US-China ‘trade war’ and PH federalism

* This is my column in BusinessWorld last July 9, 2018.

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Among the big topics that dominated last week’s global and national reports are (a) US-China ‘trade war’ which technically means equalized high tariff (EHT), and the hard push for Charter change towards federalism by the Duterte-appointed Constitutional Commission (ConCom).

The US-China EHT or ‘trade war’ officially started last Friday, July 6. The US slapped 25% tariffs on imports from China worth $34 billion and the latter immediately slapped a higher tariff on equivalent value of imports from the US. There will be a follow up EHT from the US up to $550 billion worth of imports from China and the latter is expected to have its counterpart.

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Meanwhile, funds have fled stock markets of countries that are expected to be net losers of this trade spat. China’s Shenzhen and Shanghai are the worst-performing stock markets in the world this year, having suffered a -19.1% and -16.9% drop in index values year to date (Ytd) or from January 02 to July 06, 2018, largely because of this EHT spat.

In comparison, the US’ DJIA experienced only a -1.5% decline year to date.

It is worth noting that the Philippine Stock Exchange (PSEi) is the 2nd worst-performing stock market in the world after China.

Several business uncertainties in the Philippines this year helped pull down the PSEi: (a) sharp rise in inflation rate after TRAIN 1 law, (2) changes in fiscal incentives and corporate income tax under TRAIN 2 bill, (3) wholesale closure of Boracay island for six months, (4) political uncertainties due to rabid federalism and Charter change hard sell by the government, (5) “Iglesia ni Duterte” vs “idiotic God” pronouncements, among others.

The PSEi level is also -1.2% compared to past three years, indicating that the gains under the previous administration have been wiped out under the Duterte government. This further shows that the federalism hard sell is misguided for at least three reasons.

One, a big and bureaucratic national government on the top will have another layer of big and bureaucratic state governments in the middle, aside from expanding municipal/city and provincial governments.

Two, federalism is no guarantee for economic prosperity nor political maturity.

While several developed economies have federal structures, the same can be said about some failing economies.

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And three, the current Congress that will finalize the contents of the revised Constitution is too handicapped by clear lack of independence from the Duterte presidency. Thus, potential desires by this administration for continued stay in power beyond 2022 can easily be granted by Congress.

Trade protectionism is wrong as it penalizes the consumers while fattening the protected local players. “Trump protectionism” is similarly ill-intentioned but “Xi/China protectionism” is even worse. A move towards equalized low or zero tariff is needed.

The hard sell for Federalism is wrong as it will penalize local businesses and entrepreneurs with more national and local/state taxation and regulations while fattening many national and local/state agencies and bureaucracies. A move towards shrinking national taxes and agencies should have been done before federalism is pushed.

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Fare control makes it difficult to get a ride

* This is my column in BusinessWorld last July 02, 2018.

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“For every action, there is an equal opposite reaction.”

— Isaac Newton (1642 — 1726) 3rd law of motion.

“Every government intervention creates unintended consequences which leads to further intervention.”

— Ludwig von Mises (1881-1973, Austrian economist)

My addition to the two related statements above is: For every government intervention and taxation, there is an equal opposite distortion.

And this is what exactly happens with a series of franchise, price, and surge control and then the per-minute charge control policies of the Land Transportation Franchising and Regulatory Board (LTFRB) in its regulation of transport network vehicle services (TNVSs) and transport network companies (TNCs).

First, franchise control.

When Uber exited Southeast Asia last April and was acquired by Grab, it had 19,000 Uber drivers in the Philippines. However, only 11,000 were absorbed by Grab because LTFRB only accredited this number. Until June this year, some 6,000 former Uber drivers were still waiting accreditation but LTFRB franchise control does not give them the chance. Some 2,000 ex-Uber drivers must have given up.

Fare control makes it difficult to get a ride

As a result, after the acquisition, ride requests reached 600,000 per day on average, making it difficult for everyone — even previous Uber users — to get a ride.

Second, price and surge control.

Even when Uber was operational, LTFRB put a cap on surge pricing on both Uber and Grab to 2x, later down to 1.5x, and this resulted in passenger inconvenience as their waiting time to get a car during rush hours became longer.

When the price is too low, the number of drivers to supply the demand is also low. A notice of “no cars available” shows up and riders’ waiting time to get a ride gets longer, if ever the car shows up. Which might mean cancellations of important meetings or inability to bring a sick person to the hospital.

When the price is too high, the number of riders will decline, or they will take the regular taxi or cheaper but lesser-known (good or bad) companies. If the trip is not very important, they may choose to postpone their trip and wait until prices decline.

