Trans-Pacific Partnership Agreement

They’re Baaaaaaack!

The APEC summit in Hawaii (photo courtesy of UPI.com)

In uncharacteristically blunt language, US President Obama as host of the APEC summit in Hawaii called on China to act like a “grown up” saying “enough is enough” and that it was time for the People’s Republic to “operate by the same rules that everybody operates” threatening dire consequences unless the yuan appreciates by 20-25%.

The US has been pressing China to allow its currency the yuan to appreciate more quickly to make American products more affordable to Chinese residents and similarly make Chinese exports less attractive to US based consumers. President Hu’s pragmatic response–allow imports to rise without necessarily liberalizing the currency exchange regime–is typical of the Middle Kingdom.

Unlike America’s faith in free markets, China would rather deliberately get prices wrong if it would allow it to maintain a healthy trade surplus with the US. This after all was the same path to development that the US took when it was still in its “catch-up” phase with Western Europe.

Yet America, with its penchant for universal principles (“we hold these truths to be self-evident”) is now in the game of preaching free trade, open markets and property rights in the Far East just as it preached democracy in the Middle East. China is instinctually groping for a particularistic response. Although sounding undiplomatic, I like Pres Obama’s rhetoric because it gave away an important concession in the development debate.

“Gaming the system” or the notion of applying the tools of industrial policy to generate a competitive advantage for nascent industries in global trade as a legitimate means to catch-up with more advanced economies while a country is still relatively underdeveloped has been acknowledged. In the local vernacular, “saling pusa” which refers to little children allowed to participate in a game without having the same rules applied to them would be the way America views the Chinese.

For those who believe that lowering trade barriers helps promote growth, the following graph taken from Dani Rodrik’s paper to the UN should help dispel that notion. It shows a positive albeit insignificant correlation between tariff levels and economic growth. At best, no correlation can be inferred between lowering barriers to trade and growth, which is why the Philippines despite having very low tariffs relative to its ASEAN neighbors, has not been growing strongly. As I mentioned in my last piece, higher barriers to entry actually have been found to induce domestic innovation that in turn leads to new exports.

Source: Dani Rodrik (2001), The Global Governance of Trade--As If Development Really Mattered: A UNDP Background Paper

This should help comfort those distressed by that CNBC press release that the Philippines is the worst place for doing business in Asia. It should also be noted that in their top ten worst places, India and Indonesia were included. If these are the sorts of countries that we are in league with, then we really should not be too bothered.

Despite that dubious title, one should actually pay attention to the fact that the CNBC pronouncement was based on the World Bank’s Doing Business Report. Many of the measures in this report simply do not apply to businesses within the special economic zones which is more relevant to foreign investors. Furthermore, petty corruption actually allows many of the so-called barriers for entry to be removed.

The main roadblock to foreign direct investments is actually the desire of business to operate with the same protection of contracts and property rights wherever they are along with low costs to entry without the necessary tax burden and industrial labor costs that are needed to foster this. On the other hand, ordinary citizens that politicians seeking re-election (as in the case of Obama) try to please don’t want unfair competition for their labor from less developed countries which try to create a system of arbitrage to attract foreign investors.

It isn’t that investors want a level playing field. Consumers by and large don’t really mind whether a producer competes fairly for a slice of their hip pocket. That means for a country seeking to attract foreign investors increasingly ceding a lot of its national policy-making abilities to Western bodies and institutions to gain access to its markets. Hence the rhetoric of Obama who is trying to create a narrative that would pit the economies in the region against China.

Having ceded the scene for the better part of a decade to Beijing which has forged a free trade deal with ASEAN (CAFTA, the China-ASEAN Free Trade Area), Washington is trying to regain the initiative with its Trans-Pacific Partnership agreement that boasts the commitment of nine APEC countries and counting. China has objected to not being invited to join the agreement. This is clearly a bid by the US to isolate it and strengthen its economic clout in the region.

This week, as he travels en route to the East Asia summit in Bali, Indonesia, the US president is scheduled to make a stopover in Canberra to address the Australian parliament and sign a deal that would increase US troop presence in a base located near Darwin. The two nations have already beefed up the ANZUS mutual defense treaty by allowing allies to invoke it in the case of cyber attacks just as it was used in justifying Australian participation in the US war against terror.

This posturing is clearly aimed at containing Chinese ambitions in the region. America is trying to prevent Australia and its other allies (Japan, Korea, Thailand, and the Philippines) from following in the footsteps of Germany which has been compromised as a NATO ally due to its economy’s dependence on exports to China. Australia sees the need to boost its military capability to help counter the military build-up of China while relying on iron ore exports to China for sustaining health in its economy. Other countries in the region notably Vietnam and the Philippines will seek protection under the US security umbrella given tensions with China over the Spratlys.

PM Julia Gillard earlier this year commissioned her own white paper that would create a strategic road map for Australia in the “Asian century.” Upon her return to Australia, she announced a new position on uranium exports to India, the other emerging power in the region. This back-flip on her party’s existing position to maintain a ban until India signs the Nuclear Non-Proliferation Treaty occurred after a meeting with President Obama .

Meanwhile State secretary Hilary Clinton is set to travel through Bangkok and Manila en route to Bali. She will no doubt seek to emphasize the theme that America is back in business in the region. P-Noy has been keen to float his own ideas about a solution to the Spratlys among allies, but membership in the TPP is very much in doubt as certain hurdles including constitutional restrictions on foreign ownership and weak protection of intellectual property rights prevent the Philippines from being admitted.

