JPEPA Ratification: Threat Economics

Ofreneo and Malaluan are trustees of Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, November 12, 2007 edition, pages S1/4 and S1/5.

In their paper titled “JPEPA: Why the Need to Ratify”, economists Josef Yap, Erlinda Medalla and Rafaelita Aldaba outlined the arguments in support of the ratification of the Japan-Philippines Economic Partnership Agreement (JPEPA). In brief, the arguments include the following claims: a positive impact on gross domestic product (GDP), generation of jobs, and poverty reduction. Such impact is expected to result from greater access to the Japanese market in terms of trade and movement of natural persons and from declining prices, rising incomes, and increased Japanese foreign direct investment (FDI). Fail to ratify, and we lose all these opportunities.

This is the same kind of threat economics that economists deployed in the 1994 World Trade Organization (WTO) debate. In that debate, the executive, with the support of free trade economists, bamboozled everybody by saying that if we did not ratify the country’s membership in the WTO, we would lose the opportunity to create half a million new jobs in industry and another half million jobs in agriculture every year.

Now we are back in the same old game: Ratify or we lose trade, ratify or we lose markets, ratify or we lose jobs, ratify or we lose investments. They are pointing a gun at us.

However, we now have the benefit of experience of the results of the trade liberalization that we undertook. Trade liberalization has failed to deliver on its promises. We did not see the modernization in agriculture; it remains trapped in low productivity. We did not see the massive expansion in industry; it has stagnated, with services picking up the employment of the expanding work-force. We did not see the employment and income revolution we were promised. Instead, what liberalization created was disillusionment and lack of faith in opportunities in the home country, intensifying the pressure on Filipinos to leave for work abroad.

Given this backdrop, it is doubtful whether threat economics will have the same efficacy as before.

In addition to being made skeptical by experience, many of the projections on JPEPA overemphasize the positive and hide the negative. For instance, Yap, et.al. claim that declining prices and rising incomes will reduce poverty, with more than 200,000 persons moving up the poverty line. Such emphasis on the overall effect fails to note the distributional effects. The analysis of Caesar Cororaton from which the overall effect appears to have been derived, has the following detailed findings: With JPEPA, the contraction in agriculture intensifies, agricultural wages decline, and unemployment rate in agricultural labor deteriorates, as the reverse holds for industry, particularly non-food manufacturing. Income inequality worsens.

Yap, et.al. claim that JPEPA can boost the growth and competitiveness of auto parts makers and car assemblers. Yet Article 27 of JPEPA and its implementing guidelines explicitly recognize trade in “used four-wheeled motor vehicles.” Auto workers unions are furious about this because out of the 200,000 new vehicles registered annually at the LTO (Land Transportation Office), only 80,000 to 90,000 are locally assembled by the members of the Chamber of Automotive Manufacturers of the Philippines (CAMPI) and about 30,000 to 40,000 are produced by jeepney manufacturers.  These mean that about 80,000 are imported, many of them second-hand used vehicles from Japan. In contrast, Japan’s EPA with Malaysia has a clear provision on the cooperation to enhance competitiveness in the Malaysian automotive industry. Malaysia and Thailand, the favored hub of Japanese automakers and auto parts, have explicit and strict rules against trade in second-hand vehicles and parts.

Yap et.al. claim that the Philippines is expected to lead the deployment of nurses and caregivers to Japan. Will Japanese health workers simply look away as Filipinos fill up the health care positions? Can our health workers learn the Japanese language quickly? Also, what will be the impact of this on our own health care at this time when skills problems are already being felt given the exodus of nurses to traditional destinations?

In terms of market concessions, Yap et.al. claim that almost 95% of Philippine industrial and agricultural export will face zero duties immediately from the implementation date. What is not said is how much of these already have a zero tariff base in the first place. The goods that Japan was protecting at the time JPEPA was being negotiated will mostly be subject to phased liberalization. In addition, Japan asked for the exclusion of more tariff lines from the coverage of liberalization.

Much is said about our already very low tariff levels within the 0 to 3% range. In other words, with nothing more to liberalize, we must be getting a good deal. Yet obviously we liberalize some more as they do not dispute the estimated PhP3.7-4.2 billion projected foregone tariff revenues for the first year of JPEPA implementation alone.

More important, however, is that the very low base tariff range for the Philippines is what was wrong with the JPEPA negotiation in the first place. The very low tariff range was the result of the deep, universal and unilateral trade liberalization based on the belief that it was the country’s ticket to economic progress. But while this achieved the general lowering of consumer prices, it failed to produce the promised restructuring, employment and income effect.

The unilateral trade liberalizers will never see the problem in the liberalization we undertook. See, for instance, Yap et. al.’s analysis of the auto parts sector: it is weak and underdeveloped due to “lack of capital and technology.” It will not be about the withdrawal of tariff protection and content requirement in fact weakening this industry. But the recent news report about Toyota Motors is instructive. Tokuichi Uranishi, vice president of Toyota for planning in Tokyo, said that the aggressive trade liberalization of the Philippines in the auto industry has made it difficult for Toyota to decide how to maintain its assembly plant in Sta. Rosa.

Given the outcome of the Philippine liberalization strategy, other competing strategies can lay better claim to effectiveness in achieving growth and poverty reduction. For instance, Harvard professor Dani Rodrik positively revisits other strategies:

  • Import-substituting industrialization apparently worked well in a very broad range of countries in terms of raising domestic investment and enhancing productivity. The proximate cause for the collapse of many of the economies that followed this strategy was more their inability to appropriately adjust macroeconomic policies to external shocks, rather than being imposed by the trade strategy.
  • The success of the outward-oriented industrialization strategy of the East Asian tigers, rather than being attributable principally to opening up, had to do substantially with the active role taken by these governments in shaping their allocation of resources.
  • Recent success stories of China and India follow dual tracks of state and market mechanisms, rather than across-the-board liberalization.

The Philippines had the opportunity to adjust its baseline tariff range, considering that it goes beyond the country’s tariff bindings in the World Trade Organization (WTO), when the WTO negotiations collapsed in the Cancun Ministerial Conference in September 2003. That was an opportunity for the country to recast its trade and industrial policy, no longer tied down by the simplistic formula of deep, unilateral, and universal trade liberalization. Had it done that, the bilateral negotiations with Japan and with other countries would have started from a point of higher leverage.

Unfortunately for us, instead of seizing the opportunity to make prior adjustments, we went straight ahead to pursuing efforts to “deepen economic integration” via the bilateral and regional agreements route. This they did with limited consultation and without public access to information.

In place of informed and accountable policy-making, what we get is threat economics.

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