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An Analysis of the History of Philippine Trade Policy

*
(1950-2004)
CHRISTIAN LALUNA, ARNIL PARAS and VANESSA SOLIVA
Introduction
Does the Philippines have a consistent, independent trade policy?
If the question was simply, do we have a trade policy, then it
would have to be an unqualified yes: we have numerous executive
orders (EOs), Repuiblic Acts (RAs), tariff and customs codes,
international treaties and obligations, and so forth, that dictate how
imports and exports in the Philippines are to be treated. This is a country
arguably built on trade, where we acquire some of our inputs from abroad
and hope to earn through exporting our own products to foreign
customers.
Yet if the question is more precisea consistent, independent trade
policy?the evidence does not point in that direction. It is not just that we
have numerous policies that apply to Philippine trade, but that in the
course of post-independence Philippine economic history the direction of
Philippine trade policy has changed significantly in many occasions.
Here we argue, though the analysis of historical data available (from
1949 to present) that we do not have any constant trade policy that is
consistent with a given economic or ideological framework. Rather, what
we have are trade policies (deliberately in the plural) that are often the
result of two competing forces: global economic forces or shocks to which
the government must react to or respond to, and the local political
economy that has for the most part of this history captured trade policy

*
A paper submitted to Prof. Jeremy I. Gatdula in fulfillment of the requirements in
International Trade subject.
January 2006 An Analysis of the History of Philippine Trade Policy
81
and enjoyed its benefitseven as the costs of such policies were finally
taking its toll on the economy.
We argue that two significant global economic eventsa 1949
currency crisis and the 1980s debt crisisforced government to take
steps needed to stabilize the economy. We further argue that the
consequences of these steps, creating two distinct business classes (a
traditional industrial elite post-1949, and a more globally-oriented
entrepreneurial class post-1980) which have helped shape the political
economy out of which further developments in trade policy came out of.
Embedding of Protectionism:
Quirino 1950 - Macapagal 1960s
The first big shock that would alter postwar Philippine trade (and
economic) policy was a result of the foreign exchange crisis of 1949. The
import-substitution policies adopted by the state were not in fact intended
as a long-term development framework; rather, it was to conserve scarce
foreign currency assets in the Central Bank. Power and Sicat (1970:28)
could not find any evidence of import substitution and foreign currency
controls (which also had the effect of restricting imports) as a planned
decision whose long-term consequences were foreseen.
Net consequence of this, however, was the development of a
business class that profited from the de facto protectionism and the
reservation of foreign currency reserves for their import needs. The
import/exchange controls set by the Central Bank in 1949 quickly resulted
to resulting profit incentive [which] evoked a strong entrepreneurial
response; and what began as an emergency tactic... became the principal
policy instrument for promoting industrialization [in the 1950's] (Power,
Sicat 1970: 28). Further Congressional acts in the 1950s under Quirino,
Magsaysay, and Garcia, elevated the emergency tactic into Philippine
industrialization policy in 1950; Furthermore, for the first time there was
a clear protective intent in the law (Power, Sicat 1970: 97), specifying
industrial sectors that would enjoy import protection and access to foreign
currency (mostly along the lines of capital-intensive industry and
consumable goods).
Arellano Law and Policy Review Vol. 7 No. 1
82
Tariffs in this era figured lightly in Philippine import (restriction)
policy; Power and Sicat (1970: 102) noted that the Philippines and the US
had a free trade agreement (under Constitutional parity provisions that
allowed American goods duty-free into the Philippines). Additionally,
Frank Golay (1961: 181) assessed as efficient enough the use of import
and exchange controls. On the other hand, these control policies were soon
accompanied by incidences of corruption and black marketeering. The
Import Control Administration created by the 1949 Import Control Law
(RA 330) suffered from accusations of corruption; newspaper editorials
criticized inadequate preparation, gross mismanagement, political
interference, and greedy business interests willing to use corrupt practices
to gain competitive and monetary advantages. A Manila Chronicle article
declared that legitimate business is fast being driven from the field by a
new race of pseudo-importers, ten percenters, and other racketeers, and by
the confusion and incompetence which reigns in the Import Control
Office (both from Hartendorp 1958: 669-670). The same criticisms
could be made of the exchange controls in the same period.
