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The DTI’s holistic approach to solve the trade deficit

We thank Mr. Rudy Romero for his article entitled “DTI has no solution for worsening trade,” which appeared in Manila Standard on 20 September 2018. We want to assure him that DTI does not stop in finding ways and implementing programs that would help reduce the trade deficit, which is, for the most part, structural in nature and has been in existence for decades.

Allow us to inform the public of the holistic approach in solving this perennial issue of the trade deficit.

Building the export manufacturing base

We know the Philippine economy has been exhibiting robust growth, which in the past was largely driven by buoyant consumption. In principle, if the country’s production base is not supplying enough to meet the needs of the local economy, then we will be importing more than what we export, resulting in a trade deficit. Conversely, if local production is more than enough to address domestic demand, we would have exports outweighing imports, i.e., a trade surplus.

Under President Duterte’s administration, our economy has exhibited strong growth momentum, with the first half (H1) 2018 GDP growth at 6.3 percent on the back of gross domestic capital formation (+16.4 percent) and government spending (+12.6 percent), both of which have performed better compared to previous periods. This economic expansion is supported by locally produced and importable goods. The difference now is that imports comprised more of capital goods (33 percent of total imports for January to August 2018) and raw materials/intermediate goods (38 percent import share). These are imports that support the increasing investments and government spending that cater to the production requirements of the business sector and the major infrastructure programs of the government. These are quality imports in the sense that it builds on the manufacturing and export capacity that the country needs moving forward, preparing the country for the future. This structural change must continue in order to support the medium- to long-term objective of building a much larger export manufacturing base, and eventually attain a more balanced trade position or even a sustained trade surplus.

This is the reason why the DTI as well as the BOI and related agencies have been exerting best effort in encouraging more investments into the country, especially in the manufacturing and infrastructure sectors, that are essential for building a very competitive production base to drive up our exports in the medium to long term. We need to address the manufacturing and production efficiency to support our export strategies.

We have already seen the beginning of this structural change in the form of stronger growth for the manufacturing sector over the last two years at nearly 8 percent as opposed to its 5 percent average growth over the 2000-2015 period. This is not to belittle the importance of the services sector which has led the growth in total exports and in GDP over the past years, accounting for over half of employment and economic activity. But we need to see all sectors growing to be able to achieve a more solid and sustained economic growth.

DTI has been working together with industry groups in the formulation and implementation of industry roadmaps. In collaboration with industry and academe, DTI has crafted and implemented a new industrial policy known as Inclusive Innovation Industrial Strategy (i3S). I3S aims to grow and develop globally competitive and innovative industries with strong forward and backward linkages. It focuses on building an inclusive innovation and entrepreneurship ecosystem in order to upgrade and develop new industries; remove obstacles to growth and attract more investments and create more and better jobs; and strengthen domestic supply and value chains to enable our domestic industries to participate in global/regional value chains. The i3S has five major pillars covering the creation of new industries and new industry clusters, human resource development and capacity building, MSME development, innovation and entrepreneurship, and ease of doing business. The priority industries are: auto and auto parts, electronics and electrical, aerospace parts and MRO, agribusiness, chemicals, shipbuilding and repair, tool and die and iron and steel, agribusiness, IT-BPM, furniture, garments/textile/creative, materials, parts and components, construction, and transport and logistics. We are working closely with the private sector in the implementation of the roadmaps for the development of these priority industries.

It is import to note that industry development and the establishment of our innovation and entrepreneurship ecosystem cannot be done overnight. We need to go through a process of structural transformation. This is the essence of our new industrial policy. For the industry and innovation roadmaps to be successfully implemented, strong collaboration between and among government, academe, and industry is indeed necessary.

Through our industrial policy and innovation strategy, we believe that we can develop globally competitive and innovative industries and address the gaps in our domestic supply and value chains. DTI is focusing on building the competitiveness of and linking together manufacturing, agriculture and services. By doing so, trade would be better able to play a critical role in supporting rapid growth in incomes and reducing poverty, especially when accompanied by foreign direct investment.

Our industry development strategy aims to address the roadblocks to our industry value chain that will strengthen our export manufacturing base over time. It is important to build on the manufacturing capacities, thus the need to pursue relentlessly more investments in manufacturing, policies that will develop competitive industries, lower power cost, lessen trade barriers to materials that cannot be produced locally at competitive costs and quantity, promote greater agriculture-based inputs efficient logistics and infrastructures, and export financing and marketing.

This macro perspective provides a backdrop for the recent export performance of the country, growing but still vulnerable to internal supply and exogenous challenges.

