VZCZCXRO5218
OO RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHNH RUEHPB
DE RUEHML #1563/01 2050610
ZNR UUUUU ZZH
O 240610Z JUL 09
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4715
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHRC/USDA FAS WASHDC IMMEDIATE 1439
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION COLLECTIVE IMMEDIATE
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 MANILA 001563 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/MTS, EAP/EP, AND EB/TPP 
STATE ALSO PASS EXIM, AND OPIC 
STATE ALSO PASS USTR BWEISEL, KEHLERS, AND RBAE 
STATE ALSO PASS USAID, OPIC 
TREASURY FOR OASIA 
USDOC FOR 4430/ITA/MAC 
USDA/FAS/ONA 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON PGOV PREL RP
SUBJECT:  PHILIPPINES-JAPAN FREE TRADE AGREEMENT UPDATE 
 
REF:  08 Manila 02419 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1.  (SBU) Summary:  Since the Japan-Philippine Economic Partnership 
Agreement (JPEPA, the first Philippine bilateral free trade 
agreement) became effective in December 2008 (reftel), its impact 
has been more on the movement of people than goods, and significant 
barriers to investment in the Philippines remain.  Philippine 
officials explain that mechanisms to implement the treaty are still 
being set-up.  However, Japanese officials here believe that 
increased trade and investment will depend heavily on the Philippine 
political will to address non-tariff barriers, business climate and 
competitiveness issues, and legal barriers to greater foreign 
participation in the Philippine economy.  Our experience with the 
bilateral Trade and Investment Framework Agreement confirms that 
pushing for reforms here can be a protracted and difficult process. 
End Summary. 
 
First Batch of Nurses and Caregivers Off to Japan 
--------------------------------------------- ---- 
 
¶2.  (U) For the Philippines, the most tangible benefit thus far 
since the Japan-Philippines Economic Partnership Agreement (JPEPA) 
was ratified and came into force on December 11, 2008 has been in 
the movement of natural persons, particularly in the health services 
sector.  In May 2009, more than 280 Filipino nurses and caregivers 
left for Japan, the first batch of 500 health workers initially 
targeted under the JPEPA Implementing Agreement on the Movement of 
Natural Persons that the Japanese and Philippine governments signed 
in January 2009.  These health workers are classified as "candidate" 
nurses and caregivers until they satisfy the required Japanese 
language proficiency requirements, on-the-job training, and pass the 
license exams which will certify them as full-fledged nurses and 
caregivers.  Japan expects to accept one thousand Filipino health 
workers in the first two years of the JPEPA. 
 
Attracting Japanese Investments Hinges on Key Reforms 
--------------------------------------------- -------- 
 
¶3.  (U) The Philippine government expects JPEPA to boost Japanese 
investments in the country by providing a framework for facilitating 
capital flows between Japan and the Philippines and resolving trade 
and investment-related issues.  Although Japan is one of the 
Philippines's largest foreign investors, foreign direct investment 
flows to the Philippines from Japan over the past decade accounted 
for barely 9% of total Japanese investments in the ASEAN region. 
 
¶4.  (SBU) Officials of the Japanese Embassy in Manila told econoffs 
that credit restrictions stemming from the global financial crisis 
are currently making it difficult for Japanese businesses to invest 
abroad.  The officials also cited long-standing Philippine 
disincentives to higher levels of foreign investment -- such as the 
poor infrastructure, inconsistent policies, unpredictable legal 
system, and weak governance - which need to be addressed to boost 
Japanese investments here.  They also predict that any initiatives 
to address the foreign investment restrictions stipulated in the 
Philippine constitution and various other laws will be politicized 
and subject to controversy. 
 
So Far, No Increased Trade With Japan 
------------------------------------- 
 
¶5.  (U) Due to the global financial crisis, total Philippine trade 
with the world for the first five months of 2009 declined by 33.7% 
to $30 billion, with Philippine imports down by 32.9% and Philippine 
exports down by 34.5%.  Total bilateral trade between Japan and the 
Philippines during the first five months of 2009 contracted by 32.4% 
to $4.1 billion year-on-year.  Philippine exports to Japan declined 
by 34.5% to $2.2 billion and imports from Japan shrank by 29.9% to 
$1.9 billion during the same period.  However, most economists, 
think tanks, and business groups expect the benefits of liberalizing 
trade with Japan will outweigh potential costs from foregone tariff 
revenues and damage to some protected domestic industries. 
 
