Philippine Institute for Development Studies Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Policy Notes ISSN 1656-5266
No. 2007-02 (October 2007)
The JPEPA: why ratify? Josef T. Yap, Erlinda M. Medalla and Rafaelita M. Aldaba
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ased on the numerous studies carried out under the Philippine Institute for Development Studies (PIDS) JapanPhilippines Economic Partnership Agreement (JPEPA) Research Project, JPEPA will be advantageous to the country and the economy. On the whole, its benefits greatly outweigh the costs of its implementation. Market liberalization, trade facilitation, more transparent investment rules, and enhanced cooperation under the JPEPA will reduce the cost of doing business, leading to an improved investment climate and increased foreign direct investment (FDI) inflows. This will give rise to economic growth and poverty reduction. JPEPA can provide opportunities that could serve as catalysts for sustaining the country’s growth.
The regional context: increasing integration and “new age” partnerships The Philippines belongs to the increasingly integrating and dynamic East Asian Region, composed of the ASEAN countries, China, Japan, and Korea. Increasing trade and investment liberalization, rising international production sharing through regional/ global production networks, and deepening economic integration among countries are shaping global relationships. While the World Trade Organization’s (WTO) multilateral negotiations have come to a standstill, countries have been seeking bilateral agreements through “new age” partnerships to deal with emerging issues in the new global trading order. These partnerships would now cover not only free trade agreements (FTA) on goods but also areas of cooperation in recognition of a need for
PIDS Policy Notes are observations/analyses written by PIDS researchers on certain policy issues. The treatise is holistic in approach and aims to provide useful inputs for decisionmaking. The authors are President and Senior Research Fellows, respectively, at the Institute. The views expressed are those of the authors and do not necessarily reflect those of PIDS or any of the study’s sponsors.
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One way or the other, the JPEPA resolution would indicate to the rest of the world what the role of the Philippines as a regional/global player is...JPEPA ratification would signal that the Philippines is on board the building of an East Asian community and its vision of shared prosperity, peace, and stability.
more comprehensive economic partnership aimed at reducing development gaps, reducing the costs of doing business, and addressing regional concerns. All these are seen more as complements rather than as threats to the multilateral system of the WTO. Where is the Philippines in this new international and regional arena? Do we become an active participant, or out of sync, especially with the rest of East Asia? The ASEAN member countries have started to participate in FTA negotiations—bilaterally, through the economic partnership agreements (EPAs), and regionally, through the ASEAN-China, ASEAN-Japan, and ASEAN-India FTAs. There are other prospective FTAs such as the USASEAN, ASEAN-Korea, and the ASEAN-Australia-New Zealand Closer Economic Relations (aside from other bilateral engagements). Increasingly, countries have exerted serious efforts toward the economic integration of ASEAN and East Asia, both of which have been leading growth centers of the world. One way or the other, the JPEPA resolution would indicate to the rest of the world what the role of the Philippines as a regional/ global player is. Nonratification would be costly both in terms of losing the competitive position of our products as well as of PN 2007-02
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weakening our linkages with the East Asian Region. JPEPA ratification would signal that the Philippines is on board the building of an East Asian community and its vision of shared prosperity, peace, and stability. Questions to consider in ratifying the JPEPA or not Let us now look at the major questions in mind in deciding whether the Philippines should ratify the JPEPA or not. The most basic question is: what would the impact be on the economy? The major conclusion of the PIDS JPEPA Research Project is that JPEPA will be good for the economy. True, the short-run impact would be small (static benefits) but the reinforcing repercussions of the benefits from the trade facilitation and cooperation would result in very significant gross domestic product (GDP) gains in the medium to long term (dynamic benefits). Real GDP gain would range from 0.09 percent to 1.7 percent (PIDS: 0.09% while Kawasaki: 1.7% to 3%). The more significant gains from JPEPA arise not from greater market access as a result of
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the FTA provisions of JPEPA lowering tariffs, but from the improvement in the investment climate arising from the enhanced features of the agreement. Beyond market access, JPEPA emphasizes cooperation. Given our current level of development, we can benefit significantly from Japan’s capital, technology, and expertise that will help strengthen our capacity to meet the challenges and opportunities posed by the “new age”. Economic cooperation programs with Japan are important to help in the country’s catchup process. JPEPA will enable us to pursue cooperation initiatives on a wide range of areas covering human resource development (HRD), financial services, information and communication technology (on areas like next generation internet, broadband and ubiquitous networks), energy and environment (including cooperation in the management of hazardous and solid wastes), science and technology (S&T), trade and investment promotion, small and medium enterprises (SMEs), tourism, transportation, and road development. Even now, various government agencies are drawing up, with some ready with, concrete plans for specific development cooperation initiatives. Under the JPEPA, the Bureau of Customs has lined up its three-year capacitybuilding program on customs valuation, rules of origin, and effective border enforcement related to intellectual property rights. The Department of Labor and Employment
