Trade strategies in the Philippines
For more than 20 years, the Philippines has been limiting the volume of rice it imports. However, the agreement with the World Trade Organization (WTO) that permitted these restrictions expired in 2017. In early 2019, the government replaced the quantity restrictions with tariff protection. A 35% tariff on imported rice from the Association of Southeast Asian Nations (ASEAN)* was imposed to protect the domestic rice industry in the Philippines. Following the replacement of the quota with a tariff, rice prices are expected to fall significantly. However, urban households want the president to allow rice to be imported without any tariffs to reduce food bills even further.
The poorest quintile of households in the Philippines consumes nearly twice as much ordinary rice and 20 times more National Food Authority (NFA) rice compared to the richest quintile. Rising food prices are pushing up inflation as a result of increasing salaries in urban areas. The daily minimum wage in Manila, the Philippine capital, will increase by 4.9%, the highest hike in six years, to the equivalent of US$10.11. Farming and fishing provide the livelihoods for around one-third of the labour force in the Philippines. Land reform programmes are slowly being implemented to change the current situation of unfair ownership of land and resources by a few individuals. However, uncertainty continues to discourage investment in adequate irrigation systems in the countryside. As an agricultural country, irrigation in the Philippines is very important. Improvements in the quality of infrastructure services will help cut the cost of doing business, attract more investment, and enhance productivity around the country. Food manufacturing, including food and beverage processing, remains the most dominant primary industry in the Philippines. This has become a focus in the hope of increasing farm incomes, because this part of the economy is currently dominated by big international companies. Major exports of processed fruits and nuts include mangos, pineapples, bananas, and peanuts.
The Philippine Export Development Plan (PEDP) 2018–2022 calls for boosting the export of services, increasing export competitiveness, and exploring new markets. Efforts have already been made to harmonize the country’s standards, testing, certification, and quality accreditation of products to improve trade and comply with standards in the European Union. The PEDP aims to increase the volume and value of exports by encouraging investment in production processes and supply chains. Another strategy to achieve the plan’s objective is to exploit existing and new opportunities from trade agreements.
The Philippines lacks the infrastructure needed to attract export-oriented manufacturing. To support the PEDP, the government needs to increase its spending on new airports, roads, and bridges. These public works are critical to boosting the incomes of people in poorer areas by connecting them better to Manila. To allow for this extra spending, a series of tax reforms was started: the income tax for the highest income earners has been raised from 30% to 35%, and indirect taxes have been increased.
Table 1: Trade and Economic Data for the Philippines
| Year | Rice Imports (million tonnes) | Tariff Rate on Rice Imports (%) | Average Rice Price (US$ per kg) | Inflation Rate (%) |
|---|---|---|---|---|
| 2016 | 1.8 | 40 | 0.92 | 2.9 |
| 2018 | 2.2 | 35 | 0.88 | 3.2 |
| 2020 | 2.5 | 35 | 0.82 | 2.7 |
| 2022 | 3.1 | 35 | 0.76 | 2.5 |
Table 2: Wage and Export Data
| Year | Minimum Wage in Manila (US$ per day) | Agricultural Employment (% of total workforce) | Total Exports (US$ billion) | Food Manufacturing Exports (US$ billion) |
|---|---|---|---|---|
| 2016 | 9.64 | 34.5 | 56.2 | 12.3 |
| 2018 | 9.89 | 33.7 | 60.5 | 14.1 |
| 2020 | 10.11 | 32.9 | 64.7 | 16.4 |
| 2022 | 10.30 | 31.5 | 70.3 | 18.9 |
Define the term trade protection.
When the government intervenes in international trade
by imposing restrictions to reduce free imports.
List two possible consequences of inflation.
- Real wages may fall as inflation erodes purchasing power.
1 mark - Those on fixed incomes such as pensioners may experience a decline in their standard of living.
1 mark - Savers may lose wealth as the real value of their savings decreases.
1 mark - Uncertainty may discourage investment and economic growth.
1 mark
Using information from Table 1, calculate the percentage change in the average rice price between 2016 and 2022.
Correct percentage change formula and substitution of values:
Correct final answer:
Draw a demand and supply diagram to show the expected impact of replacing the rice import quota with a 35% tariff.
- Correct axes labeled with price and quantity, correctly drawn domestic supply and demand curves.
1 mark - World price (Pw) and world price plus tariff (Pw + t) horizontal lines properly indicated, showing the price increase due to the 35% tariff.
