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

BWorld 180, Has East Asia liberalized its trade enough?

* This is my column in BusinessWorld last January 11.

Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. By rewarding ingenuity… it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world.

— David Ricardo, Principles of Political Economy and Taxation (1817)

Classical British philosophers and political economists were the pioneer thinkers in articulating the net benefits and advantages of free trade over autarky and protectionism. These include David Ricardo, Adam Smith (“A nation may import to a greater value than it exports for half a century… and yet its real wealth, the exchangeable value of the annual produce of its lands and labor, may, during the same period, have been increasing in a much greater proportion,”) and David Hume (“the increase of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbors.”)

Perhaps it is no coincidence that former British protectorates and colonies in Asia are among the most rabid free traders in the world such as Hong Kong, Singapore, and Brunei.

Among the important indicators of how free an economy to global trade and commerce are (a) the mean and average tariff rates, and (b) standard deviation of tariff rates, which show how wide the variations among tariffs are that indicate high protectionism of certain sectors compared to other sectors.

Hong Kong, Singapore, and Brunei have impressive numbers: zero or very low tariff rates and standard deviation is also zero or very low. This means that there is little or no favoritism and protectionism of certain sectors. As a result, consumers and local producers are given the greatest freedom to choose various products and commodities available from around the world to come into their shores.

Japan, Malaysia, and Taiwan have low tariffs but their standard deviations are in double digits. For their part, the Philippines, Myanmar, and Indonesia have declining tariffs and single-digit variations, which are good.

Thailand, Vietnam, and South Korea seem to have not liberalized fast enough because of their relatively high mean tariffs and high tariff variations (see table).

David Ricardo has articulated the classical definition and theory of “comparative advantage.”

This theory has a beautiful application for developing economies like the Philippines to avoid concentrating their resources — human, financial, and land, among others — on few goals like food “self-sufficiency” when they can diversify their resources and earn higher income from manufacturing, tourism, and other sectors.

These economies can then use surplus and savings to purchase food and other commodities from abroad, especially from neighbors that have better natural endowment in bigger food production.

From the numbers above, there is a mixture of results in trade liberalization by East Asian economies. Overall tariff rates have declined through time but tariff variations have also increased in some countries and economies.

We go back to choosing three pathways to trade liberalization: multilateral like World Trade Organization (WTO), Asia-Pacific Economic Cooperation (APEC), Regional Comprehensive Economic Partnership (RCEP) negotiations; bilateral like Japan-Philippines Economic Partnership Agreement (JPEPA); or unilateral like what Hong Kong, Singapore, and Brunei have done.

The best outcome would be via global and multilateral liberalization under the WTO but this is also the most difficult, most complicated, and most bureaucratic.

After 22 years (1995-2017) of regular global negotiations, there were no major achievements except the Trade Facilitation Agreement (TFA) which needs legislative ratification by all signatory countries.

Unilateral liberalization is the simplest and fastest route to take. Just consider the interests of local consumers and producers in general — to have the widest choices possible in terms of prices and product quality. More choices means more freedom, more savings and by extension, higher incomes.

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

BWorld 177, On MMDA car towing and impounding, January 07, 2018
BWorld 178, Top 8 energy news of 2017, January 14, 2018 

BWorld 179, Federalism dream vs centralized government, January 15, 2018

IPR and innovation 37, US-China dispute on IP

Last month, there was a high profile dispute between the US and China, the former accusing the latter of having policies and practices that discriminate US companies' IP rights and innovation. Here's one story from Fox, August 03, 2017.

Weeks after that, this news from Lexology, August 22, 2017.

The China government, its state-owned enterprises and perhaps many private enterprises, have the tendency to act like business monopolies because of their political monopoly, one-party-state character. So Mr. Trump is checking this behavior.

The WTO and its relevant agreements like TRIPS should play a role in resolving this and many related disputes among member-countries.
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See also:

IPR and Innovation 34, When 95% of WHO's EML are off-patent, May 08, 2016 

IPR and Innovation 35, Letter to WIPO on World IP Day, May 06, 2017 

IPR and Innovation 36, Plain packaging from tobacco and soon to soft drinks, alcohol, ice cream products, May 31, 2017

BWorld 86, Philippine industrial policy

* This is my article in BusinessWorld Top 1,000 Corporations 2015, published in November 2015. I forgot to post this earlier, no online copy of that publication, only hard copy.
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Quo vadis, industrial policy?

A recurring question in the Philippines that crops up almost anytime anywhere is, “Why has the Philippines not industrialized as much as its East Asian neighbors?” It is a valid question, that opens up a plethora of valid and invalid explanations.

In a paper two years ago by former PIDS economist and now DTI Assistant Secretary Rafaelita M. Aldaba  summarized recent Philippine industrial policy as shown in table 1.

Source: Rafaelita Aldaba, “Twenty years after Philippine trade liberalization and industrialization: what has happened and where do we go from here,” PIDS Discussion Paper No. 2013-21, March 2013, Table 1.

