The free trade agreement (FTA) between South Korea and the Philippines, signed at the recent ASEAN summit, represents a notable economic and diplomatic development for both countries. However, it also introduces complex challenges, especially concerning its enactment and broader implications.

One primary challenge is the political complexity surrounding the FTA’s ratification process in the Philippines. Further, the FTA encompasses more than economic interests, highlighting diplomatic aspects such as knowledge exchange and potential collaboration in sensitive areas like nuclear energy.

The FTA holds particular significance for the Philippines, as it is only its second such bilateral agreement since the 2008 Economic Partnership Agreement with Japan. The signing event on Sept. 7, involving South Korea’s Trade Minister Ahn Duk-geun and the Philippines’ Alfredo Pascual, underscores the countries’ dedication to strengthening bilateral relations.

Following the signing, the next crucial step is the agreement’s ratification by both parties. Seoul anticipates its parliament will ratify the agreement in time for a 2024 implementation, while Manila maintains a cautious approach.

The Philippine government is awaiting clarification from its Department of Foreign Affairs on whether the agreement is classified as a treaty, necessitating Senate approval, or as an executive agreement, requiring only Philippine President Ferdinand Marcos Jr.’s ratification. The latter scenario could fast-track the FTA’s effect, potentially to Jan. 2024.

DEEPENING ECONOMIC TIES

Presenting an evolved economic landscape, Choi Sang-mok, South Korea’s senior presidential secretary for economic affairs, announced that under this FTA, the Philippines would abolish tariffs on 96.5% of goods, while South Korea would adopt corresponding measures by dismantling 94.8% of its tariffs when the agreement goes into effect. 

Meanwhile, Philippine Trade Assistant Secretary Allan Gepty revealed that the FTA would grant the Philippines nearly 98% preferential access to the South Korean market. This figure represents a substantial increase from the 96.4% access under the Regional Comprehensive Economic Partnership and the 88% from the ASEAN-Korea Free Trade Agreement.

The FTA’s enactment will immediately benefit South Korea’s automotive industry. It stipulates the immediate abolition of the Philippines’ 5% tariff on South Korean car imports. Additionally, it charts a five-year path to eliminate the 30% tariff on automobile parts and a similar timeline for eco-friendly vehicles.

The elimination of these tariffs is poised to bolster the competitiveness of South Korean cars in the Philippines, a market where Japanese automakers have traditionally dominated. The agreement also positions the Philippines as a pivotal hub for Korean automakers eyeing expansion in the ASEAN region, especially in the electric vehicle sector.

This enhanced market access will likely attract more Korean automakers, emulating Hyundai’s Indonesian success with its top-selling IONIQ 5. However, Erik Paolo Capistrano, a professor at the University of the Philippines’ Cesar E.A. Virata School of Business, told Korea Pro that, due to the Philippines’ intense traffic congestion, hybrid or conventional cars might initially see more significant market penetration than electric vehicles.

The FTA presents multifaceted opportunities for the South Korean automotive industry, particularly in enhancing supply chain efficiencies, diversifying market reach and establishing a stronger brand presence.

The agreement facilitates a potential restructuring of supply chains, leveraging the Philippines’ lower operational costs and responsiveness within the ASEAN region. Simultaneously, market diversification arises from accessing a growing Philippine middle class, offering a counterbalance to the saturated South Korean domestic market, and introducing Korean automobiles to a diverse consumer base with distinct needs.

On the agricultural front, the Philippines foresees notable gains, particularly for exporters of pineapples, bananas and mangoes. The FTA specifies that South Korea will phase out its 30% banana tariff, the Philippines’ principal agricultural export to Korea, within five years. Processed pineapples will also see a seven-year phased tariff reduction from the current 36%, fostering a more robust trade relationship for these critical Philippine exports.

The reduction in tariffs on agricultural products from the Philippines will provide several advantages for consumers in South Korea. Lower trade barriers will effectively extend Korean consumers’ purchasing power. Further, an increase in the diversity of imports can bolster food security in South Korea, enhancing resilience to potential global supply chain disruptions.

An illustration of a container ship unloading cars | Image: Korea Pro

KNOWLEDGE EXCHANGE

In addition to trade liberalization, the FTA establishes a legal framework for expanded knowledge exchange and increased direct investments by South Korean companies. This development aims to streamline business operations and fortify diplomatic relations between the two countries.

The agreement builds on a trend of growing Korean investments in the Philippines, with Philippine Economic Zone Authority Director General Tereso O. Panga revealing that South Korean investments reached $24.9 million in 2023, up from $17.9 million in 2022.

Capistrano emphasizes that the trade surge would put pressure on the quality of production and bilateral goods distribution, particularly on the Philippine side.

“The Philippines would greatly benefit if the focus is placed not only on the end products themselves but also the supply chains behind these products,” Capistrano told Korea Pro. “I am always amazed by how South Korea manages its agricultural sector, and the Philippines could learn a lot from it.”

However, Capistrano highlighted the Philippines’ considerable journey ahead to partner with or become an export market for South Korean nuclear reactors, owing to its complicated past with nuclear energy.

“The Philippines has an unfavorable history as far as nuclear power is concerned, and it will be a challenge to overcome these present mindsets about nuclear power,” Capistrano told Korea Pro.

The Philippines’ Bataan Nuclear Power Plant, built during Marcos Sr.’s regime and never operational despite its steep construction cost, remains a contentious issue due to historical corruption and local opposition to the plan.

Marcos Jr.’s campaign prominently featured nuclear power adoption, arguing its necessity to combat high electricity prices in the Philippines. In Nov. 2022, he introduced a proposal for a South Korea-Philippines collaboration to revamp the Bataan facility. Korea Hydro & Nuclear Power Co., Ltd. outlined a plan in February to refurbish the plant within five years at an estimated cost of $1.19 billion.

In contrast, the U.S. firm NuScale Power Corporation, with manufacturing and investment links to South Korea, proposed installing its small modular reactors in the Philippines. However, this plan faces criticism from environmentalists due to the reactors’ untested design.

Given these challenges, Capistrano sees more immediate potential in renewable energy collaborations between South Korean and Philippine companies. He believes that prioritizing the renewable energy transition in the Philippines and leveraging South Korean expertise in this field could significantly accelerate the adoption of sustainable practices.

Edited by John Lee