The Future of Trade Requires Inclusive Growth

By Victor Andres “Dindo” Manhit —

APEC Ministerial Meeting in Lima, Peru on November 18, 2016. Source: APEC Peru 2016's flickr photostream, used under a creative commons license.

APEC Ministerial Meeting in Lima, Peru on November 18, 2016. Source: APEC Peru 2016’s flickr photostream, used under a creative commons license.

President Rodrigo Duterte is on his way to Peru for his first trip to an Asia-Pacific Economic Cooperation (APEC) leaders’ summit. Just before leaving Manila, Duterte said that he would spend his time in Peru promoting the Philippine economy and his 10-point socio-economic agenda, highlighting that “the Philippines is open for business.” The president’s continued support for greater cross-border economic connections is particularly welcome, given the anti-trade attitudes that are on the rise in other parts of the world—especially in the United States.

This year’s summit theme of “Quality Growth and Human Development” builds on the priorities laid out by the Philippine government during its hosting of APEC last year. Although APEC was originally established to promote trade liberalization in the Asia-Pacific region, it has since prioritized agendas that highlight the importance of investing in human capital to build sustainable and inclusive economies.

In recent years, the uneven distribution of growth has alienated many citizens, leading to the rise of populist leaders around the globe.  Despite an average economic growth of 6.1 percent over the last six years, the Aquino administration failed to reach its target poverty incidence rate of no more than 18-20 percent. Pervasive inequality helped usher in the rise of Duterte, who pledged to lift millions of Filipinos from poverty.

In 1989, APEC was founded as a forum to facilitate discussion on economic growth, trade liberalization, and investment opportunities. Today, its 21 members constitute 58 percent of the world’s gross domestic product (GDP), 49 percent of total world trade, close to 40 percent of the global population, and include four of the world’s largest economies.

When the Philippines’ hosted APEC last year, two initiatives were adopted: one on greater economic growth in the Asia-Pacific region and the second created a framework to promote the services sector. The Philippine government held bilateral meetings with 12 foreign leaders, signed seven agreements and explored cooperation in security, climate resiliency, and counter-narcotics. Several leaders also endorsed the Philippines’ intention to join the U.S.-led Trans-Pacific Partnership (TPP).

Critics have attacked APEC for producing mere pronouncements instead of serious commitments. Nevertheless, there are now over 140 free trade agreements (FTAs) between APEC members and, since the group’s inception, tariffs are estimated to have been reduced from 17 percent to 5 percent. Thus, despite its shortcomings, APEC still remains an important platform for members to exchange ideas and discuss measures that promote trade and foster cross-country cooperation.

This year, APEC discussions will be overshadowed by the consequences of the election of Donald Trump in the United States. Just 12 months ago, the TPP was widely seen as the first major step for APEC to solidify its vision of a regional free trade zone. Now, its future looks bleak, as anti-trade policies are expected to dominate the next U.S. administration, which will radically change the dynamics in global trade.

China, which was not a member of the TPP negotiations, is now poised to be the leading advocate of regional trade deals. It is expected to promote stepped up efforts to launch negotiations on the Free Trade Area of the Asia-Pacific and the ASEAN-initiated Regional Comprehensive Economic Partnership (RCEP), which excludes North America.

Due to its constitutional restrictions on foreign ownership, the Philippines had been excluded from TPP negotiations, but the country had signaled its interest to join the deal down the road. If the TPP had pushed through without the Philippines, the country stood to lose out to other regional countries such as Malaysia and Vietnam. Even if the TPP is not resurrected in the near term, the Philippines should continue to engage TPP countries on meeting the standards of the agreement. Ultimately, even if it fails to pass in the short run, the TPP will have laid the groundwork for a trans-regional FTA.

This recent turn of events has signaled that a change in the global dynamic is inevitable. Already, Duterte has signaled his interest in conducting bilateral meetings with China and Russia during the summit. Whichever way the pendulum swings, Manila must take a balanced approach, and avoid leaning towards one nation and alienating another.

While trade clearly spurs economic growth, its impact on development is more tempered. Theoretically, by improving growth, trade also boosts incomes and tax revenues that the government can invest in human capital development. Openness to trade increases business and consumer choices across a variety of goods and services. Empirically, indirect linkages between trade and inclusive growth create overall positive effects, although the better-off segments of society have benefited more from increases in trade.

In the third quarter, the Philippine GDP grew by 7.1 percent, surpassing forecasts by economic analysts. The development figures in the Philippines are also promising: poverty dropped to 21.6 percent in 2015 from 25.2 percent in 2012. Meanwhile, unemployment is at a historical low of 5.4 percent. Despite the positive trajectory, however, the Philippines, like the rest of the world, should be mindful of whether these improvements are fast enough to be felt by the wider population.

APEC’s efforts in human capital development have been geared towards education and skills development, as well as harnessing innovation and technology to transition member countries into knowledge-based economies. This year, there is once again a focus on micro, small, and medium enterprises (MSMEs) as a driver of inclusive growth and poverty reduction. Current discussions are centered on measures to modernize MSMEs and integrate them in the global value chain.

The stage is set for Duterte to make his mark with other leaders, reach out to all countries, promote ties with existing partners, and establish relations with “non-traditional” Philippine markets, like Latin America, to advance his socioeconomic agenda. The moment calls for the Philippines to reaffirm the importance of broad economic cooperation.

Professor Victor Andres “Dindo” Manhit is president of Stratbase ADR Institute for Strategic and International Studies.


Leave a Reply

Your email address will not be published. Required fields are marked *