Analysis: The future of trade requires inclusive growth

Dindo Manhit, President of the Stratbase-Albert del Rosario Institute (ADRi) for Strategic and International Studies

President Rodrigo Duterte is on his way to Peru for the 2016 Asia-Pacific Economic Cooperation (APEC) Leaders’ Summit. On Thursday, the president said that he would spend his time in Peru promoting the Philippine economy and his 10-point socio-economic agenda, saying “the Philippines is open for business.” The president’s continued support for greater cross-border economic connections is particularly welcome, given the anti-trade attitudes that are on the rise in other parts of the world—especially the United States.

This year’s theme of “Quality Growth and Human Development” builds on the priorities laid out by the Philippine government during its hosting last year. Although APEC was originally established to promote trade liberalization in the Asia-Pacific region, it has since prioritized agendas that highlight the importance of investing in human capital to build sustainable and inclusive economies.

In recent years, the uneven distribution of growth has alienated the majority, leading to the rise of populist leaders around the globe.  Despite an average economic growth of 6.1 percent over the last six years, the past administration failed to reach their target poverty incidence of no more than 18 to 20 percent. Pervasive inequality helped usher in the rise of Duterte, who pledges to lift millions of Filipinos from poverty. As world leaders are set to convene in Lima, we must reflect on the promise of growth, the future of trade, and APEC’s role in ensuring more people feel the benefits.

APEC’s sluggish pace

In 1989, APEC was founded as a forum to facilitate discussion on economic growth, trade liberalization and investment opportunities. Today, its 21 members constitute 58 percent of the world’s gross domestic product (GDP), 49 percent of total world trade, close to 40 percent of the global population, and include four of the world’s largest economies.

During the Philippines’ hosting last year, two initiatives were adopted: on greater economic growth in the region and a framework for the services sector. For its part, the Philippines held bilateral meetings with 12 leaders, signing seven agreements and exploring cooperation in security, climate resiliency and counter-narcotics.

In trade, the most concrete outcome was an agreement with Russia establishing a Joint Commission on Trade and Economic Cooperation. Several leaders also endorsed the Philippines’ intention to join the US-led Trans-Pacific Partnership (TPP).

Critics have attacked APEC for producing mere pronouncements instead of serious commitments. Nevertheless, there are now over 140 free trade agreements (FTAs) between APEC members and, since the group’s inception, trade barriers are estimated to have been reduced from 17 percent to 5 percent. Thus, despite its shortcomings, APEC still remains an important platform for members to exchange ideas and discuss measures that promote trade and foster cross-country cooperation.

“There are now over 140 free trade agreements between APEC members and, since the group’s inception, trade barriers are estimated to have been reduced from 17 percent to 5 percent.”

Changing dynamics in global trade

This year, APEC discussions will be overshadowed by the consequences of a Trump presidency. Just 12 months ago, the TPP was widely seen as the first major step for APEC to solidify its vision of a regional free trade zone. Now, its future looks dismal, as anti-trade policies are expected to dominate the next US administration.

China, which the US had excluded from TPP negotiations, is now poised to be the leading advocate of regional trade deals. It is expected to promote its proposal on an Asia-Pacific free trade area and its Regional Comprehensive Economic Partnership, which excludes North America.

Due to its restrictions on foreign ownership, the Philippines had been excluded from TPP negotiations, but the country had signified its interest to join the deal. If TPP pushes through without us, the country stands to lose out to other countries such as Malaysia and Vietnam. The Philippines should continue to engage TPP countries on meeting the standards of the agreement; ultimately, even if it fails to pass in the short run, the TPP will have laid the groundwork for a trans-regional FTA.

“The Philippines should continue to engage Trans-Pacific Partnership countries on meeting the standards of the agreement.”

The recent turn of events has signaled that a change in the global dynamic is inevitable. Already, Duterte has signified his interest to conduct bilateral meetings with China and Russia during the summit. Whichever way the pendulum swings, the government must take a balanced approach, and avoid leaning towards one nation and alienating another.

Promoting inclusive growth

While trade clearly spurs economic growth, its impact on development is more tempered. Theoretically, by improving growth, trade also boosts incomes and tax revenues that the government can invest in human capital development. Openness to trade increases business and consumer choices across a variety of goods and services. Empirically, indirect linkages between trade and inclusive growth reveal overall positive effects, although the better-off segments of society have benefited more from trade growth.

In the third quarter of the year, GDP grew by 7.1 percent, surpassing forecasts by economic analysts. The development figures in the Philippines are also promising: poverty dropped to 21.6 percent in 2015 from 25.2 percent in 2012, or by 1.4 million people. Meanwhile, unemployment is at a historical low at 5.4 percent. Despite the positive trajectory, however, the Philippines, like the rest of the world, should be mindful of whether these improvements are fast enough to be felt by the wider population. There is still plenty of room for policy intervention.

“The Philippines, like the rest of the world, should be mindful of whether these improvements are fast enough to be felt by the wider population.”

APEC’s efforts in human capital development have been geared towards education and skills development, as well as harnessing innovation and technology to transition into knowledge-based economies. This year, there is once again a focus on micro, small and medium enterprises (MSMEs) as a driver of inclusive growth and poverty reduction. Current discussions are centered on measures to modernize MSMEs and integrate them in the global value chain. It will be up to our country to set these words into action.

Strengthen cross-border cooperation

APEC can still be a useful forum for leaders to conduct bilateral and multilateral meetings, but countries should emerge with a clear end in mind for their own people.

The stage is set for Duterte to make his mark on other leaders, reach out to all countries, promote ties with existing partners, and establish them with “non-traditional” markets, like Latin America, to advance his 10-point socioeconomic agenda. The moment calls for us to reaffirm the importance of multi-country cooperation.

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