RESTRICTED  WORLD  TRADE  
ORGANIZATION  WT/TPR/S/149 
7 June 2005  
 
(05-2264) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
THE PHILIPPINES 
 
Report by the Secretariat 
 
 
  
 
This report, prepared for the third Trad e Policy Review of the Philippines, has 
been drawn up by the WTO Secretaria t on its own responsibility.  The 
Secretariat has, as required by the Agreement establishing the Trade Policy 
Review Mechanism (Annex 3 of the Ma rrakesh Agreement Establishing the 
World Trade Organization), sought clarification from the Philippines on its trade 
policies and practices. 
 
Any technical questions arising from this report may be addressed to  
Mr. Michael Daly (tel.:  022 739 5077).  
 
Document WT/TPR/G/149 contains the policy statement submitted by the 
Philippines. 
 
 
 
Note: This report is subject to restricted circ ulation and press embargo until the end of the first 
session of the meeting of the Trade Polic y Review Body on the Philippines. The Philippines WT/TPR/S/149 
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CONTENTS 
 
    P a g e  
SUMMARY OBSERVATIONS vii 
 
 (1) E CONOMIC ENVIRONMENT  vii 
 (2) T RADE POLICY REGIME :  FRAMEWORK AND OBJECTIVES  viii 
 (3) T RADE POLICIES AND PRACTICES BY MEASURE  viii 
 (4) T RADE POLICIES BY SECTOR  x 
 (5) O UTLOOK  xi 
I. ECONOMIC ENVIRONMENT 1 
 (1) I NTRODUCTION  1 
(2) R ECENT ECONOMIC PERFORMANCE  1 
 (3) M ACROECONOMIC POLICIES  6 
 (i) Fiscal policy 6 
 (ii) Monetary and exchange rate policy 8 
 (4) S TRUCTURAL MEASURES  9 
 (5) D EVELOPMENTS IN TRADE  11 
 (i) Composition of merchandise trade 11 
 (ii) Direction of merchandise trade 14  (iii) Trade in services 14 
 (6) D
EVELOPMENTS IN FOREIGN DIRECT INVESTMENT (FDI) 15 
 (7) P ROSPECTS  15 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 17 
 (1) I NTRODUCTION  17 
 (2) T RADE POLICY FORMULATION AND IMPLEMENTATION  17 
 (i) Objectives 17 
 (ii) Institutional and legal framework 18 
 (iii) Trade policy formulation and implementation 19 
 (3) T RADE AGREEMENTS AND ARRANGEMENTS  21 
 (i) WTO 21  (ii) Other arrangements 23 
 (4) F
OREIGN INVESTMENT REGIME  28 
III. TRADE POLICIES AND PRACTICES BY MEASURE 31 
 (1) I NTRODUCTION  31 
 (2) M EASURES DIRECTLY AFFECTING IMPORTS  32 
 (i) Procedures 32  (ii) Customs valuation and rules of origin 33 
 (iii) Tariffs 33 
  (iv) Prohibitions and restrictions      40 
 (v) Contingency measures 43 
 (vi) Standards and other technical requirements 47 
 (vii) Government procurement 49 WT/TPR/S/149 Trade Policy Review 
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    P a g e  
 (viii) Import operations of state-trading enterprises 52 
 (ix) Local-content schemes 53 
 (x) Countertrade 53 
 (3) M EASURES DIRECTLY AFFECTING EXPORTS  53 
 (i) Procedures 53 
 (ii) Export taxes and other charges 53  (iii) Minimum export prices 54 
 (iv) Export prohibitions, restrictions, and licensing 54 
 (v) Export operations of state enterprises 55  (vi) Export support 55 
 (vii) Export performance requirements 56 
 (viii) Export finance, in surance, and guarantees 56 
 (ix) Export promotion and marketing assistance 56 
 (4) M
EASURES AFFECTING PRODUCTION AND TRADE  57 
 (i) Industrial policy and incentives 57  (ii) Competition policy 59 
 (iii) Price controls 61 
 (iv) Corporate governance 62 
 (v) State-owned enterprises and privatization 63 
 (vi) Intellectual property rights 64 
IV. TRADE POLICIES BY SECTOR 71 
 (1) I
NTRODUCTION  71 
 (2) A GRICULTURE  73 
 (i) Overview 73 
 (ii) Policy developments 73 
 (iii) Selected activities 76  (iv) Fisheries 78 
 (3) M
INING AND ENERGY  80 
 (i) Petroleum and petroleum products 80  (ii) Coal 82 
 (iii) Natural gas 82 
 (iv) Electricity 83 
 (4) M
ANUFACTURING  87 
 (i) Introduction 87 
 (ii) Policy developments 87  (iii) Selected activities 88 
 (5) S
ERVICES  90 
 (i) Financial services 91 
 (ii) Telecommunications 98 
 (iii) Transport 100  (iv) Tourism 105 
REFERENCES   107 
APPENDIX TABLES  113 
 
