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Stay Calm, Carry On

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With the impending flood of tariff-free Chinese imports threatening local industries Ambassador Donald Dee calls for calm

With the clock ticking toward the zero-tariff entry of cheaper Chinese goods into the country, Philippine industries are bracing for the impact. Ambassador Donald Dee, chairman emeritus of the Philippine Chamber of Commerce and Industry, says, however, that the China-ASEAN Free Trade Area is far from being the death knell for local industries.

Donald DeeDee tells China Business that while local businesses will lose ground to Chinese imports, there are some areas where we can stay competitive.

How will the China-ASEAN FTA affect local industries?
During the past years, the Department of Trade and Industry has noted that there has been a significant increase in trade between the Philippines and China. They cannot, however, pinpoint whether this positive trade trend is a direct offshoot of the FTA, or a result of business developments at the global level. At this point it is hard to measure how the FTA has impacted the Philippines.

Taking into consideration that China has become the manufacturing hub of the world today due to the low cost of doing business there, it is inevitable that with or without the FTA in place, our local industries will somehow be negatively affected. We have seen the domestic market flooded with China-made products—clothes, shoes, bags, housewares, furniture. A lot of the products being sold in malls today are from China.

As it is, China products have already been able to significantly penetrate the Philippines and have displaced local industries.

In the garments industry, a lot of domestic players have already closed shop because there is just no way for us to remain competitive with China. While efforts are being undertaken in our energy sector, the Philippines still has a high energy cost. It is also Philippine government policy to protect labor, thus the higher costs for labor here.

At the end of the day, investors will go to countries where they can get the highest return for their investments. More than the FTA, it has been China’s shift to a market economy, and its rise as an economic power that has had a negative impact on a lot of economies.

Will it give local companies entry into the large market of China, or will they be displaced by Chinese companies producing the same products?
There is no doubt that the FTA would allow more of our products to enter China because of the elimination of tariffs on our exports there. Yes, the FTA does give the Philippines more access to their market. But we have to study whether this market access given to us can actually be utilized by our domestic stakeholders. These may be the same products that China has been able to specialize on and export to the whole world, which the Philippines is not competitive in.

The Indonesian Minister of Industry has called for a postponement of the FTA because he says Indonesian firms are not yet ready to compete with China. Are Philippine industries ready?
At this time, when China has clearly dominated the global market, many—if not all—countries have witnessed their local industries complaining about cheap China imports. Just look at the US. The US government was forced to significantly raise its tariffs on imports of Chinese tires to slow their entry into the American market.

The call for postponement made by the Indonesian Minister should be given serious thought. The remedies imposed by the US only shows that not even developed countries can compete with China-made products.

I believe that the Philippines will still be able to compete with cheaper Chinese imports because Filipino consumers have become more discriminating.

With the melamine scandal affecting China last year, the toy scandal that also affected the China toy industry, and complaints that China-made products are of inferior quality, Filipino manufacturers will still be able to compete—not in terms of price, but in quality. Consumers now do not simply look at the price as a basis for a purchase. What is now more important to them is that they get value for their money, and this is where quality comes in.

One thing that we can be proud of is that Filipino manufacturers are known for giving extra attention to details and standards. Even if we have lost to China in some export markets, we are still able to get a share mainly because of the superior quality of the products we export.

What industries will benefit most? What industries will be most negatively affected?
High-value products like electrical, electronics, and machinery products will benefit the Philippines side since China’s comparative advantage is in manufacturing labor-intensive products. Take note that China has affected other countries’ local industries in those sectors that are not high in the value ladder like textiles, clothing, and fashion accessories.

What is our competitive advantage in a China-ASEAN FTA?
The ACFTA covers not only trade in goods but also that of services and investments. While we are somehow disadvantaged in terms of goods, the Philippines has a clear advantage in the services sector. This is where our comparative advantage is, as shown in the robust performance of the BPO sector. And it isn’t only in the call center industry, but also in accounting, software development, transcription, payroll outsourcing, and even animation.

With a lot of Chinese companies now expanding their operations overseas, the Philippines should capitalize on this because there are a lot of opportunities available.

A source told us that China lowered tariffs so they can buy up our raw materials and raise prices. Do you think that’s true?
If you look at the exports profile of the Philippines to China, most of our top exports to China are inputs used in the production of other goods. Even without the FTA fully in place, we can see that China already imports a lot of raw materials for the production of goods.

Whether they use the FTA as a leverage to further get concessions from the ASEAN is another matter that maybe our negotiators can talk about. What I would point out is that China sees the ASEAN as a vital trade partner since it is abundant in the resources that China needs to manufacture its goods.

Print ed: 11/09


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