has also prepared a Memorandum of Agreement (MOA) between the Philippine Overseas Employment Administration and the Japan International Corporation for Welfare Services covering implementing guidelines and employment contracts as well as the establishment of a Language and Training Institute at the Technical Education and Skills Development Authority (TESDA). Issues/questions during the first hearing: Why are there many different estimates? The major reason is that these results used different models using different assumptions. For the macroeconomic impact of JPEPA, the PIDS Research Project used some established economic modeling tools. First, we have our in-house computable general equilibrium (CGE) model by Dr. Caesar Cororaton. His results are the bare minimum because of the following limitations. One, it is a “nongrowth” model: that is, it assumes fixed amount of resources— capital and labor. Two, it takes into account only the Philippine internal production structure and does not include intercountry production response with simultaneous tariff reduction between the two countries. Three, as a result of the second limitation, it is constrained to using very rough distinction between imports from Japan and imports from the rest of the world—simple relative shares within a high level of aggregation. As such, it exaggerates the amount of competition that would result from lowering preferential tariffs for Japan, as PN 2007-02
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this reduction would tend to put generally higher-quality Japanese imports at the same level as those from other countries, e.g., those coming from China. And four, it excludes trade liberalization in agriculture. (This is because at the time the study was undertaken, indications were that agriculture would be excluded in the negotiations.) Despite these limitations, the results of Cororaton are nonetheless very useful because they provide a clear lower bound impact estimate. Hence, we are confident that the impact of JPEPA on the economy and poverty reduction would be positive. The other results we looked at are the simulation results of the Global Trade Analysis Project (GTAP) Model done by Japanese experts (Kawasaki, Urata, and Kiyota). The advantages of their analysis are that: (1) their model captures intercountry response, and (2) in particular, Kawasaki simulates the impact of capital movement and productivity gain. Finally, we should bear in mind that these models are just analytical tools that are intended to gauge the impact of policy. The CGE results are not forecasts. Related issue: Why are we using the results of the Japanese studies? It is unfortunate but PIDS (neither were we able to find other Philippine institutions) does not have the GTAP capability (software and database that are complex, considering PN 2007-02
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that it covers majority of the countries in the world). However, we do not think this is a serious shortcoming because of the following reasons. One, it is a result of a “global” methodology. What we did is to examine closely the assumptions used, in particular, with regard to supply elasticities (supply responses). They were moderate assumptions, similar to what Cororaton used. Then, as an additional test, we find that the static results of the Japanese GTAP model are consistent with Cororaton’s overall results. In this regard, the Cororaton modeling results have again been very useful. But more importantly, Dr. Cororaton’s model has its own advantage not handled by the GTAP: it is able to assess income distribution impacts. Additional issue: The Cororaton study shows contraction in agriculture (hence, a negative impact of JPEPA on agriculture) This is again a direct result of the limitations of Cororaton’s model that assumes fixed resources (capital and labor), together with the noninclusion of the market access in agriculture. As such, the expansion in one sector means contraction in another. In particular, the favorable impact on the other sectors draws resources away from agriculture, and thus, its contraction. Inclusion of agriculture in the analysis would have resulted in a much more favorable impact on agriculture. Due to these limitations, the Cororaton simulation yields lower estimates not only on GDP on the whole but, to a larger extent, on agricultural output in
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particular. Hence, this part of the Cororaton study is not a serious concern.1 What is the impact on poverty? The PIDS-Cororaton study indicates overall positive impact on poverty reduction: z More than 200,000 people will move up the poverty threshold. z All sectors benefit, but the NCR benefits most. z Again, for the same reason as above, the estimate would be on the low side. z Impact would be much more, with dynamic effects. What is the impact on FDI? The impact of JPEPA on FDI will be positive. The removal of tariff and nontariff barriers, greater certainty due to more transparent investment rules, along with improved trade facilitation measures, will result in improved perception of the Philippines by foreign investors. There will be a positive reassessment of the attractiveness of the Philippines as an investment destination, not just to Japanese investors, but to all investors in general. Numerous factors involved will result in various estimates. But for sure, as cooperation develops, the positive impact on FDI would gain momentum, as Japanese investors become comfortable and familiar with local partners.
