ࡱ> @ mbjbj uucTB>B>B>>^?Vy,@&@@@@@hA4AxxxxxxxzR|6x[N@@[N[Nx@@y)R)R%R[Nr@@x%R[Nx)R)Rj-l0t@ @ A3vgB>O]t2]w&y0Vyt2 ~PH ~dt ~t&B FF%R8I\KANBB xxD:!:DR::World Trade OrganizationRESTRICTEDWT/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 Trade Policy Review of the Philippines, has been drawn up by the ϲʹ 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 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.  ADVANCE \y 700  Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on the Philippines. CONTENTS Page SUMMARY OBSERVATIONS vii (1) economic environment vii (2) trade policy regime: framework and objectives viii (3) trade policies and practices by measure viii (4) trade policies by sector x (5) outlook xi I. Economic environment 1 (1) Introduction 1 (2) Recent Economic Performance 1 (3) Macroeconomic Policies 6 (i) Fiscal policy 6 (ii) Monetary and exchange rate policy 8 (4) Structural Measures 9 (5) Developments in Trade 11 (i) Composition of merchandise trade 11 (ii) Direction of merchandise trade 14 (iii) Trade in services 14 (6) Developments in Foreign Direct Investment (FDI) 15 (7) Prospects 15 II. trade policy regime: framework and objectives 17 (1) Introduction 17 (2) Trade Policy Formulation and implementation 17 (i) Objectives 17 (ii) Institutional and legal framework 18 (iii) Trade policy formulation and implementation 19 (3) Trade Agreements and Arrangements 21 (i) ϲʹ 21 (ii) Other arrangements 23 (4) Foreign Investment Regime 28 III. trade policies and practices by measure 31 (1) Introduction 31 (2) Measures 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 Page (viii) Import operations of state-trading enterprises 52 (ix) Local-content schemes 53 (x) Countertrade 53 (3) Measures 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, insurance, and guarantees 56 (ix) Export promotion and marketing assistance 56 (4) Measures 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) Introduction 71 (2) Agriculture 73 (i) Overview 73 (ii) Policy developments 73 (iii) Selected activities 76 (iv) Fisheries 78 (3) Mining And Energy 80 (i) Petroleum and petroleum products 80 (ii) Coal 82 (iii) Natural gas 82 (iv) Electricity 83 (4) Manufacturing 87 (i) Introduction 87 (ii) Policy developments 87 (iii) Selected activities 88 (5) Services 90 (i) Financial services 91 (ii) Telecommunications 98 (iii) Transport 100 (iv) Tourism 105 REFERENCES 107 APPENDIX TABLES 113 CHARTS Page 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 macroeconomic indicators, 1999-04 2 I.2 Basic economic and social 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 ϲʹ 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 selected 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 APPENDIX TABLES Page II. trade policy regime: framework and objectives AII.1 Selected notifications by the Philippines under ϲʹ 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 SUMMARY OBSERVATIONS Economic environment 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). 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. 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 sectors 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. 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. Merchandise exports were adversely affected by the 2001 global downturn. They decreased by 15.6% in 2001, and recovered slowly, especially in 2003 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%). Merchandise imports have grown relatively strongly, except for a decline of 4.2% in 2001 (8.2% growth in 2004). 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. trade policy regime: framework and objectives Since the last Review of the Philippines, in 1999, there 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. The Philippines, an original Member of the ϲʹ, 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. 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. trade policies and practices by measure 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, 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. 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 ϲʹ provisions. National standards and technical regulations appear to follow international guidelines whenever possible, and the number of national standards that correspond to international 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. 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. 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. 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 comprehensive, enforcement still appears to be weak. trade policies by sector 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 sectors 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 renegotiated 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. 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. 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 Corporations 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%. 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-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. 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. 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. outlook 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. 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