Top 10 positive news in Asian trade

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

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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).

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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).

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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.

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Direction of trade of Asian economies

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

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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).

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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.

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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.

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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.

Free trade means faster manufacturing growth

* This is my article in BusinessWorld today.

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There is a populist and persistent belief that free trade means weakening, if not, bringing about the death of local manufacturing industries because they will not be able to withstand competition from more advanced economies abroad.

This belief has been repudiated many times in countries including the Philippines. And there is a new paper that repudiates this belief again.

Former NEDA Secretary Dr. Cielito Habito discussed a new paper at the Department of Trade and Industry (DTI) pre-summit roundtable, based on their research at the USAID-funded Trade-Related Assistance for Development (TRADE) Project.

The roundtable was part of the preparations of the DTI and the Board of Investments (BoI) in an important event they are jointly organizing, the “Manufacturing Summit 2016: Trabaho at Negosyo” this coming Nov. 28-29, 2016 at the Makati Shangri-La Hotel.

Besides plenary sessions, breakout sessions to be held will cover seven topics, one of which is International Trade Policy and Free Trade Agreements and Dr. Habito’s discussion was in preparation for this session. I was among those invited by the DTI for the pre-summit roundtable, thanks to Assistant Sec. Rafaelita Aldaba.

In January 2010, the ASEAN Free Trade Agreement (AFTA) became operational. The import tariffs on nearly all products traded across the ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Thailand, and Singapore) dropped to 0, some at 5% maximum. What happened to Philippine manufacturing by 2010 onwards? Dr. Habito showed this data (see Table 1).

Philippine manufacturing did not weaken nor did it die with freer trade. From an average growth rate of only 3% per year in 2004-2009, it went up to an average of 7.8% per year from 2010-2015.

Other sectors — fixed investment, durable equipment, private construction, exports — also showed faster growth rates under a freer trade regime, about three to four times faster than average growth in 2004-2009.

Ciel also showed slides where Philippine exports have moved up the value chain.

For instance, the Philippines exported around $200M of boilers, nuke reactors, machineries, optical, technical, medical apparatus, etc. to Indonesia in 2013 alone.

As we moved to freer trade, to zero tariff, our manufacturing and exports became more dynamic, more competitive, more job creating and more forex-earning.

One may also credit the past Aquino administration for keeping with trade liberalization agenda compared to its predecessor Gloria Arroyo administration.

Freer trade benefitted not only the Philippine economy but also almost all other ASEAN countries (see Table 2).

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The above numbers tell us the following.

One, the size of manufacturing output of the six countries have expanded significantly in just five years. The Philippines’ has grown from $26.5B in 2009 to $38.9B in 2014.

Two, in terms of manufacturing annual growth rate, Malaysia, the Philippines, and Singapore experienced faster growth rates while Thailand and Vietnam experienced slower expansion — but they nevertheless reported growth.

Three, manufacturing as percentage share of GDP has declined for all the countries above. This is not something to be taken negatively because almost all countries have shown this trend, with the declining share of agriculture and manufacturing and rising share of services.

Some policy measures that the DTI, other departments, and Congress should consider to further improve the country’s manufacturing and trade capacity would be the following:

  1. The government should help improve the economy’s competitiveness. Very often it is not “what government should further do” but rather, “what government should NOT do and intervene,” like fewer taxes, regulations, restrictions, and bureaucratic processes.
  1. Some factors that deter more investments in manufacturing in the country are outside the scope of DTI, like expensive and unstable electricity supply, slow Internet, poor infrastructure. More competition in these sectors should be encouraged.
  1. There are winners and losers in free trade, there are also winners and losers in protectionism. Overall, there is “net gain from trade” while there is net loss under protectionism. Tables 1 and 2 above have shown and quantified some of these gains, so we should never backtrack from further liberalization.
  1. Over the long term, we should consider adopting unilateral trade liberalization, one-way free trade policy, both in tariff and non-tariff measures (NTMs), and ultimately in services too. Hong Kong and Singapore are good examples of unilateral liberalization regimes, their exports of goods and services are much larger than most countries in the world despite their small population.
  1. NTMs as indirect barriers to trade should be relaxed through time and ultimately abolished. The main purpose of trade policy should be consumers protection and empowerment, to allow the local consumers to have more choices in buying and selling, to have more access to more markets and economies abroad.

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

Free trade means faster manufacturing growth

Yesterday, I attended a pre-summit consultation meeting by the DTI on free trade agreements (FTAs). It was part of the preparation for the “Manufacturing Summit 2016” this coming November 28-29, 2016 at Shangrila Makati. Small group with representatives from selected sectors in the PH economy like the garments and textiles, pharma (represented by Unilab), other manufacturers and government agencies. I was lucky to be among the invitees. Thanks to DTI Asec Fita Aldaba for the invite.

Former NEDA Secretary Ciel Habito gave the preliminary inputs based on their research at the USAID-funded Trade-Related Assistance for Development (TRADE) Project. This chart is from his presentation, and it is a very useful one for me.

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I posted that chart in my fb wall with a note that there are at least two ways to interpret this chart, growth rate of PH manufacturing output, average for 2010-2015 vs 2004-2009 average. One interpretation on trade and economics, the other on politics.