This means that the Philippines will engage in free trade with China via CAFTA, while having a military alliance with the US. This is probably the best possible outcome–a good way to counter-balance each competing force on either side of the Pacific. Australian PM Julia Gillard put it best when she said this week,

It is well and truly possible for us in this growing region of the world to have an ally in the US and to have deep friendships in our region including with China.

But for how long this formula will work only time will tell.

Shall We Dance (Cha-cha-cha)?

As foreign ownership of land is talked up in the Philippines, other countries like Brazil and Australia are looking to limit it.

Brazil began last year when it decided to treat farmland as a strategic asset on par with oil when the government invoked an old law from 1971 limiting the amount of rural land that foreigners are able to buy. It is estimated that as a result of this about $15 billion of planned agriculture investments will be dropped.

Australia followed suit early this year when its Parliament passed a resolution that would see for the first time their bureau of statistics (the ABS) collate a list of direct foreign ownership of agricultural land, water rights and businesses. This is seen as a first step towards taking any necessary action to safeguard the food security of the nation.

What spooked the federal governments in both cases were growing reports of sovereign wealth funds and state owned or state-backed enterprises buying up vast tracts of prime agricultural land. With the world population set to rise from 7 billion to about 9 billion by mid-century, the quest for food security is forcing countries like Qatar, China and Singapore to look overseas for their food supply.

Unlike the Philippines which has a constitutional restriction against foreign ownership of any kind of land, Brazil and Australia are not seeking to resrtrict foreign ownership, but merely monitor and manage it, to ensure that it doesn’t pose a national security risk or lead to speculative bubbles.

I think these considerations should give our legislators reason to pause and consider their plans for liberalizing participation of foreigners in certain sectors like communications, education, professional services and land. Liberalizing services may be necessary for the Philippines to join the Trans-Pacific Partnership and gain market access to signatory countries in the Asia-Pacific. Opening up real property is another matter.

Opening up land to foreign acquisition would require us to have a few necessary safeguards in place. How would the country maintain food security for instance? Should there be a requirement to seek government approval once the scale of land purchase breeches a certain amount? If so, what should that amount be?

The case involving the lease of one million hectares to Chinese interests for grains and bio-fuel crops which was halted by a petition to the Supreme Court due to its constitutionality will almost certainly become mute once constitutional restrictions are removed.

If stronger states such as Australia and Brazil start to place increasing scrutiny towards the use and sale of their land to foreigners, will the affected foreign firms turn to weaker states like the Philippines in order to pursue their agenda? Once these assets are sold, it will be very hard to retrieve them.

It makes the question of lifting constitutional restrictions all the more poignant. While it is true that it might stimulate much needed investments and exports, what will happen to us as a nation once our ability to feed our people is traded away?

Reciprocity: It Should Cut Both Ways

Should we liberalize professional occupations in the country?

I always have to remind freshly arriving compatriots in Australia complaining about certain “discriminating” policies on skills migration of how discriminating the rules are back home in the Philippines.

For instance, if a doctor from the Philippines wishes to practice medicine in Australia, he or she first needs to spend a few years “paying his or her dues” working under the tutelage of a sponsoring hospital and cannot seek employment elsewhere after this period before undergoing certain theoretical and practical tests. Something similar happens for nurses.

These so-called barriers to entry prevent more skilled professionals from coming to countries like Australia. We can call them discriminatory, but consider the rules in the Philippines, where there is an absolute ban on foreign nationals from practicing their profession.

When I gained permanent residency in Australia, I was eligible to work in a state government department although I was not yet a citizen. When I became an Australian citizen, I became eligible to work for the Federal government even though I had maintained my Philippine citizenship. Yet, if I try to work in government in the Philippines, I will first have to renounce my Australian citizenship (which is probably why I have chosen to blog about Philippine affairs instead of actually working in it).

These prohibitions were conceived of by our politicians as a way of protecting and preserving the domestic labour pool from foreign competition because of the large oversupply of skills that existed and still persists today.

Yet these very restrictions might actually prevent many of our countrymen from accessing jobs from abroad being outsourced to the Philippines. When it was written, our present constitution did not take into account the world we would be living in today where technology has allowed business functions such as accounting and law to be practiced across national borders.

The international standards governing these professions make it possible for a lawyer in Delhi to advise clients in New York or for finance professionals in Singapore to do the same. Education and certification of these professionals can also take place across national boundaries now. Ironically, the things that prevent us from signing on to international trade deals to capture a greater chunk of this growing market are the very laws that sought to maximize employment opportunities for our people.

At a time when the pool of college educated unemployed workers is swelling and where the imbalance between graduates supplied by our educational system and the demand for them domestically is rising, our current stock of leaders need to look at re-designing the institutions incorporated in our Constitution. We need as a nation to examine whether they make us well-suited and adapted to the new global environment that we are living in or in fact impede us from excelling.

At the time the nationalist provisions in our Constitution were framed, there was a deep-seated conviction that only an absolute ban would prevent Congress from eroding over time the principles enshrined in it. What we have to realize today is that the very fulfillment of those principles requires us to move away from an absolute ban and towards a regulatory framework that manages the transnational flows of services from human assets just as we have institutions to handle the flow of earnings from financial and intellectual assets.

The very source of our national competitiveness, our human capital, which props up our foreign reserves and domestic economy could become restrained in the future in its ability to compete for thousands of jobs that could be created in the Philippines unless we find a way around such arcane provisions in our legal system.