China -ASEAN 3: Trade and Investment Relations

During the Philippine Economic Society (PES)  52nd conference last November 14, 2014, held at Intercon Hotel in Makati City, among the panel sessions was on "Economic Trade Integration."

One paper was An Analysis of the Evolving ASEAN-China Trade Linkages presented by Kevin Chua, (Shandong University, China), Ronald U Mendoza and Monica Melchor (Asian Institute of Management, Makati, PH).

The authors were asking if China and ASEAN are strategic partners or competitors, because while there is growing bilateral trade between the two, they  are  also competing in the exports of major goods to similar trade destinations.

They reviewed the trade statistics between  the two  and showed this -- different numbers reported  by different official sources.

What could explain for  such discrepancies in numbers? The authors pointed to  three major causes:

* Hong Kong as trade entrepot:  Upon transiting Hong Kong, export goods are added value due to further processing or re-packing.

* Recording discrepancy:  Chinese goods are recorded as exports to an intermediary country because it is the last known destination by the exporters even if the goods are destined to a third country.

* Difference in valuation:  Refers to differences in values declared by Chinese customs at time of exportation and values declared to US customs at time of importation.

Plausible explanations, so they used the UNCTAD data, chart below.

Intra-ASEAN trade slightly increased from 23 to 25 percent of total global trade from 2000 to 2013, The share of Japan declined from 16 to 9 percent, EU declined from 13 to 10 percent, US declined from 16 to 8 percent. But the share of China significantly increased from 5 to 14 percent over the same period.

ASEAN’s Total Imports and Exports with Major Trade Partners, 2013 (In US$ Billions; shares in parenthesis)

Differences and  diversity among ASEAN member economies also led to  diverse trade relations with China, and  other countries and continents.

There is competition of course, between the two. The authors observed that "Comparing the trend of ASEAN’s and China’s share of US, EU and Japanese imports on specific product lines reveals (2000 vs. 2013 figures): (1) Electronic goods (excluding parts and components) and (2) Textile fibres, yarn, fabrics and clothing."

Then they showed the RCA between  the  two.

This means that China has higher RCA over ASEAN economies  in low-skill and technology-intensive manufacturing, but the latter has higher RCA compared to China in labor- and technology-intensive manufactures.

Many China-based companies, local or foreign, are thinking of relocating to SE Asia. Below are some important push  and  pull factors:

Pull factors for China-based firms to relocate to ASEAN, are 

(1) ACFTA and the ASEAN trade blocc,  (2) Abundant commodities and resources, 

(3) Relatively low cost, (4) Growth in consumption with relatively young population demographics, and (5) Production gap between China and ASEAN likely to decrease as regional infrastructure improves.

The authors concluded:

"1. Diversity among ASEAN economies leads to uneven relations between each country with China.

2. ASEAN as a whole benefits from its relation with China primarily since China offers itself as a huge market for ASEAN products. China has become ASEAN’s second largest trading partner.

3. The two regions are becoming more engaged, highlighted by the slow but sure emergence of an integrated regional supply chain.

4. Low-income ASEAN economies are benefitting in the shift of low-value manufacturing industries into their countries. The rest see a threat as China takes over production of high-value manufactures.

5. Strengthening the trade in parts and components is a way to improve trade complementarities.

6. Dealing with the realities of an advancing ASEAN-China economic integration means each country enhances its competitive advantages, finds a niche in the regional production chain, and manages the competition with its neighbor."

There. Despite continuing territorial and diplomatic disputes between the two, or at least some ASEAN countries vs China, trade between them is rising fast. Markets and people talk about money and jobs while governments talk about military spending and positioning.

And this proves once again that people, not governments, trade with each other. There should be more integration, both competition and complementarity, in trade and investments, tourism and people mobility, between China and ASEAN countries.
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See also:

China-ASEAN 1 (Security and military)
a. China Watch 12: The Spratlys and SCS Conflict, June 08, 2011
b. China Watch 13: More on the Spratlys/SCS Conflict, June 25, 2011
c. China Watch 14: More on the SCS/WPS Noise, July 11, 2011
d. China Watch 16: Scarborough Shoal, Spratlys and Citizens Action, May 01, 2012
e. China Watch 17: Using Drones Over Scarborough, SCS, May 14, 2012
f. China Watch 18: Martin Jacques' Manila Lecture, November 20, 2012

China-ASEAN 2 (Economics and trade)
a. China Watch 15: FTA, ASEAN and UNCLOS, August 01, 2011 
b. China Watch 19: The Asian Infrastructure Investment Bank (AIIB), October 25, 2014

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.

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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

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

Migration and Freedom 16: Mobility and the Heckscher-Ohlin Theorem

(This is my article for the online magazine last night. I did not put the graphs in the original article, I only added them here, from a web lecture, The Heckscher-Ohlin Model,  http://www.valt.helsinki.fi/katal/opiskelu/ka6a/heckscher-ohlin.pdf)

http://www.thelobbyist.biz/perspectives/less-gorvernment/1269-migration-mobility-freedom

Migration = Mobility = Freedom

THURSDAY, 02 FEBRUARY 2012

Migration, whether short-term or long-term, allows an individual or a household, to pursue their dreams in other places or countries which they think they may not be able to pursue in their current work and residence. Thus, migration represents mobility across regions, countries or continents and hence, expands individual freedom.