  

It is a correct assessment, although it seems the import substitution industrialization (ISI) policy was just more than two decades (1950-72), not three. There was a “decontrol” policy or removal of quantitative restrictions (QRs) in 1962, and starting in the mid-60s, a revival of manufacturing was initiated but was not sustained. 

Export orientation on a limited scale was initiated in the mid-70s, coinciding with the world oil price shock in 1973 and the period of cheap foreign loans due to over-flowing petro dollars. It also coincided with some political stability because of political repression during the Martial Law regime.

There is a short but good literature on world and Philippines economic history from the late 1800s to the last decade written by Dr. de Dios of the UP School of Economics (UPSE) and Dr. Williamson of Harvard University. It shows that in Asia, the Philippines was third to Japan and China to attain fast growth of 5 percent or more a century ago. It was not sustained though, in the two decades before World War Two.

(Source: Bénétrix et al. (2012), Table 4. Cited by Emmanuel S. de Dios and Jeffrey G. Williamson, “Deviant Behavior: A Century of Philippine Industrialization”, UPSE Discussion Paper No. 2013-03, April 2013, Table 3.)

The post-World War Two ISI period pushed annual growth rates of Japan, Taiwan and S. Korea to double digits and the Philippines resumed its early century dynamism.

Messrs  de Dios and Williamson noted that “While the Philippines conformed to the industrial convergence pattern, it began to deviate sharply from the pack in the 1980s.”

The years between 1984‐1991 was a “period of large‐scale relocation to Southeast Asia of Japanese manufacturing industries in response to the yen revaluation following the Plaza‐Louvre Accords. This wave of foreign direct investments (FDIs) benefited Malaysia, Thailand, and Indonesia and led to the build‐up of a significant export‐oriented manufacturing in those countries”, the two academics added.

The Philippines of course could not optimize its FDI harvest that period because its Constitution made and ratified in 1986, does not welcome huge FDIs in many sectors of the economy.

Nonetheless, the government of then President Corazon C. Aquino in 1991 pursued a massive trade liberalization and official abandonment of protectionism when it reduced tariffs to a range of 3%‐30%. The Ramos administration continued the liberalization process capped by the Philippines joining the World Trade Organization (WTO), and undertook a new wave of tariff reductions in his last year in office in 1998.

Trade liberalization in the 90s was not just a Philippines or Asian phenomenon but a global one.

After many decades of trade negotiations and deadlocks at the United Nations Conference on Trade and Development (UNCTAD), the WTO was formally created in 1994.

To summarize, the Philippines’ post-WW2 industrialization policy can be categorized into three major periods: (1) trade protectionism and import substitution from 1950-72, (2) limited liberalization and export promotion  from 1973-90, and (3) accelerated trade liberalization from 1991 onwards, with “blips”of protectionism in 1997-99 Asian financial turmoil, then 2008-2010 global  financial crisis that started in the US.

Philippine membership  in the ASEAN (Association of South East Asian Nations) Free Trade Area, Asia Pacific Economic Cooperation, various bilateral FTAs and Economic Partnership Agreements, emerging Regional Comprehensive Economic Partnership (RCEP, ASEAN + 6) and the lure of joining the Trans Pacific Partnership  (TPP), are important alliances to sustain trade and investment  liberalization.

There are two important challenges for the Philippines to optimize its membership  in those mega trade alliances: (1) remove investment protectionism by abolishing the “reserved only for Filipinos” (or zero FDI) in some sectors, and 60-40 restrictions to FDIs in other sectors. And (2) relax services protectionism especially in the practice of profession, where foreign professionals are barred from practicing here while Filipino professionals are allowed in many other countries.

Mr. Oplas is the President of Minimal Government Thinkers, Inc., a Manila-based think tank advocating free market economics, and a Fellow of the South East Asia Network for Development (SEANET), a Kuala Lumpur-based regional center advocating free trade and free mobility of people in  the region.

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See also:
BWorld 61, 100 indicators better than GDP, June 03, 2016 
BWorld 71, Free trade and higher income, July 11, 2016

BWorld 72, Economic integration and disruption, July 25, 2016 

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

BWorld 84, Eliminate red tape in the Philippine energy sector, October 08, 2016 

BWorld 85, Drugs war morphed into war on critics of President Duterte? October 11, 2016

BWorld 65, PH exports growth from 1960-2014

* This is my article in BusinessWorld last June 17, 2016.

The 1950s and 1960s were periods of economic nationalism as the Philippines and many other countries emerged from post-World War II damages and reconstruction. That many countries chose trade protectionism then was understandable as it was also a period of strong communist movements and anti-global capitalism in Asia, as shown by the communist transformation of China after the successful Maoist revolution in 1949. In the Philippines, early communist movement led by the Huks also championed economic nationalism.

In the 1970s, a period of some economic liberalization plus strong state intervention and dictatorships swept many East Asian economies. Former President Ferdinand Marcos for instance imposed a dictatorship that allowed him to stay in power for a total of 20 years. Huge petro dollars financed various infrastructure projects in the region that allowed some countries to develop faster than others.

