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No Free Lunch

When infants won’t grow up

/ 05:07 AM December 06, 2019

We embraced trade openness as a policy generally behind our comparable neighbors, whose outward orientation and more liberalized trade pushed them to move decisively to strengthen their farms and firms and attain export competitiveness sooner. Meanwhile, we wasted decades falsely believing that indefinitely shielding our domestic producers from foreign competition would strengthen ours. For rice and sugar, our longest holdouts, we not only imposed high import tariffs, but also went to the extent of exercising outright government control over all importation.

I was a direct participant back in 1991 in the negotiations for the Asean Free Trade Agreement, as part of our government panel of senior economic officials led by then Trade Undersecretary Lilia Bautista. Asean still had only six members, and the Philippines, together with Indonesia, were the spoilers pulling everybody else back and prolonging negotiations. Our official stance, determined by the prevailing domestic political sentiment then, was to resist lowering our trade walls at the pace our more aggressive neighbors Thailand, Singapore, Malaysia and Brunei wanted. As a way forward, they invented the “Asean minus X” formula: Those members who wished to adopt coordinated reforms to open their markets could forge right ahead without the others, if they so chose. Meanwhile, any member uncomfortable with opening up could opt out or take its time, but forego enjoying freer access to the markets of the other members who would move ahead.

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Economic theory traditionally justified trade protection via high import tariffs or quantitative import restrictions for “infant industries,” or those that need time to build up the strength to be able to stand up to import competition. Trade protection was meant to be like walkers for babies taking their first unaided steps, training wheels on a bicycle for one initially unable to balance it, or arm floaters for one first learning to swim—all to be shed once the skill was acquired. But trade protection, like baby walkers, bicycle training wheels and arm floaters, is supposed to be time-bound, and had never been meant for indefinite or permanent use.

In essence, the idea was to initially aim at import substitution, later to transform into export orientation, and the latter requires that domestic producers attain international competitiveness in order to thrive. It was that shift that our country failed to make at pace with our more dynamic neighbors, who embraced export-oriented policies well before we did. We kept our baby walkers, bicycle training wheels and arm floaters far longer than we should have, with government failing to define a clear timeline for trade protection at the outset. By the late 1980s, the reality of having too many 25-year-old infants dawned on our policymakers, at which time most goods had domestic prices significantly higher than, and quality clearly inferior to, those coming from elsewhere. Trade economists measured effective protection rates for domestic industries running up to 200 percent or beyond, showing how much we were penalizing Filipino consumers under the prevailing policy regime. Meanwhile, the widening wedge between domestic and foreign prices made smuggling increasingly rewarding, and increasingly prevalent.

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When we decisively lowered tariff walls especially for manufactured products in the 1990s, we economic managers were roundly accused of “driving the last nail in the coffin” of domestic industry. Yet rather than die, some of those most vocal critics turned into proud exporters within a few years. In the past eight years, after Asean eliminated tariffs on manufactured goods, our manufacturing sector has been growing faster than the overall economy.We now know from hindsight that our traditional conservatism on trade policy took a toll on our longer-term welfare and economic performance, especially our ability to create ample jobs for our rapidly growing labor force. The legacy of that conservatism haunts us to this date, as we continue to have the highest domestic unemployment rate among our comparable neighbors, even as millions of Filipinos have found work overseas.

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TAGS: Asean Free Trade Agreement, liberalized trade, manufactured products, tariff, Trade protection
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