Free trade means giving people and private enterprises
the freedom to produce more commodities that consumers demand at certain
prices. These producers then leave sectors and areas where expected returns and
other gains are lower if not dwindling.
This may sound “heartless” for losing sectors but whether
one supports free trade or protectionism, there will always be winners and
losers. It is just that there are more “net gains” from trade while there are
more “net losses” from protectionism.
In a paper “Goods trade liberalization under the ASEAN
Economic Community: Effects on the Philippine economy” published in the
Philippine Review of Economics (PRE), December 2015, authors Dr. Ramon Clarete
(UPSE) and Philip Arnold Tuano (AdeMU) examined the economy-wide effects of
goods trade liberalization in the ASEAN. They used the Global Trade Analysis
Project (GTAP) model in assessing the impact of the ASEAN Free Trade Area
(AFTA) implemented in 1992.
The important provisions of AFTA mandated the 10
countries to: (a) reduce trade taxes and tariff on goods coming from other
member countries, (b) remove quantitative restrictions on goods and convert it
into tariffs that should decline through time, (c) reduce other non-tariff
measures (NTMs), and (d) enforce rules of origin or goods should have local
content of at least 40% of the freight on board (fob).
The results for the Philippines in their study showed the
following:
1. Production effect: Of the 40 industries representing
the Philippine economy, 24 suffered some output decline and 16 experienced
output expansion at a bigger rate than the losses of the former.
2. Employment effect: Of the 40 industries, 31
experienced decline in the hiring of skilled labor while nine experienced
expansion at rates larger than the combined employment losses in the former.
3. Trade effect: Thirty-six of the 40 industries that
imported goods were able to benefit as compared to the 16 industries that
engaged in exports. However, the gains were much larger than the losses of the
other industries.
4. Price effect: Wages of both skilled and unskilled
labor, cost of capital increased while land rent declined.
5. Overall effect: The Philippines gained some $237
million, equivalent to 0.05% of GDP, as a result of trade liberalization in
goods under AFTA.
There are other benefits from trade liberalization
besides the four measured by the above study. Freer trade creates more goodwill
not only in trade and investments but also in mobility of foreign
workers/managers and tourists across countries through more cultural and
educational exchanges, and so on.
Here are some data on revenues from merchandise or goods
exports, foreign direct investment (FDI) net inflows (i.e., inflows minus
outflows for the given year), worker remittances and compensation of employees,
and international tourism receipts that correspond with expansion in tourist
arrivals.
The Philippines did not expand its merchandise exports as
fast as compared to its many ASEAN neighbors. There are many factors for this,
including a generally over-valued exchange rate, and many trade bureaucracies
that prolong the process and increase the cost of exports and imports. All the
four tigers in North-East Asia plus Singapore and Thailand are major exporters.
In FDI net inflows though, the Philippines reported an
expansion of almost four times in just 10 years. Vietnam and Singapore
benefitted the most in the southern region while China and Hong Kong continue
to attract huge FDIs.
In labor remittances, China is #1 in the world while the
Philippines is #1 in the ASEAN and about #4 worldwide, next to China, India,
and Mexico perhaps.
The Philippines also reported that its receipts from
international tourism expanded by more than twice.
Notice that five ASEAN neighbors that have higher
merchandise exports are also the same countries that have higher tourism
receipts than the Philippines.
The lesson here is that trade liberalization -- by cutting
tariffs to very low, if not zero, rates and reducing non-tariff barriers -- can
result in more FDI inflows, more tourist arrivals, more cultural exchanges in
the region.
Other factors should accompany trade liberalization of
course. Like better airports, seaports, and roads; cheaper electricity and high
power capacity; more competition among airlines and shipping companies; fewer
bureaucratic processes in investments and mobility; rule of law and reduced
corruption and instability in enforcing various local and national laws.
Fewer taxes and trade restrictions, stronger law
enforcement are just among several key ingredients to further modernize and
reduce poverty in the Philippines and other developing countries.
Bienvenido S. Oplas, Jr. is the president of Minimal
Government Thinkers, a SEANET Fellow and both institutes are members of EFN
Asia.
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See also:
BWorld 93, ASEAN multinationals, December 02, 2016
BWorld 94, Economic freedom, taxes and tariffs in Asia, December 17, 2016
BWorld 95, Manufacturing and electricity costs in Asia, December 17, 2016
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