Philippine industrial policy needs to change

This was the urgent advice of Rafaelita Aldaba, who recently retired from the Department of Trade and Industry as undersecretary for competition and innovation, and who is now a strategic advisor for the Department of Education and an emeritus researcher for the Philippine Institute for Development Studies, or PIDS.

She has written a PIDS discussion paper titled “Navigating a New Era of Reciprocal Tariffs: Strategic Implications for the Philippines and Selected ASEAN Economies,” which analyzes the impact of the tariff changes that the Trump administration has announced and plans to implement following further negotiations.

In a presentation to members of the Monday Circle during a breakfast meeting at the Westin Manila last Monday, Aldaba stressed the need to align the country’s trade and industry sectors to deal with a fragmenting global trade situation.

She cited the need to transition from assembly-centric to upstream activities such as semiconductor design, advanced packaging, power electronics, medical devices, artificial intelligence (AI) hardware components and digitally enhanced manufacturing services.

At the same time, she said, the government must prioritize investments in critical sectors such as semiconductors, electric vehicle (EV) components, textiles, green metals and sustainable electronics.

The government, she said, needs to strategically use subsidies and performance-based fiscal incentives to catalyze investments in high-value, innovation-driven and ESG-compliant production.

There is also a need, she said, to align technical, vocational and higher education programs with 21st-century industrial needs, as well as digitize and upgrade logistics and customs operations.

Alongside these actions, Aldaba also emphasized the need to put in place trade defense and monitoring mechanisms such as WTO-consistent safeguards, anti-dumping and countervailing duties to defend against import surges, unfair pricing and trade distortions.

There must also be dynamic trade intelligence and an early warning system to track global tariff shifts, supply chain relocations and import surges, she said, while acknowledging the parallel need to adjust incentives responsibly, which may involve temporary relocation incentives or transition support.

The government, she said, must upgrade customs enforcement with digital post-entry audits, AI-powered anomaly detection and must observe stricter rules of origin checks. Regulatory streamlining, she said, must be done to help exporters comply quickly with evolving origin and certification requirements.

This includes the Philippines addressing rules of origin compliance to avoid US scrutiny by ensuring sufficient transformation and value addition.

Additionally, she said, there is a need for a Trade-Industrial Transformation Council that would deal with integrated trade defense, industrial upgrading and investment promotion.

Structural change, she said, is essential, and coming up with an industrial policy should be the engine of transformation.

Jobs and investments, Aldaba said, “are outcomes, not automatic consequences of growth. Structural conditions, particularly productive capacity and competitiveness, must be strengthened to attract and sustain them.”

The new industrial policy, she said, must be strategic, targeted and globally aligned, especially in a world of tariffs, trade fragmentation and technology disruption. Integrating trade, industrial and digital policy “is not optional; it’s essential to build a resilient, future-ready Philippine economy.”

According to Aldaba, the Philippines is well-positioned to capture relocation and supply chain shifts, particularly in electronics and semiconductors. Among the areas where the Philippines can capture markets, she said, are final assembly and testing of electronics, semiconductor packaging and IC back-end services, production of converters, power supplies and telecom devices, peripheral manufacturing and select consumer goods.

In her PIDS discussion paper, Aldaba wrote that compared to its regional peers, the Philippines benefits from a relatively lower reciprocal tariff rate of 17 percent, offering a strategic opening to enhance its export competitiveness, attract reconfigured global supply chains and amplify its strengths in digital and service-driven industries.

However, Aldaba admitted, such an advantage is tempered by the country’s modest export base, which significantly constrains its ability to seize emerging trade-diversion opportunities.

The Philippines, she noted, remains heavily dependent on a narrow set of export products and lacks the manufacturing necessary for scale and resilience.

As a result, any shifts in US procurement strategies or global supply chain disruptions could swiftly erode its already modest trade footprint unless the country undertakes aggressive efforts toward export diversification and value upgrading.

However, Aldaba said, to realize this opportunity, the Philippines must address several structural and institutional constraints that continue to undermine the country’s ability to fully leverage its tariff advantage.

These include the following:

Logistics and infrastructure deficits such as persistently high transportation costs, port inefficiencies and unreliable utilities that burden exporters and discourage new investment.

Limited industrial depth, as the Philippines has fewer backward linkages and supporting industries relative to competitors such as Vietnam and Thailand, constraining integrated manufacturing and advanced export capabilities.

Workforce skilling gaps. She said that while the country is competitive in basic IT services, significant gaps persist in high-value skills such as AI, advanced manufacturing, and research and development. To overcome these barriers and unlock its full export potential, the country must urgently implement a coordinated set of strategic trade and industrial interventions to safeguard critical sectors while accelerating industrial upgrading.

Aldaba explained that China’s displacement from the US market is “not merely a bilateral shock, it signals a systemic realignment of global value chains and is fundamentally reshaping the geography of international trade.”

She warned that “For ASEAN, the risks of import surges and industrial crowding are real, but so are the opportunities. The key lies in strategic positioning, regulatory clarity, and proactive industrial policy. Without these countries risk being sidelined as collateral damage. Those with tariff-safe status, competitive cost structures, skilled labor, and credible governance frameworks will emerge as the new frontline nodes of global production. If the ASEAN-5 act decisively and collaboratively, they can move beyond being fallback suppliers and position themselves as strategic beneficiaries in the next phase of global trade restructuring.”