ASEAN trade expansion and RCEP

* This is my article in BusinessWorld last June 09, 2017.

bw

Despite various protectionist rhetoric by many world leaders against free trade, deep inside they know that there are “net gains” from trade and there are “net losses” under protectionism and restricted trade. Thus, while the multilateral trading agreement under the World Trade Organization (WTO) is not moving significantly, bilateral and regional free trade agreements (FTAs) are everywhere.

Trade within the Association of Southeast Asian Nations (ASEAN) is among the most dynamic in the world because of their consensus on faster unilateral trade liberalization policy and near zero tariff for all 10 member-countries since 2016. The region of some 630 million consumers would naturally attract the attention of its neighbors that want to source many of their needs and imports and want to export many of their products and services.

Thus, the ASEAN + 6 (Japan, China, South Korea, India, Australia, New Zealand) evolved and later these 16 countries moved towards creating the world’s biggest FTA covering half of the planet’s total population + the Regional Comprehensive Economic Partnership (RCEP).

Plenty of negotiations still ongoing but member-countries are hoping that RCEP will be formalized within the next two years. The main thorn in the agreement is not on tariffs but on non-tariff barriers (NTBs) or non-tariff measures (NTMs).

Last May 8, Stratbase-Albert del Rosario Institute (ADRi) organized a small group economists’ roundtable discussion on the “Global Geopolitical Situation: its Impact on Australian and Philippine Economies” at the Manila Peninsula Hotel. The main speaker was Mark Thirlwell, chief economist of Australia Trade and Investment Commission (Austrade).

It was a good forum with lots of useful data and insights. Among Mark’s points were the following: (a) Global tariffs are still low but have stopped falling, (b) Free Trade Agreement (FTA) coverage has grown but may have plateaued, (c) Non-tariff barriers are rising, including temporary barriers like anti-dumping, countervailing duties and safeguards, (d) trade liberalizing measures are surpassed or outnumbered by discriminatory/protectionist measures, and (e) ASEAN countries fit this global pattern as shown in these two very clear charts.

2017060894920

During the ASEAN Summit in Manila, Malaysian PM Najib Razak reemphasized the need to reduce the NTBs or non-tariff measures (NTMs) in the region, which have surged from 1,634 in 2000 to 5,975 in 2015.

Mark also said that e-commerce is also enabling trade citing the role of eBay, Amazon, and he asked if the world has already attained “peak trade” as global trade/GDP ratio has somehow plateaued at around 63% over the past few years. I argued during the open forum that like “peak food” (formulated by Thomas Malthus and later by Paul Ehrlich, others) and “peak oil” (formulated in the ’70s, reformulated in the ’90s), “peak trade” will not happen.

The average merchandise exports/GDP ratio from 2010-2015 of these Asian economies are as follows: Hong Kong 352.2%, Singapore 260.7%; Vietnam 152.7%; Malaysia 134.7%; Taiwan 114.6%; Thailand 113.6%. Yearly data I got from the ADB’s Key Indicators, November 2016 report. These are exports of goods alone. If exports of services are included, the ratio will grow much higher.

20170608bc46cASEAN countries should proceed with further trade liberalization and reduce the number of NTBs/NTMs at least among themselves. There is economic prosperity in trade expansion and misery in protectionism.

Global commodity prices, trade and growth

* This is my article in BusinessWorld yesterday.

bw
One of the beauties of free trade and global economic integration is that countries can benefit from low commodity prices as improvement in technology and processes in other countries result in bigger output for the same land area and other inputs. The downside of course is that when commodity prices go up, economies that are more dependent on imported products would tend to wobble.

The period from 2008 to 2014 was characterized by generally high food and commodity prices.

For instance, price of corn was only $98/ton in 2005 but it shot up to $223 in 2008. I think it was the momentum of the biofuels law in the US in 2005, spurring huge demand in the US, Brazil, other countries. The price mellowed in 2009-2010 during the global financial turmoil that started in the US, but shot up again to nearly $300 in 2011-2012.

