Still on the elite

I still stand by my views on the utter underlying reason for what ails Philippine society which is our selfish and narrow minded elite.

To readers, it should be pointed out that I'm not even making a claim to originality as far as the ideas on the elite are concerned. I refer readers to far more thorough writers on the subject and a recommended list of books are as follows, for which Studwell's books should be read alongside with (and notably is merely the most recent on the subject):

> An Anarchy of Families,
> The Anti-Development State,
> The Rulemakers,
> The Modern Principalia,
> Booty Capitalism,
> Sugar and the Origins of Modern Philippine Society, and
> Democracy and Discipline.

Anybody can buy a copy of the above books at Fully Booked, Powerbooks, National Book Store, and i strongly suggest readers to do so and make their own conclusions regarding the matter.

While we're on the subject, I refer readers to pages 54-67 of The Odyssey of Lorenzo Tanada (by Agnes Bailen, 1998). As an exercise, see the names of the people who were charged as collaborators with the Japanese and compare them with the names of people now in the senate, congress, or government. Of course, some may say that the issue is so last century but, if that's the case, perhaps nobody should complain then if Imelda Marcos and the 'cronies' avoid proper trial and judgment, or when Erap got pardoned. However, that is not the point why I brought up the difficulties encountered by then Senator Tanada when he was prosecuting the elite for collaboration. The point is ... why do we still have the same group of people, the same families, leading us? Why are we still relying on the same people who have let us down for so long? Why entrust our future and the solution of our problems to the same group or families who created those same problems in the first place?

That is why I keep saying we recognize the problem first, make no bones about it, admit it, then solve it. The problem is the elite, our oligarchic class. The solution is to make our country no longer rely on them, have them loosen their grip, and create a system that actually encourages more qualified people into positions of leadership.

For me, a deliberate and committed policy of greater and liberalized trade and investment, focus on education, and the refinement of our tax laws (particularly the expansion of a graduated - with big exemptions for the middle class to lower class - estate tax) would be a good start (with emphasis on the word 'start').

Overall, we need to start espousing an overall policy of having a stake in each other, that the success of our neighbor and our community is our success as well. We have to stop this slide into thinking that we are above our fellow Filipinos, of our current idea of success being to escape from our countrymen by either migrating abroad or living smugly/arrogantly in gated/fortified communities or condos.

I am not fostering a class war, it's the elites who did for selfishly insisting that they are the ruling class and the rest as merely the 'exploited'. One illustration of a country going wrong: I see people comfortably driving Jaguars and luxurious SUVs around Powerplant, then I see old women and kindergarten kids scurrying to avoid rainwater and rushing buses at the EDSA crossing, without a proper pedestrian lane or crossing, topped off by MMDA people shouting at them. Even just setting aside the NBN-ZTE issue, the Malacanang cash in bags issue, and just look at the little things would show the utter lack of care for the least of our lot. From this alone we can see how undeserving our current leaders are.

Another example is our lousy education system. The primary victims here are the poor, which obviously don't have the resources to send their kids to Harvard or Georgetown. The Philippines is all the worse for it as the best economic policy is good education. Singapore has shown you don't even need more money to have a good educational system. Singapore actually spends less on it than a lot of other countries (see here). We can do better in this regard if our leaders really wanted to and given much thought to our country's education system. They don't.

I just want a better country, where your talent and hard work matters and not your family or capacity for corruption, where you don't have to be rich to have dignity, and where you don't need to buy an army to feel secure and at peace.

But I digress. First things first, we just obviously need a better set of leaders. At 80 million people, I'm sure we can do a whole lot better than what we have right now.


Lamy visit and Trade Tripper

WTO Director General Pascal Lamy was here in Manila. Two days ago he gave a speech at the ADB and said that to meet the challenges of development and participation in the trading system then country vision, financing, and the role of the private sector should be focused on. With regard to national vision, he says:

First, the importance of national vision — backed by a comprehensive strategy for getting there. No one can tell a country how to trade or become more competitive. The only successful export-led growth strategy is one which countries want themselves — that they design and implement on their own — and that remains on course over the long-term.