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In addition, knowing the limitations of simulation models, the PIDS JPEPA Research Project is a complement of 16 studies, using the CGE analysis of Cororaton with other approaches of the rest of the papers.
In terms of numbers, some indicators of the investment impact can be discerned from the following: z The Kawasaki study shows an increase of around 3 percent of the capital stock (under capital movement scenario). An implied low estimate from this would be around 10 percent increase in FDI. (This yields around P16.5 billion based on Total Approved FDI for 2006 from National Statistical Coordination Board statistics.) z Projected FDI from Japan: P365 billion over four years and more than 200,000 jobs (Investment leads, Phil. Embassy). Realizing just a fraction of this due to JPEPA would yield substantial benefits: e.g., P73 billion (20% of the leads). Another key question to ask is: What are the adjustment costs of JPEPA? What sectors are negatively affected? In any reform, the most difficult part is the adjustment costs that are entailed in the short run. In JPEPA, there would hardly be any adjustment costs involved. Domestic industries are not endangered. This is mainly because of two factors: (1) the complementary trade between the Philippines and Japan, and (2) the tariffs are The impact of JPEPA on FDI will be positive. The removal of tariff and nontariff barriers, greater certainty due to more transparent investment rules, along with improved trade facilitation measures, will result in improved perception of the Philippines by foreign investors. PN 2007-02
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already low. Most of our imports from Japan do not compete with Philippine products. Likewise, Philippine exports do not compete with Japanese products. In addition, around 80 percent of our imports from Japan come in at the 0-3 percent tariff range. This finding of low adjustment cost is reinforced by the support of major business and labor groups for JPEPA. These include the Philippine Chamber of Commerce and Industry, Makati Business Club, Chamber of Automotive Manufacturers of the Philippines, Confederation of Garments Exporters of the Philippines, Philexport, Federation of Filipino-Chinese Chamber of Commerce and Industry, Federation of Philippine Industries, Semiconductor and Electronics Industry of the Philippines, and the Federation of Free Workers, among others. On the other hand, there are clear winners with JPEPA. Even agriculture is not going to be negatively affected and based on the analysis of the Department of Agriculture, the Philippines got a better deal in agriculture than what our ASEAN neighbors ob-
...There are clear winners with JPEPA. Even agriculture is not going to be negatively affected and based on the analysis of the Department of Agriculture, the Philippines got a better deal in agriculture than what our ASEAN neighbors obtained from Japan. Indeed, the PIDS JPEPA research sector studies identify the agricultural sector as a significant gainer. PN 2007-02
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tained from Japan. Indeed, the PIDS JPEPA research sector studies identify the agricultural sector as a significant gainer (Tan; Bello 2003). This is mainly because of the following: z High tariffs in Japan are mainly in agricultural products. Hence, tariff concessions on included agricultural products would have direct, immediate positive impact. z At the same time, lowering Philippine agricultural tariffs (and few exclusions) will not pose a serious threat/competition since Japanese agricultural products are very expensive. Several agricultural products will benefit from either immediate or gradual elimination of tariffs or the implementation of tariff rate quota where in-quota tariff could decline to zero. Products that will benefit include shrimps, crabs, prawns, bananas, pineapples, mangoes, cane molasses, chicken, and tuna where the Philippines is already a major exporter. The agriculture and fishery sector remains a sensitive issue for Japan with certain products such as rice, wheat, milk and cream, beef, pork, herrings, sardines, mackerel, and other fish being excluded from the JPEPA. Sugar, a sensitive product for Japan, will be renegotiated four years after the agreement has been implemented. Tariff rate quotas (TRQs) will be implemented on some agricultural items sensitive to Japan such as small pineapples less than 900 grams, chicken meat, muscovado sugar, and sausages.
