Philippine Intra-ASEAN Trade Liberalization

The paper analyzes the implication of intra-ASEAN trade liberalization viewed from the context of the Philippine economy. As a backdrop, the first section presents the features of the Philippine intra-ASEAN trade during the postwar period. Next, we look into the pattern of Philippine imports from the ASEAN region during the period 1972-1976. In the third section, the tariff structure of Philippine imports of ASEAN products in 1975 is compared with ASEAN partners' tariff rates. The first issue on intra-ASEAN trade liberalization pertains to expansion of Philippine imports due to tariff cuts. Using partial equilibrium analysis, a formula on import expansion is derived. In general, the direct effect of ASEAN tariff reduction on a given Philippine import group depends on the level of original tariff, and on the price elasticities of import demand. Based on 1975 data, under a 10 percent tariff cut across-the-board, import expansion varies among import groups. On the whole, a 10 percent across-the-board tariff cut would have negligible expansion effects on Philippines imports from all the other ASEAN countries or even from each ASEAN partner. Another important issue is the trade creation or diversion effects of ASEAN trade liberalization. Despite some serious difficulties, trade creation or diversion is evaluated by comparing unit values of Philippine imports from ASEAN vis-a- the world. Again based on 1975 data, Philippine imports from ASEAN at the least aggregated grouping are classified in terms of whether they were lower-priced, higher-priced, or equally priced imports from ASEAN vis-a-vis the world. On the number of import groups, more ASEAN items were priced higher compared to imports from the world. In terms of import expenditures, however, a greater part was spent on competitively priced ASEAN items. Furthermore, we determine the import expansion and trade creation effects of a tariff cut on the selected 150 Philippine items offered for preferential trading agreement. Based on 1975 data, the estimated import expansion effects varied among the selected items but, on the whole, constituted only a negligible portion of the estimated effects under a 10 percent across-the-board tariff cut. More important, on trade creation or diversion issue, higher-priced ASEAN items outnumbered lower-priced ones in the selected Philippine items. More import expenditures, however, were spent on the lower- than higher-priced items included in the Philippine commodity list for tariff concession. We conclude that the limited and selective approach toward freer ASEAN intra-trade may turn a long way to expand markets of Philippine industries and more so, an unsafe approach to rationalize industries. In the meantime, if economic planners want to enhance the trade creating effects of the ASEAN item-by-item tariff reduction program, they should look closer at the price differentials of ASEAN vis-a-vis non-ASEAN sources not only for one or two years but on a long run perspective. Even so, to rationalize the Philippine industries, an across-the-board tariff reduction is recommended on the principle of equal reduction in the effective protection rates. Yet a greater than 10 percent tariff reduction across-the-board, while inducing greater trade expansion, may lead to more distortionary effective protection rates as the original ASEAN tariff rates are, to start with, unequal. Thus we conclude that a gradual move towards a free trade area may appear a more logical way out of the Philippine dilemma of a limited market and inefficient industries. We finally argue that the common fear of industrial polarization has no economic basis. To end up with, some suggestions for further research are presented. Among others, we urge that research efforts should focus on the indirect, long-run effects of alternative trade liberalization scheme.