No. 85 - January 2007
Unscheduled Trip

A rush negotiation for a Philippine-US Free Trade Agreement: Is it worth pushing?

By Roxanne V. Lu , Senior Research Associate

In light of the failure of the Doha talks of the World Trade Organization (WTO), the ultimate body pushing for globalization, countries are forging trade alliances as alternatives to continue the momentum of opening up markets. Countries began to resort to free trade agreements, bilateral or regional, to sustain gains from globalization.

For its part, after signing the controversial Japan-Philippines Economic Partnership Agreement (JPEPA) deal in September 2006, the Philippine Government immediately shifted its focus on the next target: a free trade agreement (FTA) with the United States. During the December 2006 14th Asia-Pacific Economic Cooperation (APEC) Summit in Hanoi, President Arroyo and U.S. President George Bush informally agreed to open FTA talks between the two countries. The Philippines was given until July 2007, just before President Bush’s trade promotion authority from the U.S. Congress expires, to present its FTA proposal to the U.S. government.

At present, the Philippines has signed a total of 38 bilateral trade agreements, and three memoranda of understanding on trade and investment cooperation, with China, Australia, Thailand, Indonesia, Canada, and with the U.S.

The U.S., meanwhile, has entered into 5 regional and 17 bilateral trade agreements, of which 13 are free trade pacts. The U.S. has free trade agreements in force with Singapore, Australia, Chile, Israel, Jordan, Panama, Morocco, and the countries in North America, Central America, and Andean, to name a few. It has ongoing FTA talks with Malaysia, South Korea, and Thailand.

The main objective of entering into an FTA with the U.S. is for Philippine goods and services to have greater and freer access to the U.S., a market of over 300 million people. In so doing, the Philippines hopes to gain back its competitive edge after losing a significant share of the U.S. market to China. Today, the Philippines faces the threat of further falling behind its Asian neighbors who are already in the process of signing free trade deals with its top trading partner.

This paper looks into some of the U.S. trade agreements, particularly with countries whose economies are similar to the Philippines. It highlights key agreements and specific sectoral adjustments and changes that took place since implementation or negotiations for an FTA with Singapore, Chile, Malaysia, and Thailand. A brief analysis of the U.S.-Vietnam Bilateral Trade Agreement is also featured into given Vietnam’s close similarity to the the Philippines in terms of products traded with the U.S.

U.S.-Singapore FTA

On 16 November 2000, the United States and Singapore launched one of the most comprehensive free trade deals in history. The U.S.-Singapore free trade agreement aimed to eradicate tariffs on both sides. By the time of effectivity, U.S. exports to Singapore will enjoy zero tariffs while Singapore exports to the U.S. will have their duties gradually reduced, then totally phased-out in a span of ten years. The U.S.-Singapore FTA took effect on 1 January 2004 after two rounds of negotiations.

Aside from treating U.S. products like local products, professional services are now liberalized in Singapore. Americans can now practice law, architecture, finance, and other professions in Singapore. The Singapore government also treats an American investor like its own. A principle of non-discrimination also applies to digital products delivered electronically such as software, music, and videos.

The Singapore-U.S. FTA includes provisions on intellectual property rights protection, regulatory transparency and rules of origin, labor and environmental laws, and strong commitment against bribery and corruption in international business transaction.

U.S.-Chile FTA

The FTA between Chile and the United States officially took effect on 1 January 2004. It paved the way for eliminating tariffs on more than 85% of consumer and industrial products traded between the two countries. The conditions agreed upon centered on agriculture, financial and services markets, intellectual property rights, good and transparent governance, and labor and environment protection.

Since 2004, trade between the two countries has increased by 133%. Specifically, Chilean exports to the U.S. of copper and salmon increased. In 2006, trade between the two countries reached US$14.5 billion, a 32% increase over 2005. Chilean exports to the U.S., the chief destination of its exports, hit US$8.94 billion in 2006, while U.S exports to Chile totaled US$5.57 billion, increasing by 43% and 18%, respectively.

U.S.-Malaysia FTA

In free trade agreement talks with the U.S. that kicked off on 8 March 2006, Malaysia looks to increase trade flows and wider scope of goods traded (including halal goods), enable technology transfer, develop new areas of growth, and diversify Malaysian economic base. The U.S., on the other hand, intends to access the highly protected Malaysian automotive, logistics, financial services, information and communications technology, and pharmaceutical industries, access the 26 million population of Malaysia, and bid in government procurement.

Malaysia admits, however, that after a series of negotiations since June 2006, the pact will not be concluded in July 2007 as planned, due to unresolved issues. For one, Malaysia wants to maintain the tariffs on tobacco and rice imports. Secondly, it is not in favor of U.S. participation in government procurement bids. The Malaysians are also wary of the intellectual property rights protection required by the U.S.

Among those questioning the proposed agreement are former Prime Minister Mahathir Mohamad, environmental NGOs, Committee for Asian Women, People’s Justice Party, Friends of the Earth Malaysia, Kedah Farmers Action Committee, and Islamic South Movement Malaysia.

U.S.-Thailand FTA

In 2004, Thailand and the U.S. commenced negotiations for a free trade agreement. It was put on hold in January 2006, and U.S warned Thailand that reinstating its democracy is a precondition in resuming the FTA talks.

Included in the proposed FTA are the following salient provisions: reduction of tariff and non-tariff barriers on mutual trade, liberalization of trade in goods, agriculture, services, and investments, and strengthening U.S. protection of intellectual property rights. The Thailand-U.S. draft FTA is based on the Singapore FTA model which is anchored on liberalization of sectors.

Through a free trade pact, Thailand hopes to attract U.S. investments mostly in petroleum, banking, electronics, and the automotive industry. Thailand further hopes to boost its exports to the U.S., which, over the years, have been losing market share to Mexico and China.

Through this FTA, both countries are also hoping to forge closer political and economic ties. Moreover, the U.S. expects that through FTA, it would earn the support of Thailand, a key leader in WTO, in multilateral trade negotiations under the Doha Round in the area of agricultural liberalization.

U.S.-Vietnam Bilateral Trade Agreement

The U.S.-Vietnam bilateral trade agreement was officially signed on 31 May 2006. It paved the way for Vietnam to obtain the U.S.’ support in its application to the World Trade Organization in 2007. Membership in the WTO provides Vietnam with non-discriminatory access to all WTO members.

Under the BTA, the United States extends permanent most-favored nation (MFN) status to Vietnam, and reduces its tariff rates on Vietnamese exports from 40% to 3%. Vietnam, on its end, reduced its tariffs on U.S. manufactured goods, lowered its average bound tariff rate on industrial and consumer goods by 20%, provided national treatment to foreign-invested firms on a wide range of sectors including insurance, banking and securities, telecommunications, energy services, and engineering and construction services.

In agriculture, the U.S. benefited with the tariff reduction on three-fourths of its agricultural exports to Vietnam, bound at 15% or less. U.S. businesses in Vietnam also receive legal protections that were unavailable to them before the FTA.

Vietnam also agreed to adopt numerous improvements in the implementation of sanitary and phytosanitary measures, and to provide more transparency in government procurement process.

The World Bank estimated that Vietnam’s exports to the U.S. will rise to US$1.3 billion, more than 60% over 2000 levels, in its first year of MFN status.

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