The global spike in rice prices (aka as “rice crisis of 2008”) from $288/MT in 2005 to $700 in 2008 was caused by several factors, among which are (a) price hikes in major energy sources oil, natural gas, and coal in 2008, and (b) rice export restrictions by India, Vietnam, Brazil, other countries.

o4big_052617
Maize (corn) — US No.2 Yellow, FOB Gulf of Mexico, US price
Rice — 5% broken milled white rice, Thailand nominal price quote
Swine (pork) — 51%-52% lean Hogs, US price
Poultry (chicken) — Whole bird spot price, Georgia docks
Sugar — Free Market, Coffee Sugar and Cocoa Exchange (CSCE) contract no. 11 nearest future position
Coffee — Other Mild Arabicas, International Coffee Org. New York cash price, ex-dock New York

Crude Oil (petroleum) — West Texas Intermediate 40 API, Midland Texas

Natural Gas — Indonesian Liquefied Natural Gas in Japan, $/million metric British thermal units of liquid

Coal — Australian thermal coal, 1200 btu/pound, less than 1% sulfur, 14% ash, FOB Newcastle/Port Kembla

Among the reasons why world oil prices rose to record levels in 2008 was the high energy demand in the two biggest countries in the world in population, China and India. Prior to 2008, from 2003-2007, China’s GDP growth was always double-digit, averaging 11.7% per year. India’s growth during that period was also high, averaging 8.8% per year.

Implications for the Philippines

Among the things that the Philippines should optimize given these price fluctuations in world commodity prices are the following:

  1. Rice trade liberalization should have been started in 2010 when the Aquino administration took power. After short price spikes in 2011-2012, rice prices went downhill. The Duterte administration should proceed with full rice liberalization this year because of high medium term outlook for rice output and exports by our neighbors, Thailand and Vietnam especially.
  2. Sugar liberalization should be pursued too as world sugar prices have declined from their peak prices in 2010-2012 average of around 22 US cents per pound.
  3. Trade of corn and swine, even poultry should also be liberalized. Prices of rice, corn, swine, poultry and other food products are among the major contributors of the overall consumer price index (CPI) which are used to compute the inflation rate.
  4. Energy-intensive industries like manufacturing, hotels, construction, and transportation (on air, land, water) can expand their production and fleet to take advantage of lower prices of oil, natural gas, and coal.
  5. Two hindrances here: (a) the planned hike in excise tax for oil products by P6/liter across the board, and (b) continued onslaught by feed-in-tariff (FiT) and soon, renewable portfolio standards (RPS) that will result in expensive electricity. The purpose of trade and energy revolution is to make global energy prices become cheaper. The purpose of government in this case to make cheaper energy more expensive. These two measures should be abandoned and reversed someday.
  6. Among the ASEAN-6 big economies (Indonesia, Malaysia, Thailand, Singapore, Vietnam and Philippines), the Philippines registered the highest average GDP growth per year from 2010-2015: Thailand 3.7%, Indonesia and Malaysia 5.7%, Singapore and Vietnam 6.0%, and Philippines 6.2%. There was something good that the previous Aquino administration was doing that the new Duterte administration should somehow continue.

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

Mobility of goods, capital, and people in Asia

* This is my article in BusinessWorld last Tuesday.

bw

One big issue that failed to land on front pages during the ASEAN Prosperity Summit last week is the creeping protectionism, not through rising tariffs but rising non-tariff barriers (NTBs).

Malaysian Prime Minister Najib Razak pointed out during the Summit that NTBs and non-tariff measures (NTMs) from 2000 to 2015 have surged by nearly four times to 5,975 from 1,634. This despite the zero tariff regime for intra-regional trade and the creation of the ASEAN Economic Community (AEC) or the regional single market.

While ASEAN was created initially for defense cooperation against regional communist revolutions in the ’60s and ’70s, it has evolved into a platform for freer movement of goods, people and services, and capital or investment. It was a good development and it should be pursued.

