BWorld 96, Free trade means more investments and people mobility

* This is my article in BusinessWorld last December 15, 2016.

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.

-----------

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

BWorld 91, Free trade means faster growth in manufacturing

* This is my article in BusinessWorld today.

There is a populist and persistent belief that free trade means weakening, if not, bringing about the death of local manufacturing industries because they will not be able to withstand competition from more advanced economies abroad.

This belief has been repudiated many times in countries including the Philippines. And there is a new paper that repudiates this belief again.

Former NEDA Secretary Dr. Cielito Habito discussed a new paper at the Department of Trade and Industry (DTI) pre-summit roundtable, based on their research at the USAID-funded Trade-Related Assistance for Development (TRADE) Project.

The roundtable was part of the preparations of the DTI and the Board of Investments (BoI) in an important event they are jointly organizing, the “Manufacturing Summit 2016: Trabaho at Negosyo” this coming Nov. 28-29, 2016 at the Makati Shangri-La Hotel.

Besides plenary sessions, breakout sessions to be held will cover seven topics, one of which is International Trade Policy and Free Trade Agreements and Dr. Habito’s discussion was in preparation for this session. I was among those invited by the DTI for the pre-summit roundtable, thanks to Assistant Sec. Rafaelita Aldaba.

In January 2010, the ASEAN Free Trade Agreement (AFTA) became operational. The import tariffs on nearly all products traded across the ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Thailand, and Singapore) dropped to 0, some at 5% maximum. What happened to Philippine manufacturing by 2010 onwards? Dr. Habito showed this data (see Table 1).

Philippine manufacturing did not weaken nor did it die with freer trade. From an average growth rate of only 3% per year in 2004-2009, it went up to an average of 7.8% per year from 2010-2015.

Other sectors -- fixed investment, durable equipment, private construction, exports -- also showed faster growth rates under a freer trade regime, about three to four times faster than average growth in 2004-2009.

Ciel also showed slides where Philippine exports have moved up the value chain.

For instance, the Philippines exported around $200M of boilers, nuke reactors, machineries, optical, technical, medical apparatus, etc. to Indonesia in 2013 alone.

As we moved to freer trade, to zero tariff, our manufacturing and exports became more dynamic, more competitive, more job creating and more forex-earning.

One may also credit the past Aquino administration for keeping with trade liberalization agenda compared to its predecessor Gloria Arroyo administration.

Freer trade benefitted not only the Philippine economy but also almost all other ASEAN countries (see Table 2).

The above numbers tell us the following.

One, the size of manufacturing output of the six countries have expanded significantly in just five years. The Philippines’ has grown from $26.5B in 2009 to $38.9B in 2014.

Two, in terms of manufacturing annual growth rate, Malaysia, the Philippines, and Singapore experienced faster growth rates while Thailand and Vietnam experienced slower expansion -- but they nevertheless reported growth.

Three, manufacturing as percentage share of GDP has declined for all the countries above. This is not something to be taken negatively because almost all countries have shown this trend, with the declining share of agriculture and manufacturing and rising share of services.

Some policy measures that the DTI, other departments, and Congress should consider to further improve the country’s manufacturing and trade capacity would be the following:

1. The government should help improve the economy’s competitiveness. Very often it is not “what government should further do” but rather, “what government should NOT do and intervene,” like fewer taxes, regulations, restrictions, and bureaucratic processes.

2. Some factors that deter more investments in manufacturing in the country are outside the scope of DTI, like expensive and unstable electricity supply, slow Internet, poor infrastructure. More competition in these sectors should be encouraged.

3. There are winners and losers in free trade, there are also winners and losers in protectionism. Overall, there is “net gain from trade” while there is net loss under protectionism. Tables 1 and 2 above have shown and quantified some of these gains, so we should never backtrack from further liberalization.

4. Over the long term, we should consider adopting unilateral trade liberalization, one-way free trade policy, both in tariff and non-tariff measures (NTMs), and ultimately in services too. Hong Kong and Singapore are good examples of unilateral liberalization regimes, their exports of goods and services are much larger than most countries in the world despite their small population.

