Opportunities for Philippine industries arise amid the US-China trade dispute

Rolling back decades of globalisation, the growing international trend of protectionism has disrupted cross-border trade flows. Perhaps the most significant manifestation of this is the trade war between the US and China, which has altered global supply chains, and forced governments and private firms to make difficult geopolitical and investment decisions since the dispute began in 2018. Although the trade war will undoubtedly weaken global growth in the short term and potentially slow the pace of innovation, it may provide the Philippines with opportunities to increase industrial activity and diversify its export markets.

US-China Impact 

Initiated by US President Donald Trump to curb unfair competition and provide greater access for US firms in the vast Chinese market, the trade war has rattled investor confidence and stock markets alike. In 2018 the US imposed three rounds of tariffs on Chinese goods, totalling more than $250bn. In May 2019 President Trump announced further hikes, raising the tariff on $200bn worth of Chinese products from 10% to 25%, and threatening to impose additional tariffs if China did not cut a deal that met key US demands. China has since responded with its own targeted tariffs.

As demand for the other nation’s products falls in both countries, the Philippines is fortunate to not be highly integrated in China’s export supply chain. “Only around 2-3% of Philippine exports to China go indirectly to the US. In that sense, there is little impact on the Philippines from falling demand for Chinese-made products in the US at the moment,” Kevin Chui, country head of German engineering firm Thyssenkrupp, told OBG.

Looking Up 

In fact, ASEAN members stand to benefit from the trade tensions in terms of import substitution and production diversification. In the former, regional players have the potential to fill supply gaps in China and the US in areas where the countries used to import from one another. In the latter, they can court manufacturing firms seeking new production bases in Asia to avoid tariffs as the dispute drags on. “The Philippines is capable of attracting companies seeking to move production away from China,” Brian Chen, president and CEO of industrial gases manufacturer Air Liquide Philippines, told OBG. “Manufacturers can benefit from the Philippines’ competitive workforce and existing supply chain in sectors like electronics and automobiles.”

Indeed, despite being in the early stages of addressing its infrastructure deficit, some manufacturing subsectors in the Philippines could prosper from the trade war. Speaking at the Philippine Economic Briefing in September 2018, Ernesto Pernia, secretary of socio-economic planning and director-general of the National Economic and Development Authority, suggested that the net benefit of the trade war on the Philippines’ GDP would be $34.7m in 2018, rising to $50.7m by 2023. The estimated gains would largely be due to increased electronics exports to the US market to replace Chinese goods (see Country Profile chapter).

Caution Ahead 

Conversely, a 2018 report titled “Asia’s winners in the US-China trade war” by the Economist Intelligence Unit made little mention of the Philippines. According to the study, the Philippines could expect “mild benefits” in the automotive subsector, but this would be weighed against “mild disruption” in ICT manufacturing, owing to a reliance on the Chinese market for exports of intermediary components.

Importantly, the impacts of the trade dispute on the Philippine economy are expected to vary over time. In the short term, some domestic firms that export industrial goods to China will be harmed, though production orders are likely to shift to Philippine manufacturers that already run established facilities and employ skilled workforces. In the longer term, even as the country benefits in aggregate from the tariff escalations, the Philippines’ competitive disadvantages in the region will likely prevent it from stepping into supply chains as fully as some of its ASEAN neighbours. Ultimately, the trade dispute highlights the need for the Philippines to move up the value chain and diversify its trade markets.

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The Report: Philippines 2019

Industry & Retail chapter from The Report: Philippines 2019

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This article is from the Industry & Retail chapter of The Report: Philippines 2019. Explore other chapters from this report.