Friday, January 23, 2015

Free Trade 42: ASEAN Trade and Unilateral Liberalization Challenge

Yesterday, I was a guest lecturer to an undergraduate class of graduating management engineering students of Ateneo. The class is handled by my long time friend and classmate from UP PDE, Joey Sescon.

About 20 students, nice. Joey mentioned that I just came from Nepal, so I made a brief intro about Nepal  and why a communist government in power cannot be responsive to the rising need for economic freedom by its citizens.

My outline:
I. Trade Theory: Comparative Advantage, CPE,
Consumer Surplus
II. ASEAN Tariff and Trade
III. Trade Bureaucratism
IV. Unilateral Liberalization
V. Concluding Notes

People do not have to produce everything they need or want, even if they have the skills and resources to make them. Specialization and trade will make people from across borders and countries better off and attain wealthier outcome.

The above is just a micro and modern example of David Ricardo's theory of comparative advantage, that a country that trades for products it can get at lower cost from another country is better off than if it had made the products at home.

A fraternal concept of CPE is factor price equalization (FPE). Replace commodities with factors of production  like labor,  capital and technology, and allow free mobility of such services across borders and soon, wages across certain skills levels will generally equalize across countries, all other things being equal. The low global and regional interest rates is also one proof  of FPE. What differentiates for interest rates is allowance for risk premium of  certain countries.

Protectionism and trade restrictions is trade dictatorship and hence, wrong. The government and its ally domestic special interest groups are telling the people, "you can only buy from us but not from them abroad. If you buy from them, you must pay high, or in limited quantities."

Tariff among ASEAN countries is almost zero, which  is a good thing. What really causes more smuggling is not the import tariff which are generally small, but the VAT, 12 percent.

Socialist economies that optimize their integration with the global economy, like China and Vietnam, were able to export and sell a lot to  more countries.

Part 4 of the outline is trade bureaucratism. I showed a table from the "Doing Business" annual reports of the WB-IFC, section on international  trade. And see this report, WTO was created in 1995 and it was only in 2014 or after 19 years, that the thousands of trade officials and negotiators have achieved something  significant -- trade facilitation, reduction of customs and trade bureaucracies. Which shows that many governments still pay lip service to  free trade and multilateral negotiations.

Thus, aside from multilateral negotiations  and agreements, there are regional and bilateral trade agreements  and liberalization. But the best, fastest, scheme towards free trade  is via unilateral liberalization. A good article from Dr. Razeen Sally, Chairman of  IDEAS Political Economy and Governance Program, also  of the National University of Singapore.

Another good article arguing why free trade is good for the domestic economy and the people.

I ended my presentation  with these concluding  notes.

Free trade means free individuals, free enterprises. Restrictions to trade is restricting potential economic development. Governments should reduce restrictions on people and goods mobility.

Free mobility of people and services across countries and continents will result in commodity and factor price equalization (CPE and  FPE) over the long term, all other things being equal.

Countries with expensive labor due to low population will experience decline in labor cost once additional and competing labor of similar skills from abroad come in.

Unilateral trade liberalization is pro-development. No prohibitions/regulations except bringing in or out of guns, bombs, poisonous substances, other products that are threat to public health.

The full 20-slides presentation is available in slideshare.

See also:
Free Trade 38: Liberalize Rice Imports and Demonopolize NFA, September 28, 2014
Free Trade 39: Advantages of Unilateral Trade Liberalization, October 12, 2014 
Free Trade 40: Razeen Sally Joins IDEAS, to Campaign for More Liberalization, November 25, 2014 
Free Trade 41: David Ricardo, CPE, FPE and Consumer Surplus, December 06, 2014

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