President Ferdinand “Bongbong” Marcos, Jr. has made his administration’s pivot to the United States a major plank of his presidency. He has offered to host additional military sites in the country for US forces and forged a stronger military alliance and cooperation, a stance that has angered China. The question is, aside from a stronger security posture against China, what will the Philippines get out of it?
Newspaper reports quoted unnamed government officials as having expressed disappointment that the US could not, or would not, offer a free trade agreement with the Philippines in exchange for the closer military alliance. After all, the US has a free trade agreement with Vietnam, its former enemy, and has more investments and trade with Vietnam than the Philippines.
US Trade Representative Katherine Tai came and went to the Philippines and dismissed any talk of a free trade deal.
However, the unnamed government officials in the report should not have been surprised. The US has been veering away from free trade for years now. Former US President Donald Trump pulled the US out of the Transpacific Partnership, a free trade bloc that what supposed to be an economic counterweight against China and which the Obama administration had pushed. Free trade is being perceived in the US as being inimical to the interests of US workers and US security, as manufacturing had shifted to lower-cost countries, costing jobs in the US and making its supply chain vulnerable. In particular, the Democratic Joe Biden administration is very likely not to take any action that may anger US Organized Labor, one of its major supporters.
Government officials are hoping that the US at least renews GSP (Generalized System of Preferences) privileges to the Philippines. The GSP scheme allows the duty-free entry of some 3,500 eligible products into the US, but this expired in 2020. The problem with the GSP scheme is that the Philippines still must compete with other countries, as many have been given GSP privileges. Also, the US Congress must approve the renewal of the Philippine’s GSP privileges and there has been no action on that front.
Instead, the US has been offering an Indo-Pacific Economic Framework (IPEF), a grouping of about a dozen countries that include the Philippines, Australia, Japan, Australia, Vietnam, Malaysia, and others.
The problem with the IPEF is that presently, it’s more about meeting standards on anti-corruption, anti-money laundering, tax compliance, labor, and the environment than it is about trade. No trade concessions have been offered under the IPEF when trade is the strongest glue for an economic partnership.
The US may eventually offer some trade concessions, concessional loans and financing, and investment directives under a “friend-shoring program,” that is, building resilient and dependable supply chains among IPEF members. For example, it may encourage or incentivize US investments in renewable energy and minerals processing in the Philippines that could be part of a supply chain developing the EV car market in the US. However, there are still no details in the IPEF to celebrate yet.
During forums discussing the US-Philippine economic partnership, I have raised the point that while US investments have been benefitting the country, the US has also been doing some economic harm by way of draining our medical professionals and, to a certain extent, our talented teachers, from the country. It’s a well-known fact that Philippine hospitals have been suffering from a high turnover of nurses and other medical professionals because they are being offered lucrative jobs and fast visa processing in the US and other countries like Canada, the UK, Australia, and New Zealand. This has led to a deterioration in healthcare in the Philippines.
However, that is just a fact of life: we can’t prevent our nurses and teachers from seeking better opportunities abroad. The US and other Western nations must recognize that they are doing harm by encouraging this talent drain and must seek to compensate the Philippines in some form, such as by offering grants or educational assistance to help the Philippines replenish its supply of nurses.
One way that the US could help in this area is by allowing US Medicare to be offered through Philippine hospitals. It will be a win-win situation. The US health system will benefit from the lower cost of medical care in the Philippines while Filipino-Americans or retired Americans residing here can avail of US Medicare without having to go to Guam or the mainland US to get medical care. More importantly, Philippine hospitals can generate additional revenue to be able to hire and train new nurses.
Another idea that I raised during a forum was for the US to help the Philippines build its defense industries. The United States and its defense allies are raising their defense spending. Japan will double its military spending to 2% of GDP over the next five years. In the face of the Ukraine war, Germany has shed its relatively pacifist stance and will increase its military spending to more than 2% of its GDP or about €60 billion annually. The entire EU will be dramatically increasing military spending.
The Philippines can help supply some of the defense needs of the US and its military allies, from backpacks to light armor to electronics that power drones. It’s also a democracy, unlike Vietnam, and is therefore a natural partner in the military supply chain of Western democracies.
As a start, the government should start seriously developing the Defense Industrial Estate in the Freeport Area of Mariveles, Bataan not only to supply the defense needs of our military under the AFP Modernization Program, but to export.
However, to maximize its security engagement with the United States and the West, the Philippines must continue to be open to foreign investments, improve infrastructure and the rule of law, and undertake economic reforms. Fortunately, the Philippines, under former President Rodrigo Duterte, passed the Public Service Act Amendment which opened the telecoms and transport sectors to 100% foreign investment. Consequently, American firms like Starlink have entered the local broadband market.
However, more needs to be done. Philippine procurement laws have a dysfunctional and erroneous Filipino First policy: the government is mandated to buy from Filipino firms even if the Filipino firm bids 20% more than foreign ones. This will bar state-owned defense industries from developing and accessing the most competitive and affordable technologies.
The US is also very keen on “green investments” under the Indo-Pacific Economic Framework. However, foreigners are not allowed to invest in tree plantations on state-owned lands under our current laws. So, why not pass the Tree Planting bill that would redefine trees as personal property, rather than part of the land, so foreigners can invest?
The US can help us with food security but RA 3018 bars foreigners from investing in the rice and corn trade and PD 194 mandated foreign companies who have invested, to divest in 30 years.
President Ferdinand Marcos, Jr. has said that changing the economic provisions of the Constitution isn’t a priority, but the US can do more to help the country if those restrictive economic provisions are liberalized. For example, in the Joint Seismic Memorandum of Undertaking case, the Supreme Court ruled that under the Constitution, 100% foreign-owned corporations cannot participate in the exploration of the country’s natural resources. How can the US help us with energy security when mere exploration is off-limits to foreign-owned corporations?
We must learn to take advantage of historical junctures, and the revival of Great Power rivalry and the rise in military spending is one of them. Japan’s economy was able to take advantage of the South Korean War because its firms were able to supply the UN forces fighting North Korea. Thailand took advantage of the Plaza Accord and the revaluation of the yen to attract Japanese companies to set up manufacturing plants there. So far, the US-China decoupling has led to factories being relocated to Vietnam, India, and Indonesia. Our lack of infrastructure, labor rigidities, and uncertain power outlook have caused investors to bypass the Philippines.
It’s about time we wake up. How much we can get from our economic partnership with the US will also depend on what we do. It’s good that President Bongbong Marcos has an international outlook and is seeking to engage the world through his visits. But there’s also homework to be done. I’m looking for President Bongbong Marcos to be doing homework as he enters his second year in office.
Calixto V. Chikiamco is a member of the board of IDEA (Institute for Development and Econometric Analysis).