 
 The Philippines WT/TPR/S/149 
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CHARTS 
    P a g e  
I. ECONOMIC ENVIRONMENT 
 I.1 Product composition of merchandise trade, 1999 and 2003 12 
I.2 Merchandise trade by main origin and destination, 1999 and 2003 13 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
III.1 Share of bound tariff lines by HS section 34 
III.2 Distribution of MFN tariff rates, 1999, 2003 and 2004 36 III.3 Tariff escalation by 2-digit ISIC industry, 1999 and 2004 38 
 
 
TABLES 
I. ECONOMIC ENVIRONMENT 
 I.1 Selected macroeconomi c indicators, 1999-04 2 
I.2 Basic economic and soci al indicators, 1999-04 4 
I.3 Trade in services, 1999-04 14 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 
 II.1 Main institutions involved in trade policy formulation and implementation, 2004 19 
II.2 Cases involving the Philippines under WTO dispute settlement provisions, 1999 to October 2004 22 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
III.1 Structure of the MFN tariff in the Philippines 36 
III.2 CEPT preferential rates by member country, 2004 40 III.3 Goods subject to regulation/import licensing 41 
III.4 Safeguard actions, 1999-04 46 
III.5 Alternative methods of procurement 50 III.6 Tax incentives provided under select ed special investment incentives laws 58 
III.7 Laws dealing with competition in the Philippines 60 
III.8 Intellectual property enforcement, 1999 to June 2004 69 
IV. TRADE POLICIES BY SECTOR 
 
IV.1 Effective rates of protection, 1999-04 75 IV.2 Number of head offices of commercial banks, by bank type, 1999-04 92 
IV.3 Ownership structure of private domestic banks, 2003 93 
IV.4 Interest rate spreads of commercial banks, 1998-99 and 2000-03 94 WT/TPR/S/149 Trade Policy Review 
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APPENDIX TABLES 
    P a g e  
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 
 AII.1 Selected notifications by the Philippines under WTO Agreements, October 2004 115 
AII.2 Foreign Investment Negative List 117 
AII.3 Incentives granted under the Omnibus Investments Code 119 
III. TRADE POLICIES AND PRACTICES BY MEASURE  
 
AIII.1 In-quota and out-of-quota tariff rates, 2004 121 AIII.2 Goods subject to a conditional duty exemption 123 
AIII.3 Excise taxes in the Philippines 125 
AIII.4 Prohibited imports, July 2001 128 AIII.5 Prohibited and regulated exports 129 
 The Philippines WT/TPR/S/149 
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SUMMARY OBSERVATIONS 
 