The 1980s was a period of continued economic liberalization plus a dismantling of some dictatorships in Asia, including the collapse of the Marcos dictatorship in 1986. By then, the “Asian dragons” -- South Korea, Taiwan, Hong Kong, and Singapore -- were rapidly developing and emulating the industrialization path of Japan.

Mid-1990s was the golden age of globalization. The World Trade Organization was officially created in 1995 with a clear goal of promoting rules-based global free trade. Protectionism by many member-countries were tapered and reduced. As a result, high tariffs were brought down to moderate levels and non-tariff barriers (NTBs) -- such as import quotas and quantitative restrictions were converted into tariffs.

In the Philippines, it was also a period of more substantial economic liberalization -- the country became more stable after it reeled from political and economic uncertainty that was instigated by several bloody military coup attacks and naked attempts to grab state power in the late ’80s. The foreign investments act, telecom deregulation, and similar laws were enacted in that decade.

When the 21st century came, the Philippines and many countries in Asia and around the world have already developed their own momentum of liberalization and deregulation. It was just a question of taking either a path of fast or moderate trade liberalization.

For ASEAN countries, the chosen path was unilateral, fast, regional liberalization that tariffs for intra-ASEAN trade was near zero for the six older members (Brunei, Indonesia, Malaysia, Philippines, Thailand and Singapore) while the four new comers (Cambodia, Laos, Myanmar and Vietnam or CLMV) were given a longer window of zero tariff at a later date of 2015.

Here is one summary of the foreign trade performance of the Philippines over the past half-century, expressed in the exports and imports of goods and services (G&S) as share or percent of GDP, and annual trade growth (see table).

Notice the jump in the country’s exports of G&S in 1995-2000 upon joining the WTO, despite the East Asian financial crisis in late 1997 to early 1999. There was a big decline in both the exports and imports of G&S in 1998 but it was not enough to erode the 40%+ exports/GDP ratio.

Another round of trade decline was experienced in 2008-2009, a period of global financial turmoil that started in the US’ housing and credit.

The Philippines’ exports/GDP ratio went back to the 30%+ this decade.

How can this be explained?

Did the country (a) apply some brakes on trade liberalization, (b) or has the denominator, in this case, GDP size, simply risen faster than the rise in the numerator? Or (c) both?

It appears that (c) happened.

Having brought down overall tariffs to near zero for fellow ASEAN members, the Philippines can no longer bring it down any further for its neighbors. It can only liberalize further by having multiple bilateral free trade agreements (FTAs) with other countries or bloc of countries outside of ASEAN. This is a cumbersome and bureaucratic path towards more trade liberalization. The easier, less messy path would have been unilateral liberalization the way it engaged its neighbors in the ASEAN. Singapore, Hong Kong, UAE, Chile and few other countries have adopted this policy and so far the results are more positive than negative.

The other explanation is that the Philippines’ GDP size has grown much faster, mainly because of domestic or internal factors like robust growth in household and private consumption.

Now with a 100+ million population base, it is relatively easier to sustain this momentum. More people means more producers and consumers, more workers and entrepreneurs, more sellers and buyers. Sadly, there will be more government bureaucrats, legislators, regulators and consultants too, they need lots of taxes and fees to sustain their pay, offices, travels, trainings, bonuses and pension.

So we need to take a different path of economic modernization via unilateral trade liberalization with more countries outside the region. And rejoice, not whine, at our bigger and younger population. Government interventions like bureaucratic and costly trade negotiations, implicit population control and high taxation to finance high bureaucracy and high regulations can be counter-productive over the long-term.

Bienvenido S. Oplas, Jr. is a SEANET Fellow, head of Minimal Government Thinkers, both are members of EFN Asia promoting free trade.

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See also: 

BWorld 2, Benefits of Trade Liberalization for the Philippines, May 16, 2015 

BWorld 18, Non-tariff barriers in the ASEAN, September 12, 2015 

BWorld 44, Why the Philippines should join the TPP, February 19, 2016 

BWorld 63, Can renewables only power the PH and Asian markets? June 10, 2016 BWorld 64, The WTO and trade agreements, June 17, 2016

BWorld 64, The WTO and trade agreements

* This is my article in BusinessWorld last June 13, 2016.

Free trade means free individuals and a free society.

People who cannot find certain goods and services at specific quality from local producers given their limited personal or household budget may be able to find those from foreign producers. And people who cannot sell their products or services to local buyers may find those buyers abroad.

And this highlights the beauty of free trade: No trade will occur unless both parties, the buyer and seller, will benefit. There are losers and gainers in free trade of course, the same way that there are losers and gainers in no trade (autarky) or restricted trade. Overall, there are “net gains” in free trade where the advantages outnumber the disadvantages.

Global free trade is supposed to be facilitated by the World Trade Organization (WTO) when it was created in 1995. But 21 years later, this is far from happening.

Regional trade agreements (RTAs) and even trans-continental agreements were invented such as the ASEAN Free Trade Area (AFTA), Regional Comprehensive Economic Partnership (RCEP), and the Trans-Pacific Partnership (TPP).

