The European Union—A strong economic partner of the Philippines
Business Mirror
November 30, 2016

THE European Union (EU) is the largest single market and trader in the world. It is a €12.6-trillion economy, larger than the United States (€11.5 trillion), China (€4.6 trillion) and Japan (€4.2 trillion) in 2015.  Its strong market position is achieved by its 28 member-states acting as a single voice on the global stage, resulting in a position where the EU currently accounts for 16 percent of the global trade.

The EU is a highly attractive integrated market to do business with, as it has more than 500 million consumers with a gross domestic product per capita of €25,000. The EU is the top trading partner for 80 countries in 2015 (in comparison to the United States—the top trading partner for just 20 countries). Importantly, the EU is one of the most open economies committed to freer trade, especially with developing countries, with over 70 percent of developing-country exports coming in at zero or less-than-MFN duties.

The EU is one of the most important trading partners of the Philippines. Total two-way trade in 2015 amounted to €12.9 billion, or 11 percent of the total, making the EU the Philippines’ fourth-largest trading partner.

The broad stroke numbers

IN terms of exports, the EU is the third-largest market of the Philippines with exports of €5.7 billion in 2015. Within the EU, 90 percent of EU-Philippine trade is concentrated among eight EU member-states—Germany, France, the Netherlands, the United Kingdom, Italy, Spain, Belgium and Denmark.

The Philippines’s main exports to the EU are office and telecommunication equipment (44.9 percent of the total), machinery (15.1 percent), food products (12.5 percent), and optical and photographic instruments (11.1 percent). While the main exports of the EU to the Philippines are transport equipment (30.9 percent), machinery (14.9 percent), food products (13.2 percent), chemicals (11.5 percent) and electronic components (11.3 percent).

A close look at the export data of the Philippines to the EU from 2002 to 2013 reveals a steady decline of exports from €8.5 billion in 2002 to €5.1 billion in 2014. There was an increase in 2015 of 13 percent, when exports amounted to €5.8 billion.  Hopefully, this positive increase will continue, especially with the GSP+ and the prospect for an EU-Philippines free-trade agreement. We return to these two trade instruments later in this article.

Trade in services between the EU and the Philippines was worth €3.1 billion in 2015.

The Philippines’ services exports have been very robust with an average growth rate of 20 percent from 2013 to 2015.  Philippine services exports to the EU are dominated by sea transport, travel and telecommunication services. EU services exports to the Philippines are IT services, telecommunication, and sea and air transport services.

The EU is a very large investor in the Philippines with €300.16 million in foreign direct investment (FDI) in 2015 and €6.15 billion in FDI stock. EU FDI to the Philippines came predominantly from 5 EU member states: The Netherlands, UK, Germany, Denmark and France. The potential to increase EU investment to the Philippines should be very high, especially if one looks at the EU FDI figures in other Asean countries such as Vietnam (€1.3 billion) and Thailand (€700 million) in 2015, and Malaysia (€1.563 billion in 2014).

GSP and GSP+

THE Generalized System of Preferences (GSP) was created in 1971 following an Unctad recommendation to developed countries to provide developing countries better access to their markets. Under the EU GSP, developing countries can export goods with reduced tariffs entering the EU to stimulate economic growth and job creation in their economies. The European Commission said the GSP is solely an economic instrument focused on the reduction or removal of tariffs and does not deal with political or societal challenges developing countries face.

There are two important dimensions of the GSP: First, it is a non-reciprocal arrangement; and second under the Enabling Clause under the Tokyo Round of the General Agreement on Tariffs and Trade (GATT), developed countries (e.g. EU) may provide trading preferences to developing and least developed countries at the risk of discriminating against the trade of developed countries.

The GSP has three different approaches: general/standard arrangement; special incentive arrangement for sustainable development and good governance (GSP+); and Everything But Arms (EBA) which is reserved for the least developed countries. The current GSP program covers the period 2014–2023.

The general/standard arrangement provides developing countries tariff discounts for around 66 percent of all EU tariff lines. Low or lower-middle income countries are only eligible to apply. Currently, 30 countries such as Georgia, Ethiopia, Fiji and Cook Islands are under the GSP scheme.

The Special Incentive Arrangement for Sustainable Development and Good Governance or the GSP+ provides developing countries the opportunity to export their products to the EU at zero tariff on more or less the same 66 percent of EU tariff lines outlined in the general arrangement. The EU GSP+ scheme is an essential component of the Philippines’ Europe trade and investment strategy as it has given an important opportunity for the Philippines to broaden its market access to the EU.

ember 2014, the EU granted the Philippines GSP+ status.  As a beneficiary country, the Philippines can avail itself of the zero preferential duties on 6,274 products (tariff lines). In order to be a beneficiary country under GSP+, an applicant country must meet two conditions: (i) non-diversification of exports (e.g., concentration of exports in a few HS Chapters), and low proportions or share of global EU imports; and (ii) the ratification and effective implementation of 27 international conventions on human and labor rights, environment and governance principles.  Currently, there are nine GSP+ beneficiary countries: Armenia, Bolivia, Cape Verde, Georgia, Mongolia, Pakistan, Paraguay, Kyrgyzstan and the Philippines. Sri Lanka may be re-admitted after years of being disqualified for violations of the second condition.