Though Congress in response would assign all import control powers
and duties to the Central Bank in an effort to stem the corruption, by the
1960s the government had begun a phase of decontrol in imports and the
foreign exchange market to bleed out the corruption that plagued the
1950s, and ease the administrative burden on government. A tariff
structure was set in place in 1962 under the Macapagal Administration
(Sicat 2002: 9) that preserved the same industrial structure that had been
protected by the earlier import/exchange control structure (Power, Sicat
1970: 103). The highest tariff rates was set on consumer goods, and
imported capital equipment enjoyed the lowest rates (virtually none at
all, as noted by Power and Sicat). This structure would remain essentially
unchanged until the early 1970s (Power, Sicat 1970: 107).
Power and Sicat draw an interesting conclusion from this as well.
The transition from controls to tariffication only heightened the demand of
the newly-emerging industrial sector for increased protection from foreign
competition, and thus only served to embed the 1950s economic
structure. This no doubt helps to explain why the transition to decontrol
was less painful than some had imagined it would be (Power, Sicat 1970:
103). This phase of import substitution, based at first on controls enacted
as a short-term response to a world currency crisis, and later on a tariff
structure that changed nothing in the economic structure at all, led to
January 2006 An Analysis of the History of Philippine Trade Policy
83
(among others) an inward-looking industrial sector highly dependent on
imported inputs, an excessive reliance of the economy on a few primary
exports, slow economic growth, and greater economic inequality (Power,
Sicat 1970: 9).
Conflicting Signals: Marcos 1970s
The 1970s brought with it political and economic upheavals,
resulting to several changes in trade policy, often conflicting in trade
orientation or objective. On the one hand, reforms made under the early
Marcos Administration targeted export-oriented industries, and it was also
at this stage that economic diplomacy entered the picture through ASEAN
(Sicat 2002: 9). On the other hand, no significant trade liberalization had
been made by the Administration (Bautista, Power, et. al. 1979: 20), and
with the declaration of martial law, many major industries fell under the
control of Marcos cronies. Moreover, the combined political and
economic crisis that was brewing at the end of the decade would force the
reversal of a number of these reforms (Sicat 2002: 10).
The roots of the industrial targeting policies pursued in this decade
come from the 1967 Industrial Incentives Act (RA 5186) that created the
Board of Investments (BOI), and the 1970 Export Incentives Act (RA
6135), which specified the qualifications of a domestic industry to receive
tax exemptions and subsidies on imports, and expanded the list of
qualified industries and businesses. Between these two laws, beneficiary
sectors of Philippine manufacturing would thrive: analyses by the
Bautista/Power & Associates study note only "modest increases in the
annual growth rate of manufacturing output" from 1970-1973 (averaging
5%), though there was a sudden acceleration to 14.8% in '73. The authors
attribute such performance to the fact that it was already a big
improvement relative to the decelerating rate of growth in the mid-to-late
'60's (Bautista, Power, et. al. 1979: 24).
More telling, however, is the low number of firms which availed of
BOI incentives, which necessarily affected assessments of the effects of
incentives on national economic performance (Bautista, Power, et. al.
1979: 24). The strong performance of the export sector of the economy in
1973 could be better attributed to a world price commodity boom in the
Arellano Law and Policy Review Vol. 7 No. 1
84
same period, than solely to devaluations of the Philippine currency
(Bautista, Power, et. al. 1979: 25).
As with the 1950s and 1960s, the Central Bank continued to
administer both tariff policy and remaining import controls over
nonessential products. The simplified tariff code was issued effective
January 1, 1973, raising rates on 796 product lines, reducing rates on 451,
and leaving 392 lines unchanged (Bautista, Power, et. al. 1979: 21). Also
like before, the objective of these barriers to trade was to improve the
balance-of-payments position of the Philippinesthe country in fact
enjoyed a surplus of US$44 million in 1973 (Bautista, Power, et. al. 1979:
21).