This topic was discussed during the recently concluded big annual international conference, “Jeju Forum for Peace and Prosperity 2016,” held in Jeju, South Korea. The forum also had a panel that had the theme, “Trans-Pacific Partnership: an Assessment of its Political Economy” sponsored by the Friedrich Naumann Foundation for Freedom (FNF) and the Economic Freedom Network Asia (EFN Asia) last May 26, 2016.

The discussion moderator was Dr. John Delury, Associate Professor at the Graduate School of International Studies, Yonsei University, Seoul, South Korea. The discussants were Dr. Sethaput Suthiwart-Narueput, Executive Chairman of the Thailand Future Foundation (TFF), Kwon Tae-shin, President of the Korea Economic Research Institute (KERI) in Seoul, and Dr. Keisuke Iida, Professor at the University of Tokyo Graduate Schools for Law and Politics, Japan. The opening remarks was given by Dr. Lars-Andre Richter, Resident Representative of FNF Korea Office.

Panel Rapporteur was Pett Jarupaiboon, who is also the also the Program Manager of EFN Asia, based in Bangkok, Thailand. Pett shared his notes with me.

The three discussants are all liberal economists and are pro-free trade, pro-WTO, but they disagree and debate on the role of the TPP.

In particular, Mr. Kwon and Dr. Iida were critical of the WTO because of the lack of progress in global free trade. Dr. Sethaput argued that RTAs like TPP would undermine the progress of the WTO.

Here are the main arguments of the discussants.

(1) Mr. Kwon, KERI, South Korea. TPP members will enjoy an increase in exports and income from an enlarged market size, and they will also enjoy more consumer welfare due to a decrease in import prices and intensive competition. According to a recent study by the Peterson Institute for International Economics, if TPP takes effect in 2017, the GDP of TPP member countries is likely to increase by 0.5%-8.1% in 2030, compared to the GDP forecast in an event of non-adoption of TPP.

(2) Dr. Iida, Univ. of Tokyo, Japan. TPP has a rule-making function, and these rules as provided in international relations as well as who wrote them are important issues. For the US, joining TPP is part of a larger strategy of “pivoting” to Asia or rebalancing to Asia. The US was preoccupied with the wars in Afghanistan and Iraq and was not paying enough attention to Asia. Therefore, TPP was part of the toolkit to achieve this new policy for the Obama Administration. For Japan, which has to rely on the US for security, TPP meant mending the fences with the US following a series of recent frictions including the planned relocation of one of the most important marine bases in Okinawa to outside Okinawa.

He added that TPP is seen to benefit Japan, projected at 2.6% of GDP (accordingly to the Cabinet Office), a significant number considering that its potential growth rate minus TPP membership is mere 0.5%.

(3) Dr. Sethaput, TFF, Thailand. A multilateral system with non-preferential treatment covering many countries like the WTO is better than mega-regional trade regimes like TPP and RCEP. Why?

(a) TPP is subject to the usual problems of trade diversion: increased trade among members, lesser trade with non-members.

(b) TPP is not just about trade, it also includes other issues like investor and intellectual property protection, labor and environmental standards, etc.

(c) The investor-state dispute settlement (ISDS) mechanism provides international arbitration that benefits US corporates. The US Trade Representative notes on its Web site that “the United States has never lost an ISDS case.”

(d) RCEP is a better alternative, has less non-trade baggage, uses the best elements of the multilateral system, like WTO dispute settlement, TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights).

(e) Ultimate goal should be the Free Trade Area of the Asia-Pacific, which includes all the existing members of APEC including China and Russia. This can be achieved through either expanding the TPP or merging TPP and RCEP.

Personally, I believe that the best trade policy is unilateral trade liberalization. Be friends to all countries and economies who can bring in the best products and services at best qualities and at the best or most competitive prices into our shores and shops. This will bring down the cost for all local manufacturers in need of cheaper capital goods, cheaper raw materials, and intermediate products, which will result in cheaper production processes. Local consumers will also benefit for obvious reasons. And those countries will likely return the favor with zero or very low tariff for Philippine exports too.

Since this is far from happening, the second best policy is multilateral and global free trade. This is not happening too. So the third best policy is joining mega-RTAs like the TPP and RCEP. The worst policy of course is autarky or no trade, or even very restricted trade.

The Philippines and all ASEAN members are already RCEP members. The Philippines should proceed applying for TPP membership. The dreaded provision ISDS is actually important and useful. It simply protects foreign investors who come to other TPP member-countries based on TPP rules, when other member-countries will suddenly change the rules midway. The ISDS in effect will help prevent members from arbitrarily changing rules on trade, investments, IPR, competition and other policies.