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GPN products such as auto parts, electronics, and garments are also clearly winners. In the automotive industry, the development of the auto parts sector is necessary to strengthen our domestic auto assemblers. Currently, our auto parts sector, which is largely composed of SMEs, is weak and underdeveloped due to lack of capital and technology. As a result, assemblers must import 90 percent of their inputs that make them uncompetitive. Through Japanese FDI inflows to the parts sector, technology can be transferred via joint venture activities. If potential investments are realized, JPEPA can boost the growth and competitiveness of both parts makers and assemblers. Side issue on the automotive industry: Article 27 and the claim that this indicates the intention to repeal EO 156 (ban on used car imports). z The national regulation would remain. There is no intention of repealing it. On the contrary, Article 27, rather than reflecting the intention of Department of Trade and Industry (DTI) negotiators to repeal the law, intends for this provision to be an added insurance for the automotive sector: an extra hurdle just in case the Supreme Court or any other legal action would nullify EO 156. (At the time of the JPEPA negotiation, the fate of EO 156 is in question being then a subject of a temporary restraining order.) Subsequently, the Supreme Court already made a favorable ruling on EO 156.
On the whole, the costs associated with the implementation of JPEPA are minimal...There would hardly be any adjustment costs in terms of industries negatively affected in the short run...In terms of costs to bureaucracy, this will be minimal as well.
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The automotive industry was well consulted during the negotiation process and received enough adjustment time before substantial tariff reduction would be effected. The full timing of tariff reduction would still have to be negotiated.
On the whole, the costs associated with the implementation of JPEPA are minimal. As discussed above, there would hardly be any adjustment costs in terms of industries negatively affected in the short run. Estimate of foregone tariff revenues ranges from P3 billion to P5 billion, but this is expected to be more than offset by tax revenue gains from increased economic activity resulting from the partnership (the Department of Finance estimates a net revenue gain of up to P4 billion). In terms of costs to bureaucracy, this will be minimal as well. Of course, the government could be more aggressive and choose to spend more in enhancing capacities that would enable the country to take better advantage of the opportunities from JPEPA. However, most of what the government should do in this regard, it should be doing anyway, with or without JPEPA. Cooperation PN 2007-02
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It is equally important to consider the risks of nonratification. It will not be status quo if JPEPA is not ratified...Clearly, nonratification would put our market share at risk since these countries (our other ASEAN neighbors) would now have preferential market access to Japan. initiatives would entail government counterpart funding and would thus be limited to our own domestic absorptive capacity. We could, however, start small, focusing first on identified priority areas. Risks of nonratification It is equally important to consider the risks of nonratification. It will not be status quo if JPEPA is not ratified. Japan has formed economic partnership agreements (EPAs) with our other ASEAN neighbors (Singapore, Malaysia, Brunei, Thailand and Indonesia, and soon Vietnam). Clearly, nonratification would put our market share at risk since these countries would now have preferential market access to Japan (trade diversion effect). FDI, not just from Japan, but also from the rest of the world, would be negatively affected (investment diversion effect). For example, Ford decided to increase its investments and manufacture small cars in Thailand as a result of the Thailand-Australia bilateral partnership agreement. Note that Ford Philippines is a manufacturer of small cars. However, it did not get the investments because of the preferential access that Thailand now has on Australia’s automotive PN 2007-02
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market. It is not difficult to imagine how much foreign investments will be diverted from the Philippines because Japan has signed EPAs with our ASEAN neighbors and we have not. If JPEPA is not ratified, Japanese as well as other investors will surely have a less favorable reassessment of the attractiveness of the Philippines as an investment destination. This happens while the rest of East Asia becomes even more attractive for foreign investments. Other related economic issues What are the other related economic issues on JPEPA? Aside from questions regarding the Constitution, there are four major issues raised against JPEPA: z on the environment z on nurses and caregivers z on investments, particularly National Treatment (NT), Most Favored Nation treatment (MFN), and performance requirements z on the other Singapore issues. On the environment: JPEPA is for the environment Opponents claim that JPEPA is anti-environment simply based on the reduction of tariffs to zero for wastes and scraps—that this would allow dumping of hazardous wastes. Clearly this is not the case. If anything, JPEPA is for environmental protection. Sustainable Growth and Environmental Protection objectives are clearly articulated in the agreement. This is also found in the Joint Statement that provides clear commit-
