The politics of trade policy

The author is a consultant to the Department of Agriculture, and a professor in the School of Government of Ateneo de Manila University.

Why do we trade?

Most Filipinos would answer this question with reference to the
benefits of expanded markets for the Philippines’ exports and
consequently more jobs in production for exports.

However, if asked, why do we work? Most would respond that we work to earn money so that we can buy things.

At a personal level, we intuitively know that trading our labor (then
using the money wages as the means of transactions) gives us a higher
standard of living than if we tried to produce everything ourselves. As
individuals, we know and act on the knowledge that specialization
enhances our individual incomes and wealth.

But this knowledge does not seem to hold in our perceptions of the
national economy. We know that a country will be wealthier and have a
better life if the country specializes in producing those products that
it is good at producing, exporting the surplus, and using the proceeds
to buy imports. Yet the notion that the gains from trade should be
measured by what we import, not by what we export, is difficult for
many.

Clearly, many of our leaders and commentators seem to see the benefits
of trade in terms of our ability to increase exports, not in terms of
our ability to increase our imports. For example, Agriculture Secretary
Leonardo Montemayor, along with Trade and Industry Secretary Mar Roxas,
frequently state that it is the national policy and strategy to open up
overseas export markets for the benefit of Philippine farmers.

And it is a common belief among other stakeholders, including farmers
groups, legislators and NGOs that increased imports are actually bad
for the Philippines. Recent media reports on China in the WTO
emphasized concerns that Philippine industries are threatened by
China’s exports. More specifically, there has been official action to
limit Philippine imports of tomato paste on the grounds that such hurt
local tomato paste manufacturers.

Furthermore, most Filipino leaders rail against markets closed to
Philippine exports. But how easy is it for foreign countries to open up
their markets? Our own political debates about protectionism show why
such opening is difficult to achieve.

The Politics of Trade Policy

If all our political leaders were well versed in economic principles,
then they would accept the fact that we export goods to earn foreign
exchange which enables imports. If, in addition to being good
economists, they did not care about being reelected, then they would
adopt the trade policy that would create the most wealth for Filipinos.

The trade policy that would create the most wealth for Filipinos would
be for the Philippines to unilaterally take down all trade barriers.
This action would lower import prices, raise our standard of living and
increase the level of domestic competition. This increased competition
would help keep consumer prices low and lead to increased productivity
as companies invest to stay ahead of domestic and international
competition.

But if unilateral trade liberalization would be so good for us, why haven’t we adopted it?

The answer is simple. Enhancing national wealth is not the goal of
Philippine trade policy. Policy results from the natural desire of our
political leaders to respond to the interests of their constituents.
And whose interests are most likely to be brought to the attention of
our leaders? The interests of those groups for which policy benefits
are large enough to justify advocacy efforts and resources.

In Nueva Ecija, Pangasinan and all other rice-surplus provinces, the
rice farmers and their political leaders have an interest in limiting
rice imports. In Negros and Tarlac, sugar planters and millers have an
interest in limiting sugar imports from Australia to maintain sugar
sector profits and jobs. Countrywide, poultry raisers lobby against the
import of chicken meat.

Clearly, it makes economic sense for these groups to support lobbying
to convince Congress and the administration to adopt protectionist
policies. The sugar industry is the most well organized among all the
commodity-based groups.

There are also groups and NGOs representing producers of coconuts,
coffee, bananas, livestock, poultry, fisheries, mango and cutflowers,
to name some.

Similar forces are at work in every country where competition from Philippine exports threatens their own vested interests.

To see why anti-import forces often win policy debates, consider rice
policy. The large gap between domestic retail and world rice prices
indicates that Filipino consumers would gain about P100 billion per
year if we completely opened our market to rice imports (Estimated as
the gap between world and domestic prices multiplied by the annual
consumption of the population.). In the aggregate, this is a huge sum.
However, on a per capita basis, it amounts to only about P1,250 per
Filipino per year.

In this case, the small gain to each of the many individual Filipinos
would seem to outweigh the losses to the few if we opened our market to
imported rice. Nevertheless, this economic imbalance does not usually
translate into adoption of a free-trade policy because Congress and
policy makers simply do not hear from outraged rice consumers. It only
hears from outraged rice farmers – or their self-appointed
representatives.