Bienvenido S. Oplas, Jr. is a Fellow of SEANET, President of Minimal Government Thinkers, which is a member of EFN Asia.

minimalgovernment@gmail.com

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See also: 

BWorld 2, Benefits of Trade Liberalization for the Philippines, May 16, 2015 

BWorld 7, Free Trade vs.Protectionism via Non-Tariff Measures, June 26, 2015  

BWorld 12, Investments, APEC and economic liberalization, July 25, 2015 

BWorld 18, Non-tariff barriers in the ASEAN, September 12, 2015 

BWorld 23, ASEAN trade bureaucracies and Doing Business 2016 Report, November 07, 2015

BWorld 44, Why the Philippines should join the TPP, February 19, 2016 

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

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

BWorld 62, Unemployment and underemployment data may be overstated, June 08, 2016 

BWorld 63, Can renewables only power the PH and Asian markets? June 10, 2016

EFN Asia 61, Panel on TPP at Jeju Forum 2016

Reposting this Rapporteur's report of the EFN Asia panel discussion at the Jeju Forum for Peace and Prosperity 2016, published at the EFN website. Pett Jarupaiboon was the panel Rapporteur.
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EFN ASIA AT JEJU FORUM 2016: TPP AND ITS POLITICALECONOMY

Monday, 13 June 2016

The Jeju Forum for Peace and Prosperity (Jeju Forum) addresses stability and security issues in Asia through international cooperation and the participation of various leading think tanks, academics, and leaders in the field. An annual event, the forum brings together thousands of participants from all over the world to the International Convention Center in Seogwipo on the beautiful island of Jeju.

The Economic Freedom Network in Asia (EFN Asia) with support from the Friedrich Naumann Foundation for Freedom (FNF) co-hosted a panel discussion at this year’s event (May 25-27, 2016) titled “The Transpacific Partnership (TPP): An Assessment of its Political Economy on the occasion of this year’s Jeju Forum for Peace and Prosperity”.

The Panel was moderated by Dr. John Delury, Professor at Yonsei University, Seoul. The discussion brought together venerable experts in the field: Kwon Tae-Shin, President of Korea Economic Research Institute and Former Minister of the Prime Minister’s Office; Dr. Iida Keisuke, Professor at University of Tokyo, Graduate School of Law and Politics; and Dr. Sethaput Suthiwart-Narueput, Executive Chairman of the Thailand Future Foundation. Prior to the the panel discussion, H.E. Rolf Mafael, German Ambassador to South Korea gave his opening remarks and congratulatory speech.

It has been a long tradition for EFN Asia with the support of FNF to host a session at Jeju Forum. Besides the participation of global leaders in both the public and private sectors, one of the main highlights of this year’s forum was also the presence of Ban Ki-Moon, Secretary General of the United Nations as a keynote speaker at the main opening session.

The Trans-pacific Partnership (TPP) is the biggest free trade bloc accounting for 40 percent of global GDP and one-third of world trade. It was launched last year amidst both hope and skepticism as it poses economic opportunities as well as political and social challenges. In addition to removing traditional trade obstacles at an unprecedented level, the agreement goes much broader to embrace contentious issues including the environment, intellectual property and the investor-state dispute settlement. Additionally, as often is the case with free trade agreements (FTAs), there are important US geopolitical objectives towards Asia.

While most liberal economists generally support the concept of free trade, viewpoints on TPP can differ as the panel discussion elucidated. While it can be viewed that the World Trade Organization (WTO) plays a significant role towards the progress/acceptance of TPP, some of the criticisms towards WTO has been their lack of progress on a similar front. Contrastingly it was argued that reservations toward TPP stems from the fact that preferential agreements like this would undermine the progress of WTO.

According to Mr. Kwon Tae-Shin, TPP members will enjoy an increase in exports and income from an enlarged market size, and they also will enjoy more consumer welfare due to a decrease in import prices and intensive competition. A recent study by the Peterson Institute for International Economics projected that if TTP takes effect in 2017, the GDP of TPP member countries will likely increase by 0.5~8.1% by 2030, compared to the GDP forecast in an event of the non-adoption of TPP.

Dr. Keisuke mentioned that President Obama emphasized the rule-making aspect of TPP. Certainly, what kind of rules we have in international relations and who gets to write these rules are very important issues, and hence, this rule-making aspect of TPP is certainly important. For the United States, joining TPP is part of a larger strategy of “pivoting” to Asia or rebalancing to Asia. There was recognition that the United States was preoccupied with the wars in Afghanistan and Iraq and was not paying enough attention to Asia. Therefore, TPP was part of the toolkit to achieve this new policy for the Obama Administration. For Japan, who relies on the United States for security, TPP meant mending the fences with the United States following a series of recent frictions, including those arising from the planned relocation of one of the most important marine bases in Okinawa to outside Okinawa. From an economic perspective, TPP will significantly benefit Japan as well. The economic benefits, which amount to 2.6% of GDP (accordingly to the Cabinet Office), are a significant payoff to a country whose potential growth rate is a mere 0.5%.

