Wednesday, April 02, 2008

Free Trade 7: Class War, Eco-protectionism and Climate

Two weeks ago, Dr. John Rutledge posted in his blog ( a paper, "Protectionism and the Philippine class war", in reaction to an oped by the Manila Times, "Poverty in the middle of plenty".

I have met John last May in Honolulu during the "Pacific Rim Conference" and he was our dinner guest speaker in the first day of the 2-days conference.

John wrote,

"There are important parallels with the (Philippines and) current US situation.

1) Class war leads to punitive, growth-destroying tax, trade and regulatory policies.

2) Class-war driven tax policies can drive offshore exactly the valuable resources needed to crete jobs and improve family incomes.

3) Protectionism is extremely destructive for growth and incomes. It can permanently mire an economy in poverty.

4) Once started, protectionism is hard to stop because it creates vested and well-funded political interests that want it to continue forever...."

I commented in his blog not to believe the Manila Times oped. There is no "class war" in the Philippines (and many other developing economies) because there are many "classes" or "enclaves" that were not prominent just 2 decades ago.

Entertainers, showbiz personalities, professional basketball players, boxers, IT professionals, advertisers, academics and consultants, traders, media broadcasters and columnists, travel agents, physicians, lawyers, engineers, accountants, top government bureaucrats, politicians, dozen-plus other categories, are making it big and very rich in the Philippines. They are neither "exploiting capitalists" and "exploited workers" in the old Marxist dichotomy of "class war", or "feudal lords" and "exploited peasants" in the old Maoist dichotomy of "class war".

Recently, many people here are getting rich not by becoming overseas workers, or by becoming investors in business process outsourcing (bpo), but by catering to millions of foreign tourists, especially the Koreans, Chinese, Japanese, Taiwanese, Americans, Europeans, coming here to enjoy the white sand beaches, or wonderful golf courses, or for cosmetics and beautification surgery, or simply to learn English language cheaper.

It is true that economic and trade protectionism causes economic stagnation. While free trade gives consumers lots of choices, protectionism limits choice to a few domestic producers that were blessed by the state to be the sole providers of the things and services needed by the people.

On Eco-Protectionism

There is a proposal made by some groups and politicians in rich countries, that trade protectionism by rich and industrialized countries can be justified because these countries are consuming goods by “carbon-surplus” developing countries. While rich countries focus on emission cuts, many developing countries expand their gas emission as they export and industrialize more, which worsens global warming goes their argument. Thus, to correct and mitigate this problem, exports by developing countries (mainly China, India, Brazil, others) will soon be slapped with a “carbon tax” on top of existing import duties and related taxes by rich countries.

This will be one of the big rackets resulting from climate change alarmism – the idea that with climate change being mostly man-made, then men should be so alarmed and cut their gas emission and possibly, cut their production and consumption, which can possibly cut economic growth and job creation.

So in the case of eco-protectionism, otherwise cheap imports from developing countries should be made expensive to consumers of rich countries in order to discourage high consumption of goods produced by poorer countries, and hopefully reduce gas emission there.

The argument looks cute and appealing, but it does not make much sense for a number of reasons.

First, a portion of the pollution created in poor and exporting countries are the pollution and gas emission that should have taken place in rich countries if those imported commodities are produced there. This process of “outsourcing” production and emission in poor countries should be recognized by the consumers and policy-makers of rich countries.

Take exports powerhouse China. Most of its exports are energy-intensive, and it makes many of the highly polluting manufactured products that used to be made in the US, Europe and Japan. The smoke-stack power plants and industries were exported to China and other developing countries and the products made from those polluting industrial plants are imported into rich countries.

Second, reducing importation of rich countries from poor countries – through imposition of “carbon tax” on top of regular import tax – even if such trade protectionism is limited to so-called “energy-intensive, low value-added” products, will slow down but not stop, further economic growth and industrialization of developing countries. When countries are poor, people there tend to use dirtier technologies, like buying 2nd- or 3rd-hand vehicle engines and assemble their own rickety vehicles that are less fuel efficient and consume more petroleum products per kilometer of distance traveled. Which again, worsens pollution and global warming.

Third, creating artificial scarcity of certain commodities in rich countries because of reduced importation from poor countries which do not have carbon emission constraints, will further widen the gap between rich country price and poor country price of the same or similar goods. Two results will happen and they are both environmentally bad.

One, lower imports by rich countries as a result of such artificial scarcity will lead to higher inflation there, which will adversely affect the income of individuals and profitability of companies there, which ultimately will reduce their capacity to invest in more environment-friendly but expensive technologies and production processes.

And two, lower exports by poor countries as a result of eco-protectionism will slow down if not depress their national income, which will adversely affect their capacity to import products from rich countries, especially more fuel-efficient cars, less energy-intensive machineries and less-polluting production technologies.

Meanwhile, where will the additional revenues from carbon tax go? Most likely to pay for the salaries and perks of additional bureaucrats at the Finance and Environment Ministries of rich countries, who will be hired to compute how much new gas emissions were created by developing country so and so and how much will be the "countervailing" carbon tax to be imposed for their exports.

Free trade has only one unique and very important merit: to give consumers more choices. And more choice means more freedom. Hijacking free trade to advance certain environmental advocacies, even labor or human (and animal) rights advocacies, is wrong. Penalizing producers in poor countries with trade restrictions and protectionism because they are allegedly using less environment-friendly and/or more energy-intensive technologies will immediately reduce the range of choices for ordinary consumers in rich countries. But worse than this, such trade protectionism will restrict economic growth of those countries, which will limit their capacity to invest in more energy-efficient and environment-friendly technologies and production processes.

In short, eco-protectionism as a result of climate change alarmism will only succeed in making the planet dirtier, while pushing more people to poverty and economic stagnation.

See also:
Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006
Free Trade 2: Unilateral Trade Liberalization, May 17, 2006
Free Trade 3: Protectionism Perpetuate Poverty, September 05, 2006
Free Trade 4: FTA in APEC, July 09, 2007
Free Trade 5: Business, Rock Music and Cycling Globalization, July 17, 2007
Free Trade 6: Counterfeit Drugs Worldwide, December 21, 2007

No comments: