Sucking sounds and tsunamis
WHEN THE North American Free Trade Agreement (Nafta) was about to take effect in 1994, American skeptics warned of a “giant sucking sound going south.” This was an allusion to the feared massive loss of American factory jobs (paid at around $12 an hour) to much cheaper Mexican labor (at $1 an hour) south of the
border. In a similar vein, some alarmists afraid of the Asean Economic Community that formally comes into being at the end of this year warn of a “tsunami” of Asean products flooding our markets next year and drowning out local producers.
The fact is, import tariffs had been brought down to zero for more than 99.6 percent of all goods that we trade with the rest of the Asean since January 2010, under the earlier Asean Free Trade Agreement (Afta). This means that for well over five years now, free trade already largely prevails within the Asean. For the Philippines, the only remaining exceptions are the highly political crops of rice and sugar, plus a few other farm products. Even then, our rice trade will not be freed until 2017, as the World Trade Organization (WTO) granted the country one final three-year extension on its waiver on liberalizing rice trade. Sugar import tariffs will also not go down to zero but will remain at 5 percent. Those predicting a tsunami of Asean products next year are creating ghosts—perhaps not realizing that if such a tsunami was to come at all, it would have come five years ago.
Yet no such “tsunami” actually came our way. On the contrary, the Philippine manufacturing sector has experienced resurgence since 2010, with average annual growth exceeding 8 percent, in contrast with only 3 percent in the past decade. Similarly, Americans never saw the predicted
“giant sucking sound going south” materialize when Nafta came into effect. Instead, the US economy actually boomed in the 1990s.
What was perhaps not anticipated by most was how global and regional trade has transformed into a predominantly complementary rather than competitive nature. The growth and increased sophistication of production, along with freer trade ushered in by the WTO and regional trading blocs like Nafta and Afta, led firms to reorganize their production processes. Firms found new opportunities for cutting costs and increasing productivity through international outsourcing of inputs and/or offshoring of certain value chain operations. Given the differences in endowments and costs of factors of production across countries, needed intermediate inputs can now be readily provided by external sources where they cost less. Consequently, it is now intermediate goods and services (as against final goods and capital goods) that dominate international trade, accounting for 56-73 percent of total trade. Products are now better described as “Made in the World” rather than in any particular country.
Indeed, our top export earners now are intermediate goods: electronic semiconductors, circuit boards and other such components used in the manufacture of electronic equipment and consumer products. Within the Asean, our top exports are various motor vehicle parts and components such as transmissions and radiators, electronics (both intermediate and finished products), industrial chemicals and refined petroleum products. Our top imports from the Asean belong to those same industries: motor vehicles, electronic equipment and consumer products, crude oil and chemical products. We have become very much integrated into various regional production networks or value chains that our trade with the Asean is best described as complementary rather than competitive. And in this world of complementary trade, trade protection can in fact be counterproductive, inasmuch as shielding our market from, say, Thai-assembled cars will only hurt Filipino firms that exported car parts and components to Thailand.
Little wonder, then, that when the trade ministers of the 21 member-economies of the Asia-Pacific Economic Cooperation met in Boracay more than a week ago, the discussion was not so much about liberalizing trade. Rather, the meeting prominently dealt on how to facilitate it, especially in the face of numerous nontariff measures that serve to impede trade, deliberately or not. Trade liberalization, through reduction and removal of import tariffs and quantitative import restrictions, has for the most part been achieved, whether regionally via regional trading blocs, or globally via the WTO. The Asean as a group has also forged bilateral free trade agreements in the past decade with six major economies in the region, namely, Korea, Japan, Australia, New Zealand, China and India, thereby vastly expanding the reach of regional free trade. This effectively widened the coverage of freer trade beyond the Asean’s 600 million-strong market, to the 3.45 billion-strong market of Asean+6, comprising almost half of the world population.
Trade facilitation is critical in a world of complementary trade based on regional and global value chains. This is trade that could benefit more small and medium enterprises, whose entry into international trade is fostered by direct or indirect participation in such value chains. The higher mission for new Customs Commissioner Bert Lina is not so much curbing smuggling and plugging revenue leakages. Rather, it’s about easing and streamlining trade processes for legitimate traders and manufacturers who keep the regional and global economy buzzing through the cross-border value chains. It’s the unnecessary hurdles in trade processes, not imagined sucking sounds and roaring tsunamis, that are the real enemy.
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