Avoiding huge trade decifits: government’s choice
As the title of my most recent column – “Infrastructure program will produce huge trade deficits,” February 15, 2018 – the prospects look bad for near-term balance in the merchandise trade element of this country’s balance of payments (BOP). I reached that conclusion after examining the two sides, merchandise imports and merchandise exports, of Philippine external trade.
The contours of the imports side of the Philippine external trade ledger are already clear. They have been etched by the infrastructure program of the administration of President Rodrigo Duterte and by the economic policymakers’ ardent pursuit of 7 percent annual GDP (gross domestic product) growth. The combined effect of these expansionary forces is already being felt by the economy: last year the current account of the BOP, of which the merchandise trade balance is a major component, turned negative to the extent of $700 million, moving from a $600 million surplus in 2016 to a $100 million deficit in 2017. A huge merchandise trade deficit caused that negative shift almost by itself.
There is nothing wrong, per se, with a country’s raising its demand for merchandise imports in support of a drive for accelerated economic development. But it is wrong for a country to incur a huge import bill that will be financed not by a corresponding rise in merchandise exports but by borrowings or by drawdowns on its international reserve. This, in fact, is how the merchandise-imports component of the Duterte administration’s Build Build Build program is going to be financed.
Why do I say this?
I say this because in the face of a Build Build Build import avalanche there are absolutely no prospects of this country’s being able to generate, in the near term, merchandise exports sufficient to keep the nation’s external trade in balance. And the government – more specifically, the Department of Trade and Industry – has no realistic strategy for bringing about such a surge in Philippine merchandise exports.
What does the government have by way of a trade-balancing strategy? The closest thing to that was articulated by the Secretary of Socio-Economic Planning (and concurrently NEDA Director-General) in a statement he issued on February 9. “To drive exports growth, we are also looking at maximizing trade agreements with countries in the region. Export volumes may increase, especially for banana, coconut and other agricultural produce, by negotiating tariff structures and implementing free-trade agreements to bring down tariffs levied on Philippine agricultural exports in major export markets,” Ernesto Pernia declared. As against a coming cascade of heavy equipment, machinery and industrial supplies for the Build Build Build program, this country’s top economic policymaker speaks of discussions – “negotiating tariff structures,” “maximizing trade agreements” and “(bringing) down tariffs levied on Philippine agricultural products” – when he should be identifying the products whose export to other countries can be substantially increased within a relatively short time-frame and specifying the countries that are likely takers of incremental Philippine exports. The time for negotiating over tariffs and for maximizing trade agreements is surely long past; what this country should now be doing is engaging in an export drive on the basis of maximized trade agreements that embody lowered tariffs.
Moreover, it is nothing short of horrifying to have Secretary Pernia speak of an export drive involving agricultural products. There is no way that the increasingly wide gap between merchandise imports and merchandise exports can be closed with stepped-up exports of agricultural products. The two products that he singled out – bananas and coconuts – are traded in highly competitive international markets. How much more bananas and coconuts can this country export to such markets in the short term?
By now, four decades after the first Export Priorities Plan (EPP) of the Board of Investments (BOI), Secretary Pernia should be talking about exports of processed and semi-processed agricultural products and of industrial products made out of mineral and other indigenous raw materials. Instead, in 2018 Philippine economic policymakers are still talking about export-growth involving agricultural products. A more pathetic situation it is difficult to find.
In the face of the present administration’s obsession with ushering in a “golden age of infrastructure,” the choice facing President Duterte’s economic policymakers is between scaling down the Build Build Build program and facing a succession of huge trade deficits, with all the dire implications of the latter for monetary stability – especially the inflationary impact of a weakening peso – and for that key macro-economic fundamental, external-debt-to-GDP ratio.
It is a harsh choice.
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