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ment to the environment for both countries. There is nothing in the JPEPA that prohibits or restricts the power of the Philippine government to maintain or require higher environmental standards, including the prohibition of importation of hazardous wastes. In fact, under Article 102 (Environmental Measures) Chapter 8 (Investment), the two countries mutually agree not to relax environmental measures to encourage investments by the other party. In addition, there are many provisions in the JPEPA for the protection of the environment. The Agreement binds the two countries to the general principles of efficient utilization of energy, proper management of environment, and sustainable development governing the need to cooperate in the field of energy and environment (Article 34, Chapter 8, Cooperation in the field of energy and environment of the Implementing Agreement pursuant to Article 12 of the JPEPA). As such, protection and management of the environment has been identified as one of the cooperation areas in the field of energy and environment. JPEPA has sufficient provisions and safeguards (consistent with the WTO) to protect the environment and prevent any illegal trade that may arise from the zero tariffs imposed on wastes. JPEPA will not allow importation of prohibited hazardous wastes, tariff or no tariff. Article 11 binds the Philippines and Japan to uphold the provisions of the Basel Convention, to which both countries are parties. RA 6969 holds. What
are allowed or not allowed to be imported would be the same with or without JPEPA. Japan would also be eliminating tariffs on the same “hazardous wastes and scraps.� And, like the Philippines, it is also bound to honor its obligations under the Basel Convention. In addition, it is important to note that in the economic partnership agreements signed by Japan with Singapore, Malaysia, and Thailand, these tariffs have also been eliminated. In the case of Indonesia, the tariffs were slashed to 5 percent but will be eliminated gradually. Why reduce tariffs on wastes and scraps in the first place? It is an ideal policy combination to have zero tariffs across the board and at the same time to be able to discriminately regulate or ban hazardous wastes. Trade coupled with good environmental management and regulation would produce good environmental outcomes and sustainable growth. Across the board, high tariffs are indiscriminate restrictions that cannot distinguish
There is nothing in the JPEPA that prohibits or restricts the power of the Philippine government to maintain or require higher environmental standards, including the prohibition of importation of hazardous wastes. In fact...the two countries mutually agree not to relax environmental measures to encourage investments by the other party. In addition, there are many provisions in the JPEPA for the protection of the environment. PN 2007-02
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between hazardous and nonhazardous wastes, and manageable and nonmanageable “hazardous” wastes. Direct trade control— ban or regulation—can and is the more efficient measure. In addition, if later on, a need is felt to raise tariffs on certain hazardous wastes for environmental purpose, Article 23 on General and Security Exceptions, and Article 99 of similar exceptions, would allow both governments to do so. Indiscriminate high tariffs would only raise the costs of waste treatment and management for environmentally conscious firms. Where, upon inspection and subject to Department of Environment and Natural Resources regulations, wastes and scraps are allowed, zero tariffs would support the companies trying to ensure proper waste treatment. Where the Philippines has the comparative advantage to properly treat, recycle, and reuse wastes and scraps (including those containing hazardous materials), the concerned industries should be allowed to enjoy the zero tariffs. At the same time, in many other (usually technology-intensive) cases, the Philippines would have very limited capacity and capability to treat toxic and hazardous wastes. As such, it would be beneficial for the Philippines to be able to export these duty-free to Japan. Zero tariffs at the Japanese end would likewise be an incentive for companies located here to export such wastes to Japan for proper treatment. Indeed, Japan has allowed importation of hazardous wastes, compliant to the Basel Convention, such as PN 2007-02
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copper sludge, printed circuit board, and fluorescent lamps from the Philippines for this purpose. Trade in waste is two-way. And, as explained above, trading is not “dumping garbage” in each other’s backyard. It is cleaning up and caring for the environment, in a more efficient manner. Indeed, it is in the environment area where the spirit of JPEPA is exemplified. JPEPA illustrates the “new age” principles of freer trade, cooperation, and capacity building in its joint concern for protecting the environment. The Philippines will benefit from such cooperation for example in initiatives such as: z designing technology transfer programs to manage toxic and hazardous wastes; z capability-building programs to improve the capacity of our regulators to implement environmental laws; and z closer coordination among the customs and environment people between the two countries in order to effectively regulate and prevent illegal wastes trade. A side question: Why is the environment provision limited to certain investment activities unlike, for example, in Malaysia and Thailand? The investment activities included (establishment, acquisition, or expansion) are the core activities, where the environmental provision is where it counts. In addition, a
