The timing is perfect for a free trade agreement with Canada

In August 2016, the economic ministers of Canada and the ASEAN agreed to co-sponsor a study to determine the economic outcomes should an ASEAN-Canada Free Trade Area (FTA) be put into effect.

Two economic models were built and simulated. The first was a Canadian-proposed model whose scope of liberalization included trade in goods, services, and investments. The other was an ASEAN-proposed model whose scope of liberalization included trade in goods, a reduction of non-tariff measures (eg. import quotas, etc. ), and improvement of trade facilitation.

When the study was commissioned, Canada was the sixth largest trading partner of the ASEAN with bilateral trade amounting to $20.2 billion. The ASEAN enjoyed a sizable trade surplus, with exports of goods and services amounting to $14.3 billion against imports of $5.9 billion. Canadian foreign investments in the ASEAN amounted to $8.9 billion while ASEAN investments in Canada stood at only to $249.2 million.

The study was finally completed in September 2019 and it was determined that a comprehensive agreement that included the elimination of tariffs for goods as well as the liberalization of services and investments, further complimented by reductions of non-trade measures and improvement in trade facilitation was the optimal arrangement. In other words, a comprehensive FTA would work to the best interests of both the ASEAN and Canada.

According to the economic simulations, the ASEAN’s GDP would increase by up to $39.4 billion (a 1.6% increase of total GDP) in the first year alone should an ASEAN-Canada FTA materialize. ASEAN exports to Canada would surge by 18.7% to $3.46 billion on top of a deluge of Canadian investments coming in.

What does this mean for the Philippines? The Philippines would be the second most favorably affected country after Thailand. Philippine GDP is seen to increase by $7.5 billion (or 2.6% of 2019’s GDP) in the first year alone, with successive increases thereafter.

In terms of trade in goods and services, the Philippines already enjoys a trade surplus with Canada. The surplus amounted to $771 million last year. Fortunately, Philippine exports generally align with Canada’s needs. The study shows that should the FTA materialize, the Philippines can reasonably expect a 35% increase in exports of apparel, chemicals, rubber and plastic products as well as an 8.8% increase in wood and metal products.

Other products categories poised to experience an upturn in exports are rubber tires, coconut oil, leather goods, appliances, footwear, rubber products, wooden furniture and jewelry. Meanwhile, export of services, like business process outsourcing (BPOs), would increase by nearly 10%. All this means a windfall for Philippine exporters.

An important consideration too is that Canada has 14 active FTA’s with 51 countries, many of which the Philippines has no preferential tariff agreement with nor access to. This includes lucrative markets like Mexico, Central and South America. With an FTA in place, Philippine-made products and components can be integrated into the mega-supply chains of Canada, Mexico, and the United States. In addition, Filipino exporters can gain access to lucrative but untapped markets like Brazil and South Africa. All this bodes well in our quest to diversify our trading partners and wean ourselves away from traditional markets like China and Japan.

The Philippines is only one of two ASEAN countries having a Foreign Investment Promotion and Protection Agreement with Canada. Should the FTA materialize, the Philippines will be among the preferred investments destinations for Canadian enterprises involved in BPO and financial services. And since an FTA will compel Filipino regulators to improve the legal framework for intellectual property protection, an influx of Canadian investments in creative industries such as animation, gaming, arts and entertainment, software and engineering design can be expected. All these will enhance the Philippine’s position as the center for IT-BPO, knowledge services and creative industries in the region.

An FTA will also serve as an incentive for Canadian companies to invest in the government’s infrastructure program as well as in renewable energy — the two sectors where the Philippines needs most foreign inputs in. Canadians are vanguards in these fields and will be an invaluable source of capital and technology.

All in all, the country will benefit greatly from a ASEAN-Canada FTA given its positive impact on trade, investments, economic activity and tax revenues. Above all, it will generate jobs — jobs the country needs following the economic bloodbath of the COVID-19 pandemic.

Private enterprises stand to benefit too. The floodgates of opportunity will open for Filipino manufacturers and service providers to export to Canada and the 51 countries with which she has preferential trading agreements. And since cross-border investments will be liberalized, our businessmen will have the opportunity to establish partnerships and/or alliances with Canadian principals.

The entry of Canadian investors will facilitate technology transfer and an exchange of best practices — both of which will cause our industries to become more competitive.

But just as there will be winners, there will also be industries adversely affected by an FTA. With

Canadian goods allowed to enter the country with neither tariff nor friction, our producers of wood and lumber, meats, chemicals, pulp and paper, ores and metals may be edged-out of the market due to cheaper imports from Canada.

Competition has a sink or swim effect and local producers must become more efficient if they are to survive. No one says facing foreign competition is easy — but those that step up to the plate will be rewarded by becoming globally competitive. This brings a whole new dimension of opportunities for those who succeed.

But make no mistake, the consuming public will be the ultimate winner in all this since competition translates to more product options at cheaper prices.

As I write this, dialogues are ongoing between ASEAN ministers, including the Philippines, and their Canadian counterparts. The pros and cons are being weighed and the next steps are being charted.

As for me, I am very much in favor of the FTA simply because we need it. We need it to generate jobs, to narrow our ever widening trade deficit, to attract foreign investments, to widen our manufacturing base, to increase our technology quotient and to become even more competitive in the fields we are already good at like IT-BPOs. An FTA with Canada is exactly what we need to hasten our post-pandemic recovery.

Andrew J. Masigan is an economist