Third, per-minute charge control.

TNVS charging P2 per minute is a mechanism to offset the big decline in surge pricing to only 1.5x. So even if the route and the pickup and drop-off areas have heavy traffic or are flooded, drivers will have additional incentive to take that trip. Abolition of per-minute charging therefore removes the incentive and hence, passengers will be unable to get a ride.

These three ugly interventions and regulations by LTFRB are anti-commuter and directly contradict its stated mission, “Ensure that the commuting public has adequate, safe, convenient, environment-friendly and dependable public land transportation services at reasonable rates.” Cheap but not available service is not desirable.

Now there is a fourth ugly intervention by the LTFRB. It disallows Grab the P2/minute charge but allows new players to charge that amount.

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This new policy of LTFRB violates the rule of law, that a law should apply to all players with no exception. What the agency exhibited therefore is favoritism of new players while harassment of existing player. In which case, LTFRB can also be called as the “Land Transport Favoritism and Regulations Bureaucracy.”

Only about 2.7% of the commuting public use ride-hailing services, the rest use mass transportation (jeepney, bus, UV express, MRT, LRT) plus tricycle, trisikad, and regular taxi. Why is the LTFRB focusing on that segment?

LTFRB should be ashamed of its franchise control, surge control, per-minute charge control, and TNC favoritism. It should reverse these policies. It should (a) expand the number of TNC drivers, (b) allow higher surge pricing, and (c) allow the P2/minute for all players, and not play favorites.

Interview on inflation, TRAIN, BBB, cha-cha, federalism

Last July 13, 2018, 4:30-5:30pm. I was one of three resource persons at One News, Cignal TV, , “The Chiefs” hosted by Ed Lingao and Roby Alampay. The two other panelists were NEDA Sec. Ernesto Pernia and fellow BWorld columnist Andrew Masigan. Topics covered were the high inflation rate, BSP and interest rates, TRAIN 1 and TRAIN 2, Build-build-build (BBB), charter change and federalism.

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Among the points that I articulated were the following:

1. TRAIN 1 law (the various tax hikes to more than cover the “revenue losses” of personal income tax (PIT) cut) is the main reason why the jump in PH inflation rates in 2018 is the highest in East Asia. Sec. Pernia disagreed of course, blaming the high world oil prices, Peso depreciation, high anticipation by businesses of price spikes, etc.

2. TRAIN 2 bill now in Congress should aspire for corporate income tax (CIT) cut from 30% to 15%, not just 25% as planned by the DOF, then the various reduction or abolition of various fiscal incentives can be done.

3. VAT should decline from 12% to only 8%, then reduce significantly the number of exempted sectors.

4. PH economic growth is a given, inevitable even if our President is a dog or a horse. Main reason is our big and young population, 106 M people with net increase of 1.7 M a year, net of death and migration. It is a big number of consumers, big number of workers and entrepreneurs.

5. BBB is possible without tax-tax-tax that we have under TRAIN law. We have NLEX, SLEX, NAIAEX, TPLEX, etc. without tax hikes. The key is to retain integrated PPP scheme, not hybrid PPP as being done by the Duterte administration. This shift to hybrid PPP is mainly to favor China and therefore, is a corrupt policy. Sec. Pernia denied this.

6. Charter change has been proposed mainly to change the economic protectionist provisions of the 1987 (current) Constitution but it is relegated now. The draft Constitution is heavily focused on political changes and little on the economic provisions.

1 news7. Federalism is pushed hard not to spur economic development as claimed by ConCom and the Duterte administration, but to spur more political development. The current big national government and current expansive LGUs (city/municipal, provincial governments) is not enough, they will create a new layer of elected and appointed officials of state governments in the middle.

Thanks Roby for the invite, thanks Andrew for the picture above.

Inflation, taxation, and protectionism

* This is my column in BusinessWorld on June 28, 2018

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Fans, allies, and supporters of Dutertenomics continue to cite high world oil prices as the reason for the Philippines’ rising inflation rates.

As expected, they maintain that tax hikes imposed by the newly implemented revenue legislation — Tax Reform for Acceleration and Inclusion (TRAIN) — have little impact on inflation.

The numbers for many countries say otherwise.

All countries were affected by high world oil prices but only a few of them have introduced higher taxes starting January 2018, unlike the Philippines. The result is indeed ugly for Dutertenomics to accept (see table).

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Even with these results, certain adjustments — if implemented — will have additional inflationary pressures.

These include:

One, fare hikes on public land transportation such as jeepneys, taxi, ride-hailing vehicles, UV expresses, and buses.

