FLAWED ECON; MISREADING TRADE - 040425

 The Trump administration's approach to calculating reciprocal tariffs presents a significant economic challenge. Their method relies on a country's trade surplus, rather than actual tariff data. This approach is fundamentally flawed and lacks support from established economic theory.

A trade surplus, which represents the difference between a country's exports and imports, is not a direct measure of tariff rates. It is a broader indicator of trade balance, influenced by numerous factors beyond tariffs. To use the trade surplus as a proxy for tariff rates is akin to attempting to measure temperature with a ruler—an inappropriate and inaccurate method.

This flawed formula ignores the complexities of international trade and the diverse factors that influence tariff rates. Basing trade policy on such a methodology can lead to significant consequences, potentially harming both domestic and international economies.

Now, consider the potential impact of a 17% tariff imposed by the United States on Philippine exports. Given that the US accounts for approximately 15-16% of the Philippines' export market, this could result in a 3-5% reduction in total Philippine exports annually.

Further, the increased cost of imported goods could contribute to inflation, potentially adding 0.3 to 0.6 percentage points within 6 to 9 months. The electronics manufacturing sector, which comprises roughly 60% of Philippine exports to the US, might experience production declines of 7-10%, potentially affecting 30,000 to 50,000 jobs. Additional economic consequences could include a 0.5 to 0.8 percentage point slowdown in GDP growth during the first year, a 10-15% decrease in foreign direct investment inflows, and a 3-5% depreciation of the Philippine peso against the US dollar.

In response, the Philippine government might implement expansionary fiscal policies to stimulate domestic demand, potentially leading to demand-pull inflation in certain sectors. The Bangko Sentral ng Pilipinas could face a policy dilemma, balancing the need to support economic growth with the imperative to control inflation.

This might necessitate raising interest rates by 25-50 basis points to stabilize the currency and manage inflation expectations.

It is crucial to remember that these are projections. The actual impacts will depend on various factors, including the adaptation strategies employed by businesses, the government's policy responses, and potential exemptions for specific products or sectors.