Download (3) trade policies and practices by measure

RESTRICTED
WORLD TRADE
WT/TPR/S/149/Rev.1
21 July 2005
ORGANIZATION
(05-3275)
Trade Policy Review Body
TRADE POLICY REVIEW
The Philippines
Report by the Secretariat
Revision
This report, prepared for the third Trade Policy Review of the Philippines, has
been drawn up by the WTO Secretariat on its own responsibility. The
Secretariat has, as required by the Agreement establishing the Trade Policy
Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the
World Trade Organization), sought clarification from the Philippines on its trade
policies and practices.
Any technical questions arising from this report may be addressed to
Mr. Michael Daly (tel.: 022 739 5077).
Document WT/TPR/G/149 contains the policy statement submitted by the
Philippines.
Note:
This report is subject to restricted circulation and press embargo until the end of the first
session of the meeting of the Trade Policy Review Body on the Philippines.
The Philippines
WT/TPR/S/149/Rev.1
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS
I.
II.
III.
vii
(1)
ECONOMIC ENVIRONMENT
vii
(2)
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
viii
(3)
TRADE POLICIES AND PRACTICES BY MEASURE
viii
(4)
TRADE POLICIES BY SECTOR
x
(5)
OUTLOOK
xi
ECONOMIC ENVIRONMENT
1
(1)
INTRODUCTION
1
(2)
RECENT ECONOMIC PERFORMANCE
1
(3)
MACROECONOMIC POLICIES
(i)
Fiscal policy
(ii)
Monetary and exchange rate policy
6
6
8
(4)
STRUCTURAL REFORMS
9
(5)
DEVELOPMENTS IN TRADE
(i)
Composition of merchandise trade
(ii)
Direction of merchandise trade
(iii)
Trade in services
11
11
14
14
(6)
DEVELOPMENTS IN FOREIGN DIRECT INVESTMENT
15
(7)
PROSPECTS
15
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
17
(1)
INTRODUCTION
17
(2)
TRADE POLICY FORMULATION AND IMPLEMENTATION
(i)
Objectives
(ii)
Institutional and legal framework
(iii)
Trade policy formulation and implementation
17
17
18
19
(3)
TRADE AGREEMENTS AND ARRANGEMENTS
(i)
WTO
(ii)
Other arrangements
21
21
23
(4)
FOREIGN INVESTMENT REGIME
28
TRADE POLICIES AND PRACTICES BY MEASURE
31
(1)
INTRODUCTION
31
(2)
MEASURES DIRECTLY AFFECTING IMPORTS
(i)
Procedures
(ii)
Customs valuation and rules of origin
(iii)
Tariffs
(iv)
Prohibitions and restrictions
(v)
Contingency measures
(vi)
Standards and other technical requirements
(vii)
Government procurement
32
32
33
33
40
43
47
49
WT/TPR/S/149/Rev.1
Page iv
Trade Policy Review
Page
(viii)
(ix)
(x)
IV.
Import operations of state-trading enterprises
Local-content schemes
Countertrade
52
53
53
(3)
MEASURES DIRECTLY AFFECTING EXPORTS
(i)
Procedures
(ii)
Export taxes and other charges
(iii)
Minimum export prices
(iv)
Export prohibitions, restrictions, and licensing
(v)
Export operations of state enterprises
(vi)
Export support
(vii)
Export performance requirements
(viii)
Export finance, insurance, and guarantees
(ix)
Export promotion and marketing assistance
53
53
53
54
54
55
55
56
56
56
(4)
MEASURES AFFECTING PRODUCTION AND TRADE
(i)
Industrial policy and incentives
(ii)
Competition policy
(iii)
Price controls
(iv)
Corporate governance
(v)
State-owned enterprises and privatization
(vi)
Intellectual property rights
57
57
59
61
62
63
64
TRADE POLICIES BY SECTOR
71
(1)
INTRODUCTION
71
(2)
AGRICULTURE
(i)
Overview
(ii)
Policy developments
(iii)
Selected activities
(iv)
Fisheries
73
73
73
76
78
(3)
MINING AND ENERGY
(i)
Petroleum and petroleum products
(ii)
Coal
(iii)
Natural gas
(iv)
Electricity
80
80
82
82
83
(4)
MANUFACTURING
(i)
Introduction
(ii)
Policy developments
(iii)
Selected activities
87
87
87
88
(5)
SERVICES
(i)
Financial services
(ii)
Telecommunications
(iii)
Transport
(iv)
Tourism
90
91
98
100
105
REFERENCES
107
APPENDIX TABLES
113
The Philippines
WT/TPR/S/149/Rev.1
Page v
CHARTS
Page
I.
