Question

In Philippines, what are the benefits and the detriments that the 60/40 rule to the Philippines? (60/40 rule = where Filipinos must own 60% of the venture leaving only 40% to foreign investors)

Answer 1

The World Trade Organization (WTO), had it been effective, is much favorable for developing countries like the Philippines because of its multilateral approach where all countries, regardless of state of development, are accorded fair treatment. But several rounds have failed to reach consensus at the WTO and therefore, countries resort to smaller Preferential Trade Agreements (PTAs) between countries within strategic geographical locations (e.g., ASEAN Free Trade Area) or between two countries in the form of bilateral agreements. However, these arrangements are not always fair for developing countries as the multilateral trading system offers.

Other than the WTO, the Philippines has only one bilateral agreement, which is with Japan, the Japan-Philippines Economic Partnership Agreement (JPEPA). The rest of its PTAs are regional, as a member country of the ASEAN. Recently though, two ‘new generation’ trade agreements are emerging, which the Philippines cannot afford not to join: the Regional Comprehensive Economic Partnership (RCEP) and the Trans Pacific Partnership (TPP). The RCEP consists of 10 ASEAN member states and the six countries that have existing free trade agreements with ASEAN: Australia, China, India, Japan, Republic of Korea and New Zealand. On the other hand, TPP includes Brunei Darussalam, Singapore, New Zealand and Chile (which form the Trans-Pacific Strategic Economic Partnership Agreement) plus the eight additional countries, namely United States, Australia, Peru, Vietnam, Malaysia, Mexico, Canada and Japan. In the next couple of years, countries anticipated to join are Chinese Taipei, Republic of Korea, Thailand, Indonesia and Columbia.

The TPP merits immediate consideration because it is likely to be launched within 2014. As a major trading partner of the US, the Philippines should have joined TPP earlier but the original four member countries, namely, Brunei Darussalam, Singapore, New Zealand and Chile, refused because of the Philippine Constitutional 60-40 rule on foreign ownership of investment. Recently though, under the Obama Administration, the Philippines has been invited to join the TPP.            

As with other PTAs, countries join for two major reasons: market access and ability to shape the rules. TPP alone offers a market share if 23%-29% of total global trade with a GDP per capita of US$25,419-35,793 and a population of no less than 724.7 million. Eventually, the Philippines would be a less attractive trading partner with its 4.77% average applied tariff whereas the 12 countries within the present TPP applies an average of only 2.38% tariff. Even with the additional five (5) countries in the next two years, average applied tariff would only be as high as 3.07%. Not joining implies huge costs for the Philippines not only in terms of lost potential market but also the possibility of losing its existing market. (Figures were taken from Ramon L. Clarete’s presentation during the seminar, ‘Trans-Pacific Partnership ((TPP)) Agreement: Possible Membership Benefits for the Philippines’)

Hence, the Philippines may need to bend and revise the 60-40 rule on foreign ownership to keep up with globalization trends. While this has been circumvented successfully in the domestic market, international negotiations are a different ballgame and are based on verifiable commitments. Foreign investors would always look at written laws rather than their varying interpretations by the Supreme Court.       

It is about time the removal of the protectionist clauses in the Constitution be seriously considered. It simply perpetuates the oligopolistic structure of our economy, undermining growth. The only way to counterbalance the rule of the few rich family businesses in this country is to bring in more players from the outside that have the resources to compete with them.

Unless the oligopolistic structure of the economy is disentangled, no competition policy would work for real. Major players would have more incentive to connive and influence the outcome of transactions because there are only a few of them. As in the case of the Government being a major buyer of goods and services, competing suppliers find it more efficient to cooperate with each other and rig bids rather than go through the lengthy and arduous government procurement process being uncertain of the outcome. Unless oligopoly is broken down through more entrants from overseas, this system is expected to continue because even though penalized, connivance is very difficult to prove in court. The lack of industry players also indirectly condones corrupt practices among decision makers.

As always, we can choose to adopt the posture of denial, let opportunities pass us by and allow losses to take their own natural course, or we can choose to adapt to the demands of globalization, catch up on our past inefficiencies and capture opportunities offered by liberalizing our markets. Whether we decide to sink or swim, no doubt, the currents of trade will flow on its own, with or without us.