ASEAN trade expansion and RCEP

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

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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.

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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.

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Mobility of goods, capital, and people in Asia

* This is my article in BusinessWorld last Tuesday.

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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).

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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.

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.

Freedom to trade in South and East Asia

* This is my article in Business 360, published in Kathmandu, October 2015 issue.

b 0ctFreedom to trade in South and East Asia

The freedom to sell one’s extra output and services, and the freedom to buy other people’s goods and services, is part of human nature. Humanity’s economic, social and cultural advancement from the primitive to modern times was made possible only with their freedom to trade and freedom of entrepreneurship and innovation.

There are various measurements of freedom to trade of countries today. One of which is Fraser Institute’s Economic Freedom of the World (EFW) annual reports.

The EFW is composed of five areas: (1) Size of government, (2) Legal system and property rights, (3) Sound money, (4) Freedom to trade internationally, and (5) Regulation.  And area 4 is composed of four sub-areas, shown in the tables below.

The EFW employs a scoring system of 0 to 10, where zero is totally unfree and 10 means there is full economic freedom.  Thus, high revenues from trade taxes, high tariff, wide variations and deviation of tariff rates mean low score. And more regulatory barriers, more NTBs also mean low score, low degrees of economic freedom for entrepreneurs.

In South Asia, Nepal and Bangladesh have scored better than India, Sri Lanka and Pakistan. Nepal in particular scored 122nd out of 157 countries. It ranked high in sub-areas (a), and average or mean tariff rate with just 12.2 percent, but it scored low in sub-areas (b) regulatory trade barriers and in (d) controls  of  movement of capital and people.

India ranked high in revenues from trade taxes and mean tariff rate, but was pulled down by big standard deviation of tariff rates, and controls of movement of goods and people.

b 0ctSource: Fraser Institute, EFW 2015 Report,
http://www.freetheworld.com/2015/economic-freedom-of-the-world-2015.pdf

To serve as comparison, four ASEAN countries are also studied. The 10 countries in the ASEAN generally have low tariff rates, with scores of 8 to almost 10 (Singapore and Brunei). This is a reflection of the accelerated trade liberalization in goods in the region.

There are problems of course, like having wide variations and high standard deviations in tariff rates, like Singapore, Malaysia, Thailand and Vietnam; they scored below 6.

The 9 countries above except Singapore and Malaysia scored below 6, rather low, in NTBs. EFW used data from the WEF’s Global Competitiveness Report, survey on NTBs.

ASEAN countries generally have low tariff rates, with scores of 8 to almost 10 (Singapore and Brunei). This is a reflection of the accelerated trade liberalization in goods in the region.

But there are problems too, like having wide variations and high standard deviations in tariff rates, like Singapore, Malaysia, Thailand and Vietnam; they scored below 6. EFW used data from the WEF’s Global Competitiveness Report, survey on NTBs.

b 0ct2Possible lesson for Asian economies, continue reducing import tariff rates….

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Non-tariff barriers in the ASEAN

* This  is my article in BusinessWorld last September 10, 2015.

1Trade between and among people is beautiful. What one does not need because he has surplus production, he can sell it and get those things he does not have but he needs, via purchase or via the old system of barter.

Countries and economies that trade more are more advanced, more developed compared to countries that are less friendly to more international trade.

That is why free trade has become a known policy and advocacy in many countries for centuries now. Import tariff rates have been declining significantly, down to zero for some economies like Hong Kong and Singapore.

But protectionist interests have invented many types of non-tariff barriers (NTBs) or non-tariff measures and these limit or restrict trade.

Among the less-visible type of NTBs are the various business bureaucracies and regulations. For instance, while it is possible to require only three documents to allow exporters and importers to ship or receive their products, other Association of Southeast Asian Nations (ASEAN) countries require six to 10 documents.

Here is one result of the World Bank’s Doing Business 2015 Report, section on International Trade. There were 189 countries covered in that report. Global ranks of ASEAN countries are given.

It would take around three weeks for an exporter to finally move his containers out of Cambodia, Laos, Myanmar, and Vietnam, too long compared to less than one week in Singapore and around two weeks for exporters in Malaysia and Thailand.

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It is really possible to cut the time to export to just 11 days or less, as shown by Singapore and Malaysia plus the seven countries above. The eight other governments in the ASEAN need not hold back the exports of their entrepreneurs for two weeks or more.