This coming November, the Philippines will host the ASEAN partners’ meeting composed of ASEAN + 6 (China, Japan, South Korea, India, Australia, and New Zealand) + Russia and US. Mr. Putin, Mr. Xi, and Mr. Trump and other leaders will be coming to Manila.

The US exit from the Trans Pacific Partnership Agreement (TPPA) and China-Japan leadership in the Regional Comprehensive Economic Partnership (RCEP) are important developments.

By how much have Asian economies improved based on freer mobility of goods, services, investments, and tourism? Here are some basic data (see table).

o4big_050917

Those that have expanded by more than seven times in just 15 years are the following:

  1. Vietnam: 11.2x in exports, 10.6x in imports, 9.1x in investments, and 10.6x in tourism receipts.
  2. Myanmar: 7.2x in imports, 12.1x in investments, 12.9x in tourist arrivals; also high expansion in tourism receipts.
  3. Cambodia: 14.2x in investments, 10.3x in tourist arrivals, and 24x in tourism receipts.
  4. Laos: 9.3x in imports, 10.4x in tourist arrivals and 36x in tourism receipts.
  5. China: 9x in exports, 7.5x in imports, almost 6x in investments, and 7 to 7.5x in tourist arrivals and receipts.
  6. Japan: 7.4x expansion in international tourist arrivals.
  7. India: 7.5x in exports, 12.3% in imports, and 7.8x in exports.

The Philippines also experienced modest growth in all the above indicators but not fast enough to create more jobs and businesses to its 104 million people. We should take hard lessons from our two small neighbors with huge economic achievements, Singapore and Hong Kong.

Singapore with only 5+ million people and just 3 1/2 hours by plane south of Manila, has 6x more exports, 11x more FDIs, attracts more than 3x foreign tourists and more than 4x in tourism receipts than the Philippines.

Hong Kong with only 7+ million people and less than 2 hours by plane north of Manila, has 8x more exports, 32x more FDIs, attracts nearly 7x foreign tourists, and nearly 8x in tourism revenues.

What small economies Singapore and Hong Kong have that the Philippines lacks are two important policies: free trade (zero tariff, minimal NTBs) and stricter rule of law (the law applies equally to both rulers and ruled, applies equally to unequal people).

So while we have improved our GDP size and material wealth via freer trade, freer movement of people and capital, we need to free up more.

We should allow more islands and provinces to have their own industrial zones to attract more investments and foreign trade. To have their own international airports and seaports to attract more investments and more tourism.

More modern infrastructure, simpler rules, and freer trade will help the Philippines attain what our developed neighbors have already achieved. Drastic reduction in NTBs and the removal of rice quantitative restriction (QR) and protectionism for instance. And less politics, taxes and bureaucracies, more respect for the law by politicians and bureaucrats.

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

Economic freedom in Asia means faster growth, lower prices

* This is my article in BusinessWorld the other day.

bw
Thanks to its rapid economic growth, the Association of Southeast Asian Nations (ASEAN) is being looked up to by other economic blocs as it celebrates its 50th anniversary this month in Manila.

The pace of trade liberalization until this decade is perhaps the world’s fastest both among ASEAN member-states, and even among those outside the group.

Free trade creates good will among people and governments across the globe. It gives foreign trade partners greater access to the home market and, in the process, these trade partners tend to open up to more ASEAN countries’ exports and investments.

Here are two tables that show the economic wonders of free trade policy — not exactly zero-tariff and minimal non-tariff barriers (NTBs) but approaching there — for the emerging economies of Asia. We will use the purchasing power parity (PPP) values of gross domestic product (GDP) to somehow equalize valuation of goods and services across the world.

Overall, the GDP size of the world at PPP values was $40.3 trillion in 1996 and it rose to $120 trillion in 2016 or an expansion of more than three times in just two decades.