Nothing to disagree about with there. I had the interesting privilege of talking to Mr. Lamy yesterday, with some of that discussion being included in today's front page article in BusinessWorld. One area I wanted to explore was the need, if any, for a revision of the present multilateral system and create in its stead a more holistic one, something like a "World Economic Organization." Mr. Lamy's answer was comprehensive and well thought of but only this portion (for reasons of space) was printed:

"BW: You mentioned before that the WTO is a medieval organization. Considering there’s been a lot of activities, is there a need to expand WTO to include finance or perhaps merge with another organization to encompass a more complete economic type of multilateral engagement?

LAMY: In my past life, I said the WTO is a medieval organization. That was some time ago in 1999.

We can improve WTO in terms of organization, institution but it’s not the present priority. The present priority is concluding the round and the reason why it’s not yet concluded has nothing to do with institutions and organization ... let’s finish the round first then we’ll have time to look at procedures that need to be improved in the organization.

Should WTO extend its limit to things covered by other international organizations? No I don’t think so, unless you totally reshuffle [the] international system which we inherited ... I don’t think members of this organization are always coherent but you know sovereignty could be monopoly of incoherence. That’s up to them but incoherence stems from incoherence of our members. If there are contradictions in what they do in trade, finance, environment, social, migration, it’s up to them to give necessary coherence within each of their organizations ...

That’s the way the system works for the moment. I don’t think enlarging the scope of WTO for the moment is the right thing to do, it would give the wrong impression that the trade dimension supersedes other dimensions of international life ...

My Trade Tripper column today in BusinessWorld is on International Law and Philippine Law. Excerpt:

"To say that international law is to be treated within our jurisdiction as superior to our local law and our Constitution is as misleading as to say that the US embassy grounds on Roxas Boulevard is US soil (it’s not: it’s Philippine territory). As I keep saying, the faster we grasp the concept of confidently asserting our national interests vis-à-vis international law, the better international citizens we’ll be."


The right mix

The FT's Weekend issue last, well ... weekend, featured this thought provoking piece by Martin Wolf and bolsters my view that free trade alone (but definitely not protectionism, even if the same is disguised as "fair trade") will not be enough to make this country successful but rather a combination of factors that we haven't even begun to determine, so caught up we are still in the narrow free trade/protectionist debate. Excerpts:

"The big successes of recent decades - from Hong Kong to China, South Korea to Ireland, Singapore to Taiwan, Japan to Finland - were not all free traders (though some were). Some also relied heavily on foreign direct investment (China, Ireland and Singapore), while others resisted it (Japan and South Korea). Yet all used the world economy - and therefore trade - as a central part of their development success. x x x

The argument that success will follow the overthrow of the neo-liberal consensus and the return of protection is nonsense. But the authors are right that those who argued that free trade alone is the answer were wrong. There are no magic potions for development. Developmental states can work. Many fail. But some may succeed.

Above all, developing countries should be allowed to try, and so learn from their own mistakes. Countries should be warned of the difficulties of following South Korea’s example, but allowed to do so if they wish.

Big and relatively successful developing countries, such as China and India, must participate in and be bound by global rules. They cannot be free riders. But the bulk of developing countries should be allowed to choose their own policies. Almost all will need to attract inward foreign direct investment. A few might still manage without it.

Chang is right that some of the constraints imposed upon developing countries, notably on intellectual property, are unconscionable. Most should enjoy the benefit of open markets from the rich, but be allowed to pursue their own paths, from laissez-faire to its opposite. They will make many mistakes. So be it. That is what sovereignty means.

In this regard, it's also worthwhile to point out that the mantra of some sectors here, which is to have "fair trade, not free trade", and to have a trading system for the Philippines that is "calibrated, measured, progressive, and in synch with the country's development priorities and capacities" do not really make sense for the simple reason that they don't mean or say anything substantial or concrete.

What is "fair trade"? "Fair" for whom? For the government favored companies, with preferential treatment, at the expense of other industries and the consumers? Fair for so-called Philippine companies that are actually owned by foreigners? Or fair for companies that could never make money no matter how much favoritism is given to it? Or fair for farmers that have been victimized not by trade liberalization but by smuggling? Also, how different is "fair" from an objective, rules based trading system such as the WTO where a small country like Antigua can win in a trade dispute against the US?

Then you have "calibrated". How different is that from protectionism, of raising or maintaining tariffs, or selecting industries that have strong lobbies for purposes of giving protection? Measured? What is measured protection for companies that have been receiving subsidies, tariff protection, and other forms of government favoritism for decades and still can't make a decent business that would provide income to its workers? Or for infant industries that have been infants for decades? In any event, who does the "calibrating" and the "measuring"? Who decides who are to be the winners, those that are to be protected? Progressive? How can something be progressive when you let consumer prices rise to the detriment of the greater number of the populace, most of which are under poverty levels, just so a few companies and a few favored businessmen can hold on to their wealth and lifestyles?

The fact is, despite all attempts by these sectors to appear reasonable and thoughtful by the use of the words "fair trade" and "calibrated", the thing still boils down to protectionism which has been proven to not work and results in even greater hardship for the poor. What we need is to open the economy within a context and environment that would allow for greater maximization of the benefits of trade and a more equitable distribution of the fruits that it will bring. Finally, the word "nationalism" should not be and never be attributed solely to protectionists or so-called "fair traders". The people who espouse trade liberalization are every bit as nationalistic or patriotic, if not more so for the simple reason that they believe the Filipino can.

In any event, it's time to move the debate past the free trade/protectionist paradigm. Protectionism doesn't work, period. What we need to find out is how to have a better form of trade liberalization that fits the country's peculiar circumstances and needs and which benefits the most and not only a few.


Feliciano on tariffs

Yesterday I had the privilege of participating (as reactor) in a highly interesting and informative lecture given by Justice Florentino Feliciano (formerly of the Philippine Supreme Court and the Appellate Body of the WTO) at the AIM. The topic was "Constitutional Law Issues and the Tariff Regime of the Philippines". The following article, by Paul How, appears in today's issue of BusinessWorld but, unfortunately, is not available online. For the benefit of the readers, here it is:

Clearer jurisdiction over tariffs sought

A former justice of the Supreme Court yesterday called for amendments to the Tariff and Customs Code of the Philippines to better define the mandate of the Legislative and Executive in the modification of tariff rates.

Retired justice Florentino P. Feliciano, in a lecture yesterday, cited Sections 401 and 402 of the Customs Code, which had been amended in 1978 by former President Ferdinand E. Marcos to allow greater discretion on the part of the Executive to change rates. Mr. Feliciano said the two sections had to be modified “back to conformity” to the 1987 Constitution, which primarily gives Congress the authority to modify taxes, duties and tariffs.

“There has been no systematic legislative effort to rationalize comprehensively the Tariff and Customs Code of the Philippines,” the former justice said, noting that limits should be imposed on legislative delegation to the Executive to revise tariff rates. Sec. 401 of the law provides, among other things, to raise import duties by up to 100% of the present rate at any single time, and to lower these even to a 0% rate. When the law was passed back in 1957, Mr. Feliciano noted, rates could be raised by up to 500% at once, and were lowered by at most
half of the rate at the time. It also limited presidential action when Congress was not in

Sec. 402, on the other hand, is the basis for the Chief Executive entering into trade agreements with foreign governments where-in import duties can be modified. Mr. Feliciano, however, said there was a “caveat” to clarifying Congress’ primary role in tariff rate revision, in that international agreements previously entered into by the President will still have to be honored. An amendment of the Customs Code, he said, “does not eliminate or mitigate international obligations. Our problem is not a defense to our liability to [other countries], and this could open us to suits.”

Ma. Lourdes A. Sereno, former Law professor of the University of the Philippines, said
the issue was not a merely “academic” one and was something affecting the present competitiveness of the country. She pointed out that while Congress has enacted two laws modifying tariff rates since 1986, the Aquino administration had ordered six of these; the Ramos administration, 15; the Estrada administration, five; and the Arroyo administration, over 20 since 2001. This, she said, was “entirely inconsistent with the constitutional design.”

She noted how tariff rates in the country were comparably lower than those of Mexico,
India, Japan, Indonesia and Malaysia. She said that, for nonagricultural imports, the Philippines was limited to imposing on average a rate of 23.4%, but the average applied rate was 4.3%. For agricultural imports covered by trade agreements, the Philippines had an average bound tariff rate of 34.7%, but only had an 8% average applied rate.

Trade lawyer Jeremy I. Gatdula, however, said tariff rates in Hong Kong and Singapore were low compared to the Philippines. But this did not mean they were performing poorly. “Malaysia may have higher average tariffs. but it’s not something we need to follow. Malaysia is essentially different from the Philippines, just as the US is different as well.” Mr. Gatdula
said discussions should not be focused on raising tariffs but on finding out “what works for
the Philippines.”

Lilia R. Bautista, a former Trade undersecretary, said it may be “misleading” to compare
Philippine tariff rates with other countries, saying that most nations normally had a high
average bound rate and a lower average applied rate. She also said that although there is
a constitutional question on the Executive’s entering into trade agreements, ratification by
Congress allowed legislative participation.

Energy Sec. Raphael P.M. Lotilla, who was also present in the talk, said Congress may
appreciate the convenience of allowing the Executive to propose changes to tariff regimes,
leaving the legislature to ratify the agreements containing these changes. Mr. Lotilla, a former
Economic Planning official, said it may be “more cumbersome” if the legislature will
have to draft their versions of a bill based on the proposals of the Executive, adding that the
Tariff Commission also went through the process of conducting public hearings.

Tariffs, as I mentioned during my talk, are but instruments of our national will. It's effectiveness (whether it be the lowering or increase thereof) depends on how well that instrument is used in conjunction with other factors that are peculiar to our society. It is therefore not substantially worth arguing that US did this or Malaysia (which, it must be emphasized, was considered in one international ranking as having an economy more open than that of the Philippines despite the alleged higher average tariffs) or Singapore or Hong Kong or Korea did so and so because those countries are evidently not the Philippines.

I also stressed the need to create well defined rules that distinguish treaties from executive agreements, particularly as the Philippines is in the process of either negotiating or entering into a number of trade agreements within the coming months.

It's also time we stop resorting to labels, whether it be protectionists or free traders as such just denigrate the arguments into simplistic categories that do nothing to help arrive at solutions. We should therefore stop referring to protectionists as "nationalists" (as the latter doesn't necessarily follow the former) and trade liberalization advocates (not free traders) as "globalists" (most of the trade libbers I know are highly nationalistic individuals). In the end, we are all Filipinos, of different persuasions maybe, but with the same purpose (hopefully) in mind.


globalization and labor

As I'm sure the entire world knows by now, I guested last night in The Explainer. The topic was labor. Host Manolo Quezon gave a comprehensive discussion on the labor picture here in the Philippines. Particularly interesting for me was on how the change in work distribution in the last ten years reflect the way the Philippine economy changed. Then I had to come in and ruin the show. My segment dealt on the issue of how globalization affected labor.

Some points I raised during the show and some which I forgot to raise out of sheer nervousness:

- economic studies have indicated that "the countries which find it easier to fire are the same countries which find it easier to hire." In other words, the focus here is on productivity, the ability to engage in business that would succeed. By doing so, such results in the creation of more and better jobs.

- as discussed by Manolo, the make up of labor has changed dramatically over the last ten years. The pie chart exhibited during the show sees the identity of the pie slices (representing the different sectors) changing from 1997 to 2007. What must be pointed out, however, is that not only has the pie slices changed but the pie got bigger as well over the years.

- businessmen, more than lower tariffs (or increasing tariffs, depending on whose side you are on), lowering of taxes, etc., all find secondary to the need to have consistent and stable policies upon which to plan and do business. If you have a country like the Philippines whose policy changes not only from administration to administration but from month to month or on a case by case basis, then you can understand why business finds it hard to do well here.