The first OPEC oil crisis of 1973, however, would wipe out most of
these gains in manufacturing, including the 1973 trade surplus (Bautista,
Power, et. al. 1979: 22). More puzzling, however, given the desire for an
export-oriented manufacturing sector, was that the sectors of industry
enjoying the highest effective protection rates (EPR) were those which did
not export to any significant extent. Worse still, those which did export
were being penalized relative to their foreign competitors (Bautista,
Power, et. al. 1979: 40; 39). Insult to injury, the foreign loans that
sustained growth during this period would finally take its heavy toll in the
debt crisis of 1980 as Marcos cronies abused the economic sector (de
Dios, Hutchcroft, in Balisacan, Hill 2003: 50).
Perhaps the best evaluation of policy efforts in the 1970's could
come from Catching Up With Asia's Tigers, page 24: It would appear that
the Industrial Incentives Act of 1967, the Export Incentives Act of 1970,
and the tariff rationalization in 1973 did not change much the structure of
industrial protection, as reflected in the continuing high effective
protection rates for industrial consumer goods that were on average four
times those for capital goods in both 1965 and 1974... Export production
continued to be heavily penalized relative to other industries, the average
EPR for the latter being about 15 times that for the former in 1974
Furthermore, despite the large nominal devaluation... the real exchange
rate remained highly overvalued during the 1970's.
January 2006 An Analysis of the History of Philippine Trade Policy
85
Force Majeure Liberalization:
Marcos 1980s - Aquino 1992
Again the world economic context would force a revamp of
Philippine trade (and economic) policy, this time through the International
Monetary Fund (IMF), and this time in a Philippine environment of
rapidly unraveling economic fundamentals (Sicat 2002: 10) and political
chaos.
Liberalizing conditionalities were attached to the structural
adjustment loans extended by the IMF to the Philippine government to
head off the impending debt and BOP crisis the country faced at the end of
the 1970s. As a result, among others, the government embarked on the
first Tariff Reform Program of 1981 (TRP 1981), which aimed to reduce
EPRs to between 30%-80%, even off protection for all sectors of the
economy, reduce tariffs from highs of 100% for many nonessential
products, and tariffication or import decontrol of the remnants of the
Central Banks import restriction list (Erlinda, Tecson, et. al. 1996: 25).
Changes to tax policy would also reduce the bias for domestic industry
(Tan, in Erlinda, Tecson, et. al. 1996: 170). A 1983 BOP crisis would,
however, lead government to suspend the import liberalization program
for three years (Tan, in Erlinda, Tecson, et. al. 1996: 170), and introduce a
general import tax and additional duties on imports, and devalue the
Philippine peso (to further curtail imports) (Bautista, Tecson, in Balisacan,
Hill 2003: 141)
1983 would also see the assassination of Senator Benigno Ninoy
Aquino, and the political chaos as a result would unseat Marcos from 20
years of continuous rule and install Aquinos widow, Corazon Cory
Aquino, as the new President of the Republic. She continued the economic
liberalization policy agreed to by the Marcos Administration in the early
1980s, but interestingly enough, trade policy reform now also acquired the
flavor of being anti-Marcos (in that it targeted the protection enjoyed by
the crony-operated industries) and thus earning social legitimacy (de Dios,
Hutchcroft, in Balisacan, Hill 2003: 53). In addition, in the last months of
the Aquino Administration the Philippines would sign into the ASEAN
Free Trade Agreement of 1992, emplacing another set of trade/tariff
commitments (on top of GATT) to the international community (in this
case, ASEAN member countries).
Arellano Law and Policy Review Vol. 7 No. 1
86
Embedded Liberalization:
The Ramos Administration (1992-1998) and Beyond
If the 1949 currency exchange crisis had embedded protectionism
into the policy framework and political economy of the Philippines (as
argued earlier), the 1980s combination of debt crisis and structural
reform, and People Power Revolution, would sow the seeds of embedded
liberalization and global orientation into the same policy framework.
Though the traditional industrial elite which had benefited from over three
decades or more of protection and state coddling would still resist (quite
naturally), government policy would reflect the economic liberalization
mindset that began to pick up pace in the 1980s around the world. The
more open and democratic space post-Marcos would also introduce new
political voices in the economic policy arena, based around small and
medium enterprises and exporters (de Dios, Hutchcroft in Balisacan, Hill
2003: 54), which would compete with the traditional industrial lobbies.
Key to this embedding were EO 470 which would launch the next
phase in Philippine tariff reform, and the election of President Fidel V.