ASEAN-5 refers to Indonesia, Malaysia, Philippines, Thailand, and Vietnam. G7 countries are the US, Canada, Japan, UK, Germany, France and Italy.

o3abig_042617

Table 1 numbers show the following:

  1. Emerging and developing Asia (including China and India) is now the world’s biggest economic bloc with GDP size of $38 trillion in 2016, overtaking the G7. The expansion of GDP size in just two decades was six times, an astonishing feat. The per-capita GDP also expanded almost five times, the fastest in the world.
  2. ASEAN-5 GDP size of $6.5 trillion in 2016 was larger than the combined economies of the CIS or developing Europe or Sub-Saharan Africa. Per capita GDP expanded more than two and a half times over two decades which is larger than that attained by many other economic blocs.

o3bbig_042617

Table 2 numbers further show that:

  1. While emerging and developing Asia is only the 3rd largest bloc in the exports of goods and services in the world, selling $3.9 trillion in 2016, the size of exports has expanded 7.2 times after only two decades, the fastest in the world. In terms of price inflation, the region also showed consistent price decline and stability at only 2.9% in 2016, the lowest among developing blocs in the world.
  2. Sub-Saharan Africa and MENA remain burdened with high prices and slow expansion in exports.

Giving local consumers and manufacturers more economic freedom where they can buy and sell the various goods and services that they need and produce means empowering the whole economy. Price declines and price stability are proof that freer trade is working and are instrumental in stabilizing the supply of various traded goods and services.

There are winners and losers in free trade, the same way that there are winners and losers in protectionism. But overall, “net gains” from trade trump “net losses” from protectionism because locals are deprived by policies that limit choices and options.

20170425fd31aIt is important therefore, that emerging Asian economies like the Philippines should never lose sight of the potentials of free trade and resist protectionist aspirations that penalize the consumers while protecting local vested business interests.

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

Top 10 positive news in Asian trade

* This is my article in BusinessWorld last January 04, 2017.

bw

Global trade has significantly slowed down in 2015 which is ironic because it was the start of significant oil price declines. After recovering from the 2009-2010 global financial turmoil that started in the US, global exports reached $18.3 trillion in 2011, $19.0 trillion in 2014, but declined to $16.5 trillion in 2015.

Nonetheless, there are some good news in Asian trade which battled this global trend in export decline.

Below is my list of these positive developments.

1 China, Vietnam, Hong Kong, and the Philippines did not follow this global trend. Their exports in 2015 were higher than their 2011 levels. For the Philippines, exports reached $58.6 billion in 2015, higher than 2011’s $48.3 billion.

2 Many Asian economies remain leading exporters and importers in merchandise or goods trade, led by China, Japan, South Korea, and Hong Kong.

3 Five ASEAN countries are important players in global merchandise trade with at least $150 billion in exports. The Philippines is playing a far catch up with Indonesia and Vietnam.

4 In services trade (including revenues from tourism and business process outsourcing (BPO) firms) many Asian economies still remain part of the big- and medium-size players, at par or even larger than the average European economies. The $915-billion revenues in 2015 is for all 28 EU economies.

5 Within the ASEAN, the Philippines is a medium-size services exporter while Indonesia did not belong to the top 50 in 2015 (see Table 1).

o3a_010417

6 In some sectors, the Philippines ranked #10 globally in 2015 in the exports of telecommunications, computer, and information with revenues of $3.5 billion, and #6 in exports of computer services with revenues of $3.2 billion.

7 Of the economic blocs and free trade areas (FTAs) in the world, ASEAN is the third biggest next to the European Union and North American FTA (NAFTA). They are followed by the Gulf Cooperation Council (GCC), European FTA (EFTA), SAARC Preferential Trading Arrangement (SAPTA), and Mercado Común del Sur (MERCUSOR).

8 An expanded ASEAN + 6 (China, Japan, South Korea, India, Australia, New Zealand) under the Regional Comprehensive Economic Partnership (RCEP) will easily overtake both the EU and NAFTA in total merchandise exports. Those six partners are huge exporters except New Zealand (see Table 2).

o3b_010417
9 The statement “this is the Asian century” in terms of trade and GDP growth will become true starting this decade. The main factor to sustain this momentum is Asia’s huge and generally young population especially in India, Indonesia, Philippines, and Vietnam, comprising 1.7 billion people with an average age of only 24-25 years old which is one-half of the average age of Japan and many developed countries in Europe.