- business leaders (and even lawyers) must realize that they have to make a more determined effort to understand the intricacies and ramifications of what is going on in international trade. No longer are companies subject to mere national laws alone. Even at this moment, companies are subject to international rules that are either prevailing at the regional level (i.e., ASEAN) or multilateral (i.e., WTO, WIPO, WCO). In short, companies from here on end have to contend with at two sets of rules for each and every transaction: local and international. This will only get worse if the Doha Round fails as it is anticipated that there will be a proliferation of bilateral trade rules (right now, such as ASEAN, ASEAN-Korea, and ASEAN-China; with the following possibles: JPEPA, RP-US, ASEAN-India).

- Business cannot and should not rely on government for information or data or possible planning for the simple reason that it is their business. Instead, it should be the other way around. Business should be quite specific in what they want and, more importantly, be able to intelligently convey what they want in the international trading arena. This won't happen unless they take the time and effort to realize that there is a need to understand or grapple with international trade rules. So far, the only industries I know who are quite consistently successful at this are sugar, cement, tuna, and poultry.

- labor should not blame (or at least not solely blame) globalization and trade for any loss of employment. There are a host of other factors, primary among them are changes in technology, which eliminates the need for certain type of workers. Another could be changes in fashion or taste. If anything else, globalization and increased trade results in more opportunities for job creation. It also generates wealth (see studies by Jeffrey Sachs) that could be used for welfare purposes, such as subsidies for workers or re-training or further education.

- legislating minimum wages and increasing taxes on the rich may not be the most effective ways in which to better the situation of labor. To legislate minimum wages is inefficient, scares off investors, and locks in resources in areas which should not be engaged in. Increasing taxes on the rich (at least to a certain extent) has the same effects. The better way is to give workers more ability to be mobile, and making business have greater productivity (which we sorely need to improve on) and competitiveness and let the benefits follow. Even then, the focus should be subsidizing workers who had to accept lower wages from reasons that could be traced to temporary dislocations caused by globalization, re-training, and better education

- finally, Filipinos should take heart in that the way the global economy is headed, greater education, intuition, language skills, quicker absorption of data, and adaptability seem to be the needed capabilities. All these are areas in which the Filipino is strong at. We should just wake up and realize that, rather than being skeptical of globalization, the Filipino is best positioned to take advantage of the benefits of and succeed in a more open world.

Thank you's to the following for their valuable insights (errors in understanding mine): Bobing Venida, Tong Buencamino, Oswald Lorenzo, Pons Intal, Ciel Habito, Dondi Teehankee, John Avila.


IEL updates

(these updates were taken from various sources)

> the US lost to Antigua and Barbuda at the WTO Panel level regarding US measures affecting the cross-border supply of gambling and betting services.

> China's continuing alleged violation of it's WTO commitments getting to the nerves of US Congressmen, this coming at a time that China has seemed to overtake the US in terms of export growth.

> Nevertheless, the US remains the biggest buyer of the world's goods, with over twice the global share of second-ranked importer Germany.

> Ministers from Brazil, the EC, India, the United States, Australia and Japan met in New Delhi to make a strong push for a successful conclusion to the Doha Round by this year. Still, things hang in the balance.

> "The reduced pace of global economic activity will imply lower trade growth which is expected to average maybe around 6 percent in 2007," the WTO's chief economist Patrick Low said. Pascal Lamy, WTO Director-General, on the other hand, stated that "a successful conclusion to the Doha Round holds great potential for boosting growth and alleviating poverty ... an agreement would also deliver more relevant trade rules, helping to establish a more stable and certain foundation for today's dynamic global marketplace."

> The WTO's Appellate Body issued its report regarding the compliance panel report in the case “United States — Sunset Reviews of Anti-Dumping Measures on Oil Country Tubular Goods from Argentina”, and recommending that the United States implement fully the recommendations and rulings of the DSB.

* * * * * * * *

This week saw the last of my MCLE lectures on international economic law for the present cycle. Next week, I shall be in Baguio to participate in the Round Table discussion with the Justices of the Supreme Court on various legal issues with economic significance. The Round Table is a culmination of a training program held under the auspices of PhilJA to educate the judiciary on law and economic development.