1 mark - Quota limit shown as a vertical line, demonstrating the transition from quantity restriction (quota) to price-based restriction (tariff), with correct identification of domestic production and imports under the tariff.
1 mark
Using a consumer and producer surplus diagram, explain how the 35% tariff on rice imports might affect consumer and producer surplus in the Philippines.
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Consumer surplus decreases by areas a + b + c + d as the price increases from Pw to Pw + t, making rice more expensive for Filipino consumers, particularly affecting the poorest quintile who consume more rice.
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Producer surplus increases by area a as domestic rice producers benefit from the higher prices, protecting the agricultural sector which employs about one-third of the labor force.
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There is a deadweight loss of areas c + f, representing the overall welfare loss to society from the tariff's market distortion, reducing market efficiency.
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Government revenue increases by area e, which is the tariff revenue collected on imported rice (shown as Q2 to Q3), which can potentially be used for infrastructure development as mentioned in the text.
Using a labour market diagram, explain the possible impact of the 4.9% increase in the minimum wage in Manila on employment levels.
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The diagram shows a labor market with supply of labor (S of labour) and demand for labor (D for labour) curves, with an equilibrium wage (We) and quantity (Qe) where the curves intersect.
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The 4.9% increase in the minimum wage in Manila is represented by Wmin, which is set above the equilibrium wage level (We), creating a price floor in the labor market.
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At the minimum wage (Wmin), the quantity of labor demanded decreases from Qe to Qd, as employers are willing to hire fewer workers at the higher wage rate, potentially affecting the approximately one-third of the Philippine workforce employed in farming and fishing.
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The quantity of labor supplied increases from Qe to Qs, as more workers are willing to work at the higher minimum wage, particularly in urban areas like Manila.
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This creates a labor surplus (unemployment) equal to the difference between Qs and Qd, as shown in the diagram, with more workers seeking employment than there are jobs available at the higher wage.
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The resulting unemployment may disproportionately affect agricultural workers and those in food manufacturing, which the case study identifies as important sectors for Philippine employment.
Using an aggregate demand and aggregate supply (AD-AS) diagram, explain how increased government spending on infrastructure might contribute to economic growth.
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In the short run (Keynesian model on right), the increase in government spending shifts the aggregate demand curve (AD) rightward as infrastructure investment directly increases expenditure in the economy.
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This shift in AD initially leads to an increase in both real GDP (from Y₁ to Y₂) and price level (from PL₁ to PL₂), with the horizontal portion of the Keynesian AS curve allowing for significant output growth with minimal inflation.
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In the longer term (left diagram), the increased infrastructure investment shifts both the AD curve and the long-run aggregate supply (LRAS) curve rightward, representing an increase in the economy's productive capacity.
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The rightward shift of LRAS (from LRAS₁ to LRAS₂) occurs because improved infrastructure enhances productivity and efficiency throughout the economy, particularly by "connecting people in poorer areas to Manila" as mentioned in the case study.
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The improved infrastructure stated in the Philippine Export Development Plan (PEDP) would reduce "the cost of doing business, attract more investment, and enhance productivity," allowing for sustainable long-term economic growth without inflationary pressure.
Using a production possibilities curve (PPC) diagram, explain how inadequate infrastructure and limited investment in irrigation might act as barriers to economic development in the Philippines.
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The diagram shows the Philippines' current production at point A on PPC₁, constrained by inadequate infrastructure and irrigation systems mentioned in the case study.
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The outward shift to PPC₂ (point B) represents potential economic growth achievable with improved infrastructure, which would "cut the cost of doing business, attract investment, and enhance productivity."
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Limited irrigation restricts agricultural productivity, creating inefficiencies in resource allocation between farming and manufacturing sectors.
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The case study highlights irrigation as "very important" for the Philippines as an agricultural country, where uncertainty "discourages investment in adequate irrigation systems."
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Government plans to increase spending on "new airports, roads, and bridges" would shift the entire PPC outward, enabling greater production of both agricultural and manufactured goods.
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This infrastructure development would particularly benefit "food manufacturing," which remains "the most dominant primary industry" but is currently constrained.
Using information from the text/data and your knowledge of economics, evaluate the impact of the Philippine Export Development Plan (PEDP) on economic growth and development.
Answers may include:
Definition
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Economic growth: An increase in a country's real output (real GDP) over a period time.