Dr. Sethaput expressed his support for a multilateral system with non-preferential treatment like the WTO to mega-regional trade regimes like TPP and RCEP. He argued that when talking about the pros and cons of TPP, it is important to distinguish whether we are talking about the region as a whole or individual countries.  While individual countries in the region can and do benefit from preferential access under TPP, most countries in the region as a whole—especially the developing ones—would be collectively better served by greater progress in multilateral liberalization under the WTO.  This is due to several reasons. First, TPP is a preferential trading arrangement, and therefore subject to the usual problems of trade diversion. Second, TPP is not just about trade, but has a whole lot of other issues included (investor and intellectual protection, labor and environmental standards, etc.), a lot of which are not necessarily in the interests of developing countries. Third, they have less bargaining power, as reflected by the sequential bargaining approach taken by the United States in its negotiations as well as some of the features of the agreements on standards and dispute settlement.

Undoubtedly, TPP will significantly increase trade between its members. However, it is worth noting that the benefits gained by each member country will be much different. The effects it has on non-members are also significant. Taking Japan’s example, TPP meant mending with the United States. There were strains in the U.S.-Japan relations from 2009 to 2010, involving the relocation of one of the most important marine bases in Okinawa to outside Okinawa. This issue infuriated some policymakers in the U.S. government, and their bilateral relations faced a crisis. However, strengthening a relationship with an ally comes with some costs, especially for those countries that are outside this agreement. Putin is said to be very critical of TPP.

As far as trade is concerned, there is no inherent trade-off between different trading arrangements. Japan and ASEAN countries are still negotiating RCEP in good faith, and no one has so far turned their back on the RCEP. Inevitably, the degree of trade opening through RCEP will be lower than that achieved through TPP, but still it is worth trying. Eventually, our ultimate goal should be the Free Trade Area of the Asia-Pacific (FTAAP), which includes all the existing members of APEC. And this could be achieved through either an expansion of TPP or the merging of TPP and RCEP. At this point in time, it is hard to say which is more likely. Concerning WTO, on the one hand it has had a salutary impact on the global trading system. Legally, it is most advanced. Also, the dispute settlement system it possesses is very valuable. On the other hand, it has had a very poor track record in facilitating trade negotiations and how to bring the Doha Round to a satisfactory conclusion without incurring a reputation that it ended in a failure is a big question to consider.

Thailand, according to Dr. Sethaput, has the unfortunate distinction of being the country that is usually estimated to lose out the most from not being in TPP, but the losses are not that huge: around 0.9% of GDP cumulatively through 2030, or a CAGR of less than 6 basis points. Most of the potential gains from joining are on the trade front and the improved market access for Thailand from TPP is not that significant. First, Thailand already has FTAs in place for 75% of the trade it does with TPP countries.  The countries Thailand does not have FTAs with include the United States, Mexico, and Canada, and these three collectively account for about 10% of it exports.  Second, tariffs on many of the things Thailand export to the United States are not that high to begin with.  Third, the reduction in tariff and non-tariff barriers in the United States under TPP for key export categories for Thailand will not be that rapid, if what was offered to Malaysia is any indication (e.g., 0% in autos in 10 years). The possible indirect benefits to FDI are probably more important but also more difficult to assess.

Dr. Sethaput also pointed out the less visible costs, especially in the investor-state dispute settlement (ISDS) mechanism.  Under TPP, the ISDS provides international arbitration in the way that benefits US corporates. The US Trade Representative (USTR) notes on its website that “the United States has never lost an ISDS case.”  Issues like fairness and equal treatment under the law are sensitive ones.  Excessive corporate recourse to arbitration has already started to raise concerns in domestic court cases in the United States. In relation to WTO, he argued that the world as a whole would be much better served by greater progress under WTO.  But mega-regional trading agreements (RTAs) like the TPP or RCEP undermine the multilateral trading system. We decide to participate in RTAs because we cannot conclude Doha, and we cannot conclude Doha because we decide to participate in RTAs. Also, even if one believes that WTO is dead and that RTAs are the only game in town, RCEP is a better alternative. It is the one loaded with much less non-trade baggage and at the same time, making the best use of the best elements of the multilateral system (e.g. WTO dispute settlement, TRIPS).  At the very minimum, this would help to enhance limited bargaining power that countries have under TPP.

Turning to Korea, according to Mr. Kwon Tae-shin, export is an essential element to sustain the Korean economy. Korea’s dependence on exports (exports/GDP) was 53.9% as of 2013, nearly twofold the average of OECD, which stood at 28.7%. Its dependence on foreign trade was also 102.8% as of 2013, which was significantly above the average of OECD: 57.7%. It is necessary for Korea to expand its trade through international agreements such as TPP. The negative effects of non-participation in TPP are greater than participation.  Especially, it may possibly leave Korea behind in competition with Japan, which is a TPP member country and one of Korea’s main rivals in various manufacturing industries. Additionally, TPP pursues high standard FTA, and it strictly complies with international norm including anti-corruption, institutional transparency, investment & the protection of intellectual property, labor & environment related rules, etc. Those requirements actually make developing countries reform their local laws and institutions and accept global standards, which will become institutional strength of those developing countries in the long run.

