The Trump-Kim summit, more capitalism and commerce, less communism and missiles

June 12, 2018 was a historic day as the leader of the world's biggest capitalist economy met with the leader of a very small yet nuke-armed communist economy, for the first time. Thank you President Trump, Chairman Kim. You are no angels (none of us here) but it is better to have more capitalism and commerce, less communism and missiles, in Asia and the world. Great initiative (photo below from BBC).

"President Donald J. Trump of the United States of America and Chairman Kim Jong Un of the State Affairs Commission of the Democratic People's Republic of Korea have committed to cooperate for the development of new US-DPRK relations and for the promotion of peace, prosperity, and the security of the Korean Peninsula and of the world."

https://edition.cnn.com/2018/06/12/politics/read-full-text-of-trump-kim-signed-statement/index.html

"The US president said he had invited Mr Kim to visit the White House at “the appropriate time” and that the North Korean leader had accepted his invitation."

https://www.ft.com/content/0342ebf2-6dc5-11e8-852d-d8b934ff5ffa

Poor North Korea but with a medium size population of 25 M people (S.Korea has about 51 M), it is safe to project that after denuclearization, soon Samsung and Apple, Ford and Toyota, BMW and Hyundai, HSBC and Citibank, Marriott and Shangri-la, San miguel and Jolibee, other big globa and regionall brands will soon be setting offices and factories, hotels and banks, in Pyongyang and beyond.

Singapore as host is a good model for NK -- small in both land area and population, previously very poor, no nukes, yet very prosperous and rich.

Trump as long-time businessman and recent politician with little political baggage that many politicians have may have inspired KJU to have more businesses, more trade and investments and less missiles and bombs in his country. The 8 years of "hope and change" leader has no track record of real business. The Clinton couple has politics as business, no real business selling useful goods and services.

  

US Ambassador to the PH Sung Kim has been with the Trump team in negotiating with KJU. Amb. Kim with US State Sec. Mike Pompeo in SG. Cool guys. (photo from Sec Pompeo's twitter)

I have a S. Korean free marketer friend, Dr. Chung-ho Kim, then Pres. of the Center for Free Enterprise (CFE) in Seoul. We were in an Atlas event in Washington DC in Nov. 2009, 20th anniv of the fall of the Berlin Wall (thanks to the invite and travel grant secured by Jo Kwong, then Atlas VP). Chung-ho was one of the freedom speakers. In front of about 300 people he made a toast, "Unlike in Berlin where they have a wall, in Korea we have a fence separating the N and S. Korea. As Pres. of the Center for Free Enterprise in Seoul, I call on Chairman Kim (il Song) -- tear down this fence." Big applause from the crowd.

"I want to bring our soldiers back home. We have, right now, 32,000 soldiers in South Korea, and I’d like to be able to bring them back home. But that’s not part of the equation right now. At some point, I hope it will be, but not right now.

We will be stopping the war games, which will save us a tremendous amount of money, unless and until we see the future negotiation is not going along like it should. But we’ll be saving a tremendous amount of money. Plus, I think it’s very provocative."

https://www.whitehouse.gov/briefings-statements/press-conference-president-trump/

So he wants to pull out his Troops out of S. Korea, mainly to (1) save money, cut US spending, and (2) in line with zero nuke for NKor, zero US troops in SKor. 

Good plan then. I think Trump plans to have another round of tax cut so he needs more spending cut.

CN influence over NKor will significantly decline. Soon N. Koreans will fall in love with McDonald's and Starbucks, google and youtube, Apple and Samsung, Toyota and Hyundai, Toshiba and LG.

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See also:

EFN Asia 24: Jim Rogers talk at Jeju Forum, June 10, 2013 

Korea Unification Soon? October 10, 2014 

The Korea Summit, moving to world peace, April 30, 2018 

BWorld 219, The US-North Korea summit and the global economy, June 20, 1028

BWorld 221, Mindanao power development, reality vs illusion

* This is my column in BusinessWorld last Monday, June 11.

From 2006 to 2013, the Mindanao grid had only 1,900 to 2,000 MW of installed power capacity, mostly sourced from hydropower facilities that provide higher output during the rainy season but declines during the summer.

As a result, power shortages lasting several hours a day are experienced during dry spells.

In 2014, the supply situation improved.

