Trading up: Busy shipping lanes are providing potential growth advantages

Situated on some of the busiest trade routes in the world, and catering to an inflow of raw materials from Africa and the Middle East as well as an outflow of manufactured goods, the Philippines’ transport and logistics sector is uniquely positioned to take advantage of the massive movement of goods steaming past its front doorstep. More than half of the world’s annual merchant fleet tonnage passes through the Straits of Malacca to the west of the Philippines and the Straights of Sunda and Lombok in Indonesia to the south, with the majority continuing on to the West Philippine Sea. So important are these shipping routes off the country’s west coast that control over these waterways has caused numerous international disputes in recent years between the regional rivals of China, Taiwan, Vietnam, the Philippines, Malaysia and Brunei Darussalam. While much of this dispute stems from the potential energy resources thought to be residing in undersea deposits, control over the shipping lanes is also of vital importance, with many countries heavily dependent on energy and cargo shipments plying these waters. Not coincidentally, the bulk of the Philippines’ international trade is made with countries situated along the West Philippine Sea as well. Eight of the country’s top 10 import and export trade partners (Japan, China, Thailand, Malaysia, South Korea, Hong Kong, Singapore and Taiwan) operate major ports along this waterway and the East China Sea to the north.

Busy Lanes

In addition, nearly a third of global crude oil and over half of global liquefied natural gas (LNG) trade passes through the busy body of water, making it one of the most strategically important trade routes in the world. An estimated 15.2m barrels per day of oil passed through the Strait of Malacca in 2013, the shortest sea route between African and Persian Gulf suppliers and Asian markets, notably to China, Japan and South Korea. Moreover, approximately 6trn cu feet of LNG, or more than half of global LNG trade, traversed the West Philippine Sea in 2013.

Regional Opportunities

This vast amount of global trade in such close proximity represents a significant opportunity for the Philippines, both as a trans-shipment hub and as a base for industrial operations given the country’s ideal geographic location between Asia’s traditional economic powerhouses to the north and its new rising economies to the south and east. Although the Philippines maintains some of the strongest trade ties in the region with the recovering US economy, much of the future trade growth is likely to come from sources closer to home. This expansion is being further fuelled by numerous trade agreements, which are helping further boost trade as Asian economies become further integrated with the erosion of traditional economic barriers.

One of the most influential of the free trade agreements the Philippines has signed on to is ASEAN. Formed by charter members Indonesia, Malaysia, the Philippines, Singapore and Thailand in 1967, Brunei Darussalam later signed on in 1984 along with Myanmar (1997), Laos (1997), Cambodia (1999) and Vietnam (1995) to form a combined population bloc of some 600m making it the third largest in Asia behind only China and India. As of 2014, the ASEAN+6, consisting of Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand, has applied zero tariff rates for intraASEAN trade in more than 99% of tariff lines since 2010. Progress has also been made in the newer ASEAN members including Cambodia, Laos, Myanmar, and Vietnam, where zero tariff rates have been applied to 72.6% of tariff lines in 2013, a significant increase from only 45.9% in 2010. The transport sector stands to benefit from the increased cargo movement these changes have brought about.