Owing to higher oil prices combined with increased taxes, several vehicle operators may be forced to cut costs elsewhere — buying cheaper spare parts, for instance — if they aren’t given the chance to raise fares, at least until end-2018.

Two, wage hikes by many companies that are reeling from the uncertainties of TRAIN 2 on the removal of various fiscal incentives.

Three, another round of oil/LPG/coal tax hikes by January 2019 or half-year away.

One option that Dutertenomics and its allies has not seriously considered is the reduction of VAT from 12% — the highest in ASEAN, higher than those in Japan, South Korea, Taiwan, China, Australia — and reduce the number of exempted sectors. Prosperous Hong Kong has zero VAT or gross sales tax (GST); Malaysia has also abolished its 6% GST as a result of Mahathir’s campaign promise. Cutting VAT from 12% to 8% (Taiwan has only 5%, Singapore has 7%, Japan has 8%) or even 10% will be a good anti-inflation policy.

On the positive side, Dutertenomics is pushing for the abandonment of rice protectionism this year, liberalizing trade imports by converting quantitative restrictions into lower tariff, no cap or maximum on rice importation. They project that rice prices can go down up to P7/kilo and hence, food inflation will follow.

This is a good move but pushed rather late instead of being legislated side by side with TRAIN 1. But it is better late than never.

Besides rice, government should also consider freer trade in many other commodities — clothes, shoes, appliances, gadgets and consumer electronics, oil, etc.

And we go to the subject of protectionism.

To stop or reduce all those accusations of who’s protectionist, (1) everyone or all countries should go for zero or near-zero tariff, zero or near zero subsidy, and minimal non-tariff measures/barriers (NTM/NTBs). And (2) let this demand will come from us, consumers, not from Trump or any head of state or politician.

Free trade, zero or near-zero tariff, is beautiful and is currently done by 10 member countries within the ASEAN, done by 28 member countries within the European Union (EU).

Free trade means cheaper commodities — cheaper food and medicines, cheaper oil and gas, cheaper mobile phones and computers, cheaper cars and motorcycles, etc. — and low inflation (even deflation for some), more consumption of more goods by the people.

On the global scene, here is one example.

Tariff rates on imported cars are 25% in Canada, 10% in the EU, and 2.5% in the US.

When Trump challenged equalized zero tariff for all, the others got angry. When Trump challenged equalized high tariff, the others remained angry.

So one big problem is that while people enjoy more choices via free trade, they also produce all sorts of protectionist excuses why free trade cannot be done in their country then lambast some leaders and countries for being protectionist. Double talk and trade hypocrisy is very evident here.

 

There are net gains (positives outweigh the negatives) from free trade and there are net pains from protectionism.

Anti-reason of Duterte’s anti-tambay order

* This is my column in BusinessWorld last June 22, 2018.

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“I have no reason to suppose that he, who would take away my Liberty, would not when he had me in his Power, take away everything else.”

— John Locke

(1632-1704, British philosopher)

Recently, President Rodrigo Duterte ordered the Philippine National Police (PNP) to arrest people who are out on the streets at night and seem to be idle or out making “tambay.” His speech to the PNP last June 14, 2018, which effectively became a directive was,

“My directive is ’pag mag-istambay-istambay sabihin niyo, ‘Umuwi kayo. ’Pag ’di kayo umuwi, ihatid ko kayo don sa opisina ni ano don, Pasig.’ Ako na ang bahala, ilagay mo lang diyan. Talian mo ’yung kamay pati bin[ti]–ihulog mo diyan sa ano. Do not — you be strict. Part of confronting people just idling around. They are potential trouble for the public.”

That directive has no details and since then, thousands have been rounded up by the PNP and brought to jails. Loitering or vagrancy has been decriminalized by RA 10158 in 2012 or under the previous administration.

I shared on Facebook a video uploaded by Ariel Morco last June 20. In that video, he went out of his small house, shirtless, when a police car and motorcycle passed by.

After he was accosted by an officer on a motorcycle, he went back inside but the officer pulled him out and was brought to the police van.

Mr. Morco wrote this note in his video,

“Ang tindi nio mga kumag na pulis. Andito lng ako sa bahay eh hinuli nio parin ako. Kahit wala ako damit pang itaas di naman ako nakatambay at wala ako sa kalye kita na naman sa video pumasok na eko eh hinila pa ako at pinilit na sumama. Mga walang utak na pulis. Kau na lng humusga.”

That video with 10,454 views the last time I checked it, was later removed with a note by Facebook, “Page could not be found.”

