Thursday, April 3, or depending on where you are, was a “tariffying day” across 185 economies following United States (US) President Trump’s imposition of a reciprocal tariff on goods shipped to the US.
While most of the affected economies are still weighing the extent of the economic cost, this early, however, some have actually tagged such policy as “distrumptive.”
Yes, Virginia, the Philippine marketplace woke up yesterday facing this new and incremental challenge that could dampen the country’s economic growth momentum.
Despite the fact that the country is merely a small trading partner with an annualized of 1.89-percent export rate and has been sliding from a pre-pandemic level of $14.6 billion in 2018 to $13.3 billion in 2023, the secondary effect of the reciprocal tariff is believed to be an additional challenge for business operations.
Machinery, nuclear reactors, vegetables, fruits, food preparations, vegetable fats and oils, rubbers, knit or crocheted articles of apparel, furniture, lightning signs, and prefabricated buildings are just some of the local products we export to the US.
Exactly what does this mean to us? Definitely, this will create a challenge as well as an additional risk in doing business. And without a doubt, there will be a cost to us, consumers, in terms of interest, foreign exchange, and inflation rates.
Before I unpack the possible effect, allow me to share with you the facts on reciprocal tariff. In 1934, President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act that gave the US President power to negotiate bilateral and reciprocal trade agreements with other countries, and enabled Roosevelt to liberalize American trade policy around the globe.
This is the rationale behind President Trump’s declaration of the imposition of sweeping tariffs as “Liberation Day.”
Now, back to the issue at hand. As I write this to comply with my deadline (Thursday morning), the reduction of the key policy interest rate of the Bangko Sentral ng Pilipinas (BSP) is already a done deal, as monetary easing has already been communicated and telegraphed by Governor Eli Remolona Jr. and Finance Secretary Ralph Recto.
Cutting the rate is a defensive move, which will bring the interest rate differential one percentage point, with the BSP overnight rate at 5.5 percent and the US Federal Reserve’s at 4.5 percent. Moving forward, however, it will be an altogether different narrative.
In my previous conversation with the president of Philippine Business Bank, Roland Avante, he was optimistic that interest rate reduction will come in three for the year. With this developing story, I went back to him inquiring whether his stance remains the same?
“It’s back to the drawing board” was his curt reply, as he is still assessing and unpacking the impact of the reciprocal tariff. It’s not that Mr. Roland is sounding the alarm bells, but he’s just pragmatic enough to admit that such could dampen the growth prospects of the country.
As a consequence of the White House move, US economic analysts forecasted that instead of tapering down, inflation rate could take a reverse path that could hinder further monetary easing by the US Fed.
The BSP, which almost always takes the cue from the US Fed, may have to embrace the same. And alternatively, this means the cost of borrowed funds will remain relatively high, with businesses taking a second look whether to expand operations or be on status quo.
Also on the economic horizon is currency volatility. As my favorite market analyst tells me: the uncertainty in interest rate reduction by the BSP could “jeopardize the stability of the local currency” and could “dampen consumer and corporate confidence.”
‘nuff said for now.
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