The Trade Policy and the Balance of Payments

Teresita S. Cadiz, MD, MHPEd, FPOGSProf. Marjorie Rola , PhDDevelopment PlanningThe Trade Policy and theBalance of Payments1OutlineBalance of PaymentsBalance of TradeLiberalization of the AccountsCapital Account ControlPhilippine Situation

2Balance of Paymentthe balance of international payments, encompassing all transactions between a countrys residents and its nonresidents involving goods, services and income financial claims on and liabilities to the rest of the world3Balance of Paymentthe method countries use to monitor all international monetary transactions at a specific period of timeis calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. If a country has received money=creditIf a country has paid or given money= debit.

BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming.

43 Categories of BOPCategoryComponents1. Current accountInflow and outflow of goods and services into the country2. Capital accountall international capital transfers incl. physical assets e.g building or factory 3. Financial accountinternational monetary flows related to investment in business, real estate, bonds and stocks 5Current AccountInflow and outflow of goods and servicesGoods: raw materials, manufactured goods that are bought, sold or given away (including those in the form of aid). Services: receipts from tourism, transportation , engineering, business service fees , royalties from patents and copyrightsSalaries: Receipts from income-generating assets such as stocks (in the form of dividends)Unilateral transfers: credits fr. OCWs remittancesForeign aid that is directly received

6Balance of TradeGoods and Services together make up a country's balance of trade (BOT). BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. Refers to the credits and debits on the trade of merchandiseIf a country has a balance of trade deficit, it imports more than it exportsIf it has a balance of trade surplus, it exports more than it imports.

7Balance of TradeAlso referred to as "trade balance" or "international trade balance" Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economyDebit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. 8Capital Accountwhere all international capital transfers are recordedacquisition or disposal of non-financial assets (e.g. land) non-produced assets needed for production but have not been produced (e.g. mine used for diamond-extraction)broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income), transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies and uninsured damage to fixed assets.

9Financial AccountIncludes international monetary flows related to investment in business, real estate, bonds and stocks government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund (IMF), private assets held abroad and direct foreign investment.assets owned by foreigners, private and officialCapital and financial accounts are intertwined because they both record international capital flows

10The Balancing Act Current Account

deficit in the current account= balance of trade deficit difference can be borrowed or funded by the capital accountIf a country has a fixed asset abroad and borrows using it= amount is a capital account outflow = inflow of foreign capitalBut the sale of that fixed asset = a current account inflow (earnings from investments)

Capital/FinancialAccount11The Current Account and BOP Current Account

(Current Account Balance )CAB = X - M + NY + NCT whereX = Exports of goods and servicesM = Imports of goods and servicesNY = Net income abroadNCT = Net current transfersA surplus means an economy that is a net creditor to the rest of the world where savings (used to finance deficit of other nations) >investments

Capital/FinancialAccount12The Current Account and BOP A deficit means a govt that is a net debtor to the rest of the world where investments > savingsusing resources from other economies to meet its domestic consumption and investment requirementsinvestment sent abroad to earn is listed as a deficit and becomes credit only when it is sent back as investment incomeusually accompanied by depletion in foreign-exchange assets because those reserves would be used for investment abroadsignify increased foreign investment in the local market, in which case the local economy is liable to pay the foreign economy investment income in the future

13The Current Account and BOP Is having a deficit in the current account or balance of trade bad for the economy?Answer: Depends on the nation's stage of economic growth, goals, implementation of its economic programA developing economy or one under reform has to spend money to make moneyMust finance this deficit through a combination of means that will reduce external liabilities and increase credits from abroad. 14The Current Account and BOP Is having a deficit in the current account or balance of trade bad for the economy?Answer: Depends on the nation's stage of economic growth, goals, implementation of its economic programFinancing by short-term portfolio investment or borrowing is risky as a sudden failure in an emerging capital market or an unexpected suspension of foreign government assistance, perhaps due to political tensions, will result in an immediate cessation of credit in the current account

15Capital/Financial Accounts & BOP Current Account

If economy has positive capital and financial accounts (a net financial inflow), the country's debits are more than its credits (due to an increase in liabilities to other economies or a reduction of claims in other countries)- parallel with a current account deficit; An inflow of money means that the return on an investment is a debit on the current account. Thus, the economy is using world savings to meet its local investment and consumption demands. It is a net debtor to the rest of the world.

Capital/FinancialAccount16Capital/Financial Accounts & BOP Current Account

If the capital and financial accounts are negative (a net financial outflow), the country has more claims than it does liabilities either because of an increase in claims by the economy abroad or a reduction in liabilities from foreign economies- parallel a current account recording a surplus at this stage, indicating that the economy is a net creditor, providing funds to the world.

