The Philippines: A Swordsman in A Gunfight

The Philippines: A Swordsman in a Gunfight

Introduction

After World War II, there was a dire need to reestablish and rebuild. Believing that trade is a key tool in rebuilding nations, a hundred and fifty-three (153) nations, countries, and territories  signed the General Agreement on Tariffs and Trade (GATT) in 1947. The purpose of the GATT is to reduce tariffs and other trade barriers substantially, elimination of preferences, on a reciprocal and mutually advantageous basis. On January 1, 1995, the World Trade Organization (WTO) came to be. It is the organization that implements the agreements, provides a forum for negotiating additional reductions of trade barriers, sets policy disputes, and enforces trade rules. The World Trade Organization (WTO)   Secretariat's Trade and Environment Report released on 14 October 1999 argues that international economic integration and growth reinforce the need for sound environmental policies at the national and international level.

        So, if all this trade liberalization, tariff reduction, trade restriction stuff is said to be good, what is it that is in store for the Philippines? How will it affect the Filipinos on a micro scale?

This paper aims to study the effects of trade liberalization in the in the Philippines from the post-WWII period up to the present

International Trade and the World Trade Organization

The WTO implements agreements, provides forums for negotiating additional reductions of trade barriers and for settling policy disputes, and enforces trade rules. It is the only international organization dealing with global rules of trade between nations. It functions to ensure trade flows as smoothly, predictably, and freely as possible. In other words, the end goal is trade liberalization. Consumers and producers can then enjoy a greater variety of goods and services. Firms are also assured that foreign markets will always be open to them. This results to a “more prosperous, peaceful, and accountable economic world.” (wto.org).

In essence, trade is a good thing. According to the Standard Theory of International Trade, nations can specialize on making the goods they produce more efficiently and least costly compared to other countries. If each country were to specialize on producing more of a good, then these nations can enjoy a larger amount of goods, beyond of what they can produce alone – if they were to not trade. Thus, the international exchange of goods and services benefit the welfare of all (?). Not necessarily. The proposal behind this is discussed on the next part.

Neo-colonialism and U.S. Trade Agreement on Post-WWII Philippines

The inauguration of the Commonwealth of the Philippines on November 5, 1935 was what the Filipino people thought as their independence. The Philippine economy was still highly dependent on the U.S. And on 1946, the Philippine Trade Act, more commonly known as the Bell Trade Act, mandated that free trade is to be persistent until 1954.

The Bell Trade Act included controversial provisions that tied the Philippine economy to the United States. These are: (1)  the amendment of the Philippine constitution to give U.S. citizens parity with native Filipinos in the right to own public utilities and corporations engage in natural resource exploitation until July 3, 1974; (2) that there is to be unlimited free trade for eight more years, after which time and for the next twenty years a gradually increasing tariff would be applied until 1974 when there would be full tariffs; (3) that the PH peso to the U.S. dollar exchange rate is fixed to 2:1; and (4) that the Philippines should not export its products that might come into substantial competition with U.S. goods.

All this sounds so good for the Americans. Under free trade, the Philippines sold raw agricultural materials to the U.S. and entered untaxed; American processed goods drove out other foreign competition from the Philippine market since they were cheaper, having entered the islands untaxed. 

First proposed by Adam Smith, the Labor Theory of Value states that "The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not as the greater or less compensation which is paid for that labour". Simply put, it is better to export processed goods than raw materials because the latter receives much less value than the former. What the U.S. did via Bell Trade Act was to acquire raw materials from the Philippines, process it in their country, and then return it to the Philippines with a much higher value.

Free trade between the Philippines and the U.S. discouraged any attempt of industrialization in the Philippines. It also kept majority of the Filipinos in the agricultural sector. The Americans were making a lot of money. In fact, during these times as in 1936, the Philippines was ranked first for importing lots of U.S. products, of course, making the Americans want to continue free trade.

To analyze the effects of the Bell Trade Act on the Philippines under a fixed exchange rate, the Mundell-Fleming Model is to be used. Assume that the Philippines is a small open economy. In a Philippine standpoint, given that the exchange rate of the Philippine peso to the U.S. dollar is fixed, and that there are to be no whatsoever production of goods that are competitive against American goods, the amount of imports is relatively higher than exports, thus reducing net exports, ceteris paribus. As shown in Figure 1, as net exports NX fall, so does Gross Domestic Product (Y= C+I + G +NX). The IS* curve shifts to the left (from IS*1 to IS*2), causing the supposed exchange rate to fall. Since the exchange rate is fixed, arbitrageurs would then start selling Philippine pesos in exchange for U.S. dollars. This reduces the amount of pesos in the nation, resulting to a shift in [pic 1][pic 2]

the LM* curve to the left (from LM*1 TO LM*2) until such time that the exchange rate is back on its prior level. This results to a generally lower income level for the Filipinos.        

Well, of course, this was the post-war Philippines. The Philippines is highly economically dependent on the United States. Imports were flooding the country. According to the 1969 Statistical Bulletin issued by the Central Bank of the Philippines, the Balance of Trade reached its trough in 1949 at -338 million U.S. dollars (as shown in Table 1). Those in red are negative values. Further down the table, we can see that Philippine exports significantly increased over time. This may be caused by the gradually increasing tariff of the Bell Trade Act (let’s leave the tariff theories on trade to focus on the discussion) [pic 3]

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