International Law and Philippine law

A basic but misunderstood area in the study of international law here in the Philippines is the doctrine of “incorporation”. In our Constitution, the Philippines made two important assertions regarding its stand on international law: one is on the duality of international law vis-à-vis local law (sometimes called municipal law) and, secondly, is that we automatically consider international law as part of the law of the Philippines.

The latter assertion has been touched upon in a long line of Supreme Court cases. In practice, however, lawyers are seemingly in disagreement as to the extent to which international law plays a part in local legislation. Much of the belief regarding the position of international law seemingly stems from ideology or emotion, rather than a clear-eyed analysis of what international law is.

This can be seen in the discussions relating to the recent Bar exam on international law and women’s rights by some newspaper commentators. Sometimes, the same can be said for those who locally advocate for international human rights or the environment. Laudable as their advocacies are, however, the same still shouldn’t detract from the fact that international law is a highly fluid and analytical field, requiring precision thinking specially in delineating international obligations in relation to national interests.

One significant fact that must be considered is that international law does not hold a position of primacy in our jurisdiction. In our country, the one standard that embodies the legality of actions and the definition of rights is our Constitution. The Constitution reigns supreme and whenever international law (understood for the moment to be treaties or customary law) is in conflict with the former, then the Constitution will prevail. Without question. This is a legal policy we share with a number of other jurisdictions, such as the United States. In fact, there is only one country I know that expressly stated that international law prevails over its constitution. The Philippines, to be clear, is not that country.

The rank which international law holds in our jurisdiction is equal to that of a congressional enactment (i.e., Republic Acts). Thus, assuming that there is an actual conflict between international law and a Republic Act, then legal techniques on statutory construction (i.e., the tools used by lawyers to determine which law prevails over another in case of conflict between the two) would be employed. Some of such rules say that the “later in time prevails” or that the “specific law prevails over the general”. Depending on the circumstances, local law can and will prevail over international law.

In any event, the point is that international law is merely equal to congressional enactments, nothing more and nothing less. Like any congressional enactment, international law has to comply with the provisions of our Constitution and if it doesn’t then such international law will have no force or effect within our country. The words “within our country” has to be emphasized though, for outside our jurisdiction and within the realm of international law different rules will prevail regarding the operation of international law vis-à-vis local law.

Like any law, international law as a source of rights and cause of action could be restricted or restrained, particularly if required by the State’s police, eminent domain, or taxation powers. The application of a treaty’s provisions within our jurisdiction, again as a source of a cause of action, could be amended by a mere subsequent Republic Act if Congress, in its discretion, decides to do so.

Thus, declarations by officials that the Philippines can’t do a certain measure because its hands are tied by international law are false. Within our borders, the Philippines generally can do what it wants even if such goes against international law: the Congress can enact laws, the Executive branch can issue measures implementing the law, and the Judiciary can rule and uphold such law even if that law conflicts with international law. This is because, as previously stated, within our jurisdiction the one dominant and primary standard is the Constitution. As long as that law is constitutional, then - even if it is “violative” of international law - such law is valid as far as the Philippines (internally) is concerned.

Doubtless there will be some excitable reactions to the foregoing explanations. However, that will not change the fact that within local jurisdictions, the common practice among countries is to treat international law as being regulated by and subservient to their constitutions. To say that international law is to be treated within our jurisdiction as superior to our local law and our Constitution is as misleading as to say that the US embassy grounds on Roxas Boulevard is US soil (it’s not - it’s Philippine territory). As I keep saying, the faster we grasp the concept of confidently asserting our national interests vis-à-vis international law, the better international citizens we’ll be.


Swiss miss NAMA-nam

After articles about Christmas reindeer and frappuccino wimps, I’ve been asked by friends to write again about trade. Thus, as exciting as the US primaries are, I’ll instead discuss the Zen-like world of the Swiss formula. The Swiss formula (and its variants) has taken center stage in the Non-Agriculture Market Access (NAMA) talks in the still ongoing WTO’s Doha Round. As the term indicates, NAMA involves products that are not considered agricultural or services. Interestingly, fishes and fish products, as well as forestry products, are not considered agricultural for the present discussions.

