RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/59
27 August 1999
(99-3559)
Trade Policy Review Body
TRADE POLICY REVIEW
THE PHILIPPINES
Report by the Secretariat
This report, prepared for the second Trade Policy Review of the Philippines, has
been drawn up by the WTO Secretariat on its own responsibility.  The
Secretariat has, as required by the Agreement establishing the Trade Policy
Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the
World Trade Organization), sought clarification from the Government of the
Philippines on its trade policies and practices.
Document WT/TPR/G/59 contains the policy statement submitted by the
Government of the Philippines
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on the Philippines.The Philippines WT/TPR/S/59
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS ix
(1) I NTRODUCTION ix
(2) T HE ECONOMIC ENVIRONMENT ix
(3) T RADE POLICIES AND PRACTICES x
(4) S ECTORAL POLICY DEVELOPMENTS xi
(5) T RADE POLICIES AND FOREIGN TRADING PARTNERS xii
I. ECONOMIC ENVIRONMENT 1
(1) I NTRODUCTION 1
(2) R ECENT ECONOMIC DEVELOPMENTS 4
(i) Recent growth and employment trends 4(ii) Macroeconomic policies 5(iii) Structural and trade reforms 9
(3) T
RADE AND INVESTMENT PERFORMANCE 10
(i) Trade patterns 10(ii) Investment trends 13
(4) O
UTLOOK 15
II. THE INSTITUTIONAL ASPECTS OF THE PHILIPPINES' TRADE POLICIES 16
(1) T HE INSTITUTIONAL FRAMEWORK 16
(i) General framework 16(ii) Economic and trade policy formulation 16
(2) T
RADE POLICY FRAMEWORK 19
(i) Trade policy objectives 19(ii) Multilateral agreements and arrangements 20
(iii) Regional agreements and arrangements 24
(iv) Participation in other organizations and fora 25(v) Bilateral relationships 25
Annex II.1 Developments in ASEAN 26
III. TRADE POLICIES AND PRACTICES BY MEASURE 28
(1) I
NTRODUCTION 28
(2) M EASURES DIRECTLY AFFECTING IMPORTS 28
(i) Registration, documentation and customs procedures 28(ii) Preshipment inspection 29(iii) Customs valuation and rules of origin 31(iv) Tariffs 31(v) Tariff quotas 39
(vi) Other charges on imports 41
(vii) Concessional entry 43(viii) Import prohibitions, quantitative restrictions and licensing 44(ix) Anti-dumping and countervailing duty actions 46(x) Safeguards 49
(xi) Balance-of-payments measures 49WT/TPR/S/59 Trade Policy Review
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Page
(xii) Government procurement 49
(xiii) Countertrade 50
(3) M EASURES DIRECTLY AFFECTING EXPORTS 51
(i) Registration and documentation 51(ii) Export restrictions and licensing 51(iii) Export taxes:  charges and levies 54(iv) Export subsidies, and duty and tax concessions 54(v) Export finance, insurance and guarantees 55
(vi) Export promotion and marketing assistance 55
(vii) Export processing zones 56
(4) M
EASURES AFFECTING PRODUCTION AND TRADE 56
(i) Investment regulation and promotion 56(ii) Trade-related investment measures 62(iii) Privatization, public enterprises and state trading 63
(iv) Measures affecting prices and marketing 64
(v) Regional assistance 65(vi) Assistance to small and medium-sized enterprises (SMEs) 65(vii) Assistance to research and development (R&D) and modernization 66(viii) Standards and other technical requirements 66
(ix) Intellectual property rights (IPRs) 69
(x) Competition policy 76
IV. TRADE POLICIES BY SECTOR 77
(1) I
NTRODUCTION 77
(2) A GRICULTURE , FORESTRY AND FISHERIES 78
(i) Structural developments 78
(ii) Policy objectives and instruments 78
(iii) Main subsectors 81
(3) M INING AND ENERGY 85
(i) Overview 85(ii) Petroleum and petroleum products 86(iii) Coal 87
(iv) Electric utilities 87
(4) M
ANUFACTURING 88
(i) Overview 88(ii) Electronics 89(iii) Garments and textiles 89(iv) Motor vehicles 91
(5) S
ERVICES 92
(i) Overview 92(ii) Financial services 93(iii) Telecommunications 99(iv) Transport 101
REFERENCES 105
APPENDIX TABLES 107The Philippines WT/TPR/S/59
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CHARTS
Page
I. ECONOMIC ENVIRONMENTI.1 Main indicators of macroeconomic performance, 1990-98 8
I.2 Merchandise trade by partner, 1993 and 1997 12I.3 Merchandise trade by product, 1993 and 1997 14
II. THE INSTITUTIONAL ASPECTS OF THE PHILIPPINES' TRADE POLICIES
II.1 Organization of the Department of Industry and Trade 18III. TRADE POLICIES AND PRACTICES BY MEASUREIII.1 Tariffs on manufactured products by HS chapter, 1998-99 35