Total installed power capacity increased to 2,211, rising once more to 2,414 MW in 2015.

Starting 2016, the situation improved further with capacity reaching 3,162 MW and later rising to 3,559 MW in 2017, with the help mostly of coal power plants. The last two years showed significant power surpluses that competing power plants were bidding as low as P2.50/kWh in generation cost.

As of end-2017, coal power constituted 39% of installed capacity but actual electricity production was 53% of total because of coal’s reliability and higher capacity factor. Oil-based plants constituted 26% of installed capacity but actual electricity output was only 7% because they were peaking plants and were seldom used.

The committed projects (financing, construction stage) and indicative projects (planning and proposal stage) are shown below.

The Department of Energy (DoE) projects that from 2016 to 2040, the Mindanao grid will need additional capacity of 10,200 MW (6,300 baseload, 3,200 mid-merit, 700 peaking).

Early this month, a paper was presented at the UP School of Economics (UPSE), entitled “Cost-Effectiveness of Maximum Renewable Energy Penetration in the Mindanao Power Grid” by Dr. Sven Teske of the Institute for Sustainable Futures (ISF), University of Technology, Sydney. The event was sponsored by the Institute for Climate and Sustainable Cities (ICSC) and Mindanao Development Authority.

I was not there so I asked for a copy from UPSE, nothing came and perhaps ICSC did not give them a copy either. A friend of a friend sent me a paper by Dr. Teske last year which could be the basis of his presentation.

The IFS and Dr. Teske made a weird scenario of Mindanao capacity 6x that of DoE scenario. Their scenario is based on heavy renewable energy plus storage (RE+S) and RE plus dispatch (RE+D) and the following assumptions: (1) coal, oil and diesel plants phased out by 2050, (2) of the 3,200 mid-merit target by 2040, half to come from gas plants, half from hydro and biomass, (3) significant increase in solar and wind, (4) increase in storage especially battery (2,491 MW in 2050), and (5) interconnection with neighboring islands.

The weird ISF paper as propagated by the ICSC is obviously a product of the solar-wind lobby, partly by the gas lobby too. Compare what the industry players would actually invest, 410 MW of solar-wind indicative projects, vs what ISF-ICSC lobby of 37,496 MW or 91.5x larger, which is hallucination and illusion.

Electricity consumers in Mindanao and elsewhere simply want two things: stable electricity available 24/7 no brownout even for a minute, and cheap or competitive.

Solar and wind are not cheap.

If they are, we should have abolished by now the feed-in-tariff (FIT) scheme or guaranteed high price for 20 years, then the planned mandatory or obligatory renewable portfolio standards (RPS).

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See also:

BWorld 210, Electricity competition, EPIRA, and WESM, May 16, 2018 

BWorld 216, Positive and negative disruptions in the electricity market, May 31, 2018

BWorld 218, Tobacco taxation, smuggling and plain packaging, June 07, 2018 

BWorld 219, The US-North Korea summit and the global economy, June 20, 2018 

BWorld 220, Trade imbalances, protectionism and rhetoric, June 15, 2018

US Government as Republicans dominated

US government, Republicans-Democrats distribution.

Top, HOR; middle, Senate; below, Governors.

Republicans dominate all three layers, four including the Presidency.

Sources: (a) HOR, http://history.house.gov/Institution/Party-Divisions/Party-Divisions/

(b) Senate, https://www.senate.gov/history/partydiv.htm

(c) Governors, https://www.statista.com/statistics/198486/number-of-governors-in-the-us-by-political-party-affiliation/

Does this mean that the US is veering away from statism?

No. The statist policy has not stopped, not stopping, just slower under Republicans than Democrats. I remember my friend Joe Lehman of MacKinac Center commented in a speech in 2004 in HK, he said "While the Democrats want to bring America to socialism on a train, the Republicants want to bring us there on a bus." :-)

I hope that Trump will reverse more statist policies. Early measures were already there -- tax cut, bureaucracy cut, some spending cut especially on "save the planet" agencies and programs.

BWorld 220, Trade imbalances, protectionism and rhetoric

* This is my article in BusinessWorld last June 7, 2018. 

In a free trade, an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind.

— Adam Smith

The Wealth Of Nations (1776), Book IV Chapter VIII.

Free trade should mean that people are free to trade and do not need to secure permits to trade from governments. The expansion of governments — local, national, and multilaterals — has also resulted in the expansion of preconditions and negotiations before meaningful trade can be allowed.