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better comparison should be with status quo. With JPEPA, there is now a clear commitment and articulation of not using lower environmental standards for attracting investments. JPEPA is clearly better for the environment than the status quo. Another side question: Junk JPEPA asks why phrases referring to wastes and scraps in the “draft” agreement in defining originating goods that were struck out were reinserted in the final agreement. Chapter 3 Rules of Origin of the JPEPA defines originating goods and the procedural obligations for customs administration are explained. The draft was just that, a working draft getting comments from different agencies that may not know how these terms and definitions are used. The final text is the accepted standard (harmonized) wording, definition for originating goods. In defining originating goods, scrap and wastes derived from production in the territory of the Party and fit only for disposal or retrieval of raw materials are included. The same definition is found in JMEPA, JSEPA, JTEPA, and JIEPA. Even under Article 415 of the NAFTA, goods wholly produced in the NAFTA region include waste and scrap derived from production in Canada, Mexico, and/or the United States. On nurses and caregivers: Opponents claim that our nurses will be sent to Japan as trainee, a deviation from the draft’s initial position to seek Japan’s recognition of our nurses as equally qualified upon entry to
Japan. Indonesia got a better deal for their own nurses who undergo only a three-year nursing course and comply with the requirement of a two-year work experience. JPEPA is the first EPA entered into by Japan that allows foreign workers in new occupations to qualify for residential status. This is considered a landmark decision for Japan. At our end, it is only fair that we should also consider Japan’s sensitivity. The strict requirement for language proficiency and licensure exams are not without reason, providing legitimate precautions. The JPEPA goes beyond what is permitted by the Japanese immigration system by: (i) permitting nurses and care workers to work as such (only those who acquire Japanese qualifications); and (ii) permitting such candidates to work in their field for a limited time as preparation period for acquiring Japanese qualifications. It should be noted that foreign nurses who acquired Japanese qualifications were permitted a maximum seven-year stay as a training period before this EPA, but were not officially permitted to work. JPEPA will allow entry for Philippine nurse and care worker candidates who pass the language proficiency exam and the Japanese licensure exams. Since realistically, few can be expected to hurdle these requirements, JPEPA provides for allowing entry to Filipino candidates who fulfil certain criteria and conditions, as they train to comply with the necessary requirements (such as complePN 2007-02
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tion of Japanese language training). A prerequisite is an employment contract. Permission to work will be granted as part of the preparation to obtain qualifications required under Japanese law (maximum length of stay is three years for nurses and four years for care workers). Hence, they will be covered by an employment contract while undergoing training. The first six months would include mainly language training where they would be provided a stipend and free board and lodging. They can then take language proficiency and/or licensure exams. Whether they pass or not, after six months, they will be working under an employment contract under the supervision of a Japanese nurse but nonetheless receiving a salary under this employment contract. Under JPEPA, Japan will shoulder the language training program for Filipino nurses and caregivers. This is not provided for under the JIEPA. Since the educational system of Japan and Indonesia are the same, the latter has a shorter work experience requirement. Indonesians have six years of high school, while we only have four years. To compensate for the difference, the required number of years for the Philip...In the end, it would be market forces that would determine how much supply and demand would be generated by such concession of market opening in Japan...What should be important to bear in mind is that in any case, there is no question that such concession definitely provides additional options for nurses and caregivers. PN 2007-02
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pines is three years, in contrast to Indonesia’s two years. In addition, under the HRD technical cooperation of JPEPA, Japan will fund a Japanese language institute here in the Philippines so that the language training could be undertaken here. The Department of Labor and Employment has made a concrete proposal in this regard. Finally, in the end, it would be market forces that would determine how much supply and demand would be generated by such concession of market opening in Japan. (There is no quota to be imposed. The initial number of nurses and caregivers who would be allowed entry for training is simply constrained by Japan’s absorptive capacity of how many it could train.) What should be important to bear in mind is that in any case, there is no question that such concession definitely provides additional options for nurses and caregivers. In other words, it adds to, rather than detracts from, the benefits from JPEPA. On investment measures: National Treatment (NT), Most Favored Nation treatment (MFN), and Prohibition of Performance Requirements (PPR) The questions center on two areas. The first concerns the nationalistic provisions in the Constitution that opponents interpret as inconsistent with NT. The second is on policy space regarding the prohibition of performance requirements.