5. NTMs as indirect barriers to trade should be relaxed through time and ultimately abolished. The main purpose of trade policy should be consumers protection and empowerment, to allow the local consumers to have more choices in buying and selling, to have more access to more markets and economies abroad.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET. Both institutes are members of the Economic Freedom Network (EFN) Asia.

----------

See also:

BWorld 48, On unilateral trade liberalization, March 17, 2016 

BWorld 59, Free trade and Norwegian salmon, May 28, 2016

BWorld 64, The WTO and trade agreements, June 17, 2016 
BWorld 65, PH exports growth from 1960-2014, June 22, 2016

BWorld 71, Free trade and higher income, July 11, 2016 

BWorld 78, If the US becomes protectionist, who loses? August 11, 2016

BWorld 88, Economic freedom and human rights, October 31, 2016 

BWorld 89, President Duterte's outbursts and PH economic momentum, November 12, 2016 
BWorld 90, Who should set the energy mix, government or consumers?, November 12, 2016

Business 360 16: ASEAN Economic Community 2016

* This is my article for B360, a monthly business magazine published in Kathmandu, March 2014 issue.
------------

The Association of SouthEast Asian Nations (ASEAN) is composed of 10 countries in East Asia -- Thailand, Myanmar, Laos, Cambodia, Viet Nam, Philippines,  Brunei Darussalam, Indonesia, Malaysia and Singapore. It has a combined population of around 670 million people -- about twice the US population.

The ASEAN Economic Community (AEC) has been envisioned to be a common space to facilitate mobility of goods and people markets of the member-countries. It will officially materialize on December 31, 2015 but since there are hardly any official transactions on a new year’s eve, it will effectively start in January  2016.

Among the important characteristics of the common market are: tariff and non-tariff reduction; trade facilitation; services liberalization; investment liberalization and facilitation; connectivity and transport facilitation; and a Regional Comprehensive Economic Partnership (RCEP).

Since trade facilitation and liberalization is the cornerstone of the common market, here is some data on the exports performance of ASEAN member countries. Data for its neighbors in North and South Asia are included for comparison purposes.

Notice how Vietnam has expanded its exports 21x in just 17 years, from 1995 to 2012. China was also able to expand its exports by more than 13x over the same period. These two countries’ achievements are definitely an object of envy for many other countries and governments.

What some countries miss out in exports of goods, they were able to compensate somehow with high remittances of their nationals who are working abroad.

  

AEC is a useful project for many citizens of the member-countries as it will facilitate further liberalization in trading of goods and services, investments, and accelerate domestic reforms. Compared to the European Union’s common market, AEC is less ambitious and hence, more practical; there will be no monetary union.

The ASEAN Free Trade Area (AFTA) has been effective in promoting intra-ASEAN trade. Movement of people is further facilitated if there is freer flow of goods and commodities across national borders. Many member countries give visa-free entry for travels below 31 days of citizens of other member countries .

Member countries should aspire to extend the free trade philosophy and public policy to many other countries outside the region or continent. Small population economies Hong Kong and Singapore were able to export $400+ billion of merchandise goods in 2012 mainly because of their almost unilateral trade liberalization policy.

Where trade is facilitated and welcomed, foreign investments follow. And this will create new jobs to the people of developing countries of Asia. Having stable and good-paying jobs for the people is the single biggest important measure to fight poverty in the region and the rest of the world.

--------------

See also:
Business 360 12: Optimum Size of Government, October 13, 2013 
Business 360 13: US Government Shutdown and Lessons for Asia, November 28, 2013 
Business 360 14: Middle Income Trap and Economic Freedom, January 02, 2014 
Business 360 15: How to Improve Economic Freedom in Asia, January 22, 2014 

Globalization, Mobility and Inequality, February 18, 2014 
Free Trade 34: ASEAN's Bilateral and Regional FTAs, February 27, 2014

Free Trade 29: ASEAN and Education Competitiveness

* This is my article yesterday in thelobbyist.biz.
----------

We will have the ASEAN Economic Community (AEC) by January 2015 or just 14 months from now. This is a great opportunity for many of us in the region to experience freer movement of goods and services or people.