III.2 Tariffs on agricultural products by HS chapter, 1998-99 36
III.3 Frequency distribution of MFN tariff rates, 1999 37
III.4 Tariff escalation by 2-digit ISIC industry, 1999 38III.5 In- and out-of-quota tariff rates, 1999 39III.6 Exports from and investment in ecozones, 1990-98 61
IV. TRADE POLICIES BY SECTORIV.1 Effective protection rates by major product group, 1999 77WT/TPR/S/59 Trade Policy Review
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TABLES
Page
I. ECONOMIC ENVIRONMENTI.1 Basic economic and social indicators, 1992-98 2
I.2 Economic performance, and selected economic indicators, 1992-98 3
I.3 Balance of payments, 1992-98 10
II. THE INSTITUTIONAL ASPECTS OF THE PHILIPPINES' TRADE POLICIESII.1 Principal notifications made in the context of implementing the
WTO Agreement, June 1999 21
II.2 Cases involving the Philippines under WTO dispute settlement provisions, May 1999 23
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Average customs clearance times for sea and air cargoes 29
III.2 Goods exempt from preshipment inspection prior to importation in the Philippines 30III.3 National government tax revenues by collecting agency, 1992-98 32III.4 Summary of the Philippine tariff analysis, 1998-99 33III.5 Excise taxes in the Philippines 41
III.6 Rice importation into the Philippines, 1993-98 45
III.7 Regulated importations 45III.8 Prohibited importations 46III.9 Inventory of anti-dumping cases investigated by the Tariff Commission and
decided by the Secretary of Finance, January 1994-December 98 47
III.10 Products requiring prior export approval/permit from relevant government agencies 51
III.11 Foreign Investment Negative List 57
III.12 Major privatizations, 1993-98 63III.13 Gross revenues from privatization, 1987-98 63III.14 Trade measures taken on health, safety, or sanitary grounds 69III.15 Compulsory licensing granted since 1993 72
III.16 Applications and registrations of industrial property rights, 1990-99 74
III.17 Enforcement of intellectual property rights in the Philippines, 1994-99 75
IV. TRADE POLICIES BY SECTORIV.1 Value of production of major agricultural crops, 1993-97 79
IV.2 Minimum access volume utilization rates, 1995-98 80IV.3 Comparison of Philippine and world prices of rice and corn, 1993-97 81
IV.4 Production of major agricultural commodities, 1993-97 82
IV.5 Imports and exports of principal agricultural commodities, 1993-97 82IV.6 Value of imports and exports of principal agricultural products, 1993-97 83IV.7 Energy consumption by source, 1993-97 85IV.8 Gross value of output of manufacturing establishments, 1993-95 90IV.9 Average price of garment exports, 1995-98 91
IV.10 Minimum capital requirements for insurance companies 98The Philippines WT/TPR/S/59
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APPENDIX TABLES
Page
I. ECONOMIC ENVIRONMENTAI.1 Share of exports by major trading partner, 1990-97 109
AI.2 Share of imports by major trading partner, 1990-97 110AI.3 Share of exports by groups of products, 1990-97 111
AI.4 Value of exports by groups of products, 1990-97 112
AI.5 Share of imports by groups of products, 1990-97 113
III. TRADE POLICIES AND PRACTICES BY MEASUREAIII.1 Applied MFN and bound tariffs by HS chapter, 1998 and 1999 114IV. TRADE POLICIES BY SECTOR
AIV.1 Schedule of in-quota and out-quota tariffs, 1997-2000 118The Philippines WT/TPR/S/59
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SUMMARY OBSERVATIONS
(1) INTRODUCTION
1. Since the previous Trade Policy
Review of the Philippines in 1993, policy
reform has continued to open the economy,
going a long way to correcting the
misallocation of resources associated withearlier trade and industrial policies.  Non-
tariff trade barriers have been largely
removed and tariff protection has been sharply
reduced, with MFN duties currently averaging
just over 10% compared with almost 26% in1992.  More liberal investment policies and
the privatization programme have widened the
choice of sectors for domestic and foreign
private investors, and together with sound
macroeconomic policies were instrumental inboosting real GDP growth to an average
annual rate of 5% between 1994 and 1997;
subsequently, those policies have also helped
soften the impact on the Philippine economy of
the Asian financial crisis.
