What the circus ringmaster really wants is an iron-clad mechanism – already being developed by his team – that unilaterally imposes whatever level of tariffs Trump may come up with on whatever excuse: could be to circumvent “current manipulation”, to counter a value-added tax, on “security grounds”, whatever. And to hell with international law. For all practical purposes, Trump is burying the WTO—Pepe Escobar
In this issue
Trump’s Tariff Gambit: A
Political Win, an Economic Minefield for the Philippines
I. Introduction: A Tariff
with Two Faces
II. Trump’s Sweeping
Tariffs: A Policy of Chaos: The Rise of Regime Uncertainty
III. U.S. Stock Market
Meltdown Echoes the Smoot-Hawley Era and the Great Depression
IV. The Tariff’s
Double-Edged Sword: For the Philippines, Relative Tariffs Represent a Political
Win, But a Formidable Economic Challenge
V. Fallout from Tariffs: An
Uncertain Future: Tariffs May Deter Investment in the Philippines
VI. Shaky Foundations: Why
the Consumer Economy Isn’t Immune
VII. Financial Fragility: Historic
Savings-Investment Gap, Record Debt, and Dollar Dependence
VIII. Intertemporal Impact
or Short-to-Longer Term Impact on the Philippine Economy
IX. The US Dollar’s ‘Triffin
Dilemma’: Global Risks and Philippine Challenges
X. Conclusion: Winnowing the Political Chaff from the Economic Wheat
Trump’s Tariff Gambit: A Political Win, an Economic Minefield for the Philippines
Will the Philippines benefit from Trump's sweeping tariff reforms? The realities of the existing economic and political structure suggest otherwise.
I. Introduction: A
Tariff with Two Faces
Figure 1
On April 9, 2025, the United States imposed a 17% tariff on Philippine goods—a lighter burden compared to Vietnam’s 46% or Cambodia’s 49%. The Philippines was listed among the 'worst' tariff offenders against the US. (Figure 1, upper table)
At first glance, this appears to be a political victory, offering the Philippines a chance to attract investment and outshine its ASEAN neighbors in a global trade war.
Some experts even argue that because the Philippines is a consumption-driven economy, it would be less affected by the ongoing trade war, potentially insulating it from the worst of the fallout.
However, a closer examination reveals a far more challenging reality.
The Philippines faces deep-seated vulnerabilities: a heavy reliance on trade (42% of its 2024 GDP), a chronic savings shortage that hampers investment, and global risks that could destabilize the U.S.’s dollar dominance.
As the Philippines navigates this turbulent landscape, its ability to transform this political advantage into economic gains hinges on addressing these structural weaknesses amidst an uncertain global economic horizon.
II. Trump’s Sweeping Tariffs: A Policy of Chaos: The Rise of Regime Uncertainty
On April 3, 2025, President Trump declared a national emergency, citing the U.S.’s $1.2 trillion goods trade deficit in 2024 as a threat to national and economic security. This declaration, invoking the International Emergency Economic Powers Act (IEEPA), allowed the administration to impose reciprocal tariffs without Congressional approval, including a baseline 10% tariff on all countries.
The Trump administration’s formula for these reciprocal tariffs—(trade deficit ÷ imports) ÷ 2—serves as a proxy for what they deem “unfair” trade practices.
This approach, however, oversimplifies the intricate politics of global merchandise trade. The U.S. trade deficit is not merely a result of unfair practices but a symptom of deeper structural dynamics, including the U.S. dollar’s role in the Triffin Dilemma, global easy money policies, various mercantilist practices by numerous nations and more.
The absurdity of using a one-size-fits-all metric like the trade deficit to define “unfair practices” is starkly illustrated by the Trump administration’s decision to impose tariffs on the remote Antarctic outpost of Heard and McDonald Islands. Inhabited primarily by penguins and seals, and unvisited by humans for nearly a decade, this territory faces tariffs despite a complete absence of economic activity.
Ironically, nations like Cuba, North Korea, Belarus, and Russia were exempted from these tariffs due to the absence of bilateral trade with the U.S., a result of existing sanctions.
The Trump administration’s aggressive tariff regime has pushed U.S. effective tariff rates beyond those of the Smoot-Hawley era, a period infamous for exacerbating the Great Depression. (Figure 1, lower chart)
As Cato’s Grabow, Lincicome and Handley recently wrote, "The result appears to be the highest US tariffs since 1909, already ten times the size of those in place before Trump took office and at an average rate exceeding even that imposed by the infamous Smoot-Hawley Act, which is widely blamed for prolonging the Great Depression." (Cato, 2025) [bold added]
This drastic policy shift—a potential abrupt reversal of globalization—introduces significant Regime Uncertainty (Higgs 1997), defined as the perceived lack of protection for property rights due to the unpredictability of government policies and institutional frameworks.