Philippine export performance

Philippine merchandise exports increased at a more rapid pace than initially estimated in 2017: Final annual export figures released by Philippine Statistics Authority in June revealed exports grew by 20 percent to $68.7B for the year, superseding the preliminary 10 percent growth rate it reported earlier. The 2017 final export figures created a high base effect, leading first half 2018 exports to incur a slight decline of -2 percent from previous years. Note, however, that export growth has reverted to positive territory over three-consecutive months through August, the letter depicting 3 percent growth. We hope to see certain sectoral growth tracks sustained as large export groups like electronics expect upticks in the second half of 2018 albeit at a modest single-digit trajectory.

Meanwhile, services exports continue to perform very well, growing by 15 percent in 2017 and 13 percent in the first half of 2018. Combining merchandise and services exports, its total for 2017 amounted to $87.8B, posting a growth rate of 19 percent. For the first half of 2018, total exports (merchandise and services) valued $51.8B, translating to a 2 percent growth rate.

Data shows that Philippine merchandise exports have been largely concentrated in a few products namely: Electronic products, machinery and transport equipment, and other electronics. In 2017, these products namely: electronic products, machinery and transport equipment, and other electronics. In 2017, these products comprised 65 percent of our total exports. Garments which used to be a major export of the country indicated a tiny share of 1.6 percent while special transactions accounted for 2 percent of the total.

In recent years, we have also seen the growth of non-electronics export products, with the share of non-electronics exports to total increasing to 47 percent in 2017 from 38 percent in 2007.

Strategies for export growth and development

We wish to reiterate the DTI synergizes its efforts in building a more robust production and market base by encouraging investments in manufacturing; diversifying into new markets and products; elevating the competencies of our labor and manufacturing processes; pushing technological upgrading as well technological know-how of workers; identifying and developing export capabilities in products where global market demand is fast-growing; addressing bottlenecks that undermine the competitiveness of exports; and harnessing the potential of goods and services where the Philippines can be competitive.

To this end, the DTI, through the Export Development Council (EDC), has finalized the Philippine Export Development Plan (PEDP) 2018-2022 which consolidated the strategies in PEDP 2015-2017 into more effective groups of strategies, namely: 1) Improve the Overall Climate for Export Development; 2) Exploit existing and prospective opportunities from trading arrangements; and 3) Design comprehensive packages of support for selected products and services sectors. The economic development cluster has approved the PEDP 27 directing all government agencies to strengthen the implementation of the PEDP and involving other relevant government agencies are directed to collectively work, review, institute reforms, and implement all relevant policies in harmony with the PEDP and the Philippine Development Plan (PDP) to boost export growth.

On another front, the currency depreciation, brought about by market forces, should encourage exports and increase its production base. Also, the continued consultation and collaboration with various stakeholders in addressing supply concerns, particularly agricultural products, are expected to contribute to the country’s better export performance in the future. Alongside it is the proposal to build and encourage more exporters in an economic zone to make them more globally competitive.

On promotion efforts, the DTI, through the Export Marketing Bureau (EMB) and the Center for International Trade Expositions and Missions (CITEM) under the Trade and Investment Promotions Group (TIPG), continues to undertake, subject to sufficient budget appropriated, the following action points to help the sectors increase their competitiveness and address other concerns hampering their growth and market share among others:

Aggressively invite exporters to participate in outbound business matching missions (OBMMs) and international trade fairs to help them meet prospective buyers and market their products and services in the export market. For instance, the country’s participation in the 1st China International Import Expo (CIIE) in November is expected to provide a wide-range of opportunities that the Philippine companies can take advantage of as trade relations between the two countries continue to warm up;

Conduct information sessions to prepare the companies in entering the foreign markets and push them to avail themselves of the benefits of utilizing the free trade agreements where the Philippines is a signatory to as an individual economy or as a member of the Association of Southeast Asian Nations; and

Increase the base of export-ready companies with the continued implementation of the Regional Interactive Platform for Philippine Exporters Plus (RIPPLES Plus) Program to help prepare local companies to compete in terms of volume, quality, price, packaging, compliance with market entry requirements, rules and regulations, and design leadership, or alignment with current design trends.

These industry development strategies and export promotion programs will address roadblocks to our industry value chain that will strengthen our export manufacturing base over time.

We hope that with all these initiatives, our efforts at revving up the country’s exports and investments would bear good fruits that everyone will get to enjoy in the future.

RAMON M. LOPEZ

Secretary

Department of Trade and Industry

Topics: Ramon Lopez , Department of Trade and Industry , Economy , Rodrigo Duterte , Trade
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