External trade: Reading between the numbers

One plus one is not always equal to two. The sum could be equal to one or two, or even one hundred, depending on the value of one. Value: that is the key point when reading numbers.

For years, China has been regarded from the perspective of being the Philippines’ top trading partner. On paper, that is true. However, deriving a conclusion out of that unqualified narrative requires more questions. When the numbers are analyzed in detail, data will show that the total bilateral trade between the Philippines and China is skewed towards imports.

With a registered total bilateral trade of P39.17 billion in the full-year 2022 based on data from the Philippine Statistics Authority (PSA), some 72% of this figure accounted for imports while the remaining 28.0% were exports. This explains why the Philippines is always running a trade deficit with China. This means that the Philippines spends more foreign exchange than it receives, thus fueling a balance of payments deficit as well. 

A closer look at the country’s trade data indicates that the Philippines has been posting a deficit in its balance of trade every year since around 2010 but became more pronounced and quickly rose starting in 2016. In all of those years, the trade between the Philippines and China has favored the latter. The Philippines has been buying more goods from China than the other way around. In other words, for the past several years, the trade relations between the two countries have consistently been imbalanced – and this imbalance has grown larger through the years.

In fact, according to figures from the PSA, for the full-year 2022, China was only the third biggest export market of the Philippines, with exports amounting to US$ 10.97 billion and accounting for 13.9% of total exports. During the same period, the United States was the top export partner of the Philippines, with exports valued at US$ 12.34 billion that accounted for 15.7% of total exports, followed by Japan, with 14.1% of the total exports. On the other hand, China remained to be the Philippines’ top import partner in 2022, with imports amounting to US$ 28.20 billion that accounted for 20.6% of total imports. Following China were Indonesia (9.6%), Japan (9.0%), South Korea (9.0%), and the US (6.5%). 

To date, latest data from the PSA indicate that imported goods continued to dominate Philippine external trade in January 2023 as they accounted for 67.7% of the total, while the rest were exported goods. Consequently, the trade deficit in the same month rose to US$ 5.74 billion – or 27.2% higher year-on-year – which was the widest trade gap recorded by the country in five months. In this equation, China continued to gain materially from the Philippine’ trade deficit. 

In January 2023, Japan was the Philippines’ top export trading partner, accounting for 16.6% of total exports. Trailing behind were the US (14.1%), China (12.7%), Hong Kong (10.1%), and Singapore (6.1%). On the other hand, China was still the Philippines’ top source of imported goods valued at US$ 2.32 billion, which accounted for 21.1% of the total imports during the month. Other top suppliers of imports were Indonesia (10.6%), Japan (8.7%), Republic of Korea (7.9%), and the US (6.4%).

In terms of investments, latest data from the Bangko Sentral ng Pilipinas (BSP) show that the net inflows of FDI in the full-year 2022 contracted by 23.2%, amounting to US$ 9.2 billion. Most of these inflows were sourced from Japan, Singapore, and the US, and were channeled to the manufacturing, real estate, and financial and insurance activities.

The approved foreign investments that have yet to materialize show some surprises as well. Data from the PSA indicate that total foreign investments approved in the fourth quarter of 2022 amounted to P173.61 billion, which presented a growth of 30.1% year-on-year. The top source of these foreign investment commitments was Singapore – accounting for 64.2% of the total – followed by Japan (21.5%) and the United Kingdom (5.9%). Meanwhile, investment pledges from China during the same quarter only amounted to P253.77 million, accounting for 0.1% of the total. For the full-year 2022, only around 0.6% of the total investment commitments were from China, valued at P1.43 billion.

Based on these figures, the one thing that the Philippine government needs to do is to build up its strength in the Japanese, US, and Singaporean markets to help create a sustained captive market for trade and investments. If Philippine exports have the ability to compete in mature markets like Japan and the US, it means that products from the Philippines are competitive in terms of quality and pricing. 

From this perspective, therefore, the government can promote the entry of FDIs also from these same export markets since the move will be mutually beneficial. More high-quality jobs will result from prioritizing investment opportunities in productive sectors and enhancing human capital, allowing a thriving labor market in the Philippines. In this case, the country’s balance of trade will hopefully swing from the perennial imbalance and deficit to one that reflects a healthy balance in the preferred world markets.

Venice Isabelle Rañosa is a research manager at think tank Stratbase ADR Institute.