POSSIBLE MEASURES FOR INCLUSION IN A TRADE ASSISTANCE PACKAGE FOR THE PHILIPPINES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01117R000702280006-6
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: December 23, 2016
• Document Release Date: April 4, 2011
• Sequence Number: 6
• Publication Date: September 5, 1986
• Content Type: MEMO

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IUCIV I INL
THE UNITED STATES TRADE REPRESENTATIVE
WASHINGTON
20506
September 5, 1986
~IORANDUM
T0: THE ECONOMIC POLICY COUNCIL
FROM: THE TRADE POLICY REVIEW GROUP
SUBJECT: Possible Measures for Inclusion in a Trade Assistance
Package for the Philippines
President Corazon Aquino will be on a state visit to Washington
on September 17-18. It is expected that she will want to discuss
U.S. economic assistance to the Philippines, including possible
trade measures.
After the change of government in the Philippines, the Administra-
tion expressed a determination to assist the new leadership in
reviving economic growth in the Philippines. The Chairman of
the EPC requested an analysis of trade options for achieving this
goal.
Recommendations
The TPRG and a special Working Group reviewed a number of options
for providing trade assistance to the Philippines. They found
that an effective trade assistance plan should include: (1)
an opening of the U.S. and Japanese markets to increase traditional
Philippine exports, especially in products with high domestic
value-added, which would have an immediate impact on employment
and rural incomes; and (2) measures to stimulate exports in non-
traditional products, especially manufactured goods and other
products with high domestic value-added.
The TPRG unanimously recommends that the Administration undertake
four measures, none of which retruire legislation, to assist the
Philippines:
1) Negotiate a more liberal textile agreement with the Philippines
to replace the existing agreement which expires at the end of 1986.
2) Propose establishment of a Japan-U.S.-Philippines Trade
Committee for one year to develop a coordinated package of
trade liberalization measures in all three countries what would
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be of assistance to the Philippines.
3) Provide the Philippines with more liberal treatment under
GSP by granting Philippine competitive need waiver requests in
the GSP General Review even if we are not fully satisfied with
their responses to our requests for country practice improvements.
4) Expand U.S.-Philippine trade and investment by establishing a
Business Promotion Council with high-level government and busi-
ness participation.
the TPRG unanimously ocposes the following option:
5) Propose legislation which would provide duty-free treatment
for Philippine exports for five years (with a one year phase-out
period).
Auer extensive debate on the question of sugar, the TPRG developed
two suboctions for Council consideration. The TPRG unanimously
opposes suboption B and most agencies supvort suboption A:
6) Improve treatment of the Philippines under the Sugar Program.
suboption A: Maintain our current policy of non-discriminatory
application of the existing quota, but express our
willingness to consider possible forms of commodity
donations to compensate countries affected by the
sugar quota, in the event that their import quota
is reduced in the coming years.
suboption B: Discriminate in favor of the Philippines by
eliminating quota eligibility for net-sugar-impor-
ting countries and reallocating the amount to the
Philippines.
Background
-- The Philippine economy and per capita income have been
contracting since 1983. The GNP fell 6.8 percent in 1984 and 3.8
percent in 1985. Current estimates are that the Philippines will
not grow measurably in 1986.
-- The country continues to face its most difficult postwar
economic crisis, including a depressed investment environment, 26
percent underemployment, extremely low prices for its mayor
commodities (i.e. coconut oil, copper and sugar), and extensive
poverty.
-- The Philippines remains a heavy debtor, with an overall
external debt of $26 billion and a debt-service ratio of 36.5
percent after rescheduling of principal repayments.
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The United States is the Philippines' largest trading partner.
U.S. imports from the Philippines in 1985 were $2.1 billion,
while our exports totaled $1.4 billion, resulting in a $760
million surplus in favor of the Philippines. Trade turnover
between the United States and the Philippines fell 14 percent
between 1984 and 1985 and dropped a further 12 percent in the
first six months of 1986 compared to the same period in 1985,
with exports of both countries declining.
The largest U.S. import from the Philippines is electrical
machinery (assembled U.S. parts), followed by apparel and vegetable
oil. our largest export is electrical machinery for assembly,
followed by cereals.
discussion of options
1~ Negotiate a more liberal teatil? agreement with the Philippines
The present bilateral textile agreement expires at the end of
1986. The Philippines have requested early renegotiation and a
number of liberalizing changes as their best prospect for expanded
exports and increased employment in depressed areas. Among ideas
floated by the Philippine government are large quota increases,
including merger of the adult and children apparel quotas,
increased growth rates, and CBI-type treatment under which they
would assemble American made and cut fabrics to obtain additional
quota.