Capital/FinancialAccount17Liberalization of the AccountsUnrestricted movement of capital is fundamental to ensuring world trade and theoretically, greater prosperity for all. Reality: Restrictive macroeconomic policies preventing foreign ownership of financial and non-financial assets and limited the transfer of funds abroadEffects of capital and financial account liberalization governments, corporations and individuals are free to invest capital in other countries. Growth of capital markets allowing a more transparent and sophisticated market for investors,By investing in more than one market, investors are able to diversify their portfolio risk while increasing their returns, which result from investing in an emerging market.

Companies striving for bigger markets and smaller markets seeking greater capital and domestic economic goals can expand into the international arena, resulting in a stronger global economy.

18Liberalization of the AccountsEffects of capital and financial account liberalization for recipient countriesforeign direct investment (FDI) into industries and development projectsportfolio investment in the capital market can encourage capital-market deregulation and stock-exchange volumes.inflow of foreign capital into its country as well as the sharing of technical and managerial expertise.What is the downside?Dumping ground for cheap productsMight kill local manufactuirimgLack of proper infrastructure to meet the demands of liberalization of accountPreparedness of leaders forproper governance

Liberalization can give rise to FDI. For example, investments in the form of a new power station would bring a country greater exposure to new technologies and efficiency, eventually increasing the nation's overall GDP by allowing for greater volumes of production19Capital Account ControlIMF and World Trade Organization historically supported free trade in goods and services (current account liberalization) now faced with the complexities of capital freedom seen the Asian financial crisis in 1997Asian countries opened up the their economies to foreign capital mostly in the form of portfolio investment (a financial account credit and a current account debit) which were short term and easy to liquidateAnalysts argue that financial disaster may have been less severe had there had been some capital account controls e.g. limiting foreign borrowing (current account debit), short-term obligations would have been limited and the damage to the economy could have been less severe.

When speculation rose and panic spread throughout the region, the first thing that happened was a reversal in capital flows: money was now being pulled out of these capital markets. Asian economies now had to pay their short-term liabilities (debits in the current account) as securities were sold off before capital gains could be reaped. Not only did stock market activity suffer, but foreign reserves were depleted, local currencies depreciated and financial crises set in.

When speculation rose and panic spread throughout the region, the first thing that happened was a reversal in capital flows: money was now being pulled out of these capital markets. Asian economies now had to pay their short-term liabilities (debits in the current account) as securities were sold off before capital gains could be reaped. Not only did stock market activity suffer, but foreign reserves were depleted, local currencies depreciated and financial crises set in.

20Balance of TradeBalance of trade =exports - importsA healthy economy, then, is one where both exports and imports are growingFor countries where growth is led by exports like oil, industrial goods and other natural resources, the balance of trade will move positively toward a surplus during an economic expansionFor countries where growth is led by demand, like the US, the trade balance tends to worsen during growth stages of the business cycle because need to import more goods to grow.Trade policies: Nations that are insular and have restrictive trade policies such as high import tariffs and duties may have larger trade deficits than countries that have open trade policies, since they may be shut out of export markets because of these impediments to free trade.Exchange rates: A domestic currency that has appreciated significantly may pose a challenge to the cost-competitiveness of exporters, who may find themselves priced out of export markets. This may pressure a nations trade balance.Foreign currency reserves: To compete effectively in extremely competitive international markets, a nation has to have access to imported machinery that enhances productivity, which may be difficult if forex reserves are inadequate.Inflation: If inflation is running rampant in a country, the price to produce a unit of a product may be higher than the price in a lower-inflation country. This would affect exports, affecting the trade balance.

21Balance of TradeFactors That Affect Trade BalanceTrade policiesExchange ratesForeign currency reservesInflation and interest ratesEffect on GDPTheory 1: Trade deficits drag down GDP and add to the threat of an economic crisis if foreigners dump the local currency in world currency markets. Theory 2: Increasing trade deficits can be a sign of strong GDP. They will not create a drag on GDP, and any potential downward pressure on the local currency is actually a benefit to that country.

Trade policies: Nations that are insular and have restrictive trade policies such as high import tariffs and duties may have larger trade deficits than countries that have open trade policies, since they may be shut out of export markets because of these impediments to free trade.Exchange rates: A domestic currency that has appreciated significantly may pose a challenge to the cost-competitiveness of exporters, who may find themselves priced out of export markets. This may pressure a nations trade balance.Foreign currency reserves: To compete effectively in extremely competitive international markets, a nation has to have access to imported machinery that enhances productivity, which may be difficult if forex reserves are inadequate.Inflation: If inflation is running rampant in a country, the price to produce a unit of a product may be higher than the price in a lower-inflation country. This would affect exports, affecting the trade balance.