This is what Adam Smith referred to in the quote above. It is the collective action of traders and not the coercive regulation of governments that free trade and real competition is established.

In recent months, “trade war” has become a common term used in international media and blame is put on the US President for stoking protectionism and implying that US trade partners that enjoy and experience huge trade surpluses for many years are not practicing protectionism.

Trade numbers will greatly help us to clarify things.

I got monthly data of merchandise trade, exports and imports, from the World Trade Organization (WTO). After getting the sum of trade balance, January to June then July to December of 2016 and 2017 and the first three months of 2018, I got the monthly average and daily average. I chose countries with relatively large value of trade surplus or deficit (in parenthesis) plus selected ASEAN countries like the Philippines. The numbers show some interesting patterns (see table).

Here are the notable facts from these numbers.

One, the US continues to experience more than $2 billion a day in trade deficit, since many years ago until today. The second half of 2017 showed a big deficit, posting an average of $2.5 billion a day. US President Trump’s threats of imposing higher tariffs on certain imports became louder in early 2018, hoping to reduce the trade deficit.

Two, China has been enjoying a trade surplus of up to $1.5 billion a day in the second half of 2016, then Trump’s higher tariff in early 2018 for some of its exports has significantly reduced the imbalance but China still enjoys a trade surplus overall.

Three, Germany has the second biggest trade surplus after China with about $0.8 billion a day. The recent higher US tariffs for steel and aluminum were mainly directed at Germany and other European exporters.

It would seem that the US is not exactly “becoming protectionist” as most media reports and opinions claim. People got used to seeing the US as having perennial big trade deficit for many years and when Trump tries to correct this, those people get angry.

Ultimately we should assert free trade and people’s freedom to trade, not governments and bureaucrats’ freedom to restrict trade. There are net gains in trade (gains are larger than pains) while there is net diswelfare in protectionism.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.

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See also:

BWorld 217, Dutertenomics, TRAIN and high inflation, June 02, 2018 

BWorld 218, Tobacco taxation, smuggling and plain packaging, June 07, 2018 

BWorld 219, The US-North Korea summit and the global economy, June 20, 2018

Energy 110, The 2nd America First Energy Conference (AFEC 2018), Louisiana, August 7

Heartland Institute will organize and sponsor again a big conference, the 2nd America First Energy Conference (AFEC 2018) in Hilton Riverside Hotel, New Orleans, Louisiana, August 7.

The 1st AFEC 2017 was also organized by Heartland and was held at JW Marriott Houston, Texas on November 9, 2017. I attended that successful conference, seems I was the only Asian in the big room and I have written some proceedings in my column in BusinessWorld last year,

US energy policies and implications in Asia and Philippines

October 31, 2017, http://bworldonline.com/us-energy-policies-implications-asia-philippines/

US energy trading and implications for Asia and Philippines

November 16, 2017, http://bworldonline.com/us-energy-trading-implications-asia-philippines/

The conference also inspired me to further comment on the irrationality of carbon tax, coal tax, other watermelon (green outside, red inside) policies. Like these,

The Habito carbon tax distortion

December 7, 2017, http://bworldonline.com/habito-carbon-tax-distortion/

Energy favoritism under TRAIN

December 19, 2017, http://bworldonline.com/energy-favoritism-train/.

Website of AFEC2018 is http://americafirstenergy.org/ 

The agenda looks exciting, from the website:

BREAKFAST KEYNOTE

Opening remarks by Heartland Institute President Tim Huelskamp, Ph.D., and a keynote address by Louisiana Attorney General Jeff Landry.

PANEL 1A. THE FUTURE OF COAL, OIL, AND NATURAL GAS

President Donald Trump has unleashed an Energy Freedom agenda for America with the aim of making the United States the world’s leading energy power. There is a lot of positive news on that front, and these speakers will talk about the bright times ahead for the future of coal, petroleum, and natural gas.

PANEL 1B. CARBON TAXES, CAP & TRADE, AND OTHER BAD IDEAS

Carbon taxes and “cap and trade” schemes, are NOT market-based conservative ideas. They are distortions of the market — a ruse embraced by the environmental left to enact command-and-control policies over our use of energy and the economy as a whole.