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Economic development: The process of increasing real per capita income while improving living standards and reducing poverty within an economy as whole.
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Economic growth refers to increases in real output over time, whereas economic development refers to a process that leads to improved living standards for a population as a whole.
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Increasing levels of output and incomes resulting from economic growth do not, by itself, guarantee economic development.
Increased Export Volume and Value
Expansion of Trade and Export Diversification
- The PEDP targets growth in both goods and services exports, with export value rising from US70.3B in 2022 (Table 2), contributing directly to aggregate demand (AD) and GDP growth through higher net exports.
- Food manufacturing exports increased from US18.9B, indicating success in processing and adding value to agricultural products, supporting agricultural incomes and industrial upgrading.
- Diagram: AD/AS model – rising exports shift AD to the right, increasing output and reducing cyclical unemployment, promoting short-run growth.
Limitations
- Growth has been concentrated in certain sectors, such as processed foods and services, while export-oriented manufacturing remains underdeveloped due to poor infrastructure.
- The dependence on agriculture and a few commodity exports (e.g., bananas, mangoes) makes export earnings vulnerable to climate shocks and price volatility.
Improved Trade Infrastructure and Business Environment
PEDP Emphasis on Infrastructure and Connectivity
- The plan’s focus on airports, roads, and bridges facilitates internal trade, allowing producers in rural areas to connect to urban markets like Manila, reducing transportation costs and increasing market access, particularly for the poor.
- This contributes to inclusive growth by enabling small-scale farmers and producers to access formal supply chains, enhancing regional development.
Investment in Standards and Accreditation
- Harmonization of product quality and testing standards helps firms access high-value markets, particularly in the European Union, promoting export diversification and international competitiveness.
- Enhanced compliance reduces non-tariff barriers, encouraging FDI into export-processing zones and supply chains, which supports technology transfer and productivity growth.
Limitations
- Infrastructure gaps remain significant, and implementation delays in public works may limit the plan’s effectiveness.
- Regional disparities persist, as the bulk of export activity and infrastructure investment remains concentrated around urban centers.
Promotion of Agricultural and Rural Development
Value Addition and Rural Employment
- PEDP strengthens agriculture-linked sectors by increasing food processing exports, supporting employment in a sector that still employs 31.5% of the workforce in 2022 (Table 2).
- This enhances rural development by raising farm incomes through value-added production, helping to reduce poverty and stimulate rural-to-urban supply chains.
Constraints from Land Ownership and Irrigation
- Slow land reform and lack of investment in irrigation systems limit productivity growth in agriculture, constraining the potential benefits of export-driven development for the poorest households.
- Investment uncertainty in rural infrastructure can deter private sector involvement, especially in upstream supply chains.
Macroeconomic Stability and Inclusive Growth
Moderation of Inflation and Rising Incomes
- The PEDP coincides with a decline in inflation from 2.9% in 2016 to 2.5% in 2022 (Table 1), suggesting export expansion has not generated significant inflationary pressure.
- Minimum wage in Manila increased from US10.30, the highest hike in six years, helping to support purchasing power and reduce income inequality in urban areas.
Balancing Urban and Rural Needs
- While urban households demand lower rice prices via tariff removal, PEDP aims to protect domestic farmers through a 35% rice tariff, balancing food security and farm-level income support.
- Diagram: Tariff on imports – helps reduce reliance on foreign rice, encourages domestic supply, and reduces volatility in rural livelihoods.
Overall Evaluation
Strengths
- PEDP has led to significant export growth, especially in processed agricultural goods, driving short-run economic growth through higher AD.
- Trade infrastructure and standards improvements enhance international competitiveness, encouraging FDI and innovation.
- The plan supports inclusive development by linking agriculture to value-added sectors and providing employment in rural areas.
Weaknesses
- Export gains are unevenly distributed, with urban manufacturing and services benefitting more than rural agriculture, where productivity constraints remain.
- Structural issues, such as slow land reform, poor irrigation, and limited logistics in rural areas, limit the long-run impact on poverty reduction.
- Without faster investment in export-oriented manufacturing, the full potential of the PEDP remains unrealized, especially for long-term transformation.
Conclusion
The Philippine Export Development Plan has contributed to economic growth by boosting exports, attracting investment, and strengthening food processing. However, for the PEDP to drive sustainable and inclusive development, it must be supported by complementary policies—particularly in infrastructure, land reform, and rural investment—to ensure that all sectors and income groups benefit from trade expansion.