Regime uncertainty distorts economic calculations, obscuring the ‘hurdle rate’—the minimum return required to justify investment in viable projects.
Or it discourages investment by creating an opaque economic horizon where businesses cannot reliably predict future costs, revenues, or risks.
Figure 2
Measured as a trade policy uncertainty metric, regime uncertainty has rocketed to an all-time high, signaling a profound shift in the global economic landscape that could have far-reaching consequences for countries like the Philippines. (Figure 2)
III. U.S. Stock Market Meltdown Echoes the Smoot-Hawley Era and the Great Depression
It is hardly surprising that last week’s U.S. stock market meltdown—the largest two-day wipeout in history—serves as a stark symptom of these policy-induced uncertainties.
The regime uncertainty plaguing the economic horizon heightens the risk of profound economic weakness, disrupting supply chains, amplifying hurdles for capital flows and Foreign Direct Investment (FDI), magnifying credit delinquencies, and prompting path-dependent responses from central banks—involving "policy easing" to counteract economic slowdowns, which could also fuel inflation risks.
In combination, these factors raise the specter of a global recession or even a financial crisis.
Given the historic highs in global debt and leverage—amounting to $323 trillion as of Q3 2024, or 326% of global GDP, according to the Institute of International Finance—a stagflation-induced financial crisis could render the 2008 Global Financial Crisis a proverbial ‘walk in the park.’
Is history rhyming?
David R. Breuhan offers a historical parallel: "The stock market collapse began on Oct. 28, 1929, as news spread that the Smoot Hawley Tariff Bill would become law. The front-page New York Times article read: ‘Leaders Insist Tariff Will Pass.’ Although the tariff bill didn’t become law until June 1930, its effects were felt eight months prior. Markets reacted immediately, as they discount future earnings. Most economists blame the gold standard for the crash, but this analysis misses the forward-looking nature of the human mind, which is the market itself. Markets need not wait for earnings to decrease due to imminent policies that will result in future losses. Hence the rapid nature of the crash. The use of leverage in the 1920s exacerbated the crash. Margin calls were made, further cascading the markets." (Breuhan, 2024) [bold added]
The parallels are striking. Today’s markets, burdened by high leverage and global debt, are reacting to the uncertainty of Trump’s tariff regime, much like they did to Smoot-Hawley nearly a century ago.
For the Philippines, this global financial instability could exacerbate the economic challenges posed by the tariff, as investors may grow wary of emerging markets amid a potential global downturn.
IV. The Tariff’s Double-Edged Sword: For the Philippines, Relative Tariffs Represent a Political Win, But a Formidable Economic Challenge
Figure 3
A chart of U.S.-Philippines trade from 1985 to 2024 reveals a persistent trade deficit, peaking at $7 billion in 2022, underscoring the high stakes of this trade war for the Philippines. (Figure 3, upper window)
Trump’s reciprocal tariff exposes the country’s vulnerabilities: a heavy reliance on trade (42% of 2024 GDP), a savings shortage that stifles investment, and global risks that could upend the U.S.’s dollar dominance.
The 17% tariff on Philippine goods, part of President Trump’s strategy to shrink the $1.2 trillion U.S. trade deficit, appears to be a political win at first glance.
Compared to Vietnam’s 46% or Cambodia’s 49%, the Philippines seems to have dodged the worst of this trade war. Mainstream analysts have spun this as an opportunity: with a lower tariff, the Philippines could attract investors looking to shift supply chains away from pricier neighbors.
Philippine Trade Secretary Cristina Roque even called it a chance to negotiate a sectoral free trade agreement with the U.S., potentially boosting market access. For a country eager to stand out in ASEAN, this lighter tariff feels like a rare edge.
But the economic reality paints a far more daunting picture.
The Philippines faces formidable structural hurdles that could blunt this political advantage. Here are some examples.
1. Energy costs, for instance, are among the highest in the region at $0.20 per kWh—double Vietnam’s $0.10—making manufacturing less competitive (International Energy Agency, 2024).
2. Regulatory complexity adds another layer of difficulty: the Philippines ranks 95th globally in the World Bank’s Ease of Doing Business Index, trailing Vietnam (70th) and Indonesia (73rd), with bureaucratic red tape often delaying investments.
3. Human capital represents another significant hurdle. While the tariff matches Israel’s 17%, the Philippines lacks Israel’s robust R&D ecosystem to export high-tech goods like medical equipment, leaving it reliant on lower-value sectors such as electronics assembly and agriculture.