ECONOMIC ENVIRONMENT
I.1
I.2
Product composition of merchandise trade, 1999 and 2003
Merchandise trade by main origin and destination, 1999 and 2003
III.
TRADE POLICIES AND PRACTICES BY MEASURE
III.1
III.2
III.3
Share of bound tariff lines by HS section
Distribution of MFN tariff rates, 1999, 2003 and 2004
Tariff escalation by 2-digit ISIC industry, 1999 and 2004
12
13
34
36
38
TABLES
I.
ECONOMIC ENVIRONMENT
I.1
I.2
I.3
Selected macroeconomic indicators, 1999-04
Basic economic and social indicators, 1999-04
Trade in services, 1999-04
II.
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1
II.2
Main institutions involved in trade policy formulation and implementation, 2004
Dispute settlement in the WTO, 1999 to October 2004
III.
TRADE POLICIES AND PRACTICES BY MEASURE
III.1
III.2
III.3
III.4
III.5
III.6
III.7
III.8
Structure of the MFN tariff in the Philippines
CEPT preferential rates by member country, 2004
Goods subject to regulation/import licensing
Safeguard actions, 1999-04
Alternative methods of procurement
Tax incentives under selected special investment incentives laws
Laws dealing with competition in the Philippines
Intellectual property enforcement, 1999 to June 2004
IV.
TRADE POLICIES BY SECTOR
IV.1
IV.2
IV.3
IV.4
Effective rates of protection, 1999-04
Head offices of commercial banks, by bank type, 1999-04
Ownership structure of private domestic banks, 2003
Commercial banks' interest rate spreads, 1998-99 and 2000-03
2
4
14
19
22
36
40
41
46
50
58
60
69
75
92
93
94
WT/TPR/S/149/Rev.1
Page vi
Trade Policy Review
APPENDIX TABLES
Page
II.
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
AII.1
AII.2
AII.3
Selected notifications under WTO Agreements, October 2004
Foreign Investment Negative List
Incentives granted under the Omnibus Investments Code
III.
TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1
AIII.2
AIII.3
AIII.4
AIII.5
In-quota and out-of-quota tariff rates, 2004
Goods subject to a conditional duty exemption
Excise taxes
Prohibited imports, July 2001
Prohibited and regulated exports
115
117
119
121
123
125
128
129
The Philippines
SUMMARY OBSERVATIONS
(1)
ECONOMIC ENVIRONMENT
1.
Economic growth in the Philippines
has resumed since the Asian financial crisis,
with the annual growth rate averaging more
than 4% during 1999-2004, and over 6% in
2004. Nonetheless, nominal GDP per capita
surpassed 1999 levels only in 2004
(US$1,026). At the same time, unemployment
has risen to almost 12%. The economy
remains vulnerable to external shocks,
reflecting macroeconomic and structural
problems. In particular, persistently large
budget deficits and consequent high levels of
public (including external) debt, which have
only just recently fallen below the equivalent
of 100% of GDP, have generated substantial
external
financing
requirements,
and
contributed to higher interest rates and costs
of
capital,
weakening
external
competitiveness.
The Philippines' growth
prospects are thus linked to reforms to
improve
macroeconomic
stability
and
productivity (through inter alia increased
investment).
2.
Improved productivity is essential to
meeting the increasing external competition.
Philippine exports, which are concentrated in
electronics, have recovered slowly since the
2001 global recession, and while they
performed better in 2004, they have benefited
less from China's economic expansion than
have exports from other economies in the
region. Investment has virtually stagnated,
and most growth since 2001 has come from
private consumption, supported by rising
overseas remittances.