PANEL 2A. FUELING FREEDOM AND PROSPERITY

America’s freedom and prosperity is literally fueled by this country’s abundant and affordable fossil fuels — coal, petroleum, and natural gas. We’re finally going after it in ways that will fire the engine of America’s economy and still protect the environment.

PANEL 2B. FIDUCIARY MALPRACTICE: THE ‘SUSTAINABLE’ INVESTMENT MOVEMENT

Environmental activists are gaining voting power to convince corporations and universities to divest from fossil fuel companies “to save the planet.” Not only is that not scientifically necessary, publicly traded companies and organizations that divest do a grave disservice to public pensions, ordinary investors, and the American economy. You want a worthy #resistance? Resist this.

PANEL 3. WHY CO2 EMISSIONS ARE NOT CREATING A CLIMATE CRISIS

Burning fossil fuels lifted humanity out of squalor and created modern society. It also adds carbon dioxide to the atmosphere, which is now more than 400 parts per million. But is human-generated CO2 causing a catastrophic climate crisis requiring wholesale conversion of the world’s energy systems? Short answer: No, as three scientists will explain.

LUNCH KEYNOTE

Two VIPs will give speeches at this lunch.

PANEL 4A. REINING IN THE REGULATORS

The Regulations from the Executive In Need of Scrutiny Act (REINS Act) requires legislative approval of regulations that cost the private sector more than a set amount. A federal version sets the bar at $100 million. This is an essential effort that will finally put unaccountable federal and state regulators back in their place.

4B. CAFE STANDARDS: WHY THEY NEED TO GO

TBA

PANEL 5A. CLIMATE LAWSUITS AGAINST ENERGY COMPANIES AND THE GOVERNMENT

Environmental activists are losing the public debate, so (naturally) they run to the courts to get judges to enact their radical agenda. From the “climate trial” in San Francisco, to the case to preserve the planet on behalf of “the children,” the litigation seem endless. What’s the status of these cases? And will they succeed?

PANEL 5B. REAL COLLUSION: RUSSIA AND THE GREEN MOVEMENT

You want to see real Russian Collusion? Look no further than the nexus between the Russian government and radical environmental activists in the United States, the UK, and Australia. The Russians have funneled millions to groups in the West to oppose energy exploration, especially fracking. This panel will expose this woefully underreported story.

PANEL 6. REFORMING EPA: LOTS OF PROGRESS, MORE TO DO

Three members of President Trump’s Transition Team for the Environmental Protection Agency evaluate the reform victories so far, and look ahead at what else needs to be done to reverse the overreach of the Obama administration. This is a moderated plenary discussion.

DINNER KEYNOTE

Two VIPs will give speeches.

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See also:

Energy 107, Avoiding brownouts due to gensets, not solar battery, March 22, 2018 

Energy 108, On mandatory solar roof in California, May 20, 2018 
Energy 109, Sudden decline in world oil prices, May 29, 2018

BWorld 219, The US-North Korea summit and the global economy

* This is my article in BusinessWorld last Wednesday, June 6.

The summit meeting between US President Donald Trump and North Korea leader Kim Jong-Un (KJU) this coming June 12, 2018 in Singapore is marked with several paradoxes.

For one, the US is the biggest economy in the world with a GDP size of $19.39 trillion in 2017 while the North Korean economy is very small with an estimated GDP size of only $16 billion in 2016, or just 0.08% of the US economic size.

North Korea’s economy is small because it has focused its resources on its military and nuclear capabilities. As a result, most of its 25 million people are starving and are deprived of several basic services, including but not limited to reliable and dependable electricity service.

Last month, a historic summit meeting was held between KJU and South Korean President Moon-Jae In with both parties discussing the formal ending of the Korean War and to finally establish peace and prosperity between the two countries in the peninsula.

An important event aiding this Trump-KJU summit is the renewed vigor of the US economy by which it can reassert its role as main “anchor” of global trade, investments, and economic dynamism. Let us review some numbers as to why this may be possible.

The last time the US economy posted a GDP growth of at least 3% was in 2005 or 13 years ago — it grew 3.3% that year. The eight years of “hope and change” under President Obama did not produce a single year of 3% growth or higher.

During that period, 2009-2016, even anemic economies of fellow rich countries managed to grow above 3%: Japan experienced 4.2% growth in 2010, UK grew 3.1% in 2014 while Germany experienced growth of 3.9% and 3.7% in 2010 and 2011, respectively.

