6th CBMS National Conference
Manila, Philippines
08-10 December 2009
Poverty Impacts of Preferential and
Multilateral Trade Liberalization on
the Philippines
Erwin Corong, Monash University, Australia
Rachel Reyes, De La Salle University, Philippines
Angelo Taningco, De La Salle University, Philippines
This paper was carried out with funding and technical assistance from the
Poverty and Economic Policy (PEP) Research Network, which is financed by
the Australian Agency for International Development (AusAID) and the
Government of Canada through the International Development Research
Centre (IDRC) and the Canadian International Development Agency (CIDA).
Outline
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Motivation of study
Research question and objective
Unilateral tariff reforms
Multilateral trade reforms
Preferential trade liberalization
Trends in Philippine Tariff Rates
Trends in Philippine Sectoral and Foreign Trade
Performances
Model description
Model results
Conclusion & Policy implications
1
Motivation of Study
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Since the 1990s, the Philippines has implemented
trade liberalization reforms, participating in
preferential trading arrangements (ex. AFTA, ACFTA,
JPEPA) and multilateralism (ex. WTO), as well as
unilateral tariff reforms.
The Philippines is committed to the Millennium
Development Goals (MDGs), including cutting in half
extreme poverty by 2015.
Empirical evidence on the link between trade
liberalization and poverty is generally mixed; in the
Philippines, the relation between the two is not yet
fully understood.
Research Question & Objective
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What is the potential impact of preferential and
multilateral trade liberalization on poverty in
the Philippines?
This study provides quantitative evidence on the
economy-wide and poverty effects of preferential and
multilateral trade liberalization on the Philippines.
2
Unilateral Tariff Reforms: The Tariff
Reform Program (TRP)
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TRP - Phase 1 (early 80s to early 90s).
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TRP - Phase 2 (early 90s to mid 90s)
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Average nominal tariff declined from 28% in 1991 to 20% in 1995.
Tariffication of quantitative restrictions.
TRP – Phase 3 (mid 90s to late 90s)
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Complemented by import liberalization program and realignment of
indirect taxes.
Average nominal tariff fell from 42% in 1981 to 28% in 1991.
Tariff structure narrowed from 0%-100% to 10%-50%.
Four-tier tariff structure (3%-10%-20%-30%).
Average nominal tariffs decreased from 20% in 1994 to 13.4% in
1997.
TRP – Phase 4 (late 90s to present)
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Eight-tier tariff structure (3%-5%-7%-10%-15%-20%-25%-30%).
22 industries were initially targeted for “tariff re-calibration”.
Multilateral Trade Reforms
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The Philippines became a World Trade Organization
(WTO) member country in 1995.
It committed to bind tariff rates at a maximum of
10% in 65% of all tariff lines and in other sectors.
It crafted laws consistent with its WTO commitments
(ex. Safeguard Measures Act of 2000, Anti-dumping
Act of 1999).
Over 1992-1999, simple average applied MFN rate
went down from 26% to 9.7%.
In early 2000s, there was “little progress” in further
promoting multilateralism with MFN rate slowly
declining from 9.7% in 1999 to 5.8% in 2003, before
climbing to 7.4% in 2004.
3
Preferential Trade Liberalization:
The Case of AFTA
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The Philippines joined the ASEAN Free Trade Area
(AFTA) in 1992.
AFTA’s Common Effective Preferential Tariff (CEPT)
Scheme: Aims to lower intra-ASEAN tariff to within
0%-5%.
As of 2004, 99% of tariff lines in Philippines under
CEPT scheme were within 0%-5% and the country’s
average CEPT rate was around 3%.
Philippine CEPT and MFN Rates, 2004
(average %)
8
7.4
7
6.3
6
4.8
4
3.3
3.6
2.5
3
2.5
2.5
CEPT - Thailand
3.8
CEPT - Singapore
5
3.0
2
1
CEPT - Viet Nam
CEPT - Myanmar
CEPT - Malaysia
CEPT - Lao PDR
CEPT - Indonesia
CEPT - Cambodia
CEPT - Brunei
Darussalam
MFN
0
Source of basic data: WTO
4
Average Nominal Tariff Rates in the
Philippines, By Sector (%)
2002
2003
2004
2005
2006
2007
12.18
11.04
11.85
11.85
11.85
11.82
Mining
2.84
2.84
2.47
2.47
2.47
2.47
Manufacturing
5.04
5.43
6.94
7.29
7.26
7.32
Overall
6.03
6.19
7.51
7.81
7.77
7.82
Agriculture, Fishery, and
Forestry
Source of basic data: Tariff Commission, Republic of the Philippines.
Sector’s Value Added (% of GDP)
60
53.5
52.0
50
40
32.3
31.6
Agriculture
Industry
30
Services
20
15.8
14.9
10
0
2000
2008
Source of basic data: The World Bank, World Development Indicators.
5
Product Share in Philippine Total
Exports, 2008
% share
5.6
0.1
5.1
2.5
83.6
3.1
Agro-Based Products
Forest Products
Mineral Products
Petroleum Products
Manufactures
Special Transactions
Source of basic data: National Statistics Office, Republic of the Philippines.
The Model
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Standard economy-wide model linked to 2000 Social
Accounting Matrix (SAM) and 2000 Family Income
and Expenditure Survey (FIES)
35 production sectors
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10 agriculture
19 industry
6 services
6 Representative Household Groups
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Agricultural workers
Clerks and sales workers
Government workers
Industrial workers
Professionals
Households not classified elsewhere
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Model’s Production and Trade
Structures
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Industrial sector has biggest share in foreign trade
with export and import shares of 92.5% and 87.1%,
respectively, while the agriculture sector has export
and import shares of 1.7% and 2.0%, respectively.