The expensive welfare system in many rich countries though results in one bad policy: migration paranoia by their governments and certain organized sectors in the destination countries. They think that in general, new migrants are just welfare seekers, and the labor unions think that new migrants are out to steal their jobs even if many of them are not willing to do "dirty work" at lower pay.

In international trade economics, if factors of production (labor, capital, technology, etc.) are mobile and free to move across countries, there will be factor price equalization (FPE) among countries, the FPE theorem. A labor-deficit or shortage country cannot always use robots and machines to do certain jobs, they need to import workers and managers from other countries. Taking care of the sick and aged for instance, cannot easily be done by robots, an economy must import nurses, caregivers and other health professionals from other countries. The migrant workers will receive higher pay (high compared to the prevailing wages and benefits in their home countries, but may be low temporarily in the host countries). The outflow of some workers will result in reduction in labor supply and hence, partial increase in wages in the country of origin. When this process continues over the long term, and skills training keeps improving in labor-surplus economies, like the ocean around the world, wages and benefits will somehow equalize worldwide.

If there will be FPE, poverty will be eradicated. Only the lazy and highly irresponsible people will become poor, and they need not be bailed out or subsidized with various welfare programs because they have willingly chosen the path of laziness and irresponsibility. Then all the complaints and advocacies of the bleeding heart activists, trying-hard and hidden socialists, and social equality campaigners will be answered. No need for higher or new taxes, new UN and foreign aid central planning like the MDGs, new government bureaucracies and their endless global junkets.

A cousin concept of FPE is the commodity price equalization (CPE) theorem. If goods and services are free to move across countries, then products that are produced abundantly in one country resulting in cheaper prices can be exported to countries which have small or zero production of those goods and hence, prices there are high. Again, like the ocean around the world, commodity prices will somehow equalize worldwide. Whatever price differential across countries will just be due to transportation or shipment, storage, insurance and related costs. The existence of local trading monopolies and oligopolies can also account for such price differential but we will assume that such practices are kept to the minimum.

Both FPE and CPE are offshoots of the Hecksher Ohlin model of comparative advantage (CA). It took off from David Ricardo’s theory of CA and the model says that “countries will export products that use their abundant and cheap factor(s) of production and import products that use the countries' scarce factor(s).” (Wiki definition)

Migration paranoia, like climate paranoia and population paranoia, are of the same ideological DNA. All of them hate spontaneity and natural path of nature and human evolution, so all of them have one solution: more or big government. So government will control migration, and visa, more than a dozen types of visa -- migrant, dependent, student, working, visitor, training, etc. -- was invented by many governments. This is a big milking cow for many governments as there are plenty of direct and indirect fees to get a visa, lots of revenues that go to the governments’ treasury. And lots of possible extortion opportunities are opened up for the different government migration bureaucracies, like the Bureau of Immigration, POEA and OWWA.

In the US, both Republicans and Democrats, both socialists and democrats (and greenies, etc.) in Europe, other dominant political parties in rich countries in Asia, have invented various migration controls and regulations. There is discrimination and double standard, of course for their migration policies. European countries may impose strict and rigid migration and visa granting policies to many Africans, South Americans and mainland Asians, but not from oil-exporting Middle East Asia and North Africa. My Venezuelan friend was jokingly bragging his passport to us in our training in Sweden in 2003, he said that he does not need any visa to go to France, Germany, Italy, etc. because of Venezuelan oil, petroleum.

I got my second, multiple entry 10 years US (visitor) visa in April 2010. My first US visa was given in 2000. When I went to the US embassy for the interview for my second visa, I noticed that about 95 to 100 percent of the interviewees that day were smiling after the short interviews, usually only about 2-3 minutes on average. Meaning the US embassy was literally giving away (i.e., approving) US visa that time (or until now?) as the US was in deep economic recession then. So one lesson here is that economic hardships can prod a slightly migration paranoid economy to relax its visitor/migration restrictions to encourage more foreigners to visit their country and spend money there.

My last trip to Europe was in October 2008, I attended an FNF political seminar in Germany for 8 days, then I applied for 4 days extension to visit a friend in Bavaria (who then brought me to a glacier in Austria, nice), total of 12 days. The German embassy here gave me a Schengen visa for exactly 12 days, single entry.

One fear of the locals in host or destination countries is that migrants might abuse their expensive welfare system. While one long-term solution is to reduce the lenient welfare and subsidies given by the government to the sick, the unemployed and the young, the locals should also realize that migrants are taxpayers too, they contribute to the fund that their governments use for their welfare and pension. Migrants are usually willing to work on tasks that the locals would shun. Where there is more production of goods and services, there is more wealth in the economy. Both the migrants and the locals will benefit.
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See also:
Migration and Freedom 8: Denmark's immigration policy, May 17, 2011
Migration and Freedom 9: Immigration bureaucracy, July 19, 2011
Migration and Freedom 10: Multiculturalism and the Norway massacre, July 25, 2011
Migration and Freedom 11: Two migration theories, September 03, 2011
Migration and Freedom 12: Visa-free entry in Asia, October 24, 2011
Migration and Freedom 13: Travel Tax Robbery, December 06, 2011
Migration and Freedom 14: Shrink or Abolish the POEA, January 01, 2012
Migration and Freedom 15: Visa Free for Filipinos, January 02, 2012