The NAMA negotiations, despite all the attention that the agriculture talks have been getting, are highly important, particularly relating as it does to the export interests of developing countries. At the heart of the NAMA discussions is the mode to be employed for tariff reductions. It must be emphasized that tariff cuts cannot be uniform for all countries, as some (usually the developing countries) still have high tariffs whereas other countries have quite low tariffs already.

The NAMA talks decided to go with a formula approach rather than the linear or product-by-product approach that were adopted in previous Rounds. At this point, it may be useful to remember paragraph 16 of the Doha Declaration (“reaffirmed” in the Ministerial Declaration adopted on 18 December 2005 in Hong Kong), which says in part:

“We agree to negotiations which shall aim, by modalities to be agreed, to reduce or as appropriate eliminate tariffs x x x The negotiations shall take fully into account the special needs and interests of developing and least-developed country participants, including through less than full reciprocity in reduction commitments.”

Eventually, the discussions boiled down to whether to use the "Swiss formula" or another approach altogether. The Swiss formula is a progressive non-linear formula for which high tariffs are cut more than low tariffs. It is called the Swiss formula because it was proposed by Switzerland during the Tokyo Round of the GATT years and is described as follows: tf = ax/(a+x) -- where x is the initial tariff rate; a is the maximum final tariff rate and the coefficient agreed to represent the level of cuts; tf is the final tariff rate that results. Thus, as one illustration puts it, a coefficient of 30 (representing a maximum final tariff of 30%) applied to an initial tariff of 100% would result in a final tariff of roughly 23%. The same cut applied to a tariff of 15% would result in a tariff of 10%. Notably, the country with the higher initial tariff made a cut of 77%, while the country with the lower initial tariff has cut by 33%. The final cut can be phased in over a certain pre-determined number of years.

The Swiss formula, advocated by the developed countries such as the US, EC, and Japan, has been considered "aggressive" in its approach to tariff cuts, in certain instances drastic and definitely deeper particularly for higher tariffs. As such, it has been considered to affect developing countries more and has accordingly been opposed by such countries. These countries, led by Argentina, Brazil and India, argue that the Swiss formula simply does not provide consideration of poor countries’ “development needs”.

Indeed, it must be remembered that in paragraph 14 of the 2005 Hong Kong Ministerial, it was stated that the tariff reduction formula to be adopted shall have “coefficients” at levels which take fully into account the special needs and interests of developing countries.

Accordingly, another non-linear type formula (sometimes referred to as the “modified Swiss formula”), which presents two coefficients that have the effect of softening the tariff cuts for developing countries, have been propounded. It can be described as follows: t1 = (a or b) x t0/(a or b) + t0 -- where t1= final bound tariff; t0 = base rate; a = coefficient for developed countries; and b = coefficient for developing countries.

That, in a nutshell, is the trade negotiators’ world of the Swiss and modified Swiss formula. It must be emphasized that after agreeing on the formula, the actual value of the coefficient must then be determined. Assuming that has been done, it must next be considered, among a heap of others, whether indeed tariff cuts in the export market help developing countries or will the effect of such cuts be mitigated by the erection of non-tariff barriers. NTB’s are actually more pernicious than tariffs for the simple fact that they are harder to identify. Another question is whether protecting domestic industry is helpful at all for the developing country. Taking it all in, one can see how difficult trade and development policy is. That is why, Swiss or modified Swiss formula aside, there is no easy formula for economic success for developing countries. All the more reason for us Filipinos to work harder and smarter.


ASEAN not so fine

After all the high praises and self-congratulations that our government made relating to the recently concluded ASEAN Summit, it’s time to take stock and get back to earth.

Yes, the blueprint for an ASEAN charter is good and, yes, the call for an acceleration to achieve an ASEAN community could also be good but we do have to remember one essential fact: what may be good for ASEAN may not necessarily be good for the Philippines.