(1) Economics: PH manufacturing surged at average growth rate of 7.8% per year vs. only 3% in 2004-2009. With the ASEAN FTA (AFTA), PH import tariff rates went down to 0 – 5% by 2010. So the chart demolishes the hypothesis that “free trade kills local industries”. The opposite happened, that as the economy turns to freer trade, tariff down to zero, the manufacturing and exports sectors become more dynamic, stronger, and more competitive.

The annual growth rates in fixed investment, durable equipment, private construction and exports also grew fast, 3-4x growth average in 2004-09.

(2) Politics: PNoy Aquino administration enabled the PH economy to recover its slow and anemic growth during the previous Gloria Arroyo admin.

 

Another chart from Dr. Habito’s presentation. Big change in the composition and value of PH exports to TH, 2003 vs 2013. TH is more developed than PH in exports and manufacturing and still, PH was selling modern exports like optical and medical apparatus.

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The PH exported around $200 M of boilers, nuke reactors, machineries, optical, technical, medical apparatus, etc to ID in 2013 alone. As we move to freer trade, to zero tariff, our manufacturing and exports capacity do not die; the reverse happens, they become more dynamic, more competitive, more job creating and more forex-earning.

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After Ciel’s presentation, open forum. I commented the following.

  1. To improve the economy’s competitiveness, very often it is not “what government should further do” but rather, “what government should NOT do and intervene.
  1. Our main advocacy in MGT and SEANET is real free trade, unilateral trade liberalization both in tariff and non-tariff measures (NTMs) and also in services.
  1. Some factors that deter more investments in manufacturing in the country are outside the scope of DTI, like expensive and unstable electricity supply, slow internet.
  1. There are winners and losers in freer trade, and there are winners and losers too in protectionism. What is important is for DTI and other stakeholders to show “net gains from trade”
  1. NTMs as indirect barriers to trade should be relaxed and ultimately abolished. both by the PH and its trade partners.
  1. The main purpose of trade policy should be consumer protection, to allow the consumers to have more choices in buying and selling, to have more access to more markets and economies from abroad.

Free trade and higher income

* This is my article in BusinessWorld last Friday.

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Among the benefits of free trade, besides having tariffs as low as possible, if not zero, is higher income for the people. There are several ways by which this takes place.

First, free trade expands the choices and options of the local consumers and producers in the economy, both in prices and product quality. Thus, a rice farmer will have more choices where to get his new farm tractor, harvester, and fertilizer and this greatly expands his productivity while reducing crop wastes and losses. Competing suppliers from different countries will offer as low prices and/or better quality as possible to secure more buyers.
20160707de30dSecond, free trade creates high levels of goodwill among other countries. Allowing them to export as much as they can at zero or very low tariff rates makes many of them to open up and liberalize their imports from that country or economy. Only goods that can affect public health and safety will be barred or subjected to heavy regulations. Thus, zero or low tariff for shoes, bags and computers but not for guns, bombs, canned food, or medicines with questionable or tainted quality.

Third, free trade invites more foreign visitors and tourists because some products that are heavily taxed and are expensive in their home countries can be found cheaply or abundantly in their destinations. As a result, airlines, hotels, restaurants, malls in the economy expands significantly. Thus, in the case of Hong Kong and Singapore, they import in thousands of containers and “export” in millions or billions of shopping bags when the tourists fly back home to their country.

Here is a sample of economies which have zero or low tariff at most favored nation (MFN) treatment. We will omit discussion about non-tariff barriers (NTBs) at the moment. Three small but dynamic Asian economies lead the pack and two non-EU members, Switzerland and Norway, have lower tariff than the EU average. The Philippines’s tariff rate would approximate the rate of co-members in the ASEAN except Singapore and Brunei. While ASEAN and EU countries have zero tariffs on their co-members in their economic bloc, they impose certain tariffs for other countries outside the bloc (see Table 1).

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Japan and the US have also reduced their overall tariff over the past two decades. The Philippines has joined its neighbors in the ASEAN in unilateral trade liberalization but not towards zero rate. It is a mystery why overall tariff has increased after 2006 (4.49% in 2007, 6.48% in 2008, 5.8% in 2009 and 5.62% in 2010). No data is shown in the WB database after 2010.

We now check the income of the countries listed above and added other ASEAN countries. Economies with zero or near zero tariff also have very high per capita income (See Table 2).

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There are many other factors of course that explain for the high per capita income of those countries above, like having a rule of law and smaller population. Small population has forced them to open up to global trade via tariff liberalization, otherwise their small volume of consumers and producers will greatly restrict their capacity to expand their income and economic freedom.

The above are lessons for the Philippines and other countries show why pursuing free trade and unilateral liberalization towards zero tariff make a lot of sense. Expanding the economic freedom of their people to have more choices, more options where to buy and sell their various products and services is actually an end in itself.

Protectionism and nationalism are old philosophies that have served their purpose in the last century but will no longer work in the current century and beyond. Governments should learn to take a step back and ease regulation and taxation of trade.

 

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

PH exports growth from 1960-2014

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

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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).

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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.