Philippines Update: Philippines Committee Quarterly Call Notes

Philippines Update | December 19, 2016
Authors: Riley Smith and Crawford Taylor

Philippines Committee Quarterly Call Notes

On December 12/13, the Philippines Committee held a planning call to discuss the 2017 work plan for the Committee. A summary of the items discussed is provided below.

A new draft of the 2017 Philippines Committee Work Plan can be accessed here. Please contact Riley Smith at rsmith@usasean.org if you have any additional suggestions or questions.

Opening Remarks
1. Main goal of call is to get some feedback for the 2017 Philippines Committee Work Plan
  1. Have already discussed draft work plan internally, including engagement opportunities in 2017
  2. Have generated some ideas for potential programs and activities, and would appreciate feedback from Committee members
  3. Main engagement opportunity will be 2017 business mission
2. Philippines is the new ASEAN Chair for 2017, so that opens up new opportunities for engagement at the regional and sector-level
3. We welcome feedback on the 2017 work plan on the call and also via email after the call

Briefing: The Duterte Administration's Foreign Policy – Issues in the Return of Equi-Balancing
1. Note: The featured speaker, Dr. Renato Cruz De Castro, was unable to participate in the call. Notes from a presentation he gave on the same subject in November are provided below.
2. Philippines’ recent back-and-forth on relations with the United States and China appears to be President Duterte’s attempt to engage in “equi-balancing”
  1. Duterte has called for reassessment of Enhanced Defense Cooperation Agreement (EDCA) with the United States
  2. During an official visit to Beijing in October, Duterte announced Philippines’ “separation” from the United States in military and economic terms, choosing instead to side with China and Russia
    1. This statement was backtracked by administration officials once back in Philippines
  3. During subsequent visit to Japan, Duterte said that the Philippines would not have any military alliance with a country except for the United States and downplayed his “pivot” to China
3. Equi-balancing: when a small power fosters diplomatic and economic activities with two or more major powers to an extent where it is able to influence the major powers’ foreign policies but still insulate itself from their influence, competition, and rivalry
  1. Many ASEAN countries have engaged in equi-balancing, most notably Thailand and Vietnam
  2. Among ASEAN countries, the Philippines played this equi-balancing game the worst
    1. It always viewed China as a threat
    2. The Philippines’ relations with China have always been defined by Manila’s status as a formal treaty ally of the United States
4. Former President Gloria Macapagal Arroyo (in office from 2001-2010) was the first Philippine president to play this equi-balancing game
  1. Her “Eight Realities of Philippine Foreign Policy” took into account China’s new status as an economic power
  2. Arroyo’s official state visit to Beijing in 2005 ushered in a “golden age” of Philippines-China relations
5. Arroyo fostered closer economic relations with China but she maintained close security cooperation with the United States
  1. Arroyo knew she could not sever relations with the United States entirely
  2. It is the close relations between the Philippines and the United States that makes the Philippines valuable to China
6. Former President Benigno Aquino III (in office from 2010-2016) tried to play the equi-balancing game early in his term; however, the Reed Bank incident in March 2011 and the Scarborough Shoal incident in 2012 forced him to scrap this approach and focus on further strengthening ties with the United States
  1. In response, he set out to balance China by:
    1. Implementing EDCA
    2. Fostering a security partnership with Japan
    3. Challenging China’s territorial claims in the South China Sea at the Permanent Court of Arbitration (PCA) Tribunal at The Hague
7. After Duterte won the presidential election in May, the PCA Tribunal ruled in favor of the Philippines in July and the United States government criticized Duterte’s anti-drug crackdown
  1. The Duterte administration’s response to these developments has been a return to equi-balancing
8. Where else is equi-balancing seen?
  1. Duterte has maintained and nurtured the Philippines’ security partnership with Japan, China’s main rival in East Asia
  2. The agreements that the Philippines signed during Duterte’s official visit to Japan were implementing agreements, while those that were signed during his trip to China were just MOUs
  3. The Philippines’ defense budget is going up 15% despite the country’s apparent rapprochement with China
  4. Despite threats to cancel the Balikatan joint military exercises between the Philippines and the United States after 2016, the administration has said it will continue them but refocus the exercises on counterterrorism and humanitarian response
  5. In October, Duterte threatened to end EDCA, but on the sidelines of the APEC Leaders Meeting in November Philippine Foreign Secretary Yasay assured U.S. Secretary of State Kerry that Duterte would continue its implementation
9. The erratic quality of the Duterte administration’s foreign policy is a consequence of their attempts to play the equi-balancing game

