquino’s other goal—dropping U.S. tariffs on his country’s clothing exports—the Obama administration sent the president home empty-handed.

The Philippine leader urged Barack Obama to support a bill introduced in both the Senate and House of Representatives to boost Philippine clothing exports to the U.S., which amounted to $1.7 billion last year. The SAVE Act—for Save Our Industries—would give Philippine garment manufacturers duty-free access to U.S. clothing markets as long as they buy U.S. fabrics to make their jeans, shirts and dresses.

Instead, Mr. Aquino got the brush off. All Mr. Obama offered regarding economic issues was a vague statement that he was working “on how we can make sure that we are structuring a relationship of expanding trade and commerce.”

As disappointing as this is to some Filipinos, the outcome is actually good news for free trade. Both sides want trade distortions, so the lack of agreement could end up putting pressure on them to make concessions in multilateral forums. Ultimately the U.S. needs a complete overhaul of its high clothing tariffs, which generally range from 18% to twice that.

The SAVE act is flawed because it would use tariff preferences to divert trade flows to the benefit of a few firms doing business in the Philippines, mainly two well-known names in the world of fashion: Ann Taylor and Ralph Lauren. The tariff breaks for the Philippines would come at the expense of more efficient producers in Asia.

Of course, the Philippines’ beleaguered garment industry doesn’t see it that way. A decade ago, it employed roughly 700,000; now it’s down to 150,000. The industry’s former success relied on guaranteed access to American markets because of assigned quotas Washington doled out to more than 40 countries pursuant to the Multifibre Arrangement. But when these quotas were eliminated in 2005, Filipinos could no longer compete with lower-wage Asian neighbors.

It’s clear this Philippine industry is globally uncompetitive and has thus suffered after the trade quotas were withdrawn, but its advocates don’t want to admit that. For one thing, today’s remaining workers rely on high-end fashion makers like Ralph Lauren and Ann Taylor, who sell to price-insensitive markets. Thanks to the Philippines’ comparatively high-cost labor markets, the rag trade has found more economical opportunities elsewhere in Asia.

That’s why Philippine boosters are resorting to historical and emotional appeals to get back on America’s trade dole. Many ask why the U.S. hasn’t eliminated tariffs for Manila, while doing so for some African clothing exporters like Mauritius, which has an economy five times that of the Philippines.

“It’s kind of perverse” to exclude the Philippines, a former U.S. colony, argues Ron Sorini, a former U.S. textile negotiator who is lobbying for the Philippines. And Chris Panlilio, the Philippine undersecretary of trade who came to Washington with Mr. Aquino, says it is unfair “given our historical relationship with America” for the Philippines not to enjoy preferential trade.

The SAVE proposal might help the Philippines, but it would only be robbing Peter to pay Paul, shifting the relative tariff burden between countries instead of promoting freer trade. For years, diplomats from lower-cost Asian clothing exporters like Bangladesh and Cambodia have been asking American presidents of both political parties to give them tariff breaks on their clothing exports—requests that have consistently been rejected.

The big problem for all textile traders around the world is that the leader of the biggest economy is running a zero-sum game, where the winner has to lobby his way out. There is a simple way Mr. Obama can help all these countries, and at the same time avoid distortions: He can cut these tariffs across the board.

But not only is this not on the agenda, the Obama Administration is these days pushing to create more two-way trade preferences. During the ongoing Trans-Pacific Partnership negotiations, Mr. Obama has been fighting tooth and nail to make Vietnam buy American fabrics in return for tariff reductions. The Vietnamese, sensibly, have pointed out the economic absurdities of this policy. Undeterred, the Obama White House vows to keep up the pressure until Vietnamese negotiators give in. The hypocrisy is too hard to ignore: Washington wants from Hanoi what it won’t give to Manila.

President Obama, who once promised to change how America treats other countries, shows no signs of shame at pitting poorer nations against each other in the scramble to get around high U.S. clothing tariffs. Nor does he appear to see the intellectual inconsistencies between his various trade positions. Dropping tariffs across the board would end the political merry-go-round and allow healthy competition based on efficiency and quality.