¶6.  (U) Since JPEPA entered into force, tariffs on a number of 
Philippine agricultural products representing about 95% of 
agricultural exports (by value) to Japan have been eliminated 
(mostly fruits, vegetables, and seafoods).  There will be immediate 
 
MANILA 00001563  002 OF 002 
 
 
tariff elimination for Philippine coffee, beer, fertilizers, fresh 
or dried mangoes, and certain fermented beverages.  There will be 
tariff elimination for some Philippine agricultural products in the 
fifth year, and some in the tenth year.  Cane molasses, muscovado 
sugar, chicken meat, and pineapples, products of interest to the 
Philippines, will enter the Japanese market under tariff rate quotas 
(TRQs, where lower tariffs will apply for import volumes within the 
quota, and a higher tariff will apply after the quota has been 
reached).   Certain agricultural and fishery products such as rice, 
raw sugar, wheat, milk, herrings, sardines, and mackerel that Japan 
considers sensitive were excluded from JPEPA. 
 
¶7.  (U) The two countries mutually committed to eliminate tariffs on 
most industrial goods within ten years from entry into force of the 
JPEPA, improving access to Japan as an export market as well as a 
supplier for inputs to the Philippine manufacturing sector 
(benefitting major industries such as electronics, automobiles, 
garments/apparel).  Japan expects to benefit from the elimination of 
Philippine tariffs on a number of agriculture products such as fresh 
apples, grapes, pears and quinces; from improved access for iron and 
steel under TRQ arrangements; and from the phased elimination of 
tariffs for electrical and electronic appliances/parts, some 
auto/auto parts, cement, and chemicals.  Although some local 
industries could be adversely affected, analysts here have noted 
that about 85% of Philippine imports from Japan were already 
entering the Philippines with low (zero to 5%) duties before JPEPA; 
and that JPEPA allowed remedies (such as safeguard mechanisms) for 
domestic industries severely affected by import surges. 
 
¶8.  (U) In the medium term, studies estimate that JPEPA could boost 
Philippine exports by up to $1.4 billion dollars annually 
(equivalent to about 20% of Philippine exports to Japan).  The 
Philippine agricultural sector also stands to gain from greater 
access to the Japanese export market.  Japan is the single biggest 
buyer (over 70% by value) of Philippine shrimps and prawns, and 
fresh fruits and vegetables (60%). 
 
Implementing Mechanisms Not Fully Established 
--------------------------------------------- 
 
¶9.  (SBU) According to Philippine Trade Undersecretary Thomas 
Aquino, work on the mechanisms to implement various aspects of the 
treaty are ongoing, including setting-up and convening the various 
committees to work on the operational details.  Although he expects 
it may take another six to twelve months for the benefits to be more 
apparent, he estimated that JPEPA could boost Philippine-Japan trade 
and investments by 10% to 20%. 
 
Challenges Ahead 
---------------- 
 
¶10.  (SBU) In meetings with econoffs, Japanese Embassy officials 
noted that although JPEPA provides a framework for dialogue, 
cooperation, and dispute resolution, the Philippines ultimately 
still needs to compete in a globalized economic environment for 
Japanese trade and investments.  They added that in order to 
maximize JPEPA's envisioned benefits, the Philippines must exercise 
the political will to address non-tariff barriers to trade, low 
competitiveness rankings, and constitutional/legal restrictions to 
foreign investments here. 
 
Comment 
------- 
 
¶11.  (SBU) The lengthy, tedious, and controversial process that 
Japan went through to negotiate a free trade agreement with the 
Philippines (i.e., nearly seven years from inception to ratification 
for JPEPA), and the U.S. experience with our bilateral Trade and 
Investment Framework Agreement both reinforce the difficulty in 
concluding trade agreements with the Philippines until they take 
more concrete and convincing steps to demonstrate a commitment to 
market-oriented reforms.  End Comment. 
 
KENNEY