* This is my article in
BusinessWorld last March11, 2016.
Free trade and voluntary exchange of goods and services
by people across villages, cities, islands, countries and continents is the
hallmark of modernization and improvement of human condition. Goods and services
of certain quality and quantity that are not available locally are made
available by liberalizing their entry from many parts of the world.
Protectionism and economic nationalism in various shades
however, has limited the march of faster global economic integration. Thus,
multilateral negotiations towards global free trade was invented via Uruguay
round and its predecessors, and later via the World Trade Organization (WTO)
since 1995.
This has proven to be a disappointment than a success in
realizing global free trade as various types of non-tariff barriers (NTBs) were
invented by many countries. So regional and bilateral free-trade agreements
(FTAs) were invented to hasten the process.
So far, economies that have progressed and expanded
faster than the average are those that embarked on unilateral trade
liberalization. Yes, one-way liberalization without waiting for other countries
and trade partners to liberalize and reduce tariff by the same amount. It may
be a reduction from 20% to 10% or 4% in a span of few years, or down to zero.
There are many economies that embarked on unilateral
liberalization, including the 10 ASEAN countries like the Philippines. The pace
of tariff reduction in the past 2 decades were fast, much faster than tariff
reduction in other regions of the world.
This paper will briefly review the experience of five
economies: Hong Kong, Singapore, New Zealand, United Arab Emirates (UAE), and
Chile. These countries have a small population of 7 million or less except
Chile and UAE, thanks to expats and foreign workers that constitute about 85%
of UAE current population (see Table 1).
1. Hong Kong. A small free port economy which thrives on
free trade -- no barriers on trade, no tariff on imports or exports of goods.
Its early open door policy made it one of the world’s largest trading
economies, an international financial and commercial center in the Asia-Pacific
region, at a time when many countries and economies have turned nationalist,
protectionist and even socialist, years after World War II.
Import and export licensing are kept to the minimum,
imposed only when there is real need like obligations to trading partners, or
meet public health, safety or internal security concerns.
Literally, HK imports in thousands of container ships,
and exports in hundreds of millions of shopping bags. Free trade attracts lots
of visitors from other countries who think certain goods are not available in
their countries or available but at higher prices. Any “losses” in import tax
revenues are more than compensated by local tax revenues when millions of
visitors and investors come to Hong Kong to spend. Major winners are the
airlines, hotels, restaurants, theme parks, malls and shops, other players in
the hospitality and tourism industry.
2. Singapore. Created only in 1965 after separation from
Malaysia, the people embarked on an open, free, competitive economy, opening up
lots of opportunities for the entrepreneurs. With a few exceptions, tariff is
zero. Total merchandise trade is almost four times of GDP, FDI inflows are big.
Import restrictions, if any, are based mainly on environmental, health, and
public security concerns. Rice is subject to import licensing to ensure food
security and price stability. Otherwise, international trade is highly
encouraged.
But while Singapore has unilateral liberalization in
goods, it practices protectionism of its services sector. Thus, many countries
have arranged for bilateral and regional FTAs with Singapore, focusing on
services liberalization. These include mutual recognition of standards,
enhanced investment protection disciplines, protection of intellectual property
rights (IPR), and elimination of anti-competitive practices, establishment of a
competition policy.
3. New Zealand. Being so geographically detached from the
rest of the world because of its location -- it is closer to Antarctica than
mainland China -- the country has no choice but to engage in stronger global
trade to enable it to procure many things and services that are not available
locally.
In its mid-80s liberalization, tariffs were removed (zero
rate) in a wide range of goods without domestic competitors, while reduced in
others. Overall tariff has decreased from 27% to 7% in 1997. Import licensing
was also gradually removed and other forms of export assistance were also
greatly reduced (Grafton et al., 1997).
An editorial from the NZ International Business Forum
(NZIBF) about two years ago summarized it this way: “History of trade in New
Zealand is that our quality of life plummets when we are shut off to the global
market. We do not get rich by selling to ourselves.”
4. Chile. The economy before the military take over in
1973 was characterized by high and dispersed import tariffs, import
prohibitions, quantitative restrictions, and distortionary multiple exchange
rate system. The fall of democracy in the country ironically paved the way for
economic reforms which liberalized the country. First was reduction and
simplification of trade barriers with more than 60% of tariffs removed and
import restrictions eliminated.
In 1985, liberalization continued with the uniform tariff
decreased to 20% and further to 15%. Reforms continued despite transitioning
back to democracy. An independent central bank was established and the uniform
tariff was again reduced. Currently, the country is pursuing several trade
agreements (Edwards & Lederman, 1998).
A WTO annual report 2009 described it well, “Chile’s
trade and investment regime continues to be characterized by openness,
transparency, and predictability... Since the last review in 2003... modernize
customs and facilitate trade, maintained a single MFN [Most Favored Nation]
tariff rate of 6% with a few exceptions, abolished some import taxes and export
subsidies...”
5. United Arab Emirates. Founded only in 1971, its seven
emirates include world-famous cities like Abu Dhabi and Dubai. It is the second
largest economy in the Gulf after Saudi Arabia. Its free-trade zones allow (a)
100% foreign ownership of enterprises, (b) 100% repatriation of capital and
profits, (c) zero import and export tax, (d) zero corporate tax for up to 50
years, and (e) zero personal income tax.
Generally, it is heaven for global businesses that locate
there. This change in policy, the rapid liberalization in goods and services
allowed or necessited the entry of millions of expats and foreign workers,
which now comprise around 85% of UAE’s total population.
Here is one summary of the performance of the five
economies that embraced unilateral trade liberalization (see Table 2).
As a result of liberalization, these economies have
expanded: 22 times for Singapore, eight to 12 times for UAE, Chile, and Hong
Kong in just a span of 35 years. That is almost a miracle. New Zealand is a bit
different because of its geography. Even if tariffs for all imports are zero,
its distance from major economies in North America, Europe, and Japan
necessarily makes shipment costs high. Which largely explains for its slower
economic expansion.
The Philippines should pursue a policy of unilateral
trade liberalization, in goods but more so in services and the practice of
different profession. By opening up those professions to foreign competition,
Filipino customers will have more choices, the Filipino professionals
themselves will learn from their foreign allies and competitors, and the policy
will earn benefits will that will open up opportunities for Filipino
professionals to practice in more countries around the world.
Bienvenido S. Oplas, Jr. is the head of Minimal
Government Thinkers, a Fellow of the South East Asia Network for Development
(SEANET), and a member of the Economic Freedom Network (EFN) Asia. All the 3
entities advocate fr
ee trade. minimalgovernment@gmail.com
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See also:
BWorld 44, Why the Philippines should join the TPP, February 19, 2016
BWorld 45, Asia Liberty Forum and property rights, February 20, 2016
BWorld 46, China's debt, central planning and central crashes, February 27, 2016
BWorld 47, Renewable energy and the illusion of merit order effect, March 06, 2016