China as second global economic “anchor” continues to grow fast but no longer in double digit figures, owing to the declining pace of its expansion.

South Korea maintains a growth rate of at least 3% and it remains the 11th biggest economy in the world. Japan remains the 3rd biggest economy and India is roaring high and is now the world’s 6th biggest economy. The Philippines has achieved fast growth since the last administration and the momentum is expected to be sustained until this year and the next (see table).

The growth momentum of the US economy is very evident since last year: 1.5% in 2016 or the last year of “hope and change,” 2.3% in 2017 and IMF projection of 2.9% this year. Actual Q1 2018 growth was 2.8% and when the May 2018 unemployment rate further went down to only 3.8%, an 18 year-low, prompting banks and research institutes to revise their growth projections for 2018 Q2 to Q4 of 3.5% to 4.7%.

With the world’s no. 1 economy rolling on high growth path and immediate neighbors being the 2nd, 3rd and 11th biggest economies in the world, the opportunities for North Korea to quickly transition from a hermit-like, autarkic economy to regional and global economic integration is high.

It will not be surprising then if Apple, Samsung, Google, Microsoft, McDonalds, Toyota, Shangri-la, other big global brands will put up offices and factories in North Korea months after the Trump-KJU meeting.

Is a North-South Korea reunification as one country like the East-West Germany reunification, desirable? It will be better if they remain as two separate countries linked by heavy commerce and investments, like Malaysia-Singapore and EU countries.

Bigger countries and economies tend to be more bureaucratic than smaller ones. Compare for instance China-Hong Kong, Indonesia-Singapore, India-Bhutan, Russia-Finland, and so on.

Peace and prosperity, more commerce and trade, more investments and tourism, more sports and cultural exchanges, more energy and electricity, and not more tanks and missiles. This is the kind of economic development in the region that many people and businesses around the world hope to see.

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See also:

BWorld 216, Positive and negative disruptions in the electricity market, May 31, 2018 

BWorld 217, Dutertenomics, TRAIN and high inflation, June 02, 2018 

BWorld 218, Tobacco taxation, smuggling and plain packaging, June 07, 2018

Free Trade 66, Trump's proposal of zero tariff in G7

This is good. Zero tariff, keep non-tariff barriers/measures to the minimum. EU, Japan, Canada, China, dare -- game?

https://www.wsj.com/articles/donald-trump-pitches-tariff-free-trade-zone-to-g-7-allies-1528556581

“We should at least consider no tariffs, no barriers — scrapping all of it,” Trump said, according to officials who were listening and taking notes.

Trump floated the idea — which was received as somewhat rhetorical — as the meeting was breaking up and was quickly challenged by Canadian Prime Minister Justin Trudeau, who asked, “What about subsidies?”

https://www.politico.eu/article/trumps-surprise-g7-pitch-we-should-at-least-consider-no-tariffs-steel-aluminum-trade/

"No tariffs, no barriers, that's the way it should be — and no subsidies," the president said at a press conference, before taking questions.

"We don't want to pay anything — why should we pay?" Trump said. "Ultimately, that's what you want. You want a tariff free, no barriers and you want no subsidies."

https://www.cnbc.com/2018/06/09/trump-says-at-g-7-summit-trade-should-be-tariff-free-barrier-free-subsidy-free.html

“No tariffs, no barriers, that’s the way it should be, and no subsidies,” Trump said during a 30-minute press conference on the sidelines of the meeting in La Malbaie, Quebec. "I did suggest it and people were -- I guess they’re going to go back to the drawing board and check it out."

https://www.bloomberg.com/news/articles/2018-06-09/trump-turns-tables-on-g-7-allies-with-free-trade-proclamation

“No tariffs, no barriers — that’s the way it should be. And no subsidies,” Mr Trump said at a brief press conference before departing from the G7 summit at the Québec resort town of La Malbaie. “We’re like the piggy bank that everybody’s robbing, it’s got to end.”

https://www.ft.com/content/ba0aa2c4-6bf6-11e8-92d3-6c13e5c92914

"Also on Friday, Trump floated the idea of ending all tariffs and trade barriers between the US and its allies - a pitch that wasn't exactly expected, according to Politico. Trump offered the proposal at the end of a "contentious" meeting on trade disputes. Most G-7 members remain furious with Trump over his decision to impose tariffs on aluminum and steel imports, and his threats to impose more trade restrictions. Merkel responded positively to Trump's suggestion, saying she would consider it."