Reforms aimed at
removing
impediments
to
investment,
including FDI, would promote productivity
and help establish robust growth, as would
renewed trade liberalization. After its reelection in 2004, the Government reiterated
the
need
to
implement
significant
macroeconomic and structural reforms to
reduce the budget deficit and to promote
efficiency.
WT/TPR/S/149/Rev.1
Page vii
3.
The fiscal situation poses the greatest
risk to macro-stability.
High public
indebtedness reflects the accumulation of
national government deficits, and the large
debt of government-owned and controlled
corporations. The total non-financial public
sector deficit rose from 3.2% to 5.7% during
1999-03, before falling to 5.1% in 2004. The
non-financial public sector debt, which
exceeded GDP in 2003, was expected to fall
slightly to 99.2% of GDP in 2004. Such debt
tends to reduce the private sector’s access to
finance and crowds out public investment in
essential infrastructure, as budgetary funds
are increasingly committed to servicing debt.
The major fiscal weakness and contributor to
persistent budget deficits is inadequate tax
revenues. These continued to fall, to 12.3% of
GDP in 2004 (14.5% in 1999), partly due to
revenue forgone (equivalent to some 2% of
GDP) through the pervasive use of potentially
distorting tax incentives, such as for exportoriented enterprises, and tax avoidance, if not
evasion.
Thus,
the
Government's
macroeconomic priorities include reducing the
public sector deficit to 1% of GDP and
achieving a balanced budget (albeit not until
2010), as provided for in the Medium-Term
Philippine Development Plan 2004-10. This
will be achieved through revenue and
expenditure initiatives and key structural
measures, such as privatizing electricity and
reducing waste and corruption through public
sector rationalization.
4.
Price stability remains the main
monetary policy objective of the Central Bank
(BSP). This was reinforced by the adoption of
inflation targeting in January 2002. However,
while inflation was kept well below targeted
levels in 2002 and 2003, it accelerated above
the 2004 target of 4%-5% to 5.5%, due mainly
to higher food, fuel, and transport prices.
5.
Merchandise exports were adversely
affected by the 2001 global downturn. They
decreased by 15.6% in 2001, and recovered
slowly, especially in 2003 when growth fell
from 9.5% to 2.9%. Growth was stronger in
2004 (9.9%) but, at 45.8% of GDP, exports
remained below their 2000 level (49.1%).
WT/TPR/S/149/Rev.1
Page viii
Merchandise imports have grown relatively
strongly, except for a decline of 4.2% in 2001
(8.2% growth in 2004).
6.
The
Philippines'
exports
are
concentrated
in
manufactures,
which
accounted for 89.8% of total merchandise
exports in 2003 (92.0% in 1999). They
comprise mainly electronic circuits, other
electrical
machines,
and
computer,
telecommunications, and office equipment.
Manufactured products still account for most
imports.
The United States remains the
Philippines' main trading partner, accounting
in 2003 for 20.1% of exports (down from
29.9% in 1999) and 19.4% of imports (20.5%
in 1999). However, there has been a shift of
exports towards Asian destinations; East
Asian economies as a group increased their
share of exports from 46.2% in 1999 to 59.1%
in 2003.
Imports from the region also
increased, albeit at a slower rate, from 56% in
1999 to 58% in 2003. The Philippines'
increased share of trade with ASEAN partners
since 1999 may reflect trade diversion
attributable to preferential tariff reductions
extended by ASEAN members under AFTA.
(2)
TRADE
POLICY
REGIME:
FRAMEWORK AND OBJECTIVES
7.
Since the last Review of the
Philippines, in 1999, there have been no major
changes in the general or institutional
framework, nor in the way that trade policy is
formulated or implemented. The formulation
of policies remains the joint responsibility of
the executive and the legislative branches of
Government. The Philippines is committed to
transparency in the formulation of trade and
investment policies and in the enforcement of
laws and regulations. In practice, however,
these broad principles of good governance are
not always met, and this undermines the
economic reform process.
8.
The Philippines, an original Member
of the WTO, continues to participate actively
in the organization, remains committed to the
multilateral system and provides at least MFN
treatment to all its trading partners. It is also
Trade Policy Review
a member of the ASEAN FTA (AFTA) and
intends to pursue further regional trade
agreements, bilaterally and collectively
through ASEAN, where appropriate. Since its
last Review, the Philippines has concluded, in
principle, major elements of its first bilateral
agreement with Japan.
However, the
Philippines’ main FTA activity has been
through various ASEAN FTAs being
negotiated or considered. The first parts of
the
ASEAN-China
Agreement
on
Comprehensive
Economic
Cooperation
(ACFTA on goods) and the RTIA with India
have entered into force; and ASEAN FTA
negotiations are to start in 2005 with Japan,
Korea, Australia, and New Zealand. Through
such arrangements the Philippines is
establishing a regional network of bilateral
trade agreements.
9.
Investment policy has not undergone
major changes since 1999; the Philippines
continues to encourage investment in
"preferred" areas, which are listed in the
Investment Priority Plan (IPP). Tax and other
incentives, often contingent on export
performance and Filipino ownership, are still
provided in an effort to attract investment.
(3)
TRADE POLICIES AND PRACTICES BY
MEASURE
10.
The tariff remains the main policy
instrument in an import regime that still
constitutes an impediment to competition in
the economy and, therefore, to improved
productivity of domestic producers. It also
remains a substantial, albeit declining, source
of tax revenue. The simple average applied
MFN tariff rate, which had fallen from 9.7% in
1999 to 5.8% in 2003, rose to 7.4% in 2004;
nonetheless, this average is still low by
developing country standards. In 2001, the
planned reduction in applied MFN rates (to 05% by 2004 with some exceptions) under the
Tariff Reform Programme began to be "recalibrated". This involved raising some tariff
rates in an attempt to promote industrial
development.
This "re-calibration" was
largely in response to political pressure from
protected producers and other interest groups,
The Philippines
but was also aimed at reducing the revenue
losses associated with previous tariff cuts. As
a result, many tariff rates that had been
lowered were raised, especially from late
2003. The large gap between applied and
bound rates imparts a degree of tariff
unpredictability as it provides substantial
scope to raise applied tariffs; the average
bound rate was 25.7% in 2004. Presidential
discretion to raise applied MFN tariffs to
100% when deemed necessary, also provides
scope to raise tariffs above their bound rates.
The Secretariat is not aware of any such
outcomes. A number of general and sectorspecific tariff exemptions remain.
Their
curtailment would reduce the tariff's
complexity and compensate for declining
revenue from reduced tariff rates. All tariffs
rates are ad valorem, which contributes
strongly to transparency and predictability.
11.
Non-tariff barriers to imports,
especially licensing and permits, affect a
number of goods, mainly for health or safety
reasons. The licensing system seems very
complex. Imports of some goods remain
prohibited (e.g. native logs), and a few
particularly sensitive goods (e.g. rice, and
seemingly fish and fish products) are subject
to import quotas. Although the President may
prohibit imports of goods from any country
that discriminates against Philippine exports,
this measure has not been applied during the
period under review. New laws have been
enacted to regulate the use of contingency
measures based on WTO provisions. National
standards and technical regulations appear to
follow international guidelines whenever
possible, and the number of national standards
that correspond to international standards has
increased since 1999.
Sanitary and
phytosanitary regulations appear to be
stringent.
According to authorities, an
electronic procurement system, introduced in
2001, has made government procurement
considerably more transparent and less costly.
However, foreign participation still seems
limited to instances when domestic goods and
services are unavailable or to foreign-funded
projects. More international competition in
WT/TPR/S/149/Rev.1
Page ix
this area could contribute
consolidation and efficiency.
to
fiscal
12.
Some items are subject to export
prohibitions and other restrictions. Exports of
sugar remain subject to special bilateral
restrictions. Export taxes currently apply to
plantation logs (20%). Such taxes, like export
bans, can be distorting by implicitly
subsidizing downstream processors. Minimum
export prices also seem to apply for rice and
corn, with similar potentially distorting effects.