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See also: 
EFN Asia 22: Dealing with Economic Nationalism, Jeju Forum 2013, June 03, 2013
EFN Asia 38: Report on Globalization and Inequality, Jeju Forum 2014, June 02, 2014 
EFN Asia 48: Report on Free Market Environmentalism, Jeju Forum 2015, May 29, 2015 
EFN Asia 54, Sethaput Narueput on economic freedom and poverty, December 16, 2015
EFN Asia 60, Conference 2014 in Hong Kong, part 5, April 03, 2016

Business 360 20: Trade and Development in Asia

* This is my article for the business magazine published monthly in Kathmandu, Nepal.
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Asia is home not only to the most populous nations around the world like China, India and  Indonesia, but also to the fast-growing economies, big and small. Opening up to global trade is among the most useful policies that governments of these more fortunate economies have undertaken.

Below is a short summary of the human resources – producers and consumers, sellers and buyers, entrepreneurs and workers – of selected Asian economies. For brevity purpose, only the big population (above 20 million) economies are included in this table. Gross domestic product (GDP) is expressed in Purchasing power parity (PPP) valuation to levelise the pricing and valuation of similar goods and services across countries.

Population, GDP Size and Exports of Selected South-East and East Asia Economies

Sources:

a. Population and GDP sizes, IMF, World Economic Outlook 2014, Database

b. Merchandise exports, ADB, Key Indicators of Asia and the Pacific 2014.

The columns on Multiple are not part of the tables from these sources; they were only added in this paper.

While most of the praise in the world is directed to East Asian economies, those in South Asia, in particular India and Bangladesh, are also showing renewed dynamism. There is a need to keep that momentum and for others, to pick up speed and momentum.

Opening up to more global trade, reducing restrictions and regulations in exports and imports, is among the most important policy reforms that a country can take. And it is not only more exports but more imports as well. When local producers have more access to better machines and newer technologies from abroad at more competitive or affordable prices, that alone quickly improves their productivity. And it translates to business expansion and more job creation.

Multilateral trade negotiations through the World Trade Organization (WTO) have become too time-consuming and bureaucratic that free trade was minimally moving through this route. The easier route taken by many countries is through bilateral and regional free trade agreements or free trade areas (FTAs).

An even faster route is via unilateral trade liberalization, a country simply opens up the border to global trade, tariff is zero, shipment of goods is given quick clearance. Only goods that can harm public health like poisonous substances, suspicious drugs and medicines, guns and bombs, are strictly regulated. Few countries have already taken this route, like Hong Kong, Singapore, Dubai and Chile.

Other countries in East Asia are also doing soft or mini-unilateral liberalization, but not to the point of having zero tariff yet. They retain the tariff but at very low rates, like among member-countries of the ASEAN, average of 1-3 percent. When the ASEAN Economic Community (AEC) materializes by end-2015, the tariff should become zero.

There is an exciting international conference to be held in  Kathmandu that will tackle free trade and economic liberalization next year,  the “Asia Liberty Forum” on January 8-10, 2015.  The event is jointly sponsored by the Asia Centre for Enterprise (ACE), Samriddhi Prosperity Foundation, and the Friedrich Naumann Foundation for Freedom (FNF). The main goal of the conference is to publicly celebrate  liberty and economic freedom in Asia, so scholars and leaders from Asia and their friends from the US and Europe are coming and help advancing liberty and markets in the continent.

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See also:
Business 360 16: ASEAN Economic Community 2016, March 21, 2014

Business 360 17: Electricity and GDP Growth, April 15, 2014

Business 360 18: Innovation, Inequality and Inclusive Growth, August 25, 2014 

Business 360 19: Investments and Inequality in Asia, October 15, 2014

Free Trade 39: Advantages of Unilateral Trade Liberalization, October 12, 2014

Free Trade 41: David Ricardo, CPE, FPE and Consumer Surplus

Minimal Government Thinkers, Inc. has a joint project with SEANET, the regional free market think tank based in Kuala Lumpur, to promote free trade and market reforms in the ASEAN countries. This is  the  first of the many public education activities that we will undertake.

The first known theoretician to  articulate the theory and beauty of comparative advantage was the British investor and later, political economist, David Ricardo. After reading Adam Smith's "The Wealth of  Nations", he was enamored with classical economic theories and studied and  wrote on  his  own.

When goods and  services are allowed free mobility with zero  restrictions, all other things being equal, CPE will occur, even temporarily. Or the price difference among  similar or homogeneous products and services will be low.

Theory 3: Factor Price Equalization (FPE)

Substitute prices of goods with prices of labor, capital, technology, other factors of production, in the above graphs

Free mobility of people and services across countries and continents will result in FPE over the long term, all other things being equal.

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

And countries with cheap labor due to high supply of workers, high population, will experience increase in labor cost once the excess labor goes out and work abroad.

The purpose of slapping import tariff and taxes is to make otherwise cheap goods from abroad to become expensive. This is one of the lousiest philosophies and policies of  many governments around the  world, while trumpeting that they "care for the poor".

Countries in East Asia are leaning towards unilateral and regional trade liberalization  compared to their counterparts in S. America and Africa. When  it comes to agricultural products though, many economies become protectionist. 