Israel invests 6.3% of its 2023 GDP in R&D, one of the highest rates globally, compared to the Philippines’ meager 0.324%, limiting its ability to compete in advanced industries.
These constraints mean that even a “favorable” tariff doesn’t automatically translate into economic gains—investors may still look elsewhere if the cost of doing business remains prohibitively high.
The tariff’s silver lining hinges on the Philippines overcoming these challenges, but deeper vulnerabilities lurk beneath the surface.
High trade exposure and financial-fiscal constraints threaten to turn this political win into an economic missed opportunity, as the country grapples with the fallout of a global trade war.
V. Fallout from Tariffs: An Uncertain Future: Tariffs May Deter Investment in the Philippines
The regime uncertainty introduced by Trump’s tariff policy creates an opaque economic horizon, deterring investments even in a country like the Philippines, which some argue is insulated due to its consumption-driven economy (72.5% of its 2024 real GDP).
However, this narrative overlooks the fundamental economic principle encapsulated in Say’s Law: "supply enables demand" (Newman 2025) or "production precedes consumption." (Shostak 2022)
The 17% tariff directly threatens this dynamic by reducing demand for Philippine exports, which totaled $12.14 billion to the U.S. in 2024, accounting for 16.6% of total exports. (Figure 3, lower graph)
Analysts estimate a direct annual loss of $1.6–1.89 billion, cutting income for workers in export sectors like electronics and agriculture, and thus curbing their spending power.
Nota Bene: These estimates reflect only the direct impact, ignoring the epiphenomenon from complex feedback loops, such as secondary and the nth effects on supply chains, employment, and consumer confidence, which could amplify the economic toll.
Government data further disproves the notion of immunity.
Figure 4
The share of goods exports and imports in 2024 GDP was 42% (13.8% exports, 28.1% imports), a significant exposure for a supposedly consumer-driven economy. This means trade disruptions hit hard, affecting both production (exports) and consumption (imports of goods like electronics and food). (Figure 4, topmost image)
Excluded from this discussion are exports and imports of services. If included, exports and imports in real GDP would account for 64.2% of the 2024 GDP! (Figure 4, middle graph)
AP Lerner (1936) highlighted the mutual dependence of exports and imports in trade economics. A decline in exports limits foreign exchange earnings, which in turn reduces the ability to finance imports. This creates a ripple effect, showcasing the interconnected nature of international trade.
Even the service sector, a key income source through business process outsourcing (BPO, contributing 8.5% of 2024 GDP), isn’t safe.
U.S. firms, facing their own tariff costs (e.g., 46% on Vietnam), might cut back on outsourcing to the Philippines, further denting income.
The opaque economic horizon—marked by unclear earnings projections and obscured hurdle rates—adds to the reluctance to deploy investments.
Businesses, unable to accurately forecast returns amidst this uncertainty, are likely to delay or cancel projects, from factory expansions to new market entries, exacerbating the Philippines’ economic challenges.
VI. Shaky Foundations: Why the Consumer Economy Isn’t Immune
The consumer economy narrative also ignores the role of debt.
Household debt has skyrocketed to Php 2.15 trillion in 2024, up 24.26% from 2023, with credit card debt alone rising 29.65% year-on-year. But this borrowing isn’t free—high interest rates strain budgets, which comes on top of the loss of purchasing power from inflation.
Consumer loans as a percentage of NGDP soared to a record 11.7%, while consumer loans relative to consumer NGDP also reached a historic high of 15.32% in 2024.
In contrast to other developed economies, the Philippine banking sector’s low penetration levels have concentrated household debt growth within higher-income segments. This phenomenon heightens concentration risk, as financial stability becomes increasingly reliant on a limited, affluent demographic.
Despite this debt-fueled spending, GDP growth slackened to 5.2% in the second half of 2024, down from 6.1% in the first half, while annual core CPI (excluding food and energy) fell from 6.6% in 2023 to 3% in 2024, signaling weak demand.
Clearly, “free money” hasn’t spruced up the economy.
Add to this the uncertainty facing export and import firms, which could lead to job losses, and a looming U.S. migration crackdown that threatens remittances—$38.34 billion in 2024, or 8.3% of 2024 GDP, with 40.6% from the U.S. (Figure 4, lowest pie chart)
If Filipino workers in the U.S. face deportations, remittances could slash household spending, especially in rural areas.
This could add to hunger rates—which according to SWS estimates—in Q1 2025 have nearly reached the 2020 pandemic historic highs.
Far from immune, the Philippines’ consumer economy is on shaky ground, vulnerable to both domestic and global pressures.