While some people see more threats than opportunities in regional free trade like the ASEAN Free Trade Area (AFTA), the threats are too often exaggerated. Free trade means local producers and manufacturers will have (a) wider sources of production inputs that are cheaper and/or better quality, and (b) wider and plentier buyers and consumers as price-distorting schemes like import tariffs are removed or significantly reduced among members of an FTA.

Thus, if local carinderias and food shops can have wider sources of cheaper poultry, pork, rice and vegetable products, then their consumers and clients, mostly poor people like jeepney and taxi drivers, ordinary office workers, will benefit in the form of cheaper food prices.

The local producers of poultry, pork, rice and vegetable products will be challenged to improve their production and hence, sell cheaper too. They will compete product per product, not only here but in other ASEAN member-countries.

While free trade of goods is the more important aspect of an economic union like AEC, concerns on education, healthcare and other sectors are also important. Economic and business competitiveness is mainly a product of a competitive educational system. Internationally traded goods and services are embodiment of the skills and efficiencies of the people who produce them.

On Tuesday, November 19, 2013, Publicus Asia, Inc. will sponsor a big forum on Education Competitiveness in an ASEAN Integrated Era, to be held at Edsa Shangrila Hotel, Ortigas. The goal of the forum is to explore the various opportunities and challenges in the higher education system of the country as the AEC is fast approaching.

There is a good line up of high profile speakers. Like UP President Alfredo Pascual, Ateneo de Manila University President Jose Ramon Villarin, Commission on Higher Education (CHED) Chairperson Patricia Licuanan, Management Association of the Philippines (MAP) President Melito Salazar, Assistant Secretary of ASEAN Affairs Teresita Barsana, Cong. Roman Romulo, Chairman of the House Committee on Higher Education, and Sen. TG Guingona, Vice-chairman of the Senate Committee on Education.

I will attend this forum. I am particularly interested in how the country’s colleges and universities are partnering with the private and corporate sector including multinational companies here, in producing well-trained personnel, equipped with sufficient technical, financial and cultural knowledge in maximizing the various opportunities while minimizing certain risks and threats in business and international trade.

We have to be prepared not only with the influx of better-manufactured products from our neighbors in the ASEAN, but also the influx of foreign talents who will come into the country as temporary visitors, or as long-term investors. Nationals of other countries outside the ASEAN like those from S. Korea, Taiwan, Japan, US and Europe, will also be expanding their businesses and manufacturing plants in any of the ASEAN member-countries in order to take advantage of the zero or near-zero tariff trading among AFTA members.

The key term is "education competitiveness". How competitive the country's tertiary educational system, both formal and informal, public and private, should be to enable our young people to adjust and even excel, in a huge, wide and diverse market. Within the ASEAN alone of 700+ million people, and the rest of the world. Even the short-courses vocational and technical education sector will have an important role in preparing a big, well-trained, pool of workers and entrepreneurs.

The forum next week promises to be a huge and wide platform to exchange ideas and observations, especially from the tertiary education and corporate sectors. There is also value for civil society leaders in exploring what are the various threats and opportunities in the AEC and help prepare and retool our people, to focus more on the opportunities than risks, the positive than the negative, of a free trade era.

---------

See also:
Free Trade 26: "Buy Local" and Protectionism, June 24, 2012
Free Trade 27: Proposed EU-PH FTA and TRIPS Plus, September 24, 2012 
Free Trade 28: Exports and Prosperity, March 11, 2013
EMHN 7: Free Trade Improves Public Health, February 26, 2013
Business 360 8: TPP, RCEP, SAARC and Free Trade, June 17, 2013

Free Trade 14: Import Substitution, AFTA, China

Posting here three short papers I wrote about the subject.