(1) ECONOMIC ENVIRONMENT  
1. Economic growth in the Philippines 
has resumed since the Asian financial crisis, 
with the annual growth rate averaging more than 4% during 1999-2004, and over 6% in 2004.  Nonetheless, nominal GDP per capita surpassed 1999 levels only in 2004 
(US$1,026).  At the same time, unemployment 
has risen to almost 12%. The economy remains vulnerable to external shocks, reflecting macroeconomic and structural problems.  In particular, persistently large budget deficits and consequent high levels of 
public (including external) debt, which have 
only just recently fallen below the equivalent of 100% of GDP, have generated substantial external financing requirements, and contributed to higher interest rates and costs 
of capital, weakening external 
competitiveness.  The Philippines' growth prospects are thus linked to reforms to improve macroeconomic stability and productivity (through inter alia increased investment). 
2. Improved productivity is essential to 
meeting the increasing external competition.  Philippine exports, which are concentrated in electronics, have recovered slowly since the 2001 global recession, and while they 
performed better in 2004, they have benefited 
less from China's economic expansion than have exports from other economies in the region.  Investment has virtually stagnated, and most growth since 2001 has come from 
private consumption, supported by rising 
overseas remittances.  Reforms aimed at removing impediments to investment, including FDI, would promote productivity and help establish robust growth, as would renewed trade liberalization.  After its re-
election in 2004, the Government reiterated 
the need to implement significant macroeconomic and structural reforms to reduce the budget deficit and to promote efficiency. 3. The fiscal situation poses the greatest 
risk to macro-stability.  High public indebtedness reflects the accumulation of national government deficits, and the large 
debt of government-owned and controlled 
corporations.  The total non-financial public sector deficit rose from 3.2% to 5.7% during 1999-03, before falling to 5.1% in 2004.  The non-financial public sector debt, which 
exceeded GDP in 2003, was expected to fall 
slightly to 99.2% of GDP in 2004.  Such debt tends to reduce the private sector’s access to finance and crowds out public investment in essential infrastructure, as budgetary funds are increasingly committed to servicing debt.  
The major fiscal weakness and contributor to 
persistent budget deficits is inadequate tax revenues.  These continued to fall, to 12.3% of GDP in 2004 (14.5% in 1999), partly due to revenue forgone (equivalent to some 2% of 
GDP) through the pervasive use of potentially 
distorting tax incentives, such as for export-oriented enterprises, and tax avoidance, if not evasion.  Thus, the Government's macroeconomic priorities include reducing the 
public sector deficit to 1% of GDP and 
achieving a balanced budget (albeit not until 
2010), as provided for in the Medium-Term Philippine Development Plan 2004-10.  This will be achieved through revenue and expenditure initiatives and key structural 
measures, such as privatizing electricity and 
reducing waste and corruption through public sector rationalization. 
4. Price stability remains the main 
monetary policy objective of the Central Bank 
(BSP).  This was reinforced by the adoption of 
inflation targeting in January 2002.  However, while inflation was kept well below targeted levels in 2002 and 2003, it accelerated above the 2004 target of 4%-5% to 5.5%, due mainly to higher food, fuel, and transport prices. 
5. Merchandise exports were adversely 
affected by the 2001 global downturn.  They decreased by 15.6% in 2001, and recovered slowly, especially in 20 03 when growth fell 
from 9.5% to 2.9%.  Growth was stronger in 
2004 (9.9%) but, at 45.8% of GDP, exports 
remained below their 2000 level (49.1%).  WT/TPR/S/149 Trade Policy Review 
Page viii 
 