On the other hand, export support policies
exist, partly in an effort to offset the antiexport bias from restrictive import policies.
Several incentives support exports (e.g. duty
exemptions, drawbacks, export-processing
zones, and tax relief); some of these are
contingent on export performance. Producers'
export competitiveness could benefit from a
simplification, if not elimination, of those
import restrictions that the export policies are
intended to offset.
13.
Tax and non-tax incentives are used to
encourage investment in export-oriented
activities, specific sectors, and less developed
regions.
The cost-effectiveness of tax
expenditures in promoting investment is
questionable. Tax incentives have eroded tax
revenues. Inadequate internal tax revenues
can constitute a barrier to cutting tariffs and
may undermine the effectiveness of fiscal
policy in achieving macroeconomic stability
and meeting the Philippines' developmental
needs.
14.
Government intervention through
ownership and regulation remains important.
Privatization has been slow, and loss-making
state-owned enterprises continue to be a drain
on the budget. Privatization, accompanied by
improved corporate governance, could
enhance competition, thereby encouraging
foreign investment and fostering long-term
development.
There is no overarching
competition law, but several laws and
agencies deal with competition;
both
coordination and enforcement could be
strengthened. Likewise, while legislation to
protect intellectual property rights is
WT/TPR/S/149/Rev.1
Page x
comprehensive, enforcement still appears to be
weak.
(4)
TRADE POLICIES BY SECTOR
15.
Despite the declining contribution of
agriculture to GDP, the section remains
important as some 70% of the poor depend on
it or on related activities. Protection in
agriculture is aimed at promoting the sector’s
growth;
however, productivity remains
relatively low. Deteriorating international
competitiveness in major products, such as
sugar, coconut and fruit has hampered export
performance. The sector's share of total
exports has remained low, rising slightly from
5% in 1999 to 6% in 2003. Agriculture
remains protected by relatively high tariffs,
tariff quotas, and non-tariff barriers, mainly a
quantitative restriction on rice and strict SPS
regulations (e.g. on fruit and meat products).
Sugar production and processing remains
protected and highly regulated and, while
catering for the domestic market, relies on
higher priced exports to the United States
under the preferential export quota. In 2003,
the Philippines renegotiated its bound tariff on
raw and refined sugar from 50% to 80%.
Price support by the National Food Authority
(NFA) still exists for rice and corn, mainly to
attain food security, and was more recently
extended to sugar. Such support tends to "tax"
consumers, especially the poor, and would
seem also to compete with the NFA's other
goal of maintaining low consumer prices.
16.
Manufacturing is concentrated in
food, beverages and tobacco, electronics and
telecommunication equipment, and garments.
While electronic equipment and garments
represented almost 70% and 6% of
merchandise exports in 2003, most
manufactured goods are produced mainly for
the domestic market. The Philippine tariff
shows escalation in certain industries, which
has promoted the development of a
manufacturing sector concentrating on
processing components.
Export-oriented
industries, such as electronics, are mainly
located in export-processing zones and
operate under a preferential regime, taking
Trade Policy Review
advantage, inter alia, of duty-free imports.
Textiles and clothing exports, which benefited
from preferential quota access to protected
markets, especially the United States, may be
adversely affected by the 2005 quota removals.
The Government has acknowledged the need
to improve the industry's productivity so that it
can compete with lower-cost suppliers.
Assistance to the motor vehicle industry
remains relatively high, despite the elimination
of the export balancing and local-content
requirements, as planned by mid 2003, and
reduced tariff protection. The Motor Vehicle
Development Plan continues to promote
assembly
operations
and
component
manufacture by applying preferential tariffs of
1% and 3% on imported completely-knockeddown kits (provided they do not include
components available locally). These rates
are well below rates on imported vehicles
(mainly 30%). A general import ban on used
motor vehicles was announced in late 2002; if
this is upheld by the courts, protection, and
thus assistance will increase.
17.
The Government supports the need to
liberalize utilities and other key services to
promote efficiency through competition and
private sector participation.
