Landmark Japan-Philippines Trade Deal: A recap - Part 2

Written by Emir M. Castro, 15 January 2009

Read Part 1

The Japan-Philippines Economic Partnership Agreement (JPEPA) is a comprehensive bilateral agreement aimed at increasing trade and investment opportunities between the two economies.

JPEPA is composed of 165 articles divided in 16 chapters and appended by eight annexes. It is the most significant bilateral free trade agreement for the Philippines in 50 years since the Laurel-Langley Agreement. This Economic Partnership Agreement’s (EPA) main goal is to achieve freer transborder flow of goods, persons, services and capital. The treaty entered into force on December 11 last year after approximately five years of negotiations.

The agreement is also significant when one considers the economic stature of Japan in the world in comparison with the Philippines. Japan is the world’s second largest economy, the fifth largest importer and it has a market of 128 million people.

It is included in the world’s Top 5 sources of foreign direct investment (FDI) and for the period of 2002-2006, Japan was the Philippines’ second largest source of FDI standing at $938 million.

The Philippines also exported $7.74 million in 2006, consistently making Japan the Philippines’ second largest export market.

Moreover, Japan is the Philippines’ largest source of Overseas Development Assistance (ODA), which stood at $4.7 million in 2006, accounting for 49% of total ODA loans.

The salient provisions of JPEPA pertain to taxation, investments, trade in goods, trade in service, customs procedures, paperless trading and intellectual property.

The following are some of the significant implications of such provisions.

Under taxation, the caveat provided by Article 10 in JPEPA must be noted as it provides that the treaty shall not affect taxation measures and the rights and obligations of either party under any tax convention.

Investment-wise, the Philippines and Japan agreed to accord national treatment and most favored nation treatment to investors of each contracting party. The first principle provides that each party shall treat investors of the other party in the same manner it would treat its own indigenous investors. The second principle provides that each party shall treat investors of the other party in the same manner it would treat the investors of a non-party.

Provisions affecting trade in goods provide that tariffs on 95% of agricultural products (in terms of value) from the Philippines will be eliminated or reduced.

On the other hand, JPEPA covers 5,968 tariff lines of Philippine imports. The tariffs on 66% (or 3,947 product lines) of these imported Japanese goods would be removed immediately and 32% would be subject to gradual tariff reduction once JPEPA enters into force. It is planned that both sides will eliminate tariffs on almost all industrial goods within 10 years.

In connection with these trade provisions, rules of origin have been formulated as a guide in determining whether a good can avail of such preferential tariff treatment. The basic concept in the formula provided is that the qualifying value content of a good originating from the availing party must not be less than 40%.

Trade in service provisions provide standstill obligation or liberalization of service sectors such as outsourcing, air transport, health related and social services, tourism and travel-related services, maritime transport services, telecommunications, and banking.

Furthermore the parties are obliged to accord the same treatment to domestic and foreign service suppliers for the specified sectors, unless otherwise stipulated in Annex 6 of the Agreement. (Schedule of Specific Commitments and List of Most-Favored-Nation Treatment Exemptions)

Filipino nationals can now be allowed to practice their profession in Japan, subject to certain conditions.

Professions which have been opened up are legal services, accounting and taxation services, architectural and engineering services, computer-related services, advertising and management consulting, translation and interpretation services, services incidental to agriculture, audiovisual services, higher education services, tourism and travel services, entertainment services (theater, live bands), and maritime transport services.

A much-publicized development was the liberalization of the Japanese nursing and care workers labor market. Filipinos may now enter such services provided they meet certain requirements.

However, the Philippine provisions stipulated that practice of all professions in the Philippines remains limited to Filipinos, save in the cases prescribed by law. This reservation may be critical as it may adversely affect the liberalized Japanese provisions on trade services which was based on the principle of reciprocity.

In terms of movement of natural persons, the agreement removes quantitative restrictions on the entry and temporary stay of natural persons.

However, they are still subject to immigration laws and procedures.

Customs-wise, both countries will cooperate to simplify customs procedures by reducing import and export documentation requirements and by making use of information and communication technology.

Recommended practices of relevant bodies such as the World Customs Organization shall also be adopted to harmonize both states procedures.

Both parties shall enter into initiatives combating trafficking of prohibited goods, with special attention on the exportation of goods suspected of infringing on intellectual property rights.

The agreement also promotes paperless trading through the creation of electronic versions of documents such as bills of lading, invoices, letters of credit etc. The ability to electronically transfer trade related information will significantly lower costs and time for companies.

Joint cooperation in understanding the protection of intellectual property and enforcement elements will elevate the status of the Philippines in Asia due to Japanese best practices.

The holistic nature of the treaty is further shown by a consultation framework which will deal with issues affecting enterprises from both parties in a timely and efficient manner. Moreover, it also provides bilateral assistance within the ODA context.

So, what will hopefully be the bottom-line effect of the agreement for the Philippines?

First, it is projected that there will be bigger net equity investment to the Philippines from the second largest source of FDI. Comparison of data from countries with which Japan has existing EPA’s, show that there was marked increase in Japanese FDI after the entry into force of such agreements.

Second, there will exist a broader range of agricultural and industrial Japanese export market for the Philippines to explore. Philippine exports to Japan will increase by 15%-20%, instead of only 10%, reaching a projected total of $19.86 billion in 2011.

The overall Gross Domestic Output is calculated to grow 1.73%-3.03%, due the additional output growth from increased exports, inward investments and remittances brought about by JPEPA.

Third, there will be more transfer of technology and technical assistance, enabling certain segments of multi-country production processes to take place in the country.

Regardless of the current economic downturn and issues that surrounded the agreement, there seems to be a clear indication that the Philippines is better off having ratified JPEPA.

Only the level of its positive impact will be up for contention and this will depend on a diverse number of factors such as the global and national economy, government implementation etc. Fingers-crossed, sky could be the limit!

*The economic statistics were culled from "The Joint Committee Report on the JPEPA" presentation by Senator Miriam Santiago to the Senate dated August 6, 2008. The report was crafted jointly by the Senate Committee on Foreign Relations and the Senate Committee on Trade and Commerce. Furthermore, it was the basis of interpel-lations and deliberations in the Senate floor and was instrumental in facilitating the ratification of the JPEPA.