22Foreign Trade Policy (1949-2004)Trade policy does not exist alone or in a policy vacuum it is enmeshed within a larger development agenda and strategy which is often the arena for political competition among politicians, elites and lobbyists, and at times international businesses and organizations (ex: IMF)2 big changes to trade policy (in 1949 and the 1980s-1992)1949 adopted import controls and other similar barriers to imports in order to prevent the currency crisis from draining Bangko Sentral1980-1992 case, because of the fiscal and balance of payments bind the country was in as a result of economic setbacks in the 1970s, the government adopted liberal reforms specified under IMF conditionalities that saw the beginning of the liberalization of the import sectorForeign Trade P{olicy 1949-2004Economic consequencesWhat began as a short-term tactic to conserve foreign currency reserves was elevated into an import substituting industrialization strategy of Philippine development. The decontrol under Macapagal, and industrial targeting and export orientation under Marcos, simply changed the favored tools of this strategy (from import controls to tariffs, and an expansion of the subsidies and credits for favored industry), but not the overall thrust of the policy framework or the industrial structure it protected.Both Estrada and Macapagal-Arroyo continued the trade liberalizationand reform program begun under RamosForeign Trade Policy (1949-2004)These policies also develop a beneficiary group of business elites or class which then agitate for the continuation or extension of the policy framework based on consumables and heavy manufacturing, dependent on cheap imports and easy access to foreign currency reserves (and loans), and thus lobbied for policies and protection.The contemporary policies from Aquino, Ramos, and beyond in turn nurtured a globally-oriented entrepreneurial class that supported trade liberalization that it gave them access to both global resources and a global market (whereas the prior era was biased in favor of domestic-consumption industries).Foreign Trade Policy (2004- )Philippines economy has performed well since 2005 based on a relatively open trade regimeEconomy is operating below potential due to the slow pace of reform while some of the key constraints on overall growth remain (e.g. inadequate infrastructure, low investment, and governance issues)Improved productivity is essential for the Philippines to compete with low-cost neighbouring economies, and additional steps are needed to promote more competition, improve human capital, eliminate limitations on foreign investment, reduce incentives, and reform state-owned institutionsForeign Trade Policy (2004- )2005-11, the Philippines had annual real GDP growth rate of 5%, moderate inflation (5% on average during the period), and a surplus in its external account in part due to high remittances inflows (about 10% of GDP)37th largest exporter and the 29th importer of goods in 201027th among exporters and 36th among importers intrade of servicesThe Philippines' outward-orientation makes it vulnerable to external shocks but has also contributed to the resilience of the economy in adapting to challenges. Greater trade diversification would help the Philippines, since it relies heavily on manufactured products (85% of exports and 67% of imports).

The Gross Domestic Product (GDP) in Philippines was worth 250.27 billion US dollars in 2012. The GDP value of Philippines represents 0.40 percent of the world economy. GDP in Philippines is reported by the The World Bank. From 1960 until 2012, Philippines GDP averaged 56.1 USD Billion reaching an all time high of 250.3 USD Billion in December of 2012 and a record low of 4.4 USD Billion in December of 1962. The gross domestic product (GDP) measures of national income and output for a given country's economy. The gross domestic product (GDP) is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time.

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Philippines recorded a Current Account surplus of 1223.70 USD Million in September of 2013. Current Account in Philippines is reported by the Bangko Sentral ng Pilipinas. Current Account in Philippines averaged 54.93 USD Million from 1980 until 2013, reaching an all time high of 1596 USD Million in September of 2010 and a record low of -884 USD Million in July of 1997. Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).

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Remittances in Philippines increased to 2061989.30 USD Thousand in October of 2013 from 1935154.20 USD Thousand in September of 2013. Remittances in Philippines is reported by the Bangko Sentral ng Pilipinas. Remittances in Philippines averaged 756905.03 USD Thousand from 1989 until 2013, reaching an all time high of 2061989.30 USD Thousand in October of 2013 and a record low of 64208 USD Thousand in February of 1989.

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Philippines recorded a trade surplus of 201569 USD Thousand in October of 2013. Balance of Trade in Philippines is reported by the National Statistics Office of Philippines. Balance of Trade in Philippines averaged -236298.46 USD Thousand from 1957 until 2013, reaching an all time high of 1144700 USD Thousand in September of 1999 and a record low of -1658000 USD Thousand in November of 2011. Philippines posts regular trade deficits due to high imports of raw materials and intermediate goods. Main imports are: fuel (25 percent), electronic products (25 percent), transport equipment (7 percent) and industrial machinery (5 percent). Philippines is a leading exporter of coconut, pineapple, abaca and electronic products like processors, chips and hard drives (more than 40 percent of total exports). Main trading partners are: Japan (28 percent of total exports and 11 percent of imports), United States (15 percent of exports and 11 percent of imports) and China (12 percent of exports and 11 percent of imports).

