Lower tariffs, cheaper labour: The Philippines hopes to draw businesses that are exiting China
MANILA – The Philippines may have caught a rare break under US President Donald Trump's latest tariff impositions, and it is hoping to turn that into an edge.
Faced with a tariff rate of only 17 per cent, one of the lowest in the region, Manila is moving swiftly to reposition itself as the region's next supply chain hub, with both government officials and industry leaders pitching the country as an alternative option for manufacturers looking to spread their operations beyond China.
The Philippine Economic Zone Authority (Peza) said in an April 4 statement that the country's relatively low tariff burden – the second lowest in the region after Singapore's 10 per cent – makes it one of South-east Asia's most attractive fallback options for firms fleeing the rising costs and tensions in China.
Peza believes that if the Philippines captures even a 10th of the US$436 billion (S$571 billion) worth of goods that China exported to the US in 2024, it could double its own export volume.
'This is a welcome opportunity despite the challenges,' said Peza.
Trade envoys are racing to convert that opportunity into concrete investment. The country's Special Assistant to the President for Investment and Economic Affairs, Mr Frederick Go, is currently in Washington to explore tariff relief and even push for a free trade agreement.
Manufacturers are being lured by the Philippines' competitive tariffs, low labour costs and English-speaking workforce. Among the early movers is Integrated Micro-Electronics Inc (IMI), a home-grown electronics giant with facilities across North America, Europe and Asia, including a major hub in Laguna, south-east of Manila.
IMI is among the world's top 25 electronic manufacturing service providers, reporting US$1.1 billion in total revenue in 2024.
Its chief executive Louis Hughes told The Straits Times that IMI is already working on finalising deals with Chinese companies looking to relocate to the Philippines, including an injection moulding firm and a machining company.
He added that IMI's operations in the Philippines have two unique capabilities not found elsewhere apart from China: camera manufacturing and power module packaging, which is integral to modern electrical systems.
'It's a great place to do business,' Mr Hughes said of the Philippines.
'It's at the logistical centre of South-east Asia, China, Taiwan. It's English-speaking, fundamentally. There is great training in maintenance and processed technology, and it's got a hardworking culture and a hardworking group of people'.
In 2024, the US was the Philippines' third-largest trading partner and top export market, taking in US$12.14 billion or about 16.6 per cent of the country's total outbound trade that year, data from the Philippine Statistics Authority showed. Electronic products were the country's top export, accounting for US$39.09 billion, or 53.4 per cent of total export earnings that same year.
Optimism carried the day at an April 25 economic estates industrial summit held in Manila. The country's special economic zones are 'open and ready' to take in relocating firms, said Peza deputy director general for policy and planning Anidelle Joy Alguso.
Mr Rafael de Mesa, president and CEO of real estate developer Aboitiz Land, which operates industrial parks across the Philippines, noted that industrial land in the country remains more affordable than in Vietnam or Malaysia.
Developers believe the Philippines has a strong chance of capturing a larger slice of the 'China + 1' manufacturing shift, if it can act swiftly. This strategy refers to global firms maintaining operations in China while also diversifying to a second country to reduce risk.
'So in a world of uncertainty and volatility, I think there's going to be more movements towards the Philippines, and that's what we're starting to see over the past month – renewed and accelerated interest,' Mr de Mesa said.
But the road to becoming the region's next supply chain hub is not without potholes. A number of structural challenges plague the Philippines, whose infrastructure falls behind that of its regional counterparts.
Dr Jan Carlo Punongbayan, an economist at the University of the Philippines, told ST that the absence of a unified railway system linking the archipelago, inadequate port facilities, and high electricity costs are often considerations that stop investors from moving their operations to the country.
'I agree that there is a silver lining; we should accelerate the development of the Philippines' export sector so that we can produce higher value-added exports,' Dr Punongbayan said.
'But in order to achieve that, we need to significantly improve the business climate in the Philippines to make our economy a lot more attractive as a destination for investments in the region. But you can't do that overnight.'
And while opportunities may be emerging for companies eager to capitalise on China + 1, the agricultural sector is bracing itself for pain instead.
The US is the top destination for Philippine agricultural exports like coconut-based products, bananas, mangoes and processed fruit like pineapple.
'(The) fact remains that our products will still become 17 per cent more expensive to the American consumer, who then may decide to stop buying our products and shift to cheaper substitutes,' said Mr Leonardo Montemayor, the former agriculture secretary and current chairman of the non-governmental Federation of Free Farmers, in an April 5 statement.
Current geopolitical risks have also not abated, with investors raising questions about Manila's ongoing dispute with Beijing over the South China Sea, and whether tensions over Taiwan would affect the stability of the Philippine economy.
Mr Hughes said that some of IMI's clients have been asking that none of their electronic components be shipped from China or Taiwan, a tough request to accede to as many electronic components are made there. He added: 'I will say that the South China Sea issue is something that they're very concerned about.'
Still, Mr Hughes is optimistic that the Philippines' robust relations with the US under President Ferdinand Marcos Jr would benefit the South-east Asian nation as it negotiates with the Trump administration.
And as the Marcos government seeks short-term relief from Mr Trump's tariffs through diplomacy, the Philippines must still seek to diversify its export market, said experts.
Dr Punongbayan said Manila must not over-rely on the US, whose trade policy is proving to be more volatile.
'We already have existing ties with the rest of the South-east Asian region, as well as other countries in Asia. So, I think we should strengthen that and further deepen our relations.' Building on existing trade relations and free trade agreements would be a sound strategy, he noted.
The irony of Mr Trump's new tariffs, he added, is that they could push allies like the Philippines closer to China, which remains Manila's largest trading partner.
The tariffs could have the unintended consequence of strengthening China, Dr Punongbayan noted. 'I think you can expect that China will kind of reach out more to the Philippines in terms of boosting our trading relations with them,' he said.
In this delicate balancing act between global powers, how the Philippines navigates its relationships with both the US and China – while positioning itself as a manufacturing and export powerhouse – could well define the trajectory of its economic future.
If Manila can negotiate these complexities, it could emerge as a key player in the evolving global supply chain, capitalising on the shifting dynamics of trade and geopolitics.
Mara Cepeda is Philippines correspondent at The Straits Times.
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