(1) Last September 22, 2009, I wrote this:

Import Substitution vs. Export Orientation

A friend asked me about my opinion about this article,

How did we get to where we are? 
By Dr. Bernardo Villegas
Philippine Daily Inquirer
First Posted 02:07:00

...Then why is the Philippines poor? The main answer is that for 30 long years after World War II, our leaders adopted economic policies that fostered an inward-looking, import-substitution industrialization based on protectionist, anti-market and ultra-nationalist ideologies not very different from what most Latin American countries implemented with the same dire consequences. Overreacting to our colonial past (as did the Latin Americans), we equated economic development with capital-intensive industrialization that did nothing to address our massive unemployment and underemployment problem. The worst consequence of these failed economic policies was not the eventual demise of the so-called infant industries that never grew up. The most devastating result was the almost criminal neglect of countryside and agricultural development. Because we used up our capital resources in the white elephants of the manufacturing sector, there were no resources left to build farm-to-market roads, irrigation systems, post-harvest facilities, seaports and airports that were essential to making our small farmers productive....

I side with Dr. Villegas here. International trade already happened even before the Philippine State was formed, even before the Spaniards came. At that time, what was the population of the entire archipelago, half million?

Export orientation policy immediately sends a strong signal to the local entrepreneurs,

"Hey, do your work well, there is a super-huge market out there around the world where you can bring your products. There is also a super-huge number of suppliers of cheaper raw materials and machineries that you need to improve your productivity."

Whereas the reverse message is signaled by import substitution:

"Hey, no need to improve the quality of your products, no need to innovate much, you got no competitors. We in government will protect you from external competition. Let the poor Filipino consumers endure your products, no matter how lousy and how expensive they are, consumers have no other options anyway, unless they go abroad and buy those stuff themselves."

(2) Last January 04, 2010, I wrote this:

ASEAN Free Trade Area

Free trade rocks! And it's one of the best news stories to start 2010.

Citizens of 6 (of 10) member-countries of the ASEAN -- Indonesia, Philippines, Thailand, Malaysia, Singapore and Brunei -- will expect zero tariff for their exports to each other starting January 1 this year. This is under the Common Effective Preferential Tariff - ASEAN Free Trade Area (CEPT-AFTA). See the ff links:

http://www.aseansec.org/24146.htm,
http://www.businessmirror.com.ph/home/top-news/20459-atiga-for-asean-6.html. 

http://globalnation.inquirer.net/news/breakingnews/view/20091231-244870/Zero-tariffs-for-Asean-6-starting-January-1, 

The other 4 member-countries of the ASEAN -- Vietnam, Cambodia, Laos, Myanmar -- will enjoy zero tariff for their exports to any of the 6 countries mentioned, but their imports from those 6 neighbor countries will still be subject to some minimal tariff, about 3 percent on average, until 2015. By 2016, the entire ASEAN will have zero tariff for all 10 member-countries.

This is one of those very rare occasions that we have to congratulate our respective governments in Asia. Although in the case of Singapore, it's been conducting bilateral free trade agreement (FTA) with so many countries. In which case, HK is still a more free marketer economy because it simply adopted the unilateral trade liberalization policy. Zero conditionality, zero FTA negotiations with any other country, big savings in otherwise hiring expensive "trade negotiators".

(3) Today:

China Biggest Exporter Around the World

This is an interesting chart. The share of total exports by the US, Germany and Japan are slowly declining, that of China's is increasing at a fast pace. It was 10 percent of total world exports, vs. the US' 8 percent and Germany's 9 percent.

source of chart: http://www.economist.com/businessfinance/displayStory.cfm?story_id=15235078&source=features_box_main

With the ASEAN-China FTA and ASEAN being a big market with 700+ million combined population (about the combined population of the US + EU15), China's share of global exports will keep rising.

The way the US is making it more bureaucratic (against terror threats), if not more protectionist, its foreign trade will be adversely affected, if not be adversely affected. Note that the significant decline in US' global exports share happened almost simultaneously with the 9/11 attacks and the high-profile anti-terror procedures of the US.

------

See also:

Free Trade 8: Global RIce Price, May 13, 2008
Free trade 9: Parallel Importation of Medicines, May 22, 2008
Free Trade 10: More on Unilateral Trade Liberalization, July 15, 2008
Free Trade 11: Global Petition, Keynes, March 19, 2009
Free Trade 12: Trade and World Peace, April 28, 2009
Free Trade 13: Benefits of Dumpiing, June 16, 2009