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NT and MFN are major principles in the WTO. While the realities in different countries necessitate reservations, member countries accept NT and MFN principles. Commitments on NT, MFN, and certain prohibitions on performance requirements are already under the WTO-TRIMS (Trade Related Investment Measures). Indeed, they are also common features of EPAs, in varying degrees within acceptable levels of reservations. For example, there are exemptions provided that allow the use of performance requirements whenever the government grants subsidies or other incentives to foreign investments (Art 93, par 2). MFN is not so much the issue for opponents as NT. On NT, this is with respect to foreign equity limitations and land ownership, related to the constitutionality issues. Our unequivocal position is: JPEPA does not relax constitutional requirements regarding foreign equity limitations nor grant land ownership rights to foreigners. This issue is addressed in the memo on constitutional issues. The issue is on the prohibition of performance requirements that are not committed under WTO-TRIMS: in particular, on technology transfer and hiring of a given level of nationals. (With respect to export performance requirement, reservations were made for activities under various Republic Acts, particularly the Foreign Investments Act, the Omnibus Investments Code, and Special Economic Zones.) Opponents ask why the
Philippines gave up these rights while Malaysia did not. First of all, it should be noted that the Philippines did not make any commitments not to impose performance requirements on investments in the services sector, so it is not the case of the Philippines having given up these “rights” and failing to make reservations. It did so, comprehensively, on services in two steps: (1) in general by including paragraphs 3 and 4 in Article 87 which explicitly provides for the nonapplicability of the investment chapter on services sector (and hence avoiding possible unintended spillovers), and (2) by excluding any mention of prohibitions of performance requirements even in its schedule of commitments (positive list).2 In addition, note also that Paragraph 4 of Article 87 is only with reference to the Philippines.3 There is no similar paragraph in the JPEPA text for Japan. This encompassingly eliminates the need for the Philippines to make specific reservations in the accompanying annex unlike the case for Japan which had to make specific reservations. The services sector, which includes ______________ 2 Hence, even in the case of prohibition of performance requirements, the Philippines did not even commit standstill obligations. Those outside the positive list are completely “unbound,” that is free to impose future restrictions. 3 Paragraph 4 states that Articles 89, 90, and 93 (on NT, MFN, and prohibition of performance requirements, respectively) shall not apply to any measure that the Philippines adopts or maintains relating to investors of Japan and their investments in service sectors.
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public utilities, mass media, advertising, among others, is also where the majority of foreign equity limitations are imposed and enshrined in the Constitution. Hence, constitutional restrictions—reservations for these sectors—are more than adequately covered. In any case, it is always difficult to make comparisons regarding concessions gained by different countries. Different countries have different priorities, constraints, endowments, advantages, and disadvantages. The relevant question is how important is it to us to retain the right to impose performance requirements in allowing FDI, not what Malaysia or any other country deems important to retain or not. In the overall policy and investment environment of the Philippines, what do such prohibitions really mean and do they matter? The prohibitions are on the mandatory requirement not on the outcome/performance itself. In other words, the prohibitions are simply what opponents consider as ______________ 4 This is unless profits are really high and/or there are rents the host country can extract. In the case of prohibition of technology transfer, there are exemptions allowed for such purpose. 5 Magnus Blomstrom and Ari Kokko. (March 1993). Policies to encourage inflows of technology through foreign multinationals. National Bureau of Economic Research Working Paper Series No. 4289. Cambridge, MA. 6 Douglas H. Brooks et al. (2004). FDI: Recent trends and the policy context. In Managing FDI in a globalizing economy Asian experiences, edited by D. Brooks and Hal Hill. Asian Development Bank, Palgrave Macmillan. 7 T.H. Moran. (2002). Strategy and tactics for the Doha Round: Capturing the benefits of FDI. Asian Development Bank, Manila.
