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.

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.

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).