These were my concluding notes. Photo taken by Lee, one of the students in the class. Thanks Lee.

* Free trade means free enterprises, free individuals. Restrictions to trade is restricting potential economic development.

* Governments should reduce restrictions on people and goods mobility. (a) reduceg tariffs and non-tariff barriers (NTBs) like customs bureaucracies; (b) simplify visa requirements and issuance, reduce the cost of migration; (c) focus on rule of law function, go after real criminals and not ordinary migrants who only wish to improve their condition through hard work.

* Smuggling can  be beneficial  to consumers in  the  form  of lower prices  compared to protectionist prices. But this expands corruption in government. No to protectionism, no need for smuggling, just abolish trade restrictions.

* Unilateral liberalization – no need for or minimum of negotiations, just open the borders at zero tariff – is pro-development. No regulations except bringing in or out of guns, bombs, poisonous substances, other products that are threat to public health.

* Protectionist PH constitution should be amended to allow more foreign investments and competition.

The full 15-slides presentation is posted in slideshare.
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See also:
Free Trade 37: Multiple Concerns and Regulations in the ASEAN, September 11, 2014
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 28: Exports and Prosperity

* This is my article yesterday in thelobbyist.biz
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An economy that exports more is creating more local jobs, directly and indirectly. Even a highly import-dependent sector like electronics is still using lots of local contents like labor, electricity, water, land and office renalt, food, housing and entertainment for both the expat managers and local staff, and so on.

The less import-dependent service exports like business process outsourcing (BPOs) tend to create more local jobs and more local support businesses. Thus, an economy must aspire to ramp up its exports capability as there is unlimited number of consumers in the global market.

Philippine total merchandise exports in 2012 was  almost $52 billion, 7.6 percent higher than the 2011 level of $48.3 billion. Export growth in 2012 were fast in Hong Kong, S. Korea and Thailand, with growth of 28 to 29 percent over their 2011 levels. Exports to China contracted  by 1.2 percent last year compared to 2011 level.  The territorial dispute with China at the South China Sea or West Philippine Sea may have contributed to this decline.

Since joining the World Trade Organization (WTO) in 1995, many things have changed in the country’s major buyers of merchandise goods. Because of the failure of multilateral free trade to be fully implemented, countries have turned to regional and bilateral free trade agreements (FTAs) and this is shown in the numbers below.

Philippines’ Top 10 Exports Market, Various Years, in US$ Billion

Source: National Statistics Office, www.census.gov.ph

The US has been trading more with its neighbors in North America compared with its trade partnership with the Philippines and other Asian economies. So the share of the US of the Philippines’ exports has significantly declined from  35 percent in 1995  to only 14.2 percent last year.

The Europeans have also been trading more with each other through the EU, and the UK’s share of Philippine exports went down from from 5.3 percent in 1995 to to being out of the top 10 by 2006 until last year. Netherlands initially had a rising share of Philippine exports, from 4.6 percent in 1995 to 10 percent in 2006, but was out of the top 10 by 2012.

Asian markets have been buying more from the Philippines. For instance, Hong Kong’s share rose from 4.7 percent in 1995, more than doubled to 9.2 percent last year. Singapore, from 5.7 to 9.3 percent over the same period, and China, from being an outsider in the top 10 in 1995, to third biggest buyer in 2012.

Japan,Taiwan, Malaysia, Thailand and Germany were somehow able to retain their average share from 1995 to 2012, with slight changes in market share in between these years.

A country’s openness to global commerce or free trade-ness is a very important policy to improve its economic competitiveness and development. To produce good quality export products at competitive prices and hence, export more, one must get various raw materials, intermediate products, capital goods and machineries, finished consumer goods at competitive prices from as many producers from many countries whenever possible. And foreign economies that exported to the home country would tend to become more open to the exports of this home country.

While regional and bilateral FTAs are better than protectionism and trade paranoia, there is a better option, and that is unilateral trade liberalization, like what Hong Kong is doing. Millions of people around the world know that certain products and services that are not available in their countries at a good price can be found in Hong Kong. So that small economy is able to attract tens of millions of visitors, conference attendees and other tourists every year. Its airlines, hotels, restaurants, malls and shops are benefitting immensely. Hong Kong is importing goods in thousands of container ships and exporting in hundreds of millions of shopping bags as the tourists fly back to their home countries.

A unilateral trade liberalization policy on top of the Philippines’ membership in the ASEAN Free Trade Area (AFTA), ASEAN + 3 (China, Japan, S. Korea) FTA and other multilateral trade deals, is a promising policy that the Philippine government and businesses should consider.

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See also:
Free Trade 23: FNF on Free Trade Agreements, February 10, 2012
Free Trade 24: Trade and Improving Health Outcome, February 15, 2012
Free Trade 25: Excess Supply or Demand and Trade, June 05, 2012 
Free Trade 26: "Buy Local" and Protectionism, June 24, 2012
Free Trade 27: Proposed EU-PH FTA and TRIPS Plus, September 24, 2012 
EMHN 7: Free Trade Improves Public Health, February 26, 2013