 
Merchandise imports have grown relatively 
strongly, except for a decline of 4.2% in 2001 (8.2% growth in 2004). 
6. The Philippines' exports are 
concentrated in manufactures, which 
accounted for 89.8% of total merchandise exports in 2003 (92.0% in 1999).  They comprise mainly electronic circuits, other electrical machines, and computer, 
telecommunications, and office equipment.  
Manufactured products still account for most imports.  The United States remains the Philippines' main trading partner, accounting in 2003 for 20.1% of exports (down from 29.9% in 1999) and 19.4% of imports (20.5% 
in 1999).  However, there has been a shift of 
exports towards Asian destinations;  East Asian economies as a group increased their share of exports from 46.2% in 1999 to 59.1% in 2003.  Imports from the region also 
increased, albeit at a slower rate, from 56% in 
1999 to 58% in 2003.  The Philippines' increased share of trade with ASEAN partners since 1999 may reflect trade diversion attributable to preferential tariff reductions extended by ASEAN members under AFTA. 
(2) T
RADE POLICY REGIME :  
FRAMEWORK AND OBJECTIVES  
7. Since the last Review of the 
Philippines, in 1999, th ere have been no major 
changes in the general or institutional 
framework, nor in the way that trade policy is 
formulated or implemented.  The formulation of policies remains the joint responsibility of the executive and the legislative branches of Government.  The Philippines is committed to 
transparency in the formulation of trade and 
investment policies and in the enforcement of laws and regulations.  In practice, however, these broad principles of good governance are not always met, and this undermines the economic reform process.  
8. The Philippines, an original Member 
of the WTO, continues to participate actively in the organization, remains committed to the multilateral system and provides at least MFN treatment to all its trading partners.  It is also a member of the ASEAN FTA (AFTA) and 
intends to pursue further regional trade agreements, bilaterally and collectively through ASEAN, where appropriate.  Since its 
last Review, the Philippines has concluded, in 
principle, major elements of its first bilateral agreement with Japan.  However, the Philippines’ main FTA activity has been through various ASEAN FTAs being 
negotiated or considered.  The first parts of 
the ASEAN-China Agreement on Comprehensive Economic Cooperation (ACFTA on goods) and the RTIA with India have entered into force;  and ASEAN FTA negotiations are to start in 2005 with Japan, 
Korea, Australia, and New Zealand.  Through 
such arrangements the Philippines is establishing a regional network of bilateral trade agreements. 
9. Investment policy has not undergone 
major changes since 1999;  the Philippines 
continues to encourage investment in "preferred" areas, which are listed in the Investment Priority Plan (IPP).  Tax and other incentives, often contingent on export performance and Filipino ownership, are still 
provided in an effort to attract investment. 
(3) T
RADE POLICIES AND PRACTICES BY 
MEASURE  
10. The tariff remains the main policy 
instrument in an import regime that still 
constitutes an impediment to competition in 
the economy and, therefore, to improved productivity of domestic producers.  It also remains a substantial, albeit declining, source 
of tax revenue.   The simple average applied 
MFN tariff rate, which had fallen from 9.7% in 
1999 to 5.8% in 2003, rose to 7.4% in 2004;  nonetheless, this average is still low by developing country standards.  In 2001, the planned reduction in applied MFN rates (to 0-5% by 2004 with some exceptions) under the 
Tariff Reform Programme began to be "re-
calibrated".  This involved raising some tariff rates in an attempt to promote industrial development.  This "re-calibration" was largely in response to political pressure from 
protected producers and other interest groups, The Philippines WT/TPR/S/149 
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but was also aimed at reducing the revenue 