https://www.zerohedge.com/news/2018-06-09/trump-g-7-closing-remarks-were-piggy-bank-everybodys-robbing

Other reports:

https://www.aninews.in/news/world/asia/trump-pitches-ending-trade-tariffs-at-g-7-summit-reports201806090959380003/

https://www.bbc.com/news/world-us-canada-44423072

https://edition.cnn.com/2018/06/09/politics/trump-g7-tariffs-trade/index.html

Tweets by @realDonaldTrump, June 8:

Please tell Prime Minister Trudeau and President Macron that they are charging the U.S. massive tariffs and create non-monetary barriers. The EU trade surplus with the U.S. is $151 Billion, and Canada keeps our farmers and others out. Look forward to seeing them tomorrow.

Prime Minister Trudeau is being so indignant, bringing up the relationship that the U.S. and Canada had over the many years and all sorts of other things...but he doesn’t bring up the fact that they charge us up to 300% on dairy — hurting our Farmers, killing our Agriculture!

Why isn’t the European Union and Canada informing the public that for years they have used massive Trade Tariffs and non-monetary Trade Barriers against the U.S. Totally unfair to our farmers, workers & companies. Take down your tariffs & barriers or we will more than match you!

Tweets by @realDonaldTrump, June 10:

Just left the @G7 Summit in beautiful Canada. Great meetings and relationships with the six Country Leaders especially since they know I cannot allow them to apply large Tariffs and strong barriers to...

...U.S.A. Trade. They fully understand where I am coming from. After many decades, fair and reciprocal Trade will happen!

The United States will not allow other countries to impose massive Tariffs and Trade Barriers on its farmers, workers and companies. While sending their product into our country tax free. We have put up with Trade Abuse for many decades — and that is long enough.

Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!

PM Justin Trudeau of Canada acted so meek and mild during our @G7 meetings only to give a news conference after I left saying that, “US Tariffs were kind of insulting” and he “will not be pushed around.” Very dishonest & weak. Our Tariffs are in response to his of 270% on dairy!

Zero tariff is good, it is happening. EU countries have zero tariff among themselves; ASEAN countries have zero tariff among themselves too; other regional blocs in Asia, S. America, Africa, Europe (like EFTA) do it among themselves; also various bilateral FTAs. However they don't do it with countries outside their regional blocs and bilateral FTAs, they practice protectionism. Except HK which has zero tariff for all countries except for a few regulated products (guns, bombs, chemical/poisonous substances,...)

The anti-trumpistas just hate any policy he takes. If he slaps high tariffs to trade partners, they are angry. If he suggests zero tariff, they are still angry. Seems they are more confused, more double-talkers than the man they hate.

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See also:

Free Trade 63, Dealing with anti-trade lib, anti-TPP activists, February 06, 2016 

Free Trade 64, PH experience in manufacturing growth, November 04, 2016 

Free Trade 65, On the US withrawal from the TPP, February 19, 2017 

BWorld 130, Mobility of goods, capital, and people in Asia, May 13, 2017 

BWorld 137, ASEAN trade expansion and RCEP, June 20, 2017 

BWorld 167, Multilateral, bilateral, or unilateral liberalization, November 27, 2017 

BWorld 175, Trends in global and Philippine trade, January 05, 2018 

BWorld 180, Has East Asia liberalized its trade enough? January 19, 2018

BWorld 218, Tobacco taxation, smuggling and plain packaging

* This is my column in BusinessWorld last June 04, 2018.

“To cease smoking is the easiest thing I ever did, I ought to know because I’ve done it a thousand times.” — Mark Twain

On May 29, 2018, I attended the “Health for Juan and Juana” conference on universal health care (UHC) at the PICC, jointly sponsored by the DoH, ADB, PHAP, MeTA, Havas, AC Health, others.

It was a big event with many participants and high-powered speakers and facilitators from national and local governments, multilaterals, NGOs, academe and private players.

Listening to the health officials of Davao, Makati, Bataan, and South Cotabato, I got the impression that with the way they provide health care to their constituents, it is possible to abolish the DoH and realign its budget to LGUs.