10 The statement “If America (or Europe) turns protectionist, Asia loses” is wrong. Whoever starts serious protectionism is the loser. Free trade creates good will with other countries while expanding the choices and options for local consumers and manufacturers, which expand their productive capacity.

Should Mr. Trump proceed with his campaign promise to ditch the Trans-Pacific Partnership (TPP), it can be good news for other Asian economies that are outside of the five Asian economies that are part of the TPP. They are expected to suffer some exports decline to big markets of the US, Canada, and Japan due to trade diversion from non-members to TPP members.

Freer trade and fewer restrictions in the movement of goods and people are becoming the norm in emerging and transitioning economies of Asia than in developed Asia, Europe, and America.

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

—————

Direction of trade of Asian economies

* This is my article in BusinessWorld last December 08, 2016.

bw

Global free trade should result in commodity price equalization across countries over the long term. Any price differences can largely be explained only by the costs of shipping, insurance, and trade administration.

Since full global free trade is not taking place yet and it is the regional free trade agreements (FTAs) that are predominant, countries’ exports and imports are diverted more to their neighbors or nearby economies in the FTAs. The gravity model of trade captures this preferential shift in trade.

The emergence of the ASEAN FTA (AFTA) with a generally zero tariff regime, ASEAN + 6 trade partners, and soon the Regional Comprehensive Economic Partnership (RCEP), resulted in Asian economies trading more with each other. The same for Europe with their European Union (EU) and the US and neighbors with their North American FTA (NAFTA).

o4big_120816

Some notable points from these numbers (see table).

One, China is the only Asian country with a declining percentage share of trade going to Asia, Europe, and Americas. This is because it expanded its exports to and imports from the Middle East, Africa, South America, Oceania, and the rest of the world. China is reaching out to all continents of the planet, which partly explains its huge growth in exports.

Two, Vietnam also experienced a decline in percentage share of exports going to Asia and Europe as it exported more to North and Central America, and there was a slight increase in percentage share going to Middle East and South America.

Three, Australia and New Zealand have become Asia-oriented in their trade performance as well, resulting in a drop in percentage share of their exports that went to Europe and North and Central America.

Four, the Philippines continued to pivot its trade from the US to Asia. The hangover of US colonialism and preferential market access has naturally waned through time.

Five, in terms of international reserves, everyone on the list showed significant increases ranging from one and a half times to more than four times expansion in just one decade — except Australia which showed only marginal increase. It is the Philippines which experienced the biggest expansion of 4.4 times in just one decade.

The experience of the Philippines and other Asian economies in trade and business expansion will be discussed in the “Pilipinas Conference 2016” organized by Stratbase-Albert del Rosario Institute (ADRi) on Dec. 8.

Panel 4 will discuss “The Philippine footprint in Southeast Asia and Beyond” and the speakers will be Chairmen and CEOs of some of the Philippines’ biggest firms like Manny V. Pangilinan of Metro Pacific Investments Corp., Jaime Augusto Zobel de Ayala of Ayala Corp., Enrique Razon, Jr. of International Container Terminal Services, Inc., and Joey Concepcion of RFM Corp. and Go Negosyo.

Political and military tensions in the region and other parts of the world mainly due to territorial disputes can be resolved peacefully as people and private enterprises do more trade and investments with each other. After all, countries and governments do not really engage in trade; people do.

Governments should continue to liberalize trade, both tariff and non-tariff measures. They should continue to liberalize investments by abolishing or drastically cutting restrictions due to nationality and racial preferences.

People only want more trade, more tourism, business and cultural exchanges, not war preparations and huge military spending that are financed via high and rising taxes.