The Philippines is the 12th ranking textile and apparel supplier
to the United States, with a 2.37 percent share of overall
U.S. imports. U.S. imports of textiles and apparel from the
Philippines in 1985 were valued at $487 million, comprising
nearly 25 percent of total Philippine exports to the United States.
Embassy Manila reports that each additional $1 million in apparel
exports provides 400 additional jobs, many of which are in the
provinces. Thus, a 10 percent increase in garment exports would
provide nearly 20,000 additional fobs.
Negotiations on a revised bilateral textile agreement are scheduled
for the week of September 8th. U.S. textile negotiators believe
that they can liberalize significantly the Philippine agreement.
They prefer not to decide in advance of the negotiations exactly
which elements of the agreement they should liberalize, as this
will depend in part on how much weight Philippine negotiators
place on various liberalization options.
Advantages:
-- As Philippines has a developed textile industry and a proven
export potential to the U.S., increased quotas would have an
immediate beneficial effect on export earnings and employment.
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- Liberalization of the textile agreement can be accomplished
administratively, without GATT/MFA problems.
Preferential treatment for poorer developing countries is
consistent with our textile policy.
Disadvantages:
-- The textile and apparel lobby and its congressional supporters
would oppose negotiation of a more liberal agreement. Granting
the Philippines more favorable treatment could be particularly
sensitive given the legislative climate after the Jenkins Bill
veto override effort.
- The current trade deficit makes this an inopportune time to
liberalize any bilateral textile agreement.
2) Establish a Japan-II.B.-Philippines Trade Committee for a
period of one year to develop a package of trade liberalizing
measures in each country that would be of benefit to the Philip-
pines
The principal purpose of this option is to bring Japan to the
table to discuss market-opening measures that it could take to
stimulate Philippine exports to Japan, as the United States should
not be the only country taking such steps. If there were a
trilateral discussion, Philippine requests would not be directed
only at the U.S. It would be advisable to keep these discussions
distinct from our own bilateral market access discussions with
Japan so that any Japanese liberalization steps are not counted
as a response to U.S. requests.
Another purpose of the Committee would be to provide a forum for
discouraging the Aquino government from adopting an inward-
looking economic recovery plan. There are some indications that
certain elements in the new government favor excessive protection
of domestic industries. We might be able to curb such tendencies
by early discussions with policy-makers. We also would have an
opportunity to encourage the Philippines to improve its climate
for foreign investment. Some early assurances by the GOP in
the investment area would be desirable, particularly regarding
stability of investment rules, transparency of investment regula-
tions, and timely review of investment applications. Raising
such issues in a trilateral context would make the United States
appear less intrusive than if we were to raise them bilaterally.
Japan has major political and security reasons for helping to
revitalize the Philippine economy. It is the Philippines' second
largest trading partner, with $1 billion in 1984 imports from the
Philippines and exports of $815 million. In the current "GATT-12"
talks, we are asking Japan to eliminate the quota on imported
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pineapples and pineapple juice, which would also benefit the
Philippines. Although Japan is Philippines' largest export
market for pineapples, in 1984 it imported only 297,000 net
kilograms of pineapple juice from the Philippines, compared to 17
million net kilograms imported by the United States. The Philip-
pines ships some $200 million in coconut oil to the United States
and EEC each, but, due to high duty rates, only $20 million to
Japan. Japan's tariff rate on coconut oil is 9percent or l0
yen/kq, whichever is higher, compared to a zero U.S. tariff rate.
Philippines would also benefit from Japan's duty reductions on
fresh bananas (12.5 percent April-September and 25 percent Octo-
ber-March), preserved bananas (40 percent and 50 percent for the
respective time periods), plywood (20 percent), tomato paste
(25 percent). Japan also could eliminate various NTB's that
inhibit imports from the Philippines (e.g., requirement that
Philippine bananas exported to Japan be shipped only in Japanese-
made boxes.)
The proposed Committee would be established for a one-year
period only. This would require Japan to give a formal response
to the Philippines within a reasonable period. Also, a temporary
Committee would not be seen as competing with established ASEAN-
wide consultative arrangements with both Japan and the United
States.
If this option is adopted, the TPSC will draw up specific propo-
sals, for TPRG evaluation, on how the Committee should operate
and on how to approach Japanese officials with the proposal.
Advantages:
-- Greater market access to Japan would be of significant
additional benefit to the Philippine economy.
-- Getting Japan to open its markets is beneficial to the world
trading system.
-- Getting Japan to make significant concessions would make it
easier to argue in Congress for U.S. concessions for the Philip-
pines.
