Trans-Pacific Partnership membership would bring access to major markets for the Philippines

Of all the decisions that will be made by the new president and Congress to be elected in May 2016 elections, none will be more important than whether to pursue membership in the Trans-Pacific Partnership (TPP), the 12-member free trade bloc being formed by the US, Japan and 10 other Pacific Rim countries.

Although the TPP agreement, signed in February 2016, was not expected to be ratified until after November 2016 US elections, the Philippines is one of the countries that have put themselves forward early as candidates to join the bloc in its first wave of expansion. A membership would substantially boost access to major markets and ensure the Philippines is not left out of one of the main venues for advancing free trade in Asia and the Americas. Some Philippine exporters, particularly in the clothing business, are concerned that they stand to lose business to Vietnam when its producers begin to enjoy lower tariffs on exports to the US market. Those fears are doubled for the longer run as more peer countries are likely to join. The TPP’s 12 founding members are expected to begin considering applicants for the bloc’s first wave of expansion soon after the TPP agreement is ratified.

Obstacles

The Philippines is likely to face high demands from existing TPP members. Informed observers told OBG that although there is no hard and fast link, as a practical matter the Philippines would need to amend its constitution to lift restrictions on foreign investment and land ownership to win an invitation to join the TPP in the first wave of expansion. The most difficult obstacle to joining the TPP is the 1987 constitution’s ban on ownership of land and businesses in the public utilities and natural resource sectors by foreigners and companies with more than 40% foreign equity. In theory, joining without changing the constitution would be possible, though in that case it would probably take much longer. There is nothing in the TPP agreement that requires land ownership to be extended to foreigners. Vietnam, a TPP founder, has a communist constitution that reserves ownership of all land for the state.

Although Vietnam recently allowed foreigners to acquire a kind of quasi-ownership called “land-use rights”, such rights generally expire after 50-70 years, and there is no guarantee a future government will not revoke them. The Philippines grants foreigners access to long-term land leases that are arguably more secure than Vietnam offers. But the Philippines is unusual in discriminating against foreigners in such an important way. Above all, the Philippines will need to win US support, and that is not likely to happen with such restrictions on foreign investment.

Renewing The Negative List

While the trend in South-east Asia has been to reduce restrictions on foreign investment, the Philippines has retained a complicated system of restrictions. A president and Congress committed to joining the TPP could provide the impetus to finally begin lifting these restrictions. The core restrictions are written into the 1987 constitution, which prohibits foreigners, foreign companies and local companies with more than 40% foreign ownership from owning land, public utilities and educational institutions. The constitution also prohibits foreigners and local companies with any foreign ownership from owning mass media companies. The constitution is unusually explicit in trying to rule out de facto control, specifically banning non-citizen executives and limiting the proportion of non-citizen board members to the proportion of foreign ownership.

The constitution also requires that any natural resource extraction business with greater than 40% foreign ownership have a “financial and technical assistance agreement” with the government. There are also many restrictions adopted in laws. Around every two years the government publishes a foreign investment negative list, which summarises the constitutional and legislative restrictions and adds a handful of others. Foreigners are banned in these ways from most licensed professions, as well as from private security, small retail businesses and small-scale mining. Foreign ownership of advertising businesses is limited to 30%, and foreigners are limited to 40% ownership in government contractors, deep sea fishing, most small businesses, rice and corn businesses (except retail trade), and arms and explosives. Infrastructure projects are limited to 40% foreign ownership except build-operate-transfer contracts. Only locals and local companies with no foreign equity can own businesses in mass media (except recording), licensed professions, small-scale retail and mining, private security, national marine resources, pyrotechnics and bombs.

Only up to 20% foreign equity is allowed in private radio networks; up to 25% in recruitment agencies and certain public construction contracts; up to 30% in advertising; up to 40% in natural resource exploration, public utilities, education, rice and corn businesses (except retail), certain public supply contracts, deep-sea fishing, insurance adjustment, guns and most other military and police equipment, certain pharmaceuticals, steam and massage houses, and gambling. Foreigners can own up to 49% of lending companies and 60% of finance companies and investment banks. After a reform in 2014, publicly listed or state-owned foreign banks are allowed to acquire full ownership of Philippine commercial banks, but other foreign investors are restricted to 40% of commercial banks and 60% of certain types of small banks. Since 2014, any foreign bank can apply for a licence to establish a new fully-owned bank branch.

Work-Arounds

There is also an evolving tradition of interpretation, which can be more important than the written legislation. Foreign investors have been finding ways to exercise greater de facto control than the legal limit, but the state’s tolerance for such schemes is inconsistent, so most foreign investors take a cautious approach. Applying for TPP membership would not mean ending all those restrictions immediately, and many could stay in place long after joining. Accession would force the government to commit to a process of further opening up the economy to foreign investment, at a pace that will depend on trade policy winds within the TPP community.

Other Trade Policy Impacts

The Philippines already has a relatively open trade regime. The country had a simple average duty by tariff line of 7.04% in 2015, according to World Trade Organisation data. This figure compares to 5.49% in Malaysia in 2013, 7.25% in Indonesia in 2014, 10.51% in Vietnam in 2014, and 12.66% in Thailand in 2014. TPP accession trade partners would force the Philippines to abandon such schemes as its high import tariffs on fully assembled automobiles, aimed at supporting investment in automobile plants. That scheme is generally considered a failure, as it is mostly bypassed with informal or privileged imports from within the ASEAN free trade bloc. The TPP would also target non-tariff trade barriers.

As one of the original members of ASEAN, the Philippines has had largely tariff-free trade with Singapore, Malaysia, Thailand, Indonesia and Brunei Darussalam since 2010. However, the ASEAN tariff-free privilege only applies to goods with certificates of origin vouching that at least 40% of their value was produced within ASEAN, which are often more trouble to get than they are worth. The Philippines is also part of ASEAN’s free trade agreements with Japan, Australia, New Zealand, China, Korea and India. ASEAN and those six countries have since 2012 been negotiating a common, deeper free trade area called the Regional Comprehensive Economic Partnership (RCEP). It is unclear how the TPP will affect development of ASEAN and RCEP, although these ongoing trade pacts are considered to be pathways to a greater regional trade deal called the Free Trade Area of the Asia Pacific. But if most major ASEAN countries join the TPP, it could divert their focus away from ASEAN. If so, ASEAN might become a “two-speed” bloc, with TPP members focusing on broader Pacific Rim trade, and no longer putting pressure on non-TPP members to reform and integrate.

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The Report: The Philippines 2016

Trade & Investment chapter from The Report: The Philippines 2016

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