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limitations in policy space. These issues on investment measures are also particularly relevant with regards to future reservations. The question is: how much more restrictive do we want to be? Opponents claim that “the Philippines essentially abdicated its legislative power to enact preferential, protective or even developmental measures over Japanese investments.” This is clearly a question of economic policy. On the economic grounds, performance requirements are often ineffective and worse than the cure because of the distortions they create. The related performance outcomes (how much technology transfer, how many local nationals to hire, etc.) are business decisions directly related to the investment’s profitability. Any direct intervention distorts market signals and would likely only lead to unwanted results (e.g., investment diversion, low-quality technology transfer).4 Market measures are more sustainable and efficient. We have had all the policy space in the past when such prohibitions did not exist; yet these have not been used because such command-andcontrol measures, as empirical studies show, are indeed ineffective, if not, perverse. Blomstrom and Kokko5 (1993) showed that technology transfer was negatively related to performance requirements, which implied that the higher the performance requirements imposed by a country, the lower the level of technology transferred. Brooks et al.6 (2004) and Moran7 (2002) showed the
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same findings. In China, X. Wang8 (2004) noted that many studies show that relatively little advanced technology has been transferred despite policies to encourage exports and technology progress. To reiterate, there has been no such prohibitions of performance requirements for FDI in the past and this has not made any difference. It is time we make a rational policy choice. This means providing investors flexibility and ensuring a clear and predictable investment environment. In contrast with other investments, servicesrelated investments, as noted above, did not make additional commitments on NT, and prohibition of performance requirements. Before the General Agreement in Trade in Services (GATS), the services sector has traditionally been considered as “nontradable� internationally. With technological change especially in information and telecommunications, even services can now cross borders (tradable). GATS has subsequently clarified and defined trade in services using four modes of supply (mode three is commercial presence, which is investments in services in host country). Nonetheless, while the distinction in modes of supply clarifies what is trade in services, it does not make it easier to deal with issues in the same way as in the case of trade in goods. (Hence, services negotiation is separated from the WTO and formed under GATS.) The services sector is so much more complicated because it is usually subject to
many domestic government regulations. These regulations often go far and beyond economics, covering multiple objectives such as protection of public morals, security, safety, prudential, monopoly, access, and equity. Hence, liberalizing trade in services, and thus the related investments, is a much more sensitive issue. To a large extent, this implies liberalizing domestic regulations long considered closed. As such, while there is general economic rationale for including all investments, reservations have been made for the services sector. (The PIDS study on services for JPEPA recommended a more liberalizing, negative list approach.) On other Singapore issues (Competition Policy and Government Procurement) There is nothing wrong with the inclusion of the Singapore issues per se in the JPEPA. It is for the good of the country to have more rational competition policy, transparent investment measures, competitive government procurement, and trade facilitation measures. But these issues are difficult to deal with at the WTO multilateral level because of the large number of countries involved with varying degrees of policies and implementation in these areas. Hence, its inclusion in a bilateral setting such as the JPEPA makes better and more practical sense where the focus is on principles, transparency, capability building, and constitutional ______________ 8 X. Wang. (2004). People’s Republic of China. In Managing FDI in a globalizing economy Asian experiences, edited by D. Brooks and Hal Hill. Asian Development Bank, Palgrave Macmillan.
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constraints. This way, we are able to deal with these issues in a gradual manner, giving us time for capability building and enough demonstration effects. In sum, why the need to ratify JPEPA We say yes to ratification because on the whole, JPEPA would be good for the economy. The economies of the Philippines and Japan are complementary, with Japan specializing in high-technology industrial products. Hence, the potential mutual gains are significant. JPEPA is a dynamic agreement with provisions for improvements embodied in the creation of the various subcommittees to further thresh out remaining issues and necessary measures. If managed carefully and strategically, JPEPA could provide opportunities and advantages that may serve as catalysts for sustaining the country’s growth. Apart from greater market access, JPEPA emphasizes cooperation. We can benefit significantly from Japan’s capital, technology, and expertise that will help strengthen our capacity to meet the challenges and opportunities posed by the “new age.” For further information, please contact The Research Information Staff Philippine Institute for Development Studies NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City Telephone Nos: (63-2) 894-2584 and 893-5705 Fax Nos: (63-2) 893-9589 and 816-1091 E-mail: jyap@pids.gov.ph; emedalla@ pids.gov.ph; faldaba@pids.gov.ph The Policy Notes series is available online at http://www.pids.gov.ph. Reentered as second class mail at the Business Mail Service Office under Permit No. PS-570-04 NCR. Valid until December 31, 2007.
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Policy Notes
Economic cooperation programs with Japan are important to help in the country’s catchup process. These cooperation initiatives cover a wide range of areas that include HRD, financial services, ICT, energy and environment, S&T, trade and investment promotion, SMEs, tourism, transportation, and road development. In the meantime, while there are concurrent negotiations going on for the ASEAN-Japan Comprehensive Economic Partnership (AJCEP) Agreement, JPEPA is still necessary to better equip us in future negotiations and take advantage of the opportunities it offers. The benefits from JPEPA are definitely higher than those to be obtained by free riding from the future AJCEP. For sure, JPEPA is not the answer to all of our development challenges. It can, however, provide us with market access and other opportunities arising from the improved investment climate. The cost of nonparticipation may be great in terms of our industries losing their international competitiveness and weakening our linkages with the East Asian Region, especially as Thailand, Indonesia, Malaysia, and Singapore have already forged their economic partnership agreements with Japan. Ratification will send a signal that the Philippines is capable of fully participating in the process of regional economic integration.