A similar measurement of bureaucracies and taxes as new variety of NTBs is covered by Fraser Institute’s Economic Freedom of the World (EFW) annual reports. The EFW is composed of five areas, including the freedom to trade internationally. This area is composed of four sub-areas: (A) Tariffs, (B) Regulatory trade barriers, (C) Black market exchange rates, and (D) Controls of movement of capital and people.

The EFW employs a scoring system of zero to 10, where zero is totally unfree and 10 means there is full economic freedom. Thus, high revenues from trade taxes, high tariff, wide variations and deviation of tariff rates mean low score. And more regulatory barriers, more NTBs also mean low score, low degrees of economic freedom for entrepreneurs.

For this piece, sub-areas A and B are shown. Laos was not included in the EFW report. Hong Kong is added here as “benchmark” for being the freest economy in the world.

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The above numbers show that ASEAN countries generally have low tariff rates, with scores of eight to almost 10 (Singapore and Brunei). This is a reflection of the accelerated trade liberalization policy in the region.

But there are problems too, like having wide variations and high standard deviations in tariff rates. Singapore, Malaysia, Thailand, and Vietnam have scores below six.

The member-governments of the ASEAN need to be reminded from time to time that the main purpose of trade liberalization is to empower the consumers and producers of their own countries with more choices. NTBs and complicated bureaucracies defeat or undermine that goal.

Free trade means free individuals, free enterprises. Restrictions to trade is restricting individual and economic freedom, the freedom to choose and compete, where and from whom to buy and to whom to sell.

Some consumers though can lose from free trade and unilateral liberalization if the goods they regularly consume are being exported because prices can go higher. But this loss is temporary because more goods, more choices from abroad will become available in the domestic market.

Multilateral trade negotiations for free trade are too unwieldy and costly, time-consuming and bureaucratic. Regional and bilateral free trade agreements (FTAs) are faster in producing agreements and results but they are selective and become an excuse for protectionism against countries where no FTAs are signed yet.

Unilateral trade liberalization, no need for or minimum of negotiations, just open the borders at zero tariff and minimal bureaucracies, is pro-development. There is little or no justification to restrict trade as it is a voluntary exchange between two or more entities — individuals, companies, and institutions.

People and companies, not nations and governments, trade with each other. Governments therefore should reduce restrictions on people and goods mobility.

In particular: (a) reduce tariff and non-tariff barriers like quantitative restrictions and customs bureaucracies, and (b) simplify visa requirements and issuance, reduce the cost of migration.

The main function of government in trade is to help enforce contracts and promulgate the rule of law. And the only justifiable considerations for governments to regulate trade are those involving public health and safety. Like bringing in or exporting weapons, ammunitions, dangerous substances, counterfeit or substandard medicines, virus-infected animals, etc.

All other goods should be allowed entry with the minimum or zero restrictions and taxation. This will significantly bring down prices and benefit consumers, especially the poor.

Two groups of people dislike unilateral trade liberalization: (a) the protected local businesses and cronies, political interest groups like militant trade unions and farmer organizations, and (b) trade negotiators and consultants who regularly fly and have endless meetings in some beautiful and expensive hotels and cities abroad.

Smuggling can be beneficial to consumers through lower prices compared to protectionist prices. But this expands corruption in government. To remove the opportunities for corruption and rent-seeking and at the same time give consumers and local producers the freedom to get cheaper goods and services, protectionism should be abandoned and unilateral liberalization should be pursued.

Other institutional constraints like protectionist constitutions that explicitly protect domestic business interests and limit foreign competition should be amended to allow or encourage more foreign investments and trade.

Bienvenido S. Oplas, Jr. heads a free-market think tank, Minimal Government Thinkers, Inc., and is a fellow of the South East Asia Network for Development (SEANET).

Non-tariff measures and barriers to free trade

* This is my article for BusinessWorld Weekender last week.
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Trade, human welfare, and their barriers

TRADE is perhaps the single most important invention made by humanity to improve their condition and welfare. It is so vital as to be essentially inherent to human nature, as shown by the earliest, the most primitive societies.

This is because no man, no matter how bright and resourceful, is capable of producing everything that he needs for himself and his family, especially in modern societies. Modernization is possible only through specialization of labor and skills, making efficient production of certain goods and services, generating big surplus and using the surplus to procure other goods and services that are more efficiently produced by other people somewhere else.

While trade is vital to human welfare and progress, it is also the object of envy and contention among certain sectors of society in different countries. While it is human nature to have free trade among people, politics and governments come in to cater to special interests in society and deprive many consumers of the freedom of choice, by erecting various tariff and non-tariff barriers (NTBs) to trade. And this creates trade disputes among participating governments.