2. However, remnants of the earlier
import-substitution policies persist, inducingan anti-export bias that the Philippines has
tried to offset through measures in support of
export-oriented activities.  Other areas have
also enjoyed special support, including the
automotive sector, which has longstandinginvestment measures and border protection;
rice, from quantitative import restrictions;
and, more recently, certain textile, clothing,
steel and other products for which tariffs have
been selectively increased (within WTO boundlevels).  Moreover, a number of activities are
yet to be fully open to foreign investment, with
no foreign participation possible in the retail
sector.  The reform process is thus not yet
complete;  its continuation is desirable for thePhilippines to establish a more outward-
looking, rather than export-oriented,
environment that could well support higher,
sustainable rates of economic growth.
(2) T
HE ECONOMIC ENVIRONMENT
3. Ttrade and investment reforms have
been carried out within the framework of astable political and institutional environment.
Disciplined macroeconomic policies have
underlain a fiscal balance and lower inflation;the current account remained weak over much
of the period since the Philippines' last
Review, given a persistent domestic
savings/investment imbalance, and private
external debt grew in consequence.  The onsetof the Asian financial crisis led to severe
balance-of-payments difficulties and in
July 1997 the Government floated the Peso,
which has since depreciated by some 50% in
nominal terms.  The current account turned toa surplus 1998, reflecting a narrowing of the
merchandise trade deficit and a surplus in the
services account.  The rate of unemployment,
however, was up to just over 10% in 1998, the
highest level since the 1991-92 recession.
4. Merchandise exports and their
contribution to GNP increased considerably
between 1992 and 1997, the export to GNP
ratio rising from just over 18% to 29% during
the period.  The shift in exports from primary
to manufactured goods continued, the share of
manufactures in Philippine exports growingfrom 76.6% in 1992 to 86.0% in 1997;
Philippine exports are now dominated by
electronics, automotive products and
garments.  By contrast, the direction of trade
has remained largely unchanged:  in 1997,main exports markets were the United States,
with about 35% of total merchandise exports,
and Japan and the European Union (EU), with
16-17%.  In 1997, Japan and the United States
accounted for some 20% of total Philippineimports, followed by the EU with just over
19%.  In 1997, the Philippines was the world's
28th importer and 23rd largest exporter of
commercial services.
5. Export growth has been closely linked
to a rapid increase of inward foreign direct
investment (FDI), notably in special economic
zones.  Although limitations to foreign equity
participation remain in various key sectors,
these have been gradually reduced.  Foreigninvestment has also been attracted by sound
macroeconomic policies, privatization, a
stable business environment, and a skilled
labour force.  The Government also offers aWT/TPR/S/59 Trade Policy Review
Page x
comprehensive package of tax and non-tax
investment incentives which, however, has
become complex and burdensome toadminister as a result of the proliferation of
eligibility criteria, conditions and
requirements.  The system may divert
investment from efficient uses, attract rent-
seeking companies that are already world-competitive or, on the contrary, attract
inefficient producers that need extra financial
assistance.  Moreover, the implicit fiscal cost
of such system is probably high.
6. Progress in the privatization of state
corporations has reduced the degree of state
intervention in the economy, but the Philippine
economy is still characterized by a high
degree of market concentration.  There is no
comprehensive competition law, nor centralgovernment agency overseeing the
implementation of competition policy.  A
comprehensive competition law might thus
help ensure that limited market competition
does not dampen the full benefits of investment
liberalization and privatization.
(3) T
RADE POLICIES AND PRACTICES
7. The overall degree of protection
granted to the economy has continued to
decline since the Philippines' last Review.  In
consequence of the commitments in the
Uruguay Round, the Philippines boundvirtually all agricultural (except for rice) and
about half of manufacturing tariff lines,
compared with only about 7% of all tariff lines
before the Round.  However, final bound
tariffs are well in excess of the currentaverage applied tariff.  Based largely on pre-
announced programmes, applied tariffs were
more than halved between 1992 and 1999,
despite tariff increases within bound levels for
some products in January 1999.  In somesectors tariff escalation persists and tariff
dispersion has increased.
