Philippines and EU Resume Free Trade Talks

The Philippines and the European Union (EU) have resumed talks over a possible future free trade agreement. The initial negotiations for a Philippines-EU FTA (PH-EU FTA) began in 2015 under former President Benigno Aquino, with the second round of talks in 2017 before stalling under former President Rodrigo Duterte.

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For the EU, a free trade agreement with the Philippines offers the bloc a new supply chain route. The ongoing Russia-Ukraine conflict has exposed the EU’s over dependency on Russian energy and economic dependence on Chinese supply chains. For the Philippines, an FTA with the EU can offer new investment opportunities that can develop and add value to local industries.

EU is the Philippines’ fourth-largest trade partner

Bilateral trade in goods reached US$19 billion in 2022, making the EU the Philippines’ fourth largest trade partner.

The Philippines recorded a trade surplus in 2022 with the EU importing goods worth some US$11 billion. More than US$6 billion of the EU’s imports from the Philippines were for electronic equipment, followed by machinery and nuclear reactors, valued at just over US$1.7 billion.

Source: Trading Economics

The EU exported approximately US$7.91 billion worth of goods in 2022. This was dominated by electrical equipment at US$1.2 billion, followed by meat and edible offal (US$961 million), machinery and nuclear reactors (US$771 million), and pharmaceutical products (US$767 million).

GSP+ extension

The Philippines currently enjoys trade preferences under the EU’s Generalized Scheme of Preferences + scheme (GSP+). The scheme provides duty-free access to the EU market for two-thirds of tariff lines. The EU is proposing to extend the scheme for another four years to 2027.

Promising sectors in the Philippines

The Philippines was among the world’s fastest-growing emerging markets in 2022, recording a GDP of 7.6 percent. This also represented the country’s fastest growth since 1976. The Southeast Asian nation is working to reduce its reliance on overseas remittances and has gradually developed its domestic industries to move up global value chains in select industries, thereby presenting EU investors with newfound opportunities.

Business process outsourcing

The BPO industry in the Philippines is important for the country’s economy and contributed around US$32.5 billion in 2022, an increase of 10 percent from 2021. The industry has improved its capacity to offer non-call center outsourcing solutions and is ripe for investments into more value-added levels of outsourcing, namely knowledge process outsourcing (KPO). This comprises of IT outsourcing, animation game development, financial research, software development, and data analytics, among others.

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The economic contribution of the Philippines’ BPO industry is expected to outpace further remittances sent from Filipinos working abroad. Remittances were an important stabilizing factor for the country’s economy during the height of the pandemic in 2020 and 2021, contributing to some 10 percent of GDP, making the Philippines the country with the highest remittances to GDP ratio in Southeast Asia. Remittances to the Philippines hit a record high of US$36 billion in 2022.

However, it is expected that the ratio of remittances will begin to decrease as revenue from local industries such as BPO begins to fill the gap. For instance, revenue from BPO activities now contributes to approximately 11 percent of GDP.

The KPO industry

The KPO sub-sector in the Philippines has become a significant contributor to the development of the country’s BPO industry. Further, as special economic zones (SEZs) permitted the work-from-home setup for BPO companies, they have been able to expand their scope of services to clients – opening the door for investments into high-value KPO sub-sectors like game animation, IT services, banking, and financial services, legal services, and data analytics, among many others. Higher-value KPO services will increasingly become more attractive investments as the outsourcing industry braces for the automation of voice-based services.

The digital economy

The Philippines’ digital economy had a gross merchandise value (GMV) of US$20 billion in 2022, at a compound annual growth rate (CAGR) of 22 percent. The GMV is expected to rise to US$35 billion in 2025 and between US$100 billion to US$150 billion by 2030.

There are significant opportunities for foreign investors in the Philippines’ e-commerce sector, which has been the main growth driver of the country’s digital economy. Lazada and Shopee recorded over 100 million visits combined in 2022.

The industry recorded a GMV of US$14 billion in 2022 and this is predicted to increase to US$22 billion in 2025. As such, digital technologies have the potential to unlock significant economic value in the Philippines especially since between 68 to 72 percent of the population has access to the internet and some 86 million use smartphones, or roughly 77 percent of the population.

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