The World Trade Organization (WTO) was established in 1995 mainly to pave the way for a rules-based global trading regime. The rules are transparent and apply to all member-countries.

In a forum at the Asian Development Bank on May 21, WTO director-general Roberto Azevedo said the organization supports global trade and development via five schemes.

  1. Providing a rules-based trading system that now covers around 98% of global commerce.
  1. Serving as a forum where countries can sit down and monitor each other’s practices and regulations to ensure that agreements are observed and respected.
  1. Offering a settlement mechanism for trade disputes between and among countries. Almost 500 trade disputes have been heard by the WTO, helping members to resolve their differences in a fair, open and transparent manner.
  1. Fighting protectionism. During the 1929-1933 Depression, retaliatory trade restrictions wiped out two-thirds of world trade. Such practice was not repeated when the world experienced heavy fiscal and financial turmoil in 2008, and response by governments was mostly calm and restrained. Under the WTO, member-states knew that they were bound by rules and obligations, so they had the confidence to resist domestic protectionist pressure.
  1. Providing a place where developing and least-developed countries have a seat at the table and an equal voice in global trade issues. These countries are also afforded special and differential treatment, and technical assistance to help improve their trading capacity.

While tariffs have generally gone down across many countries, there are various non-tariff measures (NTMs) and barriers that restrict free trade. The most prominent is restriction via various bureaucracies or trade bureaucratism, a serious problem for many exporters and importers.

In December 2013, a historic WTO ministerial conference in Bali produced an important output, the Trade Facilitation Agreement (TFA). Its goal is to make faster, easier, and cheaper the movement of goods across countries and borders. The WTO estimates that the TFA can reduce trade costs at the border by up to 15% for developing countries, and inject up to $1 trillion per year into the global economy, creating some 21 million new jobs worldwide.

The next challenge for the WTO is the TFA’s ratification by at least two-thirds of the member-states.

There are many other barriers to free trade. Here are the eight non-tariff measures (NTMs) imposed by different governments that limit or restrict the movement of goods and services across borders: Sanitary and phytosanitary (SPS), technical barriers to trade (TBT), anti-dumping, countervailing duties, safeguards, special safeguards, quantitative restrictions (QRs), and state trading enterprises (STEs).

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STEs are also known as state-owned/operated enterprises (SOEs) and, in the Philippines, they are called government-owned and -controlled corporations (GOCCs).

In East and South Asia, the NTMs are plentiful. See these charts. In the first row are charts for the Philippines, Thailand, Indonesia, Malaysia; second row has India, China, Japan, USA.

In the Philippines and Indonesia, the most common NTM is SPS. In Thailand and India, safeguards and anti-dumping are the common NTMs. China loves imposing QRs and anti-dumping while Japan’s favorites are safeguards and special safeguards.

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The US, falsely labeled by many people as the “chief ideologue” of the “jobs-killing free trade” philosophy, is actually a practitioner of multiple NTMs and other forms of trade restrictions.

In contrast, many other economies have very few NTMs, among them, Singapore, Hong Kong, United Arab Emirates, Qatar, United Kingdom, Germany, Spain, and Sweden.

Hong Kong and Singapore are the known practitioners of unilateral trade liberalization in goods in this part of the planet. Their NTMs are few compared to their neighbors in East Asia. UAE and Qatar used to be very small economies that became super rich largely through trade opening.

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UK, Germany, and other EU member-countries have strict observation of the free mobility of goods and people across the Union. Thus, their NTMs are very few, except for SPS measures. Freeing trade is among the most important policies that any nation can undertake to unleash the entrepreneurial skills and potentials of its people.

Whether high tariffs or low tariffs but multiple NTMs, such policies deprive the people of the freedom to choose and buy those goods and services that maximize their individual and household welfare. When households make big and regular savings via purchase of cheaper, freely-traded commodities, they can use those savings and surplus to procure other goods and services that otherwise they could not buy. This expands the range of commodities among consumers and, in turn, this expands business and employment opportunities for many other people.

Free trade simply expands human welfare, whether people realize it or not.

Bienvenido S. Oplas, Jr. is president of Minimal Government Thinkers, a Manila-based think tank advocating free-market economics, and a fellow of South East Asia Network (SEANET), a Kuala Lumpur-based regional think tank advocating free trade in the ASEAN.