Disadvantages:
3) Provide the Philippines with more liberal treatment under
GsP by granting Philippine competitive need waiver requests in
the GSP General Review even if we are not fully satisfied with
their responses to our requests for country practice improvements
To increase Philippine utilization of the U.S. GSP program, we
have agreed to a request by the Government of the Philippines
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to sponsor a series of UNCTAD GSP seminars in the Philippines from
October 14 - 24. A substantial amount (approximately $75 million)
of GSP-eligible imports from the Philippines is not entered
duty-free under GSP for administrative reasons (inadequate
documentation or failure to meet rules of origin criteria). Our
experience in other countries is that GSP seminars can improve
the utilization of the program and result in increased duty-free
benefits. The seminar is being funded by AID and will include
experts from all the mayor GSP donor countries.
The GSP program provides duty-free entry for a broad range of
goods from developing countries. However, if a country's exports
of a product exceed certain statutory "competitive need" limits,
the country loses GSP eligibility for that product, unless a
"competitive need waiver" is granted.
Under the GSP General Review, the Philippines requested waivers
of competitive need limits on 4 products for which they had
already exceeded the limits and lost duty-free treatment, with 1985
shipments to the U.S. of $136 million. We have already granted
waivers under existing statutory authority for three of these
requests. The remaining item is sugar, with 1985 trade of
$124 million. From a domestic economic sensitivity standpoint the
sugar waiver could also be granted. The waiver would allow
the Philippines to maximize its export earnings even if sales
continue to be limited by a sugar quota.
According to Embassy Manila, the benefit of duty-free treatment
for sugar would be likely to accrue to producers, as Philippine
export contracts contain a provision that any reduction in the
U.S. duty will pass through to exporters. Also, all sugar
exporters, large and small, would benefit, as 16 percent of
everyone's sugar production is exported to fill the U.S. quota.
In addition, the Philippines requested competitive need waivers
on 7 products where import levels are near, but not over, competi-
tive need limits with 1985 shipments to the U.S. of $84 million.
An interagency decision has been made that granting these waivers
would not have an adverse impact on the U.S. economy. Granting
of these waivers would not have an immediate impact on Philippine
exports but would be of benefit in the medium and long-term as it
would make investment to expand production of these items more
attractive.
Before granting competitive need waivers, the President is
required to consider a number of factors including the country's
practices relating to trade, investment and worker rights. We
have been consulting with the Philippines, and we informed them
that market liberalization to date would be taken into account
in making our decision on competitive need waivers, but that we
would also require, at a minimum, a firm commitment for improved
enforcement of their intellectual property laws, and an update on
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planned worker rights reforms.
The Philippine government has taken note of U.S. concerns, but the
press of other priorities may make it difficult for the GOP to
respond to U . S . concerns in time to gain credit under the GSP
General Review, i.e. by September. It is recommended that we
continue to consult with the Philippines and press for changes.
but.. if necessary, settle in the and for a commitman by the
PhiliRQines to continua exploring the issues with us. This
decision could not be announced during President Aauino's visit.
nce a enera ev ew w not be completed until the end of
the year. Any waivers granted under the General Review would not
ao into effect until July 1, 1987
In determining at this point to grant all Philippine requests
for competitive need waivers, without obtaining country practice
improvements, we would apply a slightly more lenient standard to
the Philippines than to other GSP beneficiaries at comparable
levels of development. Such a change in policy for one country
could also be interpreted as contrary to the legislative intent
behind our waiver authority.
Advantages:
-- Reinstituting duty-free treatment under GSP for sugar would
increase Philippine export earnings without adverse effect on the
U.S. economy.
-- Granting remaining waiver requests would inject some certainty
for duty-free access for these products through 1993 and may
attract more investment to these industries.
Disadvantages:
-- We would be giving up limited leverage for seeking improvements
in Philippine practices.
4) Expand 0.8.-Philippine trade and investment by establishing a
Business Promotion Council with high-level government and busi-
ness participation
A high-level U.S.-Philippine Business Promotion Council, consisting
of government and business representatives, could be a useful
vehicle for pursuing opportunities for economic expansion through
increased trade and investment. The Council could coordinate and
expand the wide range of ongoing efforts in this area. If this
option is adopted, the TPSC will draw up specific proposals for
the operation of the Council.
While the Japan-U.S.-Philippines Trade Committee (Option 2), as
well as regular government contacts, would be the venue for discus-
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sion of the Philippine foreign trade and investment policies, the
Council could be useful in promoting trade and investment. The
Council would not be a forum for resolving trade and investment
disputes with the Philippines; rather, it would provide an
umbrella vehicle for trade and investment promotion.