VII. Financial Fragility: Historic Savings-Investment Gap, Record Debt, and Dollar Dependence
The Philippines’ economic challenges are compounded by a chronic savings-investment gap that severely limits its ability to adapt to the tariff.
Domestic savings are a mere 9.3% of 2024 GDP, while investments stand at 23.7%, creating a staggering 14% gap that forces reliance on volatile foreign capital, such as remittances ($38 billion) and FDI ($8.9 billion in 2024).
These inflows, however, are increasingly uncertain amid rising global trade tensions.
This savings scarcity is primarily driven by fiscal
pressures. Government spending has soared to 14.5% of GDP, fueled by post-COVID
recovery efforts and infrastructure projects, pushing national debt to Php 16.05
trillion (60.72% of GDP) in 2024.
Figure 5
External debt grew 9.8% to USD 137.63 billion, surpassing the country’s gross international reserves (GIR) of USD 106.3 billion—a figure that includes external public sector borrowings deposited with the Bangko Sentral ng Pilipinas (BSP). (Figure 5, topmost diagram)
The external debt service burden surged 15.6% year-on-year to a record USD 17.2 billion in 2024, pushing its ratio to GDP to the highest level since 2009. (Figure 5, middle window)
To finance this ballooning debt, the government borrows heavily, crowding out private investment.
Banks, holding Php 5.54 trillion in government securities in 2024 (net claims on the central government), prioritize lending to the government while directing credit to riskier private sectors—consumers, real estate, and elite firms—rather than promoting finance to manufacturing or SMEs, which are crucial for adapting to the tariff through innovation or market diversification.
Not only through deposits, banks have been net borrowers of public savings via the capital markets. In 2024, the banking system’s bills and bonds payable swelled 30.9%, from Php 1.28 trillion in 2023 to Php 1.671 trillion.
Meanwhile, non-bank sectors, competing for the same scarce savings, also face high interest rates, creating a significant roadblock to investment.
High fiscal spending also fuels inflation. The Philippine CPI posted 6% in 2023, above the central bank’s 2–4% target. This acts as an inflation tax, eroding household savings as rising costs (e.g., food prices up 20%) force families to spend rather than save.
Though the CPI dropped to 3.2% in 2024, the fiscal deficit remains near pandemic highs, exacerbating financial pressures.
With banks, the government, and businesses all vying for limited funds, the Philippines struggles to finance the reforms needed to turn the tariff’s political edge into economic gains, such as the CREATE MORE Act’s incentives to lower energy costs and attract investors.
Moreover, uncertainties from the tariffs put at risk the rising systemic leverage (total bank lending + public debt), which rose 11.13% year-on-year in 2024 to Php 29.960 trillion—accounting for 113% of 2024 NGDP! (Figure 5, lowest graph)
Worse, potential weakness (or a recession) in GDP could spike the fiscal deficit, necessitating more debt, including external financing, which further strains the demand for foreign exchange.
The Philippines’ dependence on dollars for its external debt and imports makes it particularly vulnerable to global shifts in dollar availability, a risk amplified by the tariff’s broader implications.
VIII. Intertemporal Impact or Short-to-Longer Term Impact on the Philippine Economy
The tariff’s impact on the Philippines unfolds over time, with distinct short-term and long-term effects.
In the short term (0–2 years), the estimated $1.6–1.89 billion export loss, combined with a potential remittance drop, should add pressure on the peso (already at 57.845 in 2024), translating to higher inflation and squeezing consumers.
Job losses in export sectors like electronics and agriculture, coupled with credit constraints from the savings gap, limit the government’s ability to cushion the blow. GDP growth, already down to 5.2% in the second half of 2024, could dip further, missing the government’s 6–8% target for 2025.
Over the longer term (3–10+ years), there’s potential for growth if the Philippines leverages reforms like the CREATE MORE Act, which offers power cost deductions and tax breaks to attract investment.
However, all these take time, effort, and funding, which—unless there is clarity in the economic horizon—could offset whatever gains might occur.
Figure 6
Philippine trade balance has struggled even in anticipation of the passage of the CREATE Act. (Figure 6, topmost image)
The BSP’s USDPHP implicit cap or ‘soft peg regime’—which subsidizes the USD—has played a significant role, contributing to surging imports and external debt (previously discussed here). This policy, while stabilizing the peso in the short term, exacerbates the trade deficit and increases reliance on foreign capital, making long-term growth more challenging.
The savings gap and fiscal pressures make this a steep climb. Without domestic capital, the Philippines remains vulnerable to global capital flow disruptions, which could derail its long-term economic prospects.