Agriculture is labor-intensive while industry is capitalintensive.
Model’s Household Income &
Poverty Profile
Sources of household income
Labor Capital
income income Transfers Remittances
Philippines
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Poverty index
Headcount
Gap
Severity
33.9
10.7
4.6
Government workers
74.1
14.8
5.6
5.5
14.2
4.0
1.7
Professionals
51.2
35.2
4.9
8.7
7.8
2.0
0.7
Clerks and sales workers
56.9
31
4.9
7.2
17.3
4.3
1.6
Agricultural workers
28.4
61.1
5.4
5.1
57.8
20.0
9.0
Industrial workers
61.8
28.4
3.1
6.6
26.4
7.0
2.6
Other households (NEC)
46.4
16.7
27.7
9.2
18.4
5.0
2.0
The main source of income for most household groups is labor
income.
Highest poverty incidence belongs to agricultural workers
followed by industrial workers; smallest goes to professionals.
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Policy Simulations
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Simulation 1: Actual CEPT and MFN tariff rate
reductions between 2000 and 2006. (Note: During
this period, the average CEPT rate cut was 18.5%
while the average MFN tariff reduction was 9.7%.)
Simulation 2: Full CEPT and CEPT liberalization, i.e.,
both CEPT and MFN tariff rates were reduced by
100%.
Macro Effects of Combined CEPT and
MFN Tariff Liberalization
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Fall in both import prices and prices of locallyproduced goods, leading to a decline in consumer
prices.
Import volume rises, crowding-out domestic
production for local sales. Quantity of goods in
domestic market increases given full liberalization,
but declines given actual liberalization.
Local cost of production falls, and real exchange rate
depreciates, thereby boosting export volume.
With actual CEPT and MFN liberalization, overall
output of economy contracts slightly, but with full
liberalization, overall output rises.
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Sectoral Effects of Combined and Full
CEPT and MFN Tariff Liberalization
Prices fall for all sub-sectors in agriculture and
industry. The decline in import prices is much bigger
in agriculture.
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Import volumes rise for all sub-sectors in agriculture
and industry.
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Domestic sales fall in all sectors.
Industrial sector expands, owing to its exportintensive nature, while agricultural sector contracts,
as it is not export-intensive.
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Household Income and Consumer
Price Effects of Combined CEPT and
MFN Tariff Liberalization
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Household income and consumer prices decline for
all household groups.
Fall in household income is much larger compared to
consumer prices for households headed by workers
who are paying more income taxes (ex.
professionals, government workers).
For households headed by relatively poor
workers—agricultural workers and industrial workers,
the decrease in consumer prices is larger compared
to disposable income.
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Poverty Effects of Actual and
Combined CEPT and MFN Tariff
Liberalization (% change)
Poverty Headcount
Direct
Indirect
Tax
Tax
Philippines
Government workers
Professionals
Clerks & sales workers
Agricultural workers
Industrial workers
Other households
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-0.1
0.8
0.4
0.0
-0.1
-0.2
0.0
0.1
0.0
0.0
0.1
0.1
0.2
0.0
Poverty Gap
Direct
Indirect
Tax
Tax
-0.2
1.0
1.1
0.0
-0.3
-0.3
0.1
0.2
0.1
0.1
0.1
0.2
0.1
0.0
Poverty Severity
Direct
Indirect
Tax
Tax
-0.3
1.1
1.5
0.0
-0.4
-0.3
0.2
0.2
0.1
0.1
0.1
0.2
0.2
0.0
Results are in favor of the use of a compensatory direct tax scheme in
terms of reducing national poverty, as well as those of the relatively
poor households—households headed by agricultural workers and
industrial workers.
But changes in poverty indices are small.
Poverty Effects of Full and Combined
CEPT and MFN Tariff Liberalization
(% change)
Philippines
Government workers
Professionals
Clerks & sales workers
Agricultural workers
Industrial workers
Other households
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Poverty Headcount
Direct
Indirect
Tax
Tax
-1.2
0.4
4.5
0.8
5.0
0.4
0.1
1.1
-1.8
0.3
-1.5
0.5
0.9
-0.3
Poverty Gap
Direct
Indirect
Tax
Tax
-2.4
0.6
8.9
1.0
9.6
1.1
0.1
1.0
-3.3
0.5
-2.2
1.0
0.8
-0.2
Poverty Severity
Direct
Indirect
Tax
Tax
-3.1
0.7
9.7
1.1
12.6
1.4
0.1
1.1
-4.2
0.6
-2.6
1.2
0.9
-0.2
Changes in poverty indices are bigger.
Results still support the use of a compensatory direct tax in financing
tariff cuts (and ensuring a balanced budget) and in reducing national
poverty and poverty levels for relatively poor households, i.e., those
headed by agricultural workers and industrial workers.
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Conclusion & Policy Implications
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Both preferential and multilateral trade liberalization
measures have the potential in reducing poverty in
the Philippines.
Further CEPT and MFN tariff rate reductions
alongside an appropriate compensatory tax
mechanism—direct tax— are likely to lower national
poverty, and help more the relatively poor
households.
Conclusion & Policy Implications
(cont.)
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The Philippine government must continue to actively
implement its commitments to both AFTA’s CEPT
scheme and WTO’s MFN treatment, as well as
enhance its direct tax revenues, through improving
tax administration and tax collection efforts.
Tariff liberalization can also be complemented by
trade facilitation reforms that reduce trade costs (ex.
Improve quality of roads, reduce trade-related
procedures) as these are likely to have a much
bigger impact in boosting international trade.
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Thank you.
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