Domestic constraints may blunt gains from Philippines-EU FTA

By Justine Irish D. Tabile, Senior Reporter

THE FREE TRADE DEAL between the Philippines and European Union (EU) could provide only a modest boost to the economy as longstanding domestic constraints may limit its potential to attract investment, diversify exports and improve productivity, economists said.

China Banking Corp. Chief Economist Domini S. Velasquez said the immediate boost from tariff reductions under the free trade agreement (FTA) may be limited since the Philippines already enjoys substantial preferential access to the European market under the EU’s Generalised Scheme of Preferences Plus (GSP+).

“The EU-Philippines FTA is likely to provide a positive, though measured, boost to Philippine economic growth,” she said in a Viber message.

“The gains may not be as dramatic as in countries shifting from no preferential access to a full trade agreement, given that the Philippines already benefits from substantial market access under the EU’s GSP+ scheme,” she added.

Ms. Velasquez said the more meaningful benefits from the FTA are likely to come from greater certainty in market access, reduced nontariff barriers and increased European investment.

“Over time, these could enhance productivity through technology transfer, stronger competition, skills development, and improved access to capital goods and intermediate inputs,” she added.

On Sept. 22, the Philippines and the European Union reached a “substantial agreement” on an FTA targeted for signing in 2027.

The Philippines and the EU began negotiations in 2015 but talks stalled in 2017 amid EU concerns over human rights issues linked to former President Rodrigo R. Duterte’s war on drugs.

Negotiations formally resumed in March 2024.

The Department of Trade and Industry earlier said an FTA with the EU could unlock about $12 billion in export potential.

According to the European Commission, the two sides are set to liberalize more than 94% of tariff lines covering over 97% of bilateral trade.

In a 2022 Sustainability Impact Assessment, the EU estimated that a Philippines-EU FTA could boost Philippine gross domestic product (GDP) by €1.47 billion under a conservative liberalization scenario and by as much as €1.99 billion under an ambitious scenario by 2032, compared with a baseline without an FTA.

The ambitious scenario assumes deeper trade liberalization, including full removal of tariffs on agricultural goods and greater removal of nontariff barriers on nonagricultural goods.

This was equivalent to Philippine GDP being around 0.31%-0.41% higher than the projected 2032 baseline without an FTA under the study’s conservative and ambitious scenarios.

“At a time when protectionist policies are rising, the agreement is an important step toward diversifying the country’s trading partners,” said Ms. Velasquez.

“Ultimately, however, the magnitude of the benefits will depend on the Philippines’ ability to address longstanding domestic constraints, particularly in infrastructure, logistics, and relatively high power costs,” she added.

University of Asia and the Pacific Economist George N. Manzano said the immediate impact of the FTA would be to improve access to the EU market and encourage more trade.

The EU was the Philippines’ fifth-largest trading partner in 2025, with total trade valued at $18.1 billion, data from the Philippine Statistics Authority showed.

Philippine exports to the EU stood at $9.77 billion, while imports from the bloc were valued at $8.34 billion last year.

In the long term, Mr. Manzano said the biggest gains may come from investment, as European firms build stronger links with Philippine suppliers and integrate them into their supply chains.

“The Philippines already enjoys preferential access to the EU through GSP+. An FTA could make that access more stable and predictable, which matters to firms making long-term decisions,” he said in a Viber message.

“For products that already enter at low or zero tariffs, the immediate benefit from further tariff cuts may be modest,” he added.

The Philippines currently participates in the EU’s GSP+, a special incentive arrangement for low and lower-middle income countries. It grants the country zero tariffs on 6,274 product lines.

However, Mr. Manzano said the challenge for the Philippines is to develop more products that it can export competitively and in sufficient volumes while meeting EU sanitary and technical standards.

“So, I see the FTA’s promise mainly in attracting investment and broadening what we export. How much it contributes to Philippine growth will depend on our ability to strengthen domestic production and meet the requirements of the EU market,” he said.

Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas, meanwhile, said the FTA is “less about tariff cuts and more about competitiveness.”

“It gives the Philippines a strategic opportunity to attract investment, expand exports, and move up the value chain but its success will depend on how quickly we address our long-standing structural constraints,” he said in a Viber message.

The stock of EU foreign direct investment in the Philippines stood at €15.4 billion in 2024, while Philippine FDI stock in the EU was valued at €2.4 billion, the European Commission said.