losses associated with previous tariff cuts.  As a result, many tariff rates that had been lowered were raised, especially from late 
2003.  The large gap between applied and 
bound rates imparts a degree of tariff unpredictability as it provides substantial scope to raise applied tariffs;  the average bound rate was 25.7% in 2004.  Presidential 
discretion to raise applied MFN tariffs to 
100% when deemed necessary, also provides scope to raise tariffs above their bound rates.  The Secretariat is not aware of any such outcomes.  A number of general and sector-specific tariff exemptions remain.  Their 
curtailment would reduce the tariff's 
complexity and compensate for declining revenue from reduced tariff rates.  All tariffs rates are ad valorem, which contributes strongly to transparency and predictability. 
11. Non-tariff barriers to imports, 
especially licensing and permits, affect a number of goods, mainly for health or safety reasons.  The licensing system seems very complex.  Imports of some goods remain prohibited (e.g. native logs), and a few 
particularly sensitive goods (e.g. rice, and 
seemingly fish and fish products) are subject to import quotas.  Although the President may prohibit imports of goods from any country that discriminates against Philippine exports, 
this measure has not been applied during the 
period under review.  New laws have been enacted to regulate the use of contingency measures based on WTO provisions.  National standards and technical regulations appear to 
follow internationa l guidelines whenever 
possible, and the number of national standards that correspond to inter national standards has 
increased since 1999.  Sanitary and phytosanitary regulations appear to be stringent.  According to authorities, an 
electronic procurement system, introduced in 
2001, has made government procurement considerably more transparent and less costly.  However, foreign participation still seems limited to instances when domestic goods and 
services are unavailable or to foreign-funded 
projects.  More international competition in this area could contribute to fiscal 
consolidation and efficiency. 
12. Some items are subject to export 
prohibitions and other restrictions.  Exports of 
sugar remain subject to special bilateral 
restrictions.  Export taxes currently apply to plantation logs (20%).  Such taxes, like export bans, can be distorting by implicitly subsidizing downstream processors.  Minimum 
export prices also seem to apply for rice and 
corn, with similar potentially distorting effects.  On the other hand, export support policies exist, partly in an effort to offset the anti-export bias from restrictive import policies.  Several incentives support exports (e.g. duty 
exemptions, drawbacks, export-processing 
zones, and tax relief);  some of these are contingent on export performance.  Producers' export competitiveness could benefit from a simplification, if not elimination, of those 
import restrictions that the export policies are 
intended to offset. 
13. Tax and non-tax incentives are used to 
encourage investment in export-oriented activities, specific sectors, and less developed regions.  The cost-effectiveness of tax 
expenditures in promoting investment is 
questionable.  Tax incentives have eroded tax revenues.  Inadequate internal tax revenues can constitute a barrier to cutting tariffs and may undermine the effectiveness of fiscal 
policy in achieving macroeconomic stability 
and meeting the Philippines' developmental needs.   
14. Government intervention through 
ownership and regulation remains important.  
Privatization has been slow, and loss-making 
state-owned enterprises continue to be a drain on the budget.  Privatization, accompanied by improved corporate governance, could enhance competition, thereby encouraging foreign investment and fostering long-term 
development.  There is no overarching 
competition law, but several laws and agencies deal with competition;  both coordination and enforcement could be strengthened.  Likewise, while legislation to 
protect intellectual property rights is WT/TPR/S/149 Trade Policy Review 
Page x 
 