Ramos in the next year (1992). EO 470, which coincided the second phase
of the Tariff Reform Program (TRP II), would further lower average tariff
rate from 28% to 20% (Erlinda, Tecson, et. al. 1996: 25).
The Ramos Administration would provide the proverbial kick in the
pants that would launch Philippine trade policy into mass liberalization
and globalization. Under Ramos, the country signaled its participation in
international trading agreementsGATT-WTO, AFTA, APECthat
would cement Philippine tariff and trade commitments in international law
(EAAU 1998: 88, Rodolfo November 2002: 33). EOs were promulgated
that operationalized the intents of EO 470 (Rodolfo November 2002: 33).
In the incredible momentum of trade liberalization under Ramos, it is
important to note the role of the Presidency in bringing about this sea
change in policy orientation in both government and society. In particular,
the success of the Ramos reforms rested on the deft and savvy leadership
of the president and his key advisers, especially (Jose) Almonte (de Dios,
Hutchcroft, in Balisacan, Hill 2003: 55). The two combined a liberalizing
ideology andespecially in Almontes casea marked distrust of the
Philippine business elitewith savvy political maneuvering and exercise
of strong executive leadership (under the aegis of a strong state) (de
January 2006 An Analysis of the History of Philippine Trade Policy
87
Dios, Hutchcroft, in Balisacan, Hall 2003: 55-56) to push forward tariff
reform, international trade agreements, and other liberalizing policies,
often in the face of political-economic oligarchies. But even the business
elite came around to Ramos and Almontes view (de Dios, Hutchcroft, in
Balisacan, Hall 2003: 56). Not that a strong and sustained economic
growth from 1992-1997 did not help one bit in generating legitimacy for
liberalization, either.
The 1997 Asian Financial Crisis did nothing to derail greatly the
trade liberalization momentum under Ramos; neither did the short
presidency of Joseph Estrada (1998-January 2001) undertake any major
policy shifts. He, in fact, made explicit commitments to continue the
liberal reforms undertaken under Ramos. The juetengate scandal that blew
up in October 200, however, undermined the credibility of the
Administration, and threatened the modest gains from the Ramos reforms
and the post-1997 Philippine economic recovery (de Dios, Hutchcroft, in
Balisacan, Hall 2003: 62).If the Estradqa episode demonstrated anything,
it was that institutions themselves were weak, corruptible, and susceptible
to capture, even in their normal state (de Dios, Hutchcroft, in Balisacan,
Hill 2003: 63)a condition all too common even in the years from 1950-
1986.
The Gloria Macapagal-Arroyo administration which succeeded
Estrada, and then after which she went on to win a presidential term in
2004, is one of mixed signals in the arena of trade policy
reform/liberalization. As an economist, she would have understood the
rationale for prudent liberalization of trade and the economy. Even Sicat
was willing to say that Gloria Macapagal Arroyo has shown by her
perseverance on economic issues that she will move the forward motion
towards a more open economy (Sicat 2002: 10). On the other hand,
recent pronouncements on her part indicate a desire to slow down or
suspend/postpone trade liberalization (especially in the case of AFTA,
where she recently invoked the Protocol that suspended liberalization of
the petrochemical industry), and even raise tariff rates to the maximum
allowable under WTO bindings [this would not be in breach of WTO
commitments). Moreover, the country is in fact behind its AFTA
commitments: the Administration had not, as early as 2002, enacted the
EOs required to comply with AFTA inclusion list requirements (Rodolfo
November 2002: 36). And empirical analysis of average tariff rates for
agriculture and manufacturing shows an increase in rates for 2003.
Arellano Law and Policy Review Vol. 7 No. 1
88
CONCLUSION
It would be unfair to say that no attempts (apart from Ramos) had
been made by policymakers to formulate an independent trade policy
dependent on economic logic and national interest alone and not bound by
historical or political considerations. But as this history demonstrates,
trade policy had often been either an unintentional reaction to global
economic and political events, or captured by local elites demanding
protection of their gains and benefits from the vagrancies of competition
and deregulation/liberalization. What grand dreams Marcos had for the
Philippine economy, for example, had been lost to the winds of the oil
shock-induced economic crisis of 1973, and later to the political crisis that
cost him the Presidencyif not thoroughly abused by crony capitalism.