The keynote speaker was Sen. JV Ejercito, Chairman of the Senate Committee on Health and Demography and he talked about his UHC bill, the public consultations, the financing including his proposal to further hike tobacco tax to P90/pack. It is a far-out number compared with P30/pack in 2017 under Sin Tax law of 2012 (RA 10351), to become P35/pack in 2018, P37.50 in 2019, then P40/pack in 2022 under TRAIN law (RA 10963).

Since corruption in government remains high, higher tax rates mean higher tax avoidance. Lots of cigarette smuggling occurred in 2015-2016 involving billions of pesos of avoided taxes. In February 2017 for instance, the Bureau of Customs estimated that some P50B of foregone taxes in 2016 were due to smuggling, about P16B of it was from cigarette smuggling.

If the numbers are correct and if we divide P16B over P29/pack excise tax in 2016, that was equivalent to 552 million packs of cheap cigarettes. Cheap cigarettes encourage more smoking and, as a result, higher tobacco taxes achieve an opposite result.

With higher tobacco tax this year because of TRAIN law, cigarette smuggling has continued.

For instance, a BusinessWorld report on May 01, 2018 said “DoF warns cigarette smuggling may be helping finance terrorism.”

DoF Secretary Sonny Dominguez was quoted, “Illegal money can end up funding terrorist activities” while Customs Commissioner Caesar Dulay said that “smuggled cigarettes are currently flooding the market.”

High taxation and explicit prohibitions are often two sides of the same coin. One policy done by governments abroad is the prohibition of displaying the tobacco companies’ names, logos, and brands via plain packaging policy. So all cigarette packs by all players, old and new, established or fly-by-night, will display similar designs and graphic warnings.

After implementing plain packaging policies since December 2012, illegal tobacco consumption in Australia has increased from an estimated 11.5% to 13.5% in 2012 to up to 15.0% in 2017 (source: KPMG, “Illicit Tobacco in Australia, Full Year 2017 Report,” April 20, 2018).

This because many new players, including those engaged in criminality and terrorism, have come in, produced cheap cigarettes since plain packaging is much easier to copy, and attracted more buyers and smokers.

The United Kingdom also enacted the plain packaging policy in May 2017 and after one year, (1) no significant decline in smoking incidence happened, partly or largely because (2) cheap counterfeit plain packs surfaced.

The counterfeits were found to have high tar, nicotine, and carbon monoxide than those allowed in UK, and in some cases, are found to contain heavy metals such as arsenic, cadmium, and lead, along with other toxic contaminants: asbestos, mold, dust, dead flies, rat droppings — and even human excrement. (Sources: The Times, “Illegal tobacco tainted by asbestos and rats,” May 16, 2017; Evening Standard, “Sniffer dogs with GoPro bodycams help uncover 30,000 fake cigarettes in Soho crackdown,” May 24, 2017).

Meanwhile, the World Justice Project (WJP) produces an annual study, the “Rule of Law Index” (RoLI) and score countries based on their performance on 8 factors and 44 sub-factors. The RoLI 2017-2018 Report involves more than 110,000 households as respondents and 3,000 expert surveyors in 113 countries and jurisdictions.

A summary is shown below, focused on Factor 6: Regulatory Enforcement (Government regulations are effectively enforced, applied and enforced without improper influence; Administrative proceedings are conducted without unreasonable delay, etc.)

So if Australia and the UK with better rule of law implementation have experienced high and rising incidence of illicit trade and smuggling of cheap cigarettes, how much more for developing countries like the Philippines?

If the Philippines will consider imposing higher tobacco taxes like the P90/pack proposal by Sen. Ejercito, and/or if it is to consider plain packaging policy, given its low rule of law culture and poor regulatory enforcement, a doubling of current extent of illicit trade and smuggling can be expected.

Which means more fake and cheap cigarettes will come in, and there will be more smoking and smokers, not less.

More government taxation and prohibitions create adverse selection problems; the law of unintended consequences always kicks in as nature abhors a vacuum.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.

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See also:

BWorld 211, Intellectual property, innovation, and prosperity, May 20, 2018

BWorld 215, Urban mobility index and transport disruption, May 29, 2018 

BWorld 216, Positive and negative disruptions in the electricity market, May 31, 2018 

BWorld 217, Dutertenomics, TRAIN and high inflation, June 02, 2018