2017 Philippines Committee Work Plan
1. Themes and Policy Priorities
  1. Improvement of overall business environment
  2. Infrastructure development
  3. Development of industry sector ecosystems
  4. How U.S. private sector can help the Philippines achieve its goals as 2017 ASEAN Chair (MSMEs, Innovation, Regulatory Coherence, Inclusive Business)

Improvement of Overall Business Environment
1. Encourage the government to maintain focus on loosening foreign ownership restrictions in the Constitution
2. Encourage the government to consult with private sector stakeholders on the pros and cons of a federal system of government for the business environment
  1. Implementation of a federal system without appropriate due diligence or preparation could lead to serious regulatory uncertainty and exacerbate corruption at lower administrative levels
3. Encourage the government to pursue/fully implement other types of reforms that will improve the overall business environment
  1. The full implementation of the Customs Modernization and Tariff Act will promote transparency
  2. Strengthening IPR protections for branded goods and encouraging efforts to curb counterfeiting will make the Philippine market more attractive to foreign investors
  3. Promote adherence to good governance principles (e.g. fighting corruption, ensuring IPR protection, and adhering to legal due processes)

Discussion of “Improvement of Overall Business Environment” Theme
1. What is the timeline for when policies will be implemented? Has there been any progress on “10 Point Socioeconomic Development Agenda”?
  1. Department of Finance submitted first of four tax reform packages to Congress in late September
    1. First package lowers personal income tax rates, expands value-added tax base, adjusts excise tax on petroleum products, and restructures excise tax on certain automobiles
    2. Congress aiming to vote on first tax reform package by early 2017
  2. Second tax package will reduce corporate income tax rate from 30% to 25%
    1. Congress hopes to vote on second package by June 2017
  3. Third tax package will overhaul real estate property tax
  4. Fourth tax package will reform capital income tax
    1. Congress hopes to enact fourth package in 2018
2. Changing the constitution (Charter change (“Cha-cha”))
  1. For last several months, since Duterte took office in late June, debate has been over whether to form constituent assembly (con-ass) or constitutional convention (con-con)
    1. In October, House of Representatives committee on constitutional amendments approved creation of con-ass
  2. Executive Order (EO) No. 10, signed in early December, creates a 25-member consultative committee (con-com) to review 1987 Constitution
    1. The EO says review will cover economic and political provisions
    2. Con-com will submit report to President’s Office within six months of being formed
  3. Optimistic projections are that con-ass can finish with proposed amendments by 2018 and then hold plebiscite on changes in 2019 (aiming for 2019 midterm elections)
  4. Moving to a federal system of government is a top priority for Duterte
    1. He has said he may step down from presidency early if federal system is implemented before his 6-year term is up
  5. Council will work to ensure that focus is paid to changing economic provisions in Constitution as well as political provisions
3. Government appears well on way to meet and likely exceed goal of 5% of GDP for infrastructure spending
  1. Will be done through deficit spending, but ratings agencies comfortable with approach because of Philippines’ strong economic fundamentals
  2. Proposed budget for 2017 allocates P861 billion (approx. US$17.2 billion) to infrastructure spending
  3. Since Duterte took office at end of June, National Economic and Development Authority (NEDA) has approved 18 major public infrastructure projects for bidding
  4. Secretary of Budget and Management Benjamin Diokno expects infrastructure spending to be 7% of GDP in 2017 and reach 8% by 2022
4. At this time, don’t have clear timelines for other key points of “10 Point Socioeconomic Development Agenda”

Infrastructure Development
1. Support current government initiatives to increase foreign investment in infrastructure development (e.g., the Development of Foreign Investment Framework Project), and encourage the government to take these initiatives further
2. Encourage continued expansion of PPP program, emphasizing expertise and value from life-cycle costs that foreign companies can provide

