Liberation tariffs and the Philippines

What does US President Donald Trump’s “Liberation Tariffs” mean for the Philippines? Consider the semi-conductor industry — a crucial economic pillar, responsible for around 60% of the country’s total exports, generating over $45 billion annually, and providing employment for more than 400,000 skilled Filipino workers. The industry’s continued growth is essential for the nation’s economic prosperity.

Recent geopolitical shifts, particularly Trump’s “Liberation Tariffs,” have created substantial disruptions in global semiconductor supply chains. These tariffs significantly raised duties on Chinese semiconductor imports to 60%, while setting lower rates — approximately 20% or less — for products originating from ASEAN countries, including the Philippines. Initially, this difference suggests a promising 17% tariff advantage for the Philippines. Yet, this apparent advantage alone will not meaningfully attract semiconductor investments unless other fundamental challenges impeding foreign direct investments (FDIs) are swiftly addressed.

Despite the initial tariff edge, the Philippines faces intense competition from neighboring countries like Vietnam and Malaysia. Vietnam has already leveraged a strategic bilateral agreement with the United States to reduce its trade deficit, enhancing its competitiveness significantly. Similarly, Malaysia remains highly proactive, continuously refining its attractive incentives, advanced infrastructure, and government-backed industry support. Consequently, semiconductor companies entrenched in these nations are unlikely to relocate to the Philippines solely because of marginally lower tariffs if the Philippines fails to resolve its structural and economic impediments.

The Philippines faces significant competitive disadvantages compared to Vietnam and Malaysia. Both competitors offer robust financial incentives and substantial subsidies, providing generous tax breaks, funding for research and development, and dedicated support for infrastructure and workforce training. In contrast, Philippine incentives are modest and insufficiently competitive.

Furthermore, electricity costs in the Philippines present a significant hurdle, averaging $0.20 per kWh, making it one of the highest rates in the ASEAN region. Vietnam’s rate, around $0.08 per kWh, and Malaysia’s rate of about $0.10 per kWh, clearly highlight the Philippines’ disadvantage in this critical area. High electricity expenses significantly reduce competitiveness and dissuade potential investors.

In addition, despite having a large labor pool, the Philippines faces a considerable skills gap in advanced semiconductor manufacturing compared to Malaysia, which has heavily invested in specialized technical education and workforce development. This skills mismatch severely limits the nation’s capacity to attract high-value semiconductor production.

Moreover, infrastructure development remains a substantial weakness. Vietnam and Malaysia have strategically developed specialized infrastructure, integrated industrial zones, and efficient logistics networks tailored explicitly for semiconductor industries. In contrast, the Philippines struggles with outdated infrastructure, underdeveloped supply chains, and logistical bottlenecks, which substantially deter new investments.

Corporate taxes further exacerbate the competitiveness gap. The Philippines’ corporate tax rate remains relatively high at about 25%, even after recent reductions, compared to Vietnam’s rate of roughly 20% and Malaysia’s approximately 24%, both of which offer substantial additional incentives to investors.

Regulatory inefficiencies and institutional bottlenecks present additional obstacles. Malaysia and Vietnam have streamlined administrative processes and effective regulatory frameworks, creating investor-friendly environments. The Philippines, conversely, is hampered by bureaucratic delays, inconsistent policy applications, and slow administrative approvals, significantly limiting investor confidence.

Innovation and technological advancement are areas where the Philippines trails significantly behind regional leaders. Malaysia dedicates considerable resources to research and development, establishing technology hubs and innovation clusters, while Vietnam is swiftly enhancing its technological capacities. The Philippines must urgently enhance its investment in innovation to remain competitive.

Lastly, despite its strategic alignment with the United States, the Philippines lacks a structured framework to manage economic security proactively, one similar to Malaysia’s Geo-Economic Command Center. Such an institution could significantly bolster the nation’s capacity to respond to global semiconductor industry shifts effectively.

For the Philippines to meaningfully capitalize on the lower tariffs afforded by Trump’s trade policies, addressing these critical competitive issues must become an urgent national priority. Comprehensive financial and regulatory incentives must be rapidly expanded to match or exceed those of regional competitors. Electricity rates should be drastically reduced through infrastructure upgrades and targeted subsidies, creating specialized semiconductor industrial zones to foster growth.

To bridge the workforce skills gap, the Philippines needs substantial investment in specialized training programs and industry-specific educational initiatives, closely coordinated with industry leaders and educational institutions. Concurrently, deepening strategic geopolitical partnerships with nations such as the US, Japan, South Korea, and Europe will enhance the country’s attractiveness to semiconductor investments.

The Philippines must also prioritize advancing to higher-value semiconductor production, notably wafer fabrication, through targeted incentives and strategic investments. Regulatory reform should create transparent, efficient processes tailored explicitly for semiconductor operations, reflecting the successful models of regional competitors. Increased investment in innovation and research and development is critical, mirroring the proactive innovation-driven approaches of Malaysia.

Finally, establishing an Economic Security Council, akin to Malaysia’s Geo-Economic Command Center, is essential. Such an institution would proactively coordinate economic strategy, manage geopolitical risks, and streamline policy responses, significantly enhancing the nation’s strategic capabilities.

Ultimately, while the Philippines stands to gain theoretically from the favorable tariff differential, tangible benefits will remain elusive unless substantial action is taken to address these deeper systemic and structural challenges. The Philippines should seize this fleeting advantage into a lasting competitive edge in the global semiconductor industry.

Eduardo Araral, PhD is an associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. This op-ed is written in his personal capacity.