But on the whole of it trade policy direction in this country has been
initially reactive to global forceseither the currency crisis that
threatened to drain the Central Banks reserves, or the IMF
conditionalities that mandated the liberalization of the trading sectorand
later gained its own momentum as the business beneficiaries of these
policies set about to embed the economic framework (import substitution,
liberalization) into government policy. In the overarching analysis of trade
policy history from 1949-2004 we highlight the following important
points and characteristics of this history:
Trade policy does not exist alone or in a policy vacuum; in this
Philippine case, it is enmeshed within a larger development
agenda and strategy which is often the arena for political
competition among politicians, elites and lobbyists, and at times
international businesses and organizations (ex: IMF).
But even while enmeshed under a greater framework or
strategy, the two big changes to trade policy we have noted
above (in 1949 and the 1980s-1992) did not come about as a
result of independent government action, but as a result of
government reaction to global economic events, shocks, or
demands.
o In the 1949 case, the Philippines adopted import
controls and other similar barriers to imports in order to
prevent the currency crisis from draining the Central
January 2006 An Analysis of the History of Philippine Trade Policy
89
Banks foreign reserves, and thus conserve scarce
foreign currency assets.
o In the 1980-1992 case, because of the fiscal and balance
of payments bind the country was in as a result of
economic setbacks in the 1970s, the government
adopted liberal reforms specified under IMF
conditionalities that saw the beginning of the
liberalization of the import sector.
After these initial reactions, however, their economic
consequences began to develop momentum in favor of the
economic development framework which best suited such trade
policies.
o What began as a short-term tactic to conserve foreign
currency reserves was elevated by the government of
Quirino, Magsaysay, and Garcia into an import-
substituting industrialization strategy of Philippine
development. The decontrol under Macapagal, and
industrial targeting and export orientation under Marcos,
simply changed the favored tools of this strategy (from
import controls to tariffs, and an expansion of the
subsidies and credits for favored industry), but not the
oberall thrust of the policy framework or the industrial
structure it protected.
o Both Estrada and Macapagal-Arroyo had explicitly
stated that they would continue the trade liberalization
and reform program begun under Ramos (although in
the Macapagal-Arroyo case she had recently given
indicators otherwise in explicit pronouncements and
foot-dragging over policy).
These policies also develop a beneficiary group of business
elites or class which then agitate for the continuation or
extension of the policy framework.
o The 1949-1979 policies created a business class based
on consumables and heavy manufacturing, dependent on
cheap imports and easy access to foreign currency
reserves (and loans), and thus lobbied for ISI-based
policies and protection.
o The contemporary policies from Aquino, Ramos, and
beyond in turn nurtured a globally-oriented
entrepreneurial class that supported trade liberalization
Arellano Law and Policy Review Vol. 7 No. 1
90
in that it gave them access to both global resources and a
global market (whereas the prior era was biased in favor
of domestic-consumption industries).
President Fidel Ramos in particular figures most strongly in this
analysis because, while events in the 1980s embedded
liberalization in the countrys economic and policy framework,
Ramos did more than most to actualize or operationalize this
framework in Philippine trade policy, making it an active
commitment and participation of the Philippine government,
rather than a passive reaction to events and lobbying.
Does this mean then that there is hope for a future Philippine trade
policy consistent with liberalization? No and yes. No, because, as
indicated before, the institutions of Philippine policymaking are easily
captured, corruptible, or at least swayed. President Macapagal-Arroyos
actions in recent years, which indicate a softening of the official Philippine
position on trade liberalization, are indicative of this trend. And this
country will still have to react to global events that greatly change the
political and economic context of the world economy (e.g. 9/11 and the
following recession, oil prices). Yet liberalizationor at least the minimal
commitment to internationally-agreed upon trade barriers and tariff
ratesis embedded not only in the policy framework of Philippine
government, but also in international obligations and law. Whatever
reversals Arroyo or anyone else in the future will make can only go as far
as the limits set under the WTO, AFTA, and elsewhere, and there will be a
cost associated with renegotiating these limits. Additionally, the rise of a
new business middle class that enjoys benefits from globalization and
liberalization of the economy will ensure that there is at least one political
supporter in favor of continued liberalization. It is this class participation
in the policy formulation and implementation procedures in Philippine
government that can help set the tone for the future of Philippine trade
policy.