Free trade means more investments and people mobility

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

bw

Free trade means giving people and private enterprises the freedom to produce more commodities that consumers demand at certain prices. These producers then leave sectors and areas where expected returns and other gains are lower if not dwindling.

This may sound “heartless” for losing sectors but whether one supports free trade or protectionism, there will always be winners and losers. It is just that there are more “net gains” from trade while there are more “net losses” from protectionism.

In a paper “Goods trade liberalization under the ASEAN Economic Community: Effects on the Philippine economy” published in the Philippine Review of Economics (PRE), December 2015, authors Dr. Ramon Clarete (UPSE) and Philip Arnold Tuano (AdeMU) examined the economy-wide effects of goods trade liberalization in the ASEAN. They used the Global Trade Analysis Project (GTAP) model in assessing the impact of the ASEAN Free Trade Area (AFTA) implemented in 1992.

The important provisions of AFTA mandated the 10 countries to: (a) reduce trade taxes and tariff on goods coming from other member countries, (b) remove quantitative restrictions on goods and convert it into tariffs that should decline through time, (c) reduce other non-tariff measures (NTMs), and (d) enforce rules of origin or goods should have local content of at least 40% of the freight on board (fob).

The results for the Philippines in their study showed the following:

  1. Production effect: Of the 40 industries representing the Philippine economy, 24 suffered some output decline and 16 experienced output expansion at a bigger rate than the losses of the former.
  1. Employment effect: Of the 40 industries, 31 experienced decline in the hiring of skilled labor while nine experienced expansion at rates larger than the combined employment losses in the former.
  1. Trade effect: Thirty-six of the 40 industries that imported goods were able to benefit as compared to the 16 industries that engaged in exports. However, the gains were much larger than the losses of the other industries.
  1. Price effect: Wages of both skilled and unskilled labor, cost of capital increased while land rent declined.
  1. Overall effect: The Philippines gained some $237 million, equivalent to 0.05% of GDP, as a result of trade liberalization in goods under AFTA.

There are other benefits from trade liberalization besides the four measured by the above study. Freer trade creates more goodwill not only in trade and investments but also in mobility of foreign workers/managers and tourists across countries through more cultural and educational exchanges, and so on.

Here are some data on revenues from merchandise or goods exports, foreign direct investment (FDI) net inflows (i.e., inflows minus outflows for the given year), worker remittances and compensation of employees, and international tourism receipts that correspond with expansion in tourist arrivals.

o1_121516

The Philippines did not expand its merchandise exports as fast as compared to its many ASEAN neighbors. There are many factors for this, including a generally over-valued exchange rate, and many trade bureaucracies that prolong the process and increase the cost of exports and imports. All the four tigers in North-East Asia plus Singapore and Thailand are major exporters.

In FDI net inflows though, the Philippines reported an expansion of almost four times in just 10 years. Vietnam and Singapore benefitted the most in the southern region while China and Hong Kong continue to attract huge FDIs.

In labor remittances, China is #1 in the world while the Philippines is #1 in the ASEAN and about #4 worldwide, next to China, India, and Mexico perhaps.

The Philippines also reported that its receipts from international tourism expanded by more than twice.

Notice that five ASEAN neighbors that have higher merchandise exports are also the same countries that have higher tourism receipts than the Philippines.

The lesson here is that trade liberalization — by cutting tariffs to very low, if not zero, rates and reducing non-tariff barriers — can result in more FDI inflows, more tourist arrivals, more cultural exchanges in the region.

Other factors should accompany trade liberalization of course. Like better airports, seaports, and roads; cheaper electricity and high power capacity; more competition among airlines and shipping companies; fewer bureaucratic processes in investments and mobility; rule of law and reduced corruption and instability in enforcing various local and national laws.

Fewer taxes and trade restrictions, stronger law enforcement are just among several key ingredients to further modernize and reduce poverty in the Philippines and other developing countries.

 

Bienvenido S. Oplas, Jr. is the president of Minimal Government Thinkers, a SEANET Fellow and both institutes are members of EFN Asia.