The political balance of power in trade policy favors those who
advocate for protectionism. The benefits of protection go to the few
who can organize and lobby for it, whereas the costs of protectionism
are borne by all citizens who do not find it worthwhile to spend time
and money in support of open trade.
{mospagebreak}
What about unfair trade practices?

Of course, companies and industries that lobby for protectionist
policies do not couch their arguments in terms of their desire for
higher profits. Rather, they typically argue their case by blaming
“unfair” competition from foreign exporters.

Often the “unfairness” is caused by lower labor costs in the exporting
countries. But unfair practices can also include government subsidies
to the exporting industries, direct subsidies to exports and
preferential tax treatments. Without some protection, lobbyists argue,
domestic producers would go out of business, and Filipino consumers
would be forced to buy from foreign suppliers.

What should be the response to these arguments?

One response is to simply say, “So what?”

If a company in a foreign country chooses to supply us with a product
at a price lower than we ourselves can make it, then we had better take
advantage of the offer.

If an exporting country’s taxpayers want to subsidize our consumption, then who is taking advantage of whom?
Few countries, with the notable exceptions of Hong Kong, Singapore, and
New Zealand, have adopted this “So what?” response. This is not
surprising given that profits for domestic companies are at risk, and
those at-risk profits can be used to lobby for relief.

If domestic companies or industries go out of business because of
import competition helped by excessive government subsidies, they may
have a legitimate complaint.

Where can harmed industries get relief? From the National Government?
There is a problem with allowing the domestic government to adjudicate
a trade complaint. Past experience suggests that this results in too
much relief and too few imports.

The alternative response is to let a disinterested third party
adjudicate trade complaints beyond domestic boundaries. That third
party is the World Trade Organization (WTO).

Role of the WTO

The WTO was formed upon completion of the Uruguay Round of trade
negotiations in 1994. Its primary purpose is to review trade policies
and to settle trade disputes among member countries. The WTO has no
ability to enforce its findings, so it can settle disputes only if
member countries choose to adhere to WTO rulings.

So far, the track record of adherence to WTO rules is mixed. The EU was
found to be out of compliance when it banned American beef imports
produced with growth hormones. But the ban continues. Other examples
can be cited.

If the WTO finds that a country is out of compliance, then trade
partners are allowed to use sanctions in the form of import tariffs
against the offending country’s exports.

However, is it not odd that a country punishes another country by taxing its own citizens with import tariffs?
For the WTO dispute settlement mechanism to work, countries must
voluntarily give up some of their economic sovereignty and follow WTO
rulings. The benefits to the world trading system from reduced national
sovereignty are obvious: trade volume and value will expand,
accelerating world wealth creation.

Giving up some economic sovereignty is good for each individual country
as well, because WTO rulings can be an effective counterweight against
lobbyists for domestic protectionism. Thus, for example, if Thailand
brings a WTO complaint against Philippine rice tariffs and wins, then
Filipino politicians that have supported the tariffs can say that they
have done all they can do, and Filipinos can enjoy the benefits of less
expensive food.

Future trade policy and agriculture

The best hope for expanded exports of Philippine agricultural exports lies with the WTO.

However, developing country members are protesting that they did not
receive enough of the benefits from the last round of talks. They argue
that they still face unfair competition from EU and US export
subsidies, import tariffs, and producer subsidies.

Developing countries also dislike US production subsidies and import
restrictions on textiles and certain agricultural products such as
peanuts and sugar. Developing countries will need to be convinced that
they will have more time to implement the last agreement, and that any
new agreement will open up developed country markets to their goods.

If the US and the EU are serious about increasing world trade, then a
demonstration of good faith would go far in showing that the new round
of trade negotiations will actually benefit the developing countries.
One demonstration could be a faster timetable by which textile trade is
liberalized. Of course, cotton farmers in the US, India and a few in
the Philippines would line up to fight this liberalization.

In any case, developing countries are looking for a demonstration of
resolve and good faith in favor of open trade from the developed
countries.

Therefore, if the world community wants to move forward with further
trade liberalization, then the US and EU in particular will need to
sacrifice a few sacred cows currently protected from import
competition.

No comments yet.