Higher tariff cut in RP-Japan FTA seen to boost exports

Higher tariff cut under proposed RP-Japan FTA to boost exports

The proposed Philippine-Japan free trade agreement (FTA) can boost the export competitiveness of the Philippines since the bilateral agreement can be viewed as an extension of the overall ta-riff reduction program in the manufacturing sector.

Dr. Caesar Cororaton, senior research fellow at the Philippine Institute for Development Studies (PIDS), explained in his study "Philippine-Japan Bilateral Agreements: Analysis of Possible Effects on Unemployment, Distribution and Poverty in the Philippines Using CGE-Microsimulation Approach" that tariff cut increases the country’s export competitiveness because it results in the lowering of the local cost of production.

However, since the manufacturing industry dominates the country’s export sector, Cororaton cautioned that the effect of the possible agreement is an expansion in the manufacturing sector and a contraction in the agricultural sector.

"This could worsen the income inequality problem since the expansion of the industry could result in an increase in wages and other factor prices in manufacturing and a decline in wages and other factor prices in agriculture," Cororaton argued.

Nevertheless, Cororaton said that tariff reduction reduces consumer prices significantly. In fact, he noted that the reduction in consumer prices offsets the negative effects of the contraction of agriculture on household income. Thus, he concluded that the overall result of the FTA is a reduction in poverty incidence.

Cororaton noted, though, that the poverty reduction would be significantly higher in the National Capital Region (NCR), where poverty incidence is lower, than in rural areas. This effect can be traced to the expansion in manufacturing whose activities are usually found in the NCR and other major urban cities.