The Philippine-us Bilateral Relationship
The two countries formalized diplomatic ties 75 years ago, and bilateral trade and investments have only grown through time.
THE Philippines and the United States established formal diplomatic relations on July 4, 1946, on the same day the former gained its status as an independent and sovereign republic. Since then, the two countries have expanded and deepened bilateral cooperation in many areas—most notably in defense and security, trade and commerce, as well as culture and education.
The Philippines is also the US’S oldest treaty ally in Asia as this is also the 70th year of the Mutual Defense Treaty that formalized their treaty alliance, enabling close security cooperation which enhancing mutual peace and security. “Some say 75 years is indeed a long time to stay as friends, partners, and allies,” says Philippine Ambassador to the US Jose Manuel G. Romualdez. “But I believe this is an undeniable testament to the depth and quality of the bilateral relationship. Our ties have withstood the test of time, and have served both our countries and peoples well.”
Commercial activity and cooperation
ACCORDING to U.S. Embassy to the Philippines Chargé d’affaires John Law, the United States is one of the largest foreign investors in the Philippines, and long-time U.S. investors have continued to expand their Philippine portfolios due to the country’s vibrant domestic market, positive economic prospects, and stable macroeconomic fundamentals. It is among the Philippines’ top three trading partners, having exchanged more than US$30 billion goods and services in 2019. The United States is also among the Philippines’ top foreign investors, with more than US$161 million in Foreign Direct Investments (FDI) inflows for 2020. American firms are the largest electronics, integrated circuits, and semi-conductor exporters in the country. Nearly 40 U.S. companies operate in the Philippine semiconductor industry, which generates more than half of all Philippine exports.
The Information-technology Business Process Management (ITBPM) industry employs more than a million Filipinos, and it’s estimated that nearly 70 percent of Philippine IT-BPM business comes from the United States. Law adds, “Over the past few years, we have seen an increase in private equity placements; U.S. firms are funding important growth in areas like health care, communications, fintech, and natural gas. We have also seen new partnerships and investments in the Philippine market, including in innovative areas such as turning solid waste into fuel and in energy storage.”
Romualdez says, “We are ranked first in voice-based and second in non-voice-based services globally. We have been a cost-competitive destination for major multinationals for the last two decades and our pool of young, talented, English-speaking professionals continue to grow to take on higher value services in finance, education, healthcare, and ICT creatives.”
The partnership between the two countries is a driver for other industries to flourish. “The Philippines was recently ranked by the United Nations Conference on Trade and Development (UNCTAD) as second overperformer in ICT deployment, skills, research and development, industry activity and access to finance, relative to per capita GDP. According to UNCTAD, the Philippines exceeded expectations because of its high ranking in the industry, which showed high levels of foreign direct investment in high-technology manufacturing, especially in electronics. Multinational enterprises are also encouraged in our strong supply chains and solid base of parts manufacturing. We were also recognized for our pro-business policies, skilled and well-educated workforce, and our network of economic zones,” Romualdez explains.
Some of the most recognizable U.S. firms have opened operations in the Philippines over the past few years. Law cites Amazon, which launched its first customer service office in 2018 in Cebu, followed by a second facility in Manila. “These offices have created a total of 3,200 customer service jobs for Filipinos. Several large U.s.-based investment funds have made large investments in the Philippines in recent years. Amcham has increased its membership over the years as U.S. firms continue to expand and relocate operations to the Philippines. One example is Fedex, which announced it will expand operations in Clark. The company plans to increase flights into and out of the Clark Airport, and more efficiently serve many of the semiconductor companies in North Luzon. With the plethora of energy and digital opportunities in the country, there is growing interest from U.S. companies looking to invest in these growing markets.”
Breaking down the figures, Usec. Ceferino Rodolfo, Undersecretary for the Industry Development and Trade Policy Group of the Department of Trade and Industry and Vice Chairman and Managing Head of the Board of Investments, says that in 2020, the U.S, was the country’s 3rd major trading partner, 2nd biggest export market and 4th largest import source. The Philippines enjoys preferential duty-free market access of certain exports to the United States under the Generalized System of Preferences (GSP), with the Philippines ranking as top 5th beneficiary of the Program last year. The inclusion of travel goods into GSP in 2017 also boosted Philippine exports of those products to the United States. Total bilateral trade in 2020 was valued at US$ 16.36 billion representing US$ 9.72 billion exports and US$ 6.64 billion imports. The Philippines’ five major export products to the U.S. included semiconductors, integrated circuits, storage units, and static converters amounting to US$ 3.95 billion. The top five imports from the U.S. include integrated circuits, wheat and meslin, oil-cake, accessories on consignment, and milk and cream valued at US$ 3.14 billion. The Philippines enjoys a slight trade surplus with the United States.
“In terms of investments, the U.S. topped the rankings of the Philippines’ source of approved investments in 2020 valued at US$ 712.81 million. Industries where there were significant U.S. investments in 2020 were in transportation and storage, administrative and support service activities, manufacturing, real estate activities, information and communication technology, wholesale and retail of motor vehicles and motorcycles, and financial and insurance activities,” according to Usec Rodolfo.
As the US seeks to expand commercial activity in the Philippines, it is also actively encouraging Philippine investment in the United States. Law shares that from June 7-11, 2021, the U.S. Commercial Service and the U.S. Department of Commerce will welcome Philippine companies of all sizes to expand business in the United States through the Selectusa program. “Selectusa provides information and data to help companies move investments forward. It’s a great opportunity for Philippine companies to expand operations or discover opportunities in the United States,” he explains.