Electricity
restructuring and deregulation, including
privatization, is continuing with renewed
vigour, after considerable delay. Generating
plants representing 70% of the National
Power Corporation’s capacity are aimed to be
privatized by the end of 2005. The National
Transmission Corporation (TRANSCO), the
holder of the transmission monopoly, is also
intended to be privatized through concession
to a single operator by mid 2005. A wholesale
market for electricity is planned as from mid
2006.
Cross-subsidies between electricity
users are being phased out.
Foreign
investment in utilities (apart from generation)
is constitutionally capped at 40%.
18.
Since 1999, the Government has taken
substantial steps to strengthen the financial
sector, especially banking.
These steps
include revamping the regulatory and
supervisory framework in line with BIS
recommendations, such as introducing risk-
The Philippines
based
capital-adequacy
requirements.
Foreign ownership of domestic banks has
increased since 1999; however, foreign banks,
including branches, accounted for only 14% of
total bank assets at the end of 2004, still below
the 30% allowable limit (majority domesticowned banks must hold at least 70% of total
bank assets). Government policy has been
directed at rationalization by reducing the
number of smaller banks.
A three-year
moratorium against the establishment of new
banks, including foreign subsidiaries, was
implemented in June 2000 to encourage bank
"buy outs", and was subsequently extended.
The 60% ceiling on foreign ownership in
domestic banks was also lifted until June 2007
to allow overseas investors to own up to 100%
of one bank, subject to Monetary Board
authorization. No new foreign branch licences
have been issued since the 10 that were
granted in the 1990s. The banking sector
suffers from high levels of non-performing
loans (NPLs), equivalent to 12.5% of total
loans at end 2004; these NPLs, along with
deficiencies in loan classifications, raise
prudential concerns, including possible bank
under-capitalization.
19.
Market access remains unrestricted in
most
telecommunication
services
and
competition is boosted by relatively unfettered
market entry and exit. However, geographical
separation of the market may restrict
competition to the benefit of the dominant
supplier, Philippine Long Distance Telephone
Company (PLDT). Interconnection, although
mandatory, has been slow and may also have
hindered competition.
Currently, access
charges provide cross-subsidies to fund
unprofitable local services, which is not only
inconsistent with a competitive market, but has
made interconnection less transparent and
raised access charges. Competitive wholesale
cost-based interconnection charges are being
adopted.
Foreign
equity
in
telecommunications is constitutionally capped
at 40%; its raising could contribute to
improved efficiency.
WT/TPR/S/149/Rev.1
Page xi
20.
During the period under review,
efforts have been made to liberalize air
transport services. However, among domestic
airlines, Philippine Airlines has a virtual
monopoly on international services, and
bilateral air service agreements remain
relatively restrictive.
Foreign equity in
Philippine carriers is still constitutionally
limited to 40%. Deregulation of maritime
transport is more advanced, with rates
(seemingly excluding third-class passenger
fares and certain non-containerized basic
commodities) and routes deregulated, except
in some cases where there are still monopolies
or where there is no "effective" competition.
Cabotage is prohibited and foreign equity is
constitutionally capped at 40%. Investment
incentives were introduced in 2004 to support
domestic shipping and the shipbuilding
industry; imports of vessels are also to be
restricted progressively as of 2014, pending an
evaluation of domestic shipbuilding capacity.
(5)
OUTLOOK
21.
The
Medium-Term
Philippine
Development Plan 2004-10 forecasts growth
of between 5.3% and 6.3% in 2006, and
around 7% annually until 2010. However,
sustained future growth will require continued
domestic policy reforms, including reducing
the high overall public debt and large external
financing requirements, further trade and
investment liberalization, and other structural
reforms to improve productivity, particularly
to compete with low-cost neighbouring
economies. However, trade liberalization has
slowed, and slippage has occurred in some key
policy reforms. Addressing these concerns
would appear necessary. In addition,
promoting more competition in services and in
other markets, along with a sounder more
efficient financial sector, will improve the
investment and business climate needed to
attract FDI and private sector development.