Coping with the trade war
If jobs and incomes of Filipinos are to continue growing to sustain our fast-growing population and workforce, we must find ways to sustain that growth from within our own economy at this time. In the midst of the still-escalating US-China trade war, we cannot expect much impetus for growth from outside, particularly from exports and foreign direct investments (FDI), which are currently facing rather grim prospects.
The external economy would be the least reliable source of our growth at this time. The International Monetary Fund (IMF), which periodically issues its own projections on the world economic outlook, has already twice downgraded its global economic growth forecast for 2019. In the latter part of last year, it was expecting the world economy to grow by 3.9 percent this year, but found itself trimming this projection down to 3.5, then further down to 3.2 percent, as the year ensued.
When it made that second downgrade in July, it noted how the United States had further increased tariffs on certain Chinese imports, to which China retaliated by raising tariffs on a subset of US imports. “Additional escalation was averted following the June G20 summit,” IMF noted in its July report.
Well, it spoke too soon. What the IMF did not anticipate was yet another round of escalation that was to happen after they issued their July report. US President Donald Trump slapped a new 10-percent import tariff effective Sept. 1 on the remaining $300 billion worth of imports from China still unaffected by his previous tariff hikes. The latter responded by allowing their currency to fall to a new low, offsetting Trump’s latest move.
All these rounds of offensive moves by the two protagonists in the trade war have not only significantly reduced their imports from one another; the rest of their respective imports from elsewhere have also fallen. More broadly, world trade has also been adversely affected as cross-border value chains in globally-traded products such as electronics, machineries and transport equipment have been disrupted. As a result, the entire global economy has slowed down in turn.
The hit on our own economy has been unmistakable. Our manufacturing sector, which had sustained impressive growth at 7-8 percent annually from 2010 to 2018, has seen a significant slowdown in the last four quarters, to just 4-5 percent. The main culprit for this deceleration was an actual decline (-0.3 percent) in electronics and electronic equipment, which are our top export products, and which account for a fifth of our manufacturing sector.
Even so, the good news is that the bulk (70 percent) of manufacturing continues to grow faster than 7 percent, led by basic metal products, wood and wood products, and electrical machinery, which grew at double-digit rates in the first half of this year. Food manufactures, the single biggest subsector in manufacturing accounting for a third of the sector, has also grown by a healthy 8.6 percent—and this is propelled mostly by domestic demand from a growing population with rising average incomes.
Herein lies the key on how we must cope with the US-China trade war: We must look at the sources of demand for our products and services from within the domestic economy. These are (1) households via their consumption spending, (2) firms via their investment spending, and (3) government via its spending on its operations, various public services and infrastructure.
The first, being prominently propelled by our overseas workers’ remittances, is also being dampened by the world economic slowdown. The second is impacted by the actual decline in our FDI, with Vietnam and our other neighbors having been more attractive magnets for the businesses moving out of China to avoid the new US tariffs on their products erstwhile exported out of China.
The third, government spending, is thus critical, and the one we have direct control of. That’s why immediate measures to mitigate the plight of our rice farmers and our public health challenges in the face of epidemics, and intensified longer term investments in low-cost housing and public infrastructure, are our best bet in coping with the US-China trade war.