Development of Industry Sector Ecosystems
1. Support government initiatives to increase foreign investment in priority sectors such as agriculture, healthcare, and ICT
2. Offer recommendations on how to build and expand industry ecosystems
  1. Healthcare:
    1. Philippines-U.S. Government-Industry Healthcare Dialogue can serve as a venue to offer insight and recommendations on how the government can build a healthcare sector ecosystem
    2. Use Philippines-U.S. Government-Industry Healthcare Dialogue to push for signing of MOU between US-ASEAN Business Council and Philippine Department of Health (DOH) to deepen engagement with DOH
  2. ICT
    1. With Department of ICT established, promote the development of an overarching plan for ICT sector development, including a national cyber security strategy
    2. Cyber security event(s) with Bangko Sentral ng Pilipinas (BSP)
    3. Partner with/leverage USG programs (e.g. USAID’s STRIDE) where there is overlap in the ICT development space
  3. Agriculture
    1. Advocate for the government to pursue market-based policies that will provide consumers better access to affordable food
    2. Advocate for the government to develop a harmonized, cross-departmental, forward-looking agricultural roadmap and policy that, by embracing the latest biotechnology innovations, will help the country achieve its food security goals
    3. Raise awareness of threat climate change poses to food security and how new technologies in the agriculture sector can help mitigate this threat

Discussion of “Development of Industry Sector Ecosystems” Theme
1. Update on cybersecurity event with BSP?
  1. Recently received list of subjects that BSP is interesting in covering
  2. Financial Services and ICT Committees are collaborating with Philippines Committee on possibly holding several cybersecurity-related events in 2017, including those with BSP
    1. BSP wants to hold event in Q1 2017
    2. Considering holding an event alongside the ASEAN Finance Ministers and Central Bank Governors Meetings (April 3-7, 2017)
    3. Looking for other areas in calendar where we can hold cyber-related events
  3. In addition to BSP, consider organizing cyber-related event with Department of Trade and Industry (DTI) and/or Department of Information and Communications Technologies (DICT) to focus on e-commerce
    1. Manila office met with DTI recently to discuss priorities as 2017 ASEAN Chair
    2. DTI mentioned focus on micro, small-, and medium-sized enterprises (MSMEs) and e-commerce
    3. Raised possibility of including cybersecurity in future event
  4. Will have more information on next steps by early 2017

How U.S. private sector can help the Philippines achieve its goals as 2017 ASEAN Chair
1. The Philippines’ goals as ASEAN Chair for 2017 include:
  1. Fostering the development of a business environment in which micro, small and medium enterprises’ (MSMEs) can thrive and participate in regional and global markets
  2. Encouraging innovation
  3. Striving for regulatory coherence
  4. Supporting inclusive business, particularly with respect to the participation of women in the workplace
2. To help the Philippines achieve these goals, the Council will:
  1. Promote development of a broad, cross-sector MSME development model
  2. Advocate for increased transparency and anti-corruption enforcement for local MSMEs
  3. Promote human capital development in MSMEs in various sectors
    1. Organize at least one more MSME workshop; coordinate with the Department of Trade and Industry (DTI) to help organize workshops
  4. Promote initiatives that encourage regional regulatory coherence and help to more easily facilitate the movement of goods and labor in the ASEAN Economic Community

Upcoming Events
1. Welcome reception for new US Ambassador to the Philippines, the Honorable Sung Y. Kim, on January 24 or 25; more details to come
2. Council working with member companies in the Health & Life Science (HLS) sector and the U.S. Department of Commerce to organize an inaugural Philippines-US Government-Industry Healthcare Dialogue
  1. Format would be similar to 2^nd Korea-US Government-Industry Healthcare Dialogue in September 2016
  2. Commerce believes earliest possible date for Philippines dialogue is spring of 2017
  3. Have a draft agenda for the dialogue; are awaiting feedback from HLS companies and Commerce
    1. Proposing that one part of dialogue focus on regional issues; second part focus on Philippines-specific issues
  4. Dialogue also aligns with USG’s adjustment in policy to address drug problem in Philippines as a public health issue instead of a law and order issue
    1. One topic addressed in dialogue could be how Philippines and ASEAN countries can build rehabilitation capabilities
  5. Aim is to use dialogue to push for signing an MOU with Philippine DOH to deepen engagement with the Council
3. Roundtable with one or both special envoys to the U.S.
  1. In touch with Philippine Embassy

Closing Remarks
1. Exciting 2017 ahead for Philippines Committee
2. With Philippines serving as 2017 ASEAN Chair, have broader platform from which to push policy priorities