Trade deficit seen widening as low tariffs spur imports

By Beatriz Marie D. Cruz, Reporter

IMPORT GROWTH driven by lower tariffs runs the risk of widening the Philippine trade deficit, putting into focus the urgency of growing exports, analysts said.

“The government has reduced tariffs on many products with the objective of reducing inflation and increasing its growth prospects. What they don’t realize is that without raising exports, the increase in imports will backfire in the form of higher deficits and depreciation pressure on the currency as more pesos are exchanged for dollars,” Leonardo A. Lanzona, an Ateneo De Manila economics professor, said in a Messenger chat.

The Philippine Statistics Authority reported that exports grew 0.3% year on year to $6.75 billion in August., while imports rose 2.7% to $11.12 billion.

This resulted in a trade deficit of $4.375 billion in August, up 6.6%.

The lower tariffs will lead to continued trade deficits in the coming months, Mr. Lanzona said. 

Executive Order No. 62, which took effect on July 5, slashed import tariffs on rice to 15% until 2028. It also maintained the reduced Most Favored Nation tariff rates on 34 tariff lines and expanded the zero import-duty regime to other forms of electric vehicles.

“With the lower tariffs, the competitiveness of domestic industries is undermined, thus (setting the stage for) even further deficits,” Mr. Lanzona said, noting that such deficits could increase the debt burden going forward.

“If the country consistently runs trade deficits due to high import levels, it may need to borrow foreign currency, leading to an increase in external debt. This can strain the economy, especially if the country’s currency depreciates further, making it more expensive to service its debt.”

The balance of trade in goods has been in deficit for over nine years, or since the $64.95-million surplus posted in May 2015.

Electronic products, while remaining the Philippines’ top export, continue to decline due to the industry’s inability to produce high-value products needed for artificial intelligence applications, University of Asia and the Pacific trade professor George N. Manzano said.

“The strongest markets for semiconductors are those that cater to AI (artificial intelligence) technologies, which are not major exports of the Philippines,” he said via Viber.

In August, the value of electronics exports fell 8.2% year on year to $3.57 billion. Still, the commodity accounted for 53% of total exports.

The Philippine electronics industry is mainly engaged in low-value activity like assembly, testing, and packaging. Its growth has been dampened by supply chain disruptions and fluctuating demand, Mr. Manzano said.

In the next few months, a recovery in exports will be driven by a rebound in demand from the US and Japan, two of the Philippines’ major export markets, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said in an e-mail.

“The deficit will narrow gradually over the short run, as Philippine exports have plenty of catching up to do with regard to the nascent recovery in regional and world trade.”