I suspect that some influential people have asked Mr. Morco to take it down otherwise, some ugly incidents might happen to him or his family.

Mr. Morco obviously is poor.

As seen in the video, his house is small and since it lacks air circulation, its residents occasionally remove their shirts while indoors to keep themselves cool. Occasionally, some of them go out, shirtless.

And when some PNP officers pass by, they think they have the “right” to penalize and prosecute these poor people, based on what the president said.

The World Justice Project (WJP) produces an annual study, the “Rule of Law Index” (RoLI) and score countries based on their performance on 8 factors and 44 sub-factors. The RoLI 2017-2018 Report involves more than 110,000 households as respondents and 3,000 expert surveyors in 113 countries and jurisdictions.

I checked the Philippines’ score in relation to our East Asian neighbors on two of eight factors: Factor 4 on “Fundamental Rights,” and Factor 8 on “Criminal Justice.” Not included in the report are Brunei and Laos.

In particular, I checked these four sub-factors:

4.2 The right to life and security of the person is effectively guaranteed.

4.3 Due process of law and rights of the accused.

8.1 Criminal investigation system is effective.

8.4 Criminal system is impartial.

The result for the Philippines indeed, is ugly.

Rule of Law Index 2017-18

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These four sub-factors are among the “downers” or those that pulled down the Philippines’ overall score and global rank.

I was wondering, if Mr. Morco resisted being dragged to the police van, could he been considered as “nanlaban kasi” [resisted] and perhaps shot later?

The PNP should be ashamed of incidence like this.

If the leadership is serious in fighting abuses and extortion by their men, they should name those officers and announce their suspension, publicly. Otherwise, those officers will do it again, preferably in poor neighborhood with no CCTV.

We pay more tax-tax-tax under this administration that partly raise the salaries and perks of personnel in government including the PNP. One reason why crime can be high is because the PNP are busy with mundane concerns like going after ordinary, innocent, unarmed citizens.

China mercantilism and US free trade challenge

* This is my article in BusinessWorld last June 20, 2018.

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There seems to be a predominant sentiment to demonize the United States.

These sentiments are variations of a theme, which include: a) “US protectionism” vs G7 nations, the European Union (EU) and China; b) US is a declining power while China is now the “new vanguard” of globalization; and (c) US withdrawal from the Paris Agreement is adverse unilateralism while China or Germany is the new leader of the “save the planet” movement.

These sentiments are based on illusion and emotionalism than hard data and propelled more by anti-Trump hysteria and pro-China wishful thinking in its Belt and Road Initiative (BRI).

Here are the numbers that show why these assertions are based on illusion than reality. These data sources are (a) GDP: IMF, World Economic Outlook database, April 2018; (b) Tariff rates: Fraser Institute, Economic Freedom of the World (EFW) 2017 Report; (c) Coal use in million tons oil equivalent (mtoe): BP, Statistical Review of World Energy, June 2018.

GDPTariffCoal_062018

Tariff rates’ standard deviation of tariff rate means the degree of tariff variation, the higher the standard deviation, the more protectionist an economy is for certain merchandise goods and commodities.

Covered here are the world’s six biggest economies in terms of GDP size, current or nominal prices. The Philippines is added to help compare our GDP size, trade and energy/climate policies.

These numbers show the following:

One, the US remains the biggest economy in the world despite anemic growth over the past decade (for instance, not one of the eight years of “hope and change” that the US economy grew 3% or higher). Its GDP size is nearly equal to the combined size of China, Japan, and Germany, the second-, third-, and fourth-largest economies.

Thus, to say that the US is a declining anchor of globalization is based on illusion.

Two, the US has the lowest average tariff rates in the industrialized world, has much lower rate, nearly one-third (1/3) that of China. Thus accusing “US protectionism” and implying that the rest of G7, EU, and China are non-protectionist is again based on illusion and not hard data.

Three, US withdrawal from the Paris Agreement is a wise move as China and India are the world’s biggest consumers of coal power, a favorite whipping commodity of the “save the planet” movement.

In 2017, China’s coal consumption was more than five times larger than the US; even India’s use was larger than the US.

On a related note, it is wrong for the anti-coal groups in the Philippines to call for further coal restriction since our coal use is very small even compared to “green” Germany and Japan, and much smaller than those of India and China.

China’s BRI can be considered more as a mercantilist project than a free trade project. Mercantilism is a 16th to 18th century economic policy that viewed more exports and less imports — more wealth accumulation via protectionism while having aggressive exports — as good policy.