The Council could facilitate offshore processing in labor intensive
industries and developing the Philippines as a larger source for
U.S. food distribution companies. It could attempt to tap the
technical and capital resources of U.S. companies and try to
stimulate their interest in areas in which the Philippines has a
comparative advantage.
The Council could conduct specialized seminars in U.S. cities
where there is a concentration of relevant industries. It could
work with private sector groups interested in organizing special-
ized missions to the Philippines to meet joint venture partners
and, in the case of U.S. marketing companies, suppliers. It also
could examine what measures OPIC could take to improve future
prospects for U.S. investment in the Philippines.
The Council could also explore which sectors should be targeted
for development. For example, Philippine chrome ore production,
according to the Bureau of Mines, could be doubled through
increased investment. Development of Philippine deposits of
chromium may be useful given potential uncertainties of supplies
from South Africa. The TDP is already considering a feasibility
study for a joint venture between the U.S. and a Philippine
company on expansion of a chromite mine on Palawan Island.
However, it is important to note that the GSA stockpile currently
has an excess supply of chromium and is not in a position to
purchase additional production. In fact, GSA may become a seller
of its excess chromium. Any decision to expand Philippine
production should be based solely on economic viability.
In addition, the Council could oversee a number of technical
assistance activities. USDA and Commerce could organize business
outreach activities, including trade and investment missions and
trade shows. Other possibilities include FDA and APHIS assistance
to improve the quality of Philippine foodstuffs intended for export
to the United States. AID could provide assistance to train
Philippine executives in marketing and sales strategies for
introducing new products to the U.S. market.
Advantages:
-- Active promotional programs would be highly visible and
beneficial for targeted sectors.
-- Creation of the Council would show responsiveness to recent
GOP interest in having a trade and investment program established
during the Aquino visit.
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Disadvantages:
-- On its own, this option would be viewed as being of limited
economic benefit.
5) Propose legislation to suspend duties on a non-MFN basis
for Philippine dutiable exports for a live year period (pith a
one year phase-out period) to stimulate the export sector and to
provide increased export earnings
In 1985 approximately $1.5 billion or (70 percent) of U.S. imports
from the Philippines were dutiable. The amount of duties collected
was $144 million, which is an average rate of 9.6 percent. Duty
suspension on these products would provide the Philippines with
an important temporary margin of advantage that could stimulate
additional production. Temporary duty suspensions on items that
are constrained by quota, such as textiles, would maximize export
earnings to the Philippines on these items in the short term but
would not lead to increased investment in these sectors which are
import-sensitive in the U.S. economy. It should be acknowledged,
however, that many of these items are dutiable (i.e. not subject
to GSP) due to varying degrees of import sensitivity. In addition
to textiles and apparel, they cover agricultural products such as
pineapple juice and tobacco (see below).
Duties would be removed for all dutiable imports from the Philip-
pines for a five year period. In the sixth year, fifty percent
of the duty rate would be reinstituted, and the full rate would
be applicable in the seventh year. A one year phase-out of the
duty p reference would prevent excessive disruption from an
immediate reinstitution of full duties.
Legislation would be required to suspend duties.- A GATT waiver
under Article XXV would also be required if the action were to be
taken on a non-MFN basis. Article XXV requires approval by two
thirds of the votes cast and more than one half of the contracting
parties. We can expect opposition on principle, since MFN
treatment is one of the pillars of the GATT, and due to some
countries' fears that the Philippines' preference would disadvan-
tage their exports. These obstacles would probably not be
insurmountable, since there is widespread international support
for the new Aquino government, especially within ASEAN.
Important imports from the Philippines currently subject to duty,
and not otherwise eligible for GSP (with value of 1985 imports
from the Philippines, the ad valorem duty rate, and Philippine
supplier rank), include:
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* subject to quota
** Philippines request in 1986 GSP Annual Review for GSP duty-free
treatment.
(The alternative of granting duty-free treatment on a most favored
nation basis for products in which the Philippines is among the
top suppliers has also been considered. This alternative was
rejected because significant benefits of such reductions would
accrue to countries beyond just the Philippines, although the
Philippines would be among the principal beneficiaries -- see
supplier rank column above. Due to domestic import sensitivity,
there would be strong opposition to MFN duty-free treatment for
most of the products of importance to the Philippines, such as
apparel, leather products, watches, tuna, etc.)
Advantages:
-- Duty suspension would give an immediate competitive advantage
to the Philippines, increase employment and export earnings and
stimulate investment.
-- This is one of the few options that would be of significant
benefit across several sectors of the Philippine economy.
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