Sustainability Impact Assessment (SIA) in support of Free Trade Agreement (FTA) negotiations between the European Union and the Philippines Draft Final Report Prepared by DEVELOPMENT Solutions [23 May 2019] The views expressed in the report are those of the consultant, and do not present an official view of the European Commission EUROPEAN COMMISSION Directorate-General for Trade Directorate C – Asia and Latin America Unit C2 – South and South East Asia, Australia, New Zealand European Commission B-1049 Brussels EUROPEAN COMMISSION Sustainability Impact Assessment (SIA) in support of Free Trade Agreement (FTA) negotiations between the European Union and the Philippines Draft Final Report 23 May 2019 Europe Direct is a service to help you find answers to your questions about the European Union. Free phone number (*): 00 800 6 7 8 9 10 11 (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). LEGAL NOTICE This document has been prepared for the European Commission however it reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein. More information on the European Union is available on the Internet (http://www.europa.eu). 4 About DEVELOPMENT Solutions DEVELOPMENT Solutions (DS) is a European consultancy which serves the international donor and business community in support of sustainable development and sustainable investment objectives, world-wide. Our expertise is built on our strong grounding in project design and management, research, policy and regulatory analysis, and the management of capacity strengthening programmes for governments. Our primary projects are in support of EU external policies and cooperation in third countries, which includes deep experience in the area of trade policy, environment and sustainable solutions. This work has served as a valuable demonstration as to how trade and environmental policies can support developing countries to transition towards sustainable growth, which can bring economic efficiency and contribute to local and international efforts for sustainable development outcomes. 5 Executive Summary In 2007, free trade agreement (FTA) negotiations were launched between the Association of Southeast Asian Nations (ASEAN), which includes the Philippines, and the European Union. These negotiations were paused in 2009, giving way to a bilateral format of negotiations. Negotiations for an EU-Philippines FTA were launched on 22 December 2015 and seek to enhance trade and investment relations. The bilateral Partnership and Cooperation Agreement signed in 2012 and entering into force in March 2018 governs the overall relations between the EU and the Philippines. The aim of the FTA negotiations is to eliminate or reduce tariff and non-tariff barriers to trade in agricultural products, manufactured goods and services and thereby facilitate trade flows, realize the untapped potential and expand FDI, level the playing field between private businesses and state-owned enterprises, and contribute to sustainable development objectives. It is in this vein that DG Trade has commissioned the preparation of a Trade Sustainability Impact Assessment (SIA) for FTA negotiations between the EU and the Philippines. The major goals of this SIA are: i. To present a robust analysis of the potential economic, social, human rights and environmental impacts that the trade agreement could have, in the EU, in the Philippines, in developing countries and least developed countries, as well as in Turkey1; ii. To employ a continuous and wide-ranging consultation process which ensures a high degree of transparency and the engagement of all relevant stakeholders in the conduct of the SIA inside and outside the EU; and iii. To provide recommendations regarding positive impacts and best-practices, how to enhance these, and how to avoid or minimise any compromising and unintended negative effects The Final Report is the third of three deliverables in the SIA process, following the publication of the Interim Report in March 2019 (the Draft Interim Report was published in December 2018) and the Inception Report in August 2018. The Final Report builds upon the Interim Report, presenting the results and providing policy recommendations. The recommendations are presented in the form of measures to be included in the FTA and of accompanying measures. The Final Report also provides a detailed overview of the stakeholder consultation process undertaken for the SIA. Methodology Employed The draft Final Report includes a comprehensive quantitative analysis. In this respect, the key tool used within the SIA is a multi-region Computable General Equilibrium (CGE) model based on the framework of the Global Trade Analysis Project (GTAP). For the purposes of this report, the model has been run by DG Trade to quantitatively estimate the potential economic impacts of a future free trade agreement between the EU and the Philippines. This quantitative approach is complemented by a qualitative analysis. Throughout the analysis a baseline scenario and liberalisation scenarios are used. The baseline scenario serves as the benchmark against which impacts expected to arise from a future EU-Philippines FTA are measured, while the liberalisation scenarios represent a prediction of the potential outcome of a future agreement and serve as the basis for assessing the impacts that are likely to arise as a result. 1 Turkey is linked to the European Union by a customs union agreement. 6 EU-Philippines Relations The EU and the Philippines signed in July 2012 a Partnership and Cooperation Agreement (PCA), which provides the overall framework for EU-Philippines relations. Since December 2014, the Philippines enjoys enhanced trade preferences with the EU under the EU's GSP+ scheme. Negotiations for the FTA between the EU and the Philippines were launched on 22 December 2015. The EU and the Philippines have a well-established economic relationship, with the Philippines being the EU’s sixth largest trade partner in ASEAN and the 41st largest trade partner in the world, while the EU is the fourth largest trading partner of the Philippines. The EU’s exports to the Philippines consist mainly of machinery, transport equipment, chemicals, food products and electronic components, while major imports of the EU from the Philippines consist of telecommunication equipment, machinery, food products and optical and photographic instruments. The EU and the Philippines also have a history of cooperation in the fields of social development and human rights dialogue, as well as on environmental issues, with a multitude of cooperation programs between the two parties. Overall Economic Impacts and Policy Recommendations A reduction in tariffs and non-tariff barriers as a result of the future FTA is expected to lead to overall increases in welfare, GDP and trade for both the EU and Philippines. The size of these gains is projected to be positively correlated with the degree of liberalisation, with greater removal of tariffs and NTBs projected to lead to larger increases. The results of the CGE modelling exercise indicate that by 2032 the expected increases in the EU overall welfare would range from €1.01 billion to €1.33 billion and the increases in EU overall GDP is expected to range from €1.09 billion to €1.59 billion. For the Philippines, the predicted gains in overall welfare are between €890 million and €1.29 billion, whilst the overall GDP is estimated to increase by between €1.47 billion and €1.98 billion. The size of the ultimate impact is likely to be significantly influenced by the extent to which non-tariff barriers are eliminated. Making provisions pertaining to, inter alia, TBTs, SPS, customs and trade facilitation, rules of origin, and investment of notable significance to the eventual outcomes that arise from the agreement. Reduction in tariff and non-tariff barriers under a future FTA would lead to substantial increases in the value of goods and services traded bilaterally. A future FTA is projected to lead to an overall increase in EU global exports ranging from €2.01 billion to €2.69 billion and an increase in overall Philippines global exports ranging from €1.94 billion to €2.41 billion. Structurally, the agreement is expected to promote a reallocation of resources in each economy over the long-term, which would lead to changes in output, shifts in overall trade and, potentially, realignment and intensification of certain global production chains. Specifically, the CGE model projects increases in output and global exports of industrial products from the EU. Sectors particularly likely to experience gains include motor vehicles and parts, electronics, other transport equipment and chemical, rubber and plastic products. For the Philippines, significant increases in output and exports of textiles, apparel and electronics are expected to arise, coinciding with greater integration with the EU’s global supply chains. While the overall gains are projected to be positive, certain sectors are expected to experience declines in output and/or overall exports. For the EU, declines in output and global exports are projected to arise in the textiles and wearing apparel sector. Although the model suggests that the EU is likely to experience minor reductions in output and 7 exports of agri-food products, there can be scope for this to be countered through the removal of non-tariff measures affecting trade. In particular, an