Check China’s BRI information and these terms stand out:

  • push further exports amidst slowdown in global trade;
  • assist and promote troubled State-Owned Enterprises (SOEs) via lucrative projects abroad;
  • enhance the absorption capacity of export markets in the emerging world;
  • access to resource-rich nations in Central Asia, Middle East, Africa and Southeast Asia;
  • globalize Chinese technological and industrial standards across emerging markets.

Dutertenomics’ build-build-build (BBB) with high involvement of China banks and contractors is falling along the China BRI mercantilism. This means the government’s build-build-build requires lots of loans-loans-loans from China and necessitates tax-tax-tax via TRAIN and succeeding tax laws.

The US’ zero tariff, zero subsidy challenge during the G7 Summit in Canada early this month is somehow addressed to China. As shown by the numbers, China is far out from going to zero and thus the Trump administration’s policy is equalized high tariff with China. Judging from current movement in global stock markets, China stocks in Shenzhen and Shanghai are experiencing heavy beatings. Very likely Xi Jinping will blink first.

Ease of setting up and closing down business

* This is my article in BusinessWorld last June 18, 2018.

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Last June 6, I attended the “Seminar on Protecting your Trademarks and Inventions Overseas” jointly organized by the Philippine Chamber of Commerce and Industry (PCCI) and the World Intellectual Property Organization (WIPO), held at the PCCI building in McKinley Hill, Taguig City.

The main audience of that seminar were entrepreneurs and companies big and small to help them be aware of existing intellectual property rights (IPR) rules and their protection, commercialization, licensing and dispute resolution. I do not represent any SME or big company but I was invited there by Jess Varela, Chairman of PCCI Committee on IPR.

The three important speakers that day were Dennis Broze and Peter Willimott of WIPO Office in Singapore and Atty. Allan Gepte, Commissioner of the Tariff Commission and former Director-General of the Intellectual Property Office (IPO).

Then last June 13, I attended the 6th Ease of Doing Business (EODB) Summit 2018 at the PICC, organized by the Department of Trade and Industry (DTI). It is an annual event sponsored by the DTI with one important goal — to raise or improve the Philippines’ global ranking in the World Bank’s (WB) Doing Business (DB) annual reports. The DB 2018 report was recently released and the Philippines’ global rank has worsened, compared to its ranking in the last two or three years.

This year, the EODB 2018 event is more optimistic because of the passage of the “Ease of Doing Business Act of 2018” or RA 11032 which was signed into law only last month. The DTI and various agencies including SEC, LRA, BIR, BOC, BFP, LGUs have adopted various measures to hasten the law’s implementation.

Among the important speakers in the EODB 2018 were DTI Secretary Ramon Lopez, who is also the Chairman, Ease of Doing Business and Anti-Red Tape Advisory Council; Senators Juan Miguel Zubiri and Aquilino “Koko” Pimentel III, and Mr. Guillermo Luz, former Co-Chairman of the National Competitiveness Council (NCC). Sen. Zubiri is the main author of the law in the Senate and also the Majority Leader while Sen. Pimentel is former Senate President and now Chairman of the Committee on Trade.

In both the PCCI-WIPO and DTI events, the over-riding subject is competitiveness of the Philippine economy and its businesses.

Below are results of three annual reports, the WB’s DB, World Economic Forum’s (WEF) Global Competitiveness Index (GCI), and WIPO, INSEAD and Johnson Cornell University’s Global Innovation Index (GII) annual reports.

CompetitivenessRanking_061818

Numbers in parentheses represent the number of countries and economies covered in that particular annual report.

While the results in global ranking vary among the three reports, one trend can be identified — the most competitive Asian economies are Singapore, South Korea, Hong Kong, Japan, Malaysia, and Thailand.

The Philippines is among the least competitive in the region, which is not good for us.

I have three wish lists on this matter.

One, the prioritization and signing into law of RA 11032 is among the very few measures of the Duterte administration that I support. I wish that he will do more ease of doing business policies, not the ease of closing businesses such as when he moved to close Boracay for six months or the ease by which the government over-taxed people via TRAIN.

Two, I wish there was a provision on the ease of closing a business in RA 11032. Among the best incentives to attract investment is a contestable market or free/easy entry, free/easy exit. If businesses see that government will bureaucratize and harass them if they decide to close shop someday, they will think twice about coming in.

Three, I wish there was another law mandating that work in government (local and national, elected and appointed, continuous or on-off) will only be a maximum 15 years, prompting officials and staff to go back to the private sector.

Since many officials intend to become regulators and bureaucrats until they retire, they tend to be more prohibitionist and extortionist since their over-regulations and taxation of business will not apply to them.

 

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.