 
comprehensive, enforcement still appears to be 
weak. 
(4) TRADE POLICIES BY SECTOR  
15. Despite the declining contribution of 
agriculture to GDP, the section remains 
important as some 70% of the poor depend on it or on related activities.  Protection in agriculture is aimed at promoting the sector’s growth;  however, productivity remains 
relatively low.  Deteriorating international 
competitiveness in major products, such as sugar, coconut and fruit has hampered export performance.  The sector's share of total exports has remained low, rising slightly from 5% in 1999 to 6% in 2003.  Agriculture 
remains protected by relatively high tariffs, 
tariff quotas, and non-tariff barriers, mainly a quantitative restriction on rice and strict SPS regulations (e.g. on fruit and meat products).  Sugar production and processing remains 
protected and highly regulated and, while 
catering for the domestic market, relies on higher priced exports to the United States under the preferential export quota.  In 2003, the Philippines renegotia ted its bound tariff on 
raw and refined sugar from 50% to 80%.  
Price support by the National Food Authority 
(NFA) still exists for rice and corn, mainly to attain food security, and was more recently extended to sugar.  Such support tends to "tax" 
consumers, especially the poor, and would 
seem also to compete with the NFA's other 
goal of maintaining low consumer prices. 
16. Manufacturing is concentrated in 
food, beverages and tobacco, electronics and telecommunication equipment, and garments.  
While electronic equipment and garments 
represented almost 70% and 6% of merchandise exports in 2003, most manufactured goods are produced mainly for the domestic market.  The Philippine tariff shows escalation in certain industries, which 
has promoted the development of a 
manufacturing sector concentrating on processing components.  Export-oriented industries, such as electronics, are mainly located in export-processing zones and 
operate under a preferential regime, taking advantage, inter alia, of duty-free imports.  
Textiles and clothing exports, which benefited from preferential quota access to protected markets, especially the United States, may be 
adversely affected by the 2005 quota removals.  
The Government has acknowledged the need to improve the industry's productivity so that it can compete with lower-cost suppliers.  Assistance to the motor vehicle industry 
remains relatively high, despite the elimination 
of the export balancing and local-content requirements, as planned by mid 2003, and reduced tariff protection.  The Motor Vehicle Development Plan continues to promote assembly operations and component 
manufacture by applying preferential tariffs of 
1% and 3% on imported completely-knocked-down kits (provided they do not include components available locally).  These rates are well below rates on imported vehicles 
(mainly 30%).  A general import ban on used 
motor vehicles was announced in late 2002;  if this is upheld by the courts, protection, and thus assistance will increase. 
17. The Government supports the need to 
liberalize utilities and other key services to 
promote efficiency through competition and 
private sector participation.  Electricity restructuring and deregulation, including privatization, is continuing with renewed vigour, after considerable delay.  Generating 
plants representing 70% of the National 
Power Corporation’s capacity are aimed to be privatized by the end of 2005.  The National Transmission Corporation (TRANSCO), the holder of the transmission monopoly, is also 
intended to be privatized through concession 
to a single operator by mid 2005.  A wholesale market for electricity is planned as from mid 2006.  Cross-subsidies between electricity users are being phased out.  Foreign investment in utilities (apart from generation) 
is constitutionally capped at 40%. 
18. Since 1999, the Government has taken 
substantial steps to strengthen the financial sector, especially banking.  These steps include revamping the regulatory and 
supervisory framework in line with BIS 
recommendations, such as introducing risk-The Philippines WT/TPR/S/149 
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based capital-adequacy requirements.  
Foreign ownership of domestic banks has increased since 1999;  however, foreign banks, including branches, accounted for only 14% of 
total bank assets at the end of 2004, still below 
the 30% allowable limit (majority domestic-owned banks must hold at least 70% of total bank assets).  Government policy has been directed at rationalization by reducing the 
number of smaller banks.  A three-year 
moratorium against the establishment of new banks, including foreign subsidiaries, was implemented in June 2000 to encourage bank "buy outs", and was subsequently extended.  The 60% ceiling on foreign ownership in 
domestic banks was also lifted until June 2007 
to allow overseas investors to own up to 100% of one bank, subject to Monetary Board authorization.  No new foreign branch licences 
have been issued since the 10 that were 
granted in the 1990s.  The banking sector 
suffers from high levels of non-performing loans (NPLs), equivalent to 12.5% of total loans at end 2004;  these NPLs, along with deficiencies in loan classifications, raise 
prudential concerns, including possible bank 
under-capitalization. 
19. Market access remains unrestricted in 
most telecommunication services and competition is boosted by relatively unfettered market entry and exit.  However, geographical 
separation of the market may restrict 
competition to the benefit of the dominant supplier, Philippine Long Distance Telephone Company (PLDT).  Interconnection, although mandatory, has been slow and may also have 
hindered competition.  Currently, access 
charges provide cross-subsidies to fund unprofitable local services, which is not only inconsistent with a competitive market, but has made interconnection less transparent and raised access charges.  Competitive wholesale 
cost-based interconnection charges are being 
adopted.  Foreign equity in telecommunications is constitutionally capped at 40%; its raising could contribute to improved efficiency. 20. During the period under review, 
efforts have been made to liberalize air transport services.  However, among domestic airlines, Philippine Airlines has a virtual 
monopoly on international services, and 
bilateral air service agreements remain relatively restrictive.  Foreign equity in Philippine carriers is still constitutionally limited to 40%.  Deregulation of maritime 
transport is more advanced, with rates 
(seemingly excluding third-class passenger fares and certain non-containerized basic commodities) and routes deregulated, except in some cases where there are still monopolies 
or where there is no "effective" competition.  
Cabotage is prohibited and foreign equity is 
constitutionally capped at 40%.  Investment incentives were introduced in 2004 to support domestic shipping and the shipbuilding industry; imports of vessels are also to be 
restricted progressively as of 2014, pending an 
evaluation of domestic shipbuilding capacity. 
(5) O
UTLOOK  
21. The Medium-Term Philippine 
Development Plan 2004-10 forecasts growth of between 5.3% and 6.3% in 2006, and 
around 7% annually until 2010.  However, 
sustained future growth will require continued domestic policy reforms, including reducing the high overall public debt and large external financing requirements, further trade and 
investment liberalization, and other structural 
reforms to improve productivity, particularly to compete with low-cost neighbouring economies.  However, trade liberalization has slowed, and slippage has occurred in some key 
policy reforms.  Addressing these concerns 
would appear necessary. In addition, promoting more competition in services and in other markets, along with a sounder more efficient financial sector, will improve the investment and business climate needed to 
attract FDI and private sector development.