8. Reform of Philippine customs
procedures, as well as some streamlining of
preshipment inspection, has taken place sincethe last Review.  The Philippines has applied
the provisions allowing developing countriesto delay application of the WTO Customs
Valuation Agreement.  Customs valuation
switched from the " home consumption value"
method to the "export value" method in 1996,
and a shift to the "transaction value" method
by 2000 is envisaged.  Minimum import prices
remain in use.
9. Most quantitative restrictions have
been abolished, with the notable exception of
rice, which remains state-traded by the
National Food Authority;  other quantitative
restrictions, including import prohibitions and
import licensing, are maintained for health,security and similar objectives.  The
Philippines has apparently phased out import
restraints previously maintained for balance-
of-payments reasons, having undertaken to
disinvoke GATT Article XVIII:B (on trademeasures for balance-of-payment reasons) by
end 1997.
10. The Philippines has used trade
defence measures sparingly, five anti-dumping
cases having resulted in the imposition of
definitive duties since 1994.  Proposed anti-
dumping and countervailing legislation wouldalign Philippine regulations with the
respective multilateral rules.  There is no
specific safeguard legislation but work is in
progress to introduce it.
11. Almost half the standards in the
Philippines are aligned to international
standards, a significant increase since 1993;
the authorities intend to increase this share to
50% by 2005, and to 100% by 2020.  There
are 69 (mandatory) technical regulationscovering products such as electrical goods,
construction materials and chemical products.
National product certification marks are
voluntary except for products covered under
technical regulations.
12. In part to offset the anti-export bias
resulting from trade measures affecting
imports, Philippines has a number of measures
to support exports.  These include various tax
exemptions on imported and locally suppliedinputs provided through bonded warehouses,
and duty exemptions. Additional tax incentivesThe Philippines WT/TPR/S/59
Page xi
for export activities were provided by the
Export Development Act of 1994.  Sugar, and
textiles and clothing exports remain subject tospecial arrangements in foreign markets.
13. The Philippines is not a party to the
WTO Agreement on Government Procurement.
In its procurement, the Philippine Government
generally favours the purchase of domesticallyproduced goods and services, and applies
certain foreign ownership limitations to
suppliers.  The Philippines is a signatory to
the ASEAN Preferential Trading
Arrangements under which it grants apreferential margin in government
procurement to ASEAN suppliers;  certain
goods produced in the United States also seem
to be favoured.  Counter-purchase or offset in
certain government procurement projects isencouraged by law.
14. The Philippines maintains various
schemes of intervention in the automotive
industry, and soap and detergent production;
they have been notified under the provisions of
the WTO Agreement on Trade-Related
Investment Measures (TRIMs).  ThePhilippines adopted, in 1998, a new law on
intellectual property, to reflect the
requirements in the WTO Agreement on
Trade-Related Aspects of Intellectual Property
Rights (TRIPS);  further legislative changesare envisaged to provide protection to layout
designs of integrated circuits, and plant
varieties.
(4) S
ECTORAL POLICY DEVELOPMENTS
15. The Philippines’ continued
liberalization of its trade and investment
regimes has resulted in, and required the
adoption of policies to establish a more
neutral incentive structure.  Tariffication and
reductions in tariff rates over the past sixyears have gone a long way towards offsetting
the traditional anti-export bias in the
Philippine import regime, which pushed up
exporters' costs through competition from the
protected import-competing sectors.  Theauthorities have also sought to remove
infrastructural constraints by liberalizingregulated industries, particularly those
providing basic business inputs (e.g. electricity
and telecommunications services).
16. Nevertheless, remnants of earlier
import substitution and "picking winners"
strategies remain, combined with a complex
system of concessions to help export-oriented
industries, many located in special economiczones, to take advantage of imported inputs.
The dynamism of special economic zones
demonstrates the advantages of a liberal trade
regime, and suggest that the Philippines could
derive further benefits, including for itsconsumers, from a more outward-oriented, as
opposed to export-oriented regime focusing on
neutrality of treatment between domestic and
export-oriented production.
17. The effect of current sectoral policies
is to favour agriculture and related processing
industries over most other activities, a
significant reversal of the situation at the time
of the previous Review in 1993.  In view of
existing budget constraints, support for
agriculture relies predominantly on border
protection.  Complying with WTOcommitments to tariffy quantitative import
restrictions, tariff quotas were implemented in
1995 for 15 groups of agricultural products,
including coffee, corn, meat, potatoes, and
sugar.  Very high out-of-quota duties,administered through a complex system,
protect sensitive products, such as rice and
corn;  for some products, the out-of-quota
tariff rate is the only applicable duty.  The
Philippines also undertook minimum accesscommitment on rice.  Though legal provisions
were introduced in 1997 to enhance food
production and lower prices, the domestic
price of some agricultural commodities
exceeds world prices by a wide margin.