Post-pandemic progress
IN recent years, ASEAN has attracted huge inflows of Foreign Direct Investment (FDI), totaling more than $100 billion, exceeding the volume received by China, Law reveals. “We will continue to see more investment and focus on the ASEAN region. The U.S. Government’s Indopacific Business Forum, launched in 2019, is now an annual event that strengthens economic linkages between the United States and the region. Greater trade and investment interest in Southeast Asia also has benefited the Philippines.” He adds that in 2017, the Philippines reached a record level of US$10 billion net FDI. “This level declined to US$6.5 billion in 2020 in line with depressed FDI flows worldwide, but analysts predict FDI will pick up as the Philippines recovers from the pandemic.”
As part of the pandemic recovery process, President Rodrigo Duterte has signed the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE as the second phase of the tax reform program. Romualdez describes it as “our biggest stimulus program ever for businesses, and a game-changer that will support our pandemic recovery efforts. By cutting corporate income tax from 30% to 20% for micro, small and medium enterprises and 25% for all other companies, and providing an enhanced incentives package, we are leaving more money with the private sector to support their recovery, as well as their expansion plans. We trust that they will re-invest their tax savings to spur further economic activity.”
“The passage of CREATE, as well as of the Financial Institutions Strategic Transfer Act, which allows banks to efficiently offload their bad loans and non-performing assets to mobilize savings and investments and extend more loans to enterprises in need of assistance, presents an opportunity to deepen our trade and investment partnership with the U.S.,” Romualdez adds.
Law also makes mention of Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), saying that it will provide additional certainty for firms considering investing in the Philippines. “The recent report that the Philippines is considering joining the CPTPP (Comprehensive and Progressive Agreement for Trans-pacific Partnership) is important as it will ensure that existing and future export manufacturers will have access to more free trade markets. The CREATE Act, which reduces the corporate income tax to 25 percent and improves fiscal incentives, is a milestone for existing and new investors. Companies are watching the progress of Build, Build, Build as well as labor market reforms.“
With the mission to “build back better,’”, postpandemic focus is also given to addressing the climate challenge and gaps in the global and regional trade environment that were amplified by the current crisis. Romualdez notes energy programs as one such area of cooperation through power plant projects and clean energy technologies. This includes promoting the use of electric vehicles, starting with the conversion of engines of public transport vehicles using locally available materials such as the nickel that is used in batteries.
Another critical area is digital connectivity and telecommunications. “The pandemic magnified the importance of connectivity as schools, businesses and even government services had to migrate online. We therefore continue to invest and welcome investments in our telecommunications infrastructure.
Last month, the President also issued an Executive Order allowing inclusive access to satellite services to open opportunities for telecommunication companies to provide better internet services and access nationwide. We hope this will pave the way for the entry into the Philippine market of service providers such as Spacex’s Starlink,” Romualdez says.
“The Philippines has long been a trade and investment destination for U.S. firms in view of close historic bilateral ties and the Philippines’ recent impressive economic growth story. However, in a post pandemic global economy the country needs to continue to differentiate itself to compete more effectively with its peers in ASEAN and improve its position in Asia’s evolving regional trade landscape. A commitment to dialogue with the private sector to promote economic recovery and further trade liberalization by ratifying RCEP or joining the CPTPP, would signal openness to more economic participation by foreign firms,” states Marc Mealy, Vice-president for Policy of the US-ASEAN Business Council.
Strengthening ties
DURING the ongoing COVID-19 pandemic, foreign investors have been unable to travel to the Philippines, evaluate potential work sites, or meet with government agencies and potential partners, Law notes.
“As the pandemic situation improves, we will continue to help U.S. firms explore opportunities with Philippine partners, which would support post-pandemic economic recovery in both of our countries. We are eager to see FDI return to prepandemic levels and to identify ways to expand bilateral trade and investment even further.”
When asked about how the new administration under President Joseph Biden, Jr. will continue to strengthen the flourishing 75-year relationship, Law responds: “The Indo-pacific is a vital region for U.S. national security, economic growth opportunities, and maintaining a rules-based international system that respects national sovereignty and individual freedoms. U.S. engagement in the Indo-pacific will continue to expand, especially with allies like the Philippines and institutions such as ASEAN. The new U.S. national security team’s earliest calls to foreign interlocutors were to their Philippine counterparts; in fact, U.S. Secretary of State Antony John Blinken called Secretary of Foreign Affairs Teodoro Locsin Jr. on his second day on the job. This close, high-level engagement demonstrates how important our relationship with the Philippines is for the new administration. The Filipino people are some of our closest friends, partners, and allies.”
He also says that the full range of U.S. departments and agencies— such as USAID, U.S. International Development Finance Corporation (DFC), United States Trade and Development Agency (USTDA), Department of Commerce, Department of Agriculture, and EXIM Bank—are committed to advancing our close economic relationship with the Philippines. “Both sides are committed to elevating our trade and investment ties, and the U.S. Embassy in Manila will play a leading role. The U.S. is supporting expanded economic ties in key sectors as part of our Indo-pacific vision: energy, digital connectivity, and infrastructure. These will be priority interest areas in the coming years.”