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Imports in Philippines decreased to 4824060 USD Thousand in October of 2013 from 5710698 USD Thousand in September of 2013. Imports in Philippines is reported by the National Statistics Office of Philippines. Imports in Philippines averaged 1521217.16 USD Thousand from 1957 until 2013, reaching an all time high of 5882358 USD Thousand in July of 2008 and a record low of 37084 USD Thousand in February of 1963. Philippines main imports are: fuel (25 percent), electronic products (25 percent), transport equipment (7 percent), industrial machinery (5 percent), iron ore and metal scrap (4 percent) and cereals (3 percent). Main import partners are: United States (11 percent), China (11 percent), Japan (10 percent), Taiwan (8 percent), South Korea (9 percent), Thailand (6 percent) and Singapore (6 percent).

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Exports in Philippines decreased to 5025629.26 USD Thousand in October of 2013 from 5056209.12 USD Thousand in September of 2013. Exports in Philippines is reported by the National Statistics Office of Philippines. Exports in Philippines averaged 1284903.77 USD Thousand from 1957 until 2013, reaching an all time high of 5340847 USD Thousand in September of 2010 and a record low of 23000 USD Thousand in October of 1957. Philippines is the worlds largest producer of coconut, pineapple and abaca (more than 7 percent of total exports revenues). The country is also a major exporter of electronic products like processors, chips and hard drives (over 40 percent of exports). Other exports include: woodcrafts and furniture (5 percent), metal components (3 percent), wiring sets (3 percent), apparel and clothing, bananas, petroleum products and tuna. Main export partners are: Japan (28 percent of total exports), United States (15 percent), China (12 percent), Hong Kong (9 percent), Singapore (8 percent), Thailand (5 percent) and Germany (4 percent).

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Foreign Exchange Reserves in Philippines increased to 84024.76 USD Million in November of 2013 from 83420.11 USD Million in October of 2013. Foreign Exchange Reserves in Philippines is reported by the Bangko Sentral Ng Pilipinas. Foreign Exchange Reserves in Philippines averaged 11230.14 USD Million from 1960 until 2013, reaching an all time high of 85760.84 USD Million in January of 2013 and a record low of 44.07 USD Million in December of 1961. In Philippines, Foreign Exchange Reserves are the foreign assets held or controlled by the country central bank. The reserves are made of gold or a specific currency. They can also be special drawing rights and marketable securities denominated in foreign currencies like treasury bills, government bonds, corporate bonds and equities and foreign currency loans.

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The benchmark interest rate in Philippines was last recorded at 3.50 percent. Interest Rate in Philippines is reported by the Bangko Sentral ng Pilipinas. Interest Rate in Philippines averaged 9.86 Percent from 1985 until 2013, reaching an all time high of 56.60 Percent in December of 1990 and a record low of 3.50 Percent in September of 2012. In Philippines, interest rate decisions are taken by The Monetary Board of The Bangko Sentral ng Pilipinas (BSP). The official interest rate is the reverse repo rate (RR/P) which is the overnight borrowing rate. The central bank of the Republic of the Philippines is committed to promote and maintain price stability and provide proactive leadership in bringing about a strong financial system conducive to a balanced and sustainable growth of the economy.

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The inflation rate in Philippines was recorded at 3.30 percent in November of 2013. Inflation Rate in Philippines is reported by the National Statistics Office of Philippines. Inflation Rate in Philippines averaged 8.95 Percent from 1958 until 2013, reaching an all time high of 62.80 Percent in September of 1984 and a record low of -2.10 Percent in January of 1959. 36

Consumer Price Index (CPI) in Philippines increased to 135.80 Index Points in November of 2013 from 135.20 Index Points in October of 2013. Consumer Price Index (CPI) in Philippines is reported by the National Statistics Office of Philippines. Consumer Price Index (CPI) in Philippines averaged 38.45 Index Points from 1957 until 2013, reaching an all time high of 135.80 Index Points in November of 2013 and a record low of 1.27 Index Points in January of 1957. In Philippines, the Consumer Price Index or CPI measures changes in the prices paid by consumers for a basket of goods and services. In Philippines, the most important categories in the Consumer Price Index are: food and non-alcoholic beverages (39 percent of total weight); housing, water, electricity, gas and other fuels (22 percent) and transport (8 percent). The index also includes health (3 percent), education (3 percent), clothing and footwear (3 percent), communication (2 percent) and recreation and culture (2 percent). Alcoholic beverages, tobacco, furnishing, household equipment, restaurants and other goods and services account for the remaining 15 percent.

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External Debt in Philippines decreased to 60337 USD Million in 2012 from 61711 USD Million in 2011. External Debt in Philippines is reported by the Bangko Sentral Ng Pilipinas. From 1981 until 2012, Philippines External Debt averaged 41964.3 USD Million reaching an all time high of 61711.0 USD Million in December of 2011 and a record low of 20893.0 USD Million in December of 1981. In Philippines, external debt is a part of the total debt that is owed to creditors outside the country.

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