The interplay of these factors underscores the need for a strategic, holistic, and sustained approach to economic reform—one that tackles both immediate challenges and structural weaknesses.
However, given the tendency of popular politics to prioritize the short term, this vision may seem far-fetched.
IX. The US Dollar’s ‘Triffin Dilemma’: Global Risks and Philippine Challenges
These disruptions tie into broader global risks, starting with the Triffin Dilemma.
The Triffin Dilemma, named after economist Robert Triffin, highlights a fundamental conflict in the U.S.’s role as the issuer of the world’s reserve currency. To supply the world with enough dollars to meet global demand, the U.S. must run current account deficits.
The Triffin Dilemma arises because running persistent deficits to supply dollars undermines confidence in the dollar’s value over time. If deficits grow too large, foreign holders may doubt the U.S.’s ability to manage its debt (U.S. national debt was $34.4 trillion in 2024, or 121.85% of GDP), potentially leading to a shift away from the dollar as the reserve currency. (Figure 6, middle graph)
Conversely, if the U.S. reduces its deficits (e.g., through tariffs), it restricts the global supply of dollars, which can disrupt trade and financial markets, also eroding the dollar’s dominance.
The U.S. dollar’s role as the world’s reserve currency (58% of global reserves) relies on constant U.S. trade deficits to supply dollars globally. (Figure 6, lowest chart)
The U.S.’s $1.2 trillion deficit in 2024 does just that, supporting its “exorbitant privilege” to borrow cheaply and fund military power.
But tariffs, by aiming to shrink this deficit, reduce the dollar supply, risking the dollar’s dominance. If countries shift to alternatives like the Chinese yuan (2.2% of reserves) or euro (20%), the U.S. faces higher borrowing costs, potentially curbing military spending ($842 billion in 2024), while the Philippines struggles to access dollars for its USD 191.994 billion external debt and trade deficit in 2024. This could weaken the peso further, raising costs and inflation.
Meanwhile, if other nations like China or the EU liberalize trade in response, alternative markets could emerge.
The Philippines might redirect exports to China (which posted a $992 billion surplus in 2024) or leverage the EU-Philippines FTA, but this risks geopolitical tensions with the U.S., its key ally, especially amid West Philippine Sea disputes.
An “iron curtain” in trade, investments, and capital flows looms as a worst-case scenario, further isolating the Philippines from the global capital needed to bridge its savings gap. The potential erosion of the U.S.’s military presence in the Indo-Pacific, due to financial constraints, could also embolden China, complicating the Philippines’ strategic position.
X. Conclusion:
Winnowing the Political Chaff from the Economic Wheat
While the 17% U.S. tariff on Philippine goods seems to offer a political edge, the economic reality tells a different story.
The regime uncertainty from Trump’s bold tariff regime exposes internal fragility brought about by high trade exposure, a savings-investment gap, and fiscal-financial constraints.
The consumer economy isn’t immune, as export losses, rising debt, and remittance risks threaten investments and spending power.
Global risks, like the erosion of the U.S.’s dollar privilege through the Triffin Dilemma, could further limit the Philippines’ adaptability.
Over the long term, reforms like the CREATE MORE Act could unlock growth, but only if the Philippine government acts swiftly to boost savings by further liberalizing the economy, reforming exchange rate policies, and supporting these efforts with a material reduction in fiscal spending.
Trump’s tariff is a wake-up call: though the drastically shifting tides of geopolitics translate to the need for flexible policymaking ideally, the sunk cost of the incumbent economic structure operating under existing policies hinders this process.
‘Resistance to change’ that works against vested interest groups—such as entrenched political and business elites who benefit from the status quo—will likely pose a significant obstacle too.
As such, drastic changes in the economic and financial climate raise the risk of a recession or a crisis, particularly given the Philippines’ high systemic leverage and dependence on foreign capital.
The next step may be to throw a prayer that Trump eases his hardline stance, offering a reprieve that could buy the Philippines time to adapt to this new global reality.
___
References
Colin Grabow, Scott Lincicome, and Kyle Handley, More About Trump’s Sham “Reciprocal” Tariffs, April 3, 2025 Cato Institute
Robert Higgs, Regime Uncertainty, 1997 Independent.org
David R. Breuhan A Brief History of Tariffs and Stock Market Crises November 4, 2024, Mises.org
Frank Shostak, Government “Stimulus” Schemes Fail Because Demand Does Not Create Supply, July 26, 2022, Mises.org
Jonathan Newman, Opposing the Keynesian Illusion: Spending Does Not Drive the Economy, January 21, 2025
A. P. Lerner, The Symmetry between Import and Export Taxes, 1936 Wiley jstor.org
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