January 2006 An Analysis of the History of Philippine Trade Policy
91
APPENDIX
TABLE 1. Structural Policy by Type of Market of Objectives, 1949-1995
Period Growth Stability
1949-1959 Import-driven and industrial
Investment-led
Import and exchange controls
1960-1966 Debt-driven growth; later in the
1960s, investment-led growth
Decontrol of imports and
foreign exchange
restrictions/deficit financing
1967-1973 Debt-driven growth; greater
export-orientation
Devaluation; floated peso
1974-1979 Debt-driven and export-led growth IMF credit facility; massive
construction spending thru
government barrowing; export
diversification
1980-1985 Growth Objective postponed in
favor for stability due to serious
economic crisis
IMF stabilization/structural
adjustment program pushing for
trade liberalization; Market
oriented exchange rate;
devaluation; deregulation of
interest rates; foreign exchange
rationing; moratorium on debt
repayment; debt restructuring
1986-1992 Investment-led growth; industrial
revitalization; restoration of free
enterprise system
Import liberalization; tariff
reform; financial liberalization;
privatization; removal of
restrictions on foreign
investments
1993-1995 Export and investment-led growth Deregulation of industries;
further trade; financial and
investment liberalization and
privatization; rehabilitation of
energy and water resources
sectors
Source: Dejillas & Constantino, 1996, p. 37
Arellano Law and Policy Review Vol. 7 No. 1
92
TABLE 2. Philippine Global Economic Policy as Contrasted with Local Policy
Broad Characterization RP Economic Structure
Spanish
Colonial Era
Absence of Local Economic
Policy
-RP as part of Galleon Trade
(Spain, Mexico, China)
-In later years, commercial
dominance of other western
countries
Mainly Agricultural
Agricultural Crop exports: Sugar
cane, abaca, tobacco leaves,
coconut, coffee beans
American
Period
Local Policy as part of Global
Policy (Classical Colonial
Economy)
-RP as provider of Raw
Materials to US
-US as source of manufactured
goods for RP
Mainly Agricultural
Main Processed Agricultural
exports:
Processed sugar, coconut
products, cigars, abaca products
Period of
Reconstruction
(1946-1950s)
Local Policy as an Extension of
Global Policy (Neo-
Colonialism)
-RP as provider of raw materials
to US and Japan
Agriculture and services
oriented (Industries were
damaged by the war)
Main export product: traditional
agricultural products (sugar,
coconut products, etc.)
Period of
Import
Substitution
(1950s-
1960s)
Global Policy as a extension of
Local Policy (Import-
Substituting Industrialization
Strategy)
-Local goal of industrialization
promoted thru Import and
Foreign Exchange Controls
Increased Industrial production
and service sector growth;
decline in agriculture
Main Export product: traditional
agricultural products, mineral
products (e.g. Copper )
Period of
Export and
Investment
Promotion
(mid-1960s-
1980s)
Globally Dependent Policy
(Export Promotion Strategy)
-Integrating local production
with global market needs
-Exports, Foreign Investments
and Foreign Debt as tripod of
local Policy
Growth of Industrial and
services sectors
Ain export product: Garments,
Agric Products, including
fisheries (prawns and tuna) and
fruits (mango bananas,
pineapple) mineral products
(copper)
Globalization
(1990s)
Globalization as the Local
Policy
-Continuation of Trade Reform
and Liberalization of Sectors
-Minimal Government
intervention; reliance on market
Service oriented economy:
Decline of Agri.
Main Export Product:
Electronics, Garments, Export
Crops
Source: Rodolfo, 2002. p. 35
January 2006 An Analysis of the History of Philippine Trade Policy
93
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Arellano Law and Policy Review Vol. 7 No. 1
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January 2006 An Analysis of the History of Philippine Trade Policy
101
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Arellano Law and Policy Review Vol. 7 No. 1
102
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1
9
9
6
1
9
9
9
2
0
0
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2
0
0
1
Source: Sicat, pp. 62-69
January 2006 An Analysis of the History of Philippine Trade Policy
103
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