18. The downstream oil industry has been
largely liberalized, but a requirement for a
state corporation to use a minimum of
domestic coal is in place to support the local
coal industry.  The priority given by theGovernment to eliminate the power shortages
that plagued the economy at the time of the
previous Review has born fruit, relying mostlyWT/TPR/S/59 Trade Policy Review
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on the privatization and facilitation of private
participation in power generation;  however,
the high cost of electricity is an issue.
19. The Philippines' manufacturing sector
is becoming increasingly diversified and its
exports are now crucial to economic
performance.  Such exports have been led by
electronics, which have grown annually byabout 44% over the period since the previous
Review.  Exports subject to bilateral
agreements under the WTO Agreement on
Textiles and Clothing accounted for about four
fifths of total Philippine garment exports in1996.
20. The motor vehicle industry has grown
strongly since the last Review, becoming also
a major export activity but competing from
behind a heavily protected domestic market.Parts and components as well as used motor
vehicles are subject to import licencing, while
participants in the Car Development Program
must comply with local-content requirements
and foreign-exchange requirements.  These
measures have supported domestic producers
at the cost of significant distortions in thedomestic market, such as higher prices for
consumers and minimal scale efficiencies due
to low production volumes, and a probable net
resource misallocation in the Philippine
economy.
21. Tariff increases in 1999 to protect
industries such as textiles, clothing and steel
also appear to run counter to Philippines'
drive towards greater neutrality of sectoral
protection.  In view of the sharp currencydepreciation since 1997, the rationale for
intervention in and preferred treatment for
those industries would appear weak.
22. In the services sector, significant
headway has been made in reforming andraising the competitiveness of domestic
producers through liberalization and
privatization, including in financial services
and telecommunications.  State involvement in
some sectors, such as banking and airtransport, is still significant but decreasing.
Foreign investment remains restricted insignificant areas of the transport,
telecommunications, banking, and business
services industries, notwithstanding recentinitiatives to liberalize foreign equity
participation notably in financial services.
(5) T
RADE POLICIES AND FOREIGN
TRADING PARTNERS
23. A commitment to WTO principles has
been integral to Philippine economic policies
since the Philippines ratified of the WTO
Agreement in 1994.  Philippine undertakings
under the WTO Agreements included a
significant increase in tariff bindings,extensive tariff reductions, elimination of
quantitative and other non-tariff measures,
and commitments in many services sectors.
Under the General Agreement on Trade In
Services (GATS), the Philippines madecommitments in financial, communication,
transport, and tourism and travel-related
services;  it also participated in the Financial
Services Negotiations and the Negotiations on
Basic Telecommunication Services concluded
in 1997.  The Philippines had yet to sign the
Fifth Protocol of the GATS as of June 1999. Insome cases, existing legislation offers more
liberal treatment to foreign providers than the
Philippines' bindings under the GATS.
24. Concurrently, the Philippines has also
pursued preferential trading agreements as ameans of increasing trade flows.  Within
ASEAN, the Philippines is party to the
Common Effective Preferential Tariff (CEPT)
scheme, signed in 1992, aiming to achieve an
ASEAN Free Trade Area (AFTA).  Although,as in the case of other preferential
arrangements, the CEPT could lead to trade
diversion, this effect is currently reduced by
the relatively modest value of Philippine trade
with other ASEAN members;  in the longerterm, the effect would be minimized by the
falling external barriers in the Philippines and
other ASEAN countries.
25. The reforms pursued by the
Philippines over an extended period provide agenerally positive example of liberalization
and of their advantages in overcomingThe Philippines WT/TPR/S/59
Page xiii
macroeconomic shocks.  There can be little
doubt that the Philippines has also benefited
since 1993 from market opening and improvedrules achieved under the Uruguay Round and
subsequent multilateral negotiations.  These
results have helped in maintaining and
deepening the Philippines' autonomous
liberalization measures, and consolidatingtheir economic benefits.  The Philippine
economy stands to gain from further non-
discriminatory liberalization andstrengthening of multilateral rules, combined
with continued domesti c reforms towards a
more outward-looking economy.