Sectors where there are wide margins between the MFN duty and the GSP+ zero duty are prepared food stuffs (at least 9.3 percentage points), garments (9), textile products (5), live animals and animal products (4.2) and footwear, headwear and umbrellas (4). In principle, these are sectors that should benefit most from the GSP+.

In the first year of the GSP+ for the Philippines, GSP+ trade accounted for €1.38 billion of the €6.8 billion of total exports in 2015. This is an increase of 22.2 percent compared to €1.13 billion under the GSP in 2014.

The following product groups had the strongest overall (i.e. MFN plus GSP+) growth rates in 2015 in comparison to 2014: meat products, which grew from practically nothing in 2014 to about €72,000 in 2015, products made of wool (+4,307 percent), aircraft and spacecraft parts (+1,524 percent), products made of silk (+1,046 percent), ships and boat structures (+849 percent), products made of tin (+302 percent), products made of lead (+293 percent), prepared animal fodder (+255 percent), footwear (+225 percent), beverages (+210 percent), photographic or cinematographic (+165 percent); ores, slag and ash (+129 percent); cereals (+120 percent), dairy and animal products (+100 percent), and jewelry, pearls and precious metals (+93 percent).

The fastest-growing product groups under GSP+ alone in 2015 were textile fabrics (+1,783 percent), products made of copper (+366 percent), tobacco (+291 percent), products made of wood (+249 percent), beverages (+246 percent), clocks and watches (+242 percent), footwear (+221 percent), fish (+179 percent), pyrotechnic products (+143 percent), articles of cork (+107 percent), salt, sulphur, earths, stone and plastering materials (+100 percent), albuminoidal substances (+100 percent), modified starches (+100 percent), products made of silk (+100 percent), products made of zinc (+100 percent) and products made of metal (+100 percent).

In terms of absolute magnitudes, the biggest product groups exported under the GSP+ in 2015 were: animal or vegetable fats (€315,591,560), electrical machinery and equipment (€135,857,041), preparations of fish or meat (€127,069,275), photographic or cinematographic goods (€102,148,659), preparations of vegetables (€73,345,267), chemical products (€70,442,747), machinery and mechanical appliances (€59,260,977), vehicle parts (€57,879,039), products made of rubber (€57,014,025),  tanning or dyeing extracts (€39,530,291), tobacco (€31,709,651), organic chemicals (€31,133,461), not knitted or crocheted clothing accessories (€28,146,680), products made of steel or iron (€27,045,850) and furniture (€26,964,138).

The following product groups under the GSP+ saw their share to total trade increase the most: articles of zinc (which gained 68 percentage points), products made of cork (53), tobacco (52), textile fabrics (47), fish (38), products made of wood (26), products made of copper (21), umbrellas (20), preparations of meat or fish  (19), pyrotechnic products (16), cocoa preparations (14), products made of silk (13), felt and nonwovens (12), products made of cement, plaster and asbestos (12) and headgear parts (11).

As another condition under GSP+, the Philippines must agree to be monitored by the EU in implementing the international conventions.  The first monitoring mission took place in September 2015 and – on the basis of a scorecard that the EU provides before a monitoring mission, and which the Philippines fills up –  produced a report which showed the Philippines satisfactorily complied with substantive and reportorial obligations under the international conventions. The next GSP+ monitoring mission is scheduled in November 2016. The mission will include visits to companies benefiting from GSP+.

Free Trade Negotiations with the EU

THE FTA is another essential component of the Philippines’ trade and investment strategy for Europe.  (Unlike GSP+, an FTA- a free trade agreement – is a reciprocal arrangement and has no expiry date.)

The negotiations for the EU-Philippines FTA were formally launched on December 22, 2015. An FTA is when two or more trading partners aim to reciprocally open up their markets to each other for goods and services, by eliminating barriers to trade and custom duties, establish common rules and standards that will govern economic relations and develop joint commitments on important trade policy issues that include intellectual property rights, competition rules and dispute settlement.

In the EU-Philippines FTAm the following topics are being negotiated: trade in goods (market access, sanitary and phytosanitary measures, technical barriers to trade), rules of origin, intellectual property rights, competition, trade in services and investment, trade and sustainable development, and legal and institutional issues (including dispute settlement).

The first round of negotiations took place in Brussels in May 2016. The second round is scheduled in Manila in December 2016. Ideally, there should be three rounds every year.

The average length of negotiations for an FTA with the EU, based on the experience on recent partners (e.g. South Korea, Singapore and Vietnam) was about four years. We come back to the EU’s FTAs in our next article.□

Jose Antonio Buencamino, Foreign Trade Service Corps, Department of Trade and Industry