Note that the three countries most enthusiastic for greater integration (i.e., Malaysia, Thailand, and Singapore) have one thing in common: strong economies that keep getting stronger. The Philippines is not in that league. In the end, by allowing ourselves to join in the ASEAN integration hoopla we may, in the end, be just used in preparing a feast that only others could enjoy.

It must be emphasized that the things we signed into last weekend with such enthusiasm are international agreements, meaning international obligations that we need to comply with. The question that we need to ask is: do we have the capabilities in meeting the demands of these obligations and, succeeding this, do we have the capabilities to attain the benefits that we expected to receive when we entered into these agreements? [the recent finding of the Heritage Foundation regarding the Philippines is relevant in this regard: "The Philippines is relatively weak in business freedom, investment freedom, monetary freedom, property rights, and freedom from corruption. The government imposes both formal and non-formal barriers to foreign investment. Inflation is fairly high, and the government subsidizes the prices of several basic goods. The judicial system is weak and subject to extensive political influence. Organized crime is a major deterrent to the administration of justice, and bureaucratic corruption is extensive." - jemy]

Some facts: our utilization of ASEAN-CEPT benefits only amount to around 20% of our trade. This does not provide a pretty picture insofar as our ability to take advantage of international rules considering the fact that we have to concede something in order to qualify for those benefits. Note that ASEAN is not even the biggest destination of our exports. With regard to garments for example, ASEAN only amounts to perhaps half of 1%. Around 80% goes to the US, with substantial exports going to Japan and the EC as well.

It is for the latter reason that I advocate focusing our attention on the WTO and the present Doha Round. There is still a small chance for the Round to be successfully concluded within the next few months. Failing that, we should then focus our attention in building up our institutions: creating a Philippine Trade Representative Office, legislating a competition policy law, and amending some of our trade remedy laws.

We should also develop a more consistent economic and trade policy. One of the things I found baffling over last weekend’s Summit is that our government was enthusiastically lauding the steps towards more integration (which involves the quickening of the lessening of our tariffs) while at the same time, just several months back, our government embarked on a review of our tariff program (with such review resulting in the increase of tariffs). This same lack of consistency can be found with regard to JPEPA: we rejected the Singapore issues in the WTO’s Doha Round (in effect saying no to the US, EC, and Japan), saying that such issues should be left to each countries’ individual discretion, and then we turn around and agree to Japan by including the Singapore issues in JPEPA.

We also have to consider that the idea of a closer ASEAN integration (which apparently is to be modeled somewhat on the EC) would entail that we surrender - again - more of our sovereign rights. This, after all, is the point of a stronger ASEAN organization, with added calls by some quarters for an ASEAN parliament and common currency. Are we really prepared, are our people prepared, to accept the idea of Singaporean, Thai, Malaysian, Indonesian civil servants determining how we run our country? Are we prepared to surrender our prerogative in setting taxes and tariffs? Are we ready to give up the Peso as our currency? Note that the British aren’t ready to surrender the Pound for the Euro. In essence, are we really ready to surrender certain portions of what the Philippines is for benefits we are not really sure we are capable of attaining? That is why we have to get it into our heads that when we think about trade policy (as well as foreign policy), we think about it in terms of decades and generations, not merely a few years. Indeed, less enthusiasm and more restraint is called for on the part of our officials.

Add to all that the fact that our government trade and economic personnel are not exactly underwhelmed by work. Add also the fact that there seems to be something wrong with our trade negotiating process as can be witnessed over the public outrage regarding JPEPA. Take all that and one can really find it strange that our government seems so enthusiastic at the fact that ASEAN is heading towards FTA discussions with Australia/New Zealand, Japan (this is distinct from JPEPA), US, and EC, apart from FTAs discussed with South Korea and China. Add, as well, the really strange fact that our government is vigorously pursuing FTA discussions with the US (after publicly rejecting the notion, to the embarrassment of US trade officials).

In the end, the biggest casualty that all the inconsistencies, lack of thought, lack of consultation, lack of restraint, lack of persistence in following through on policy, and lack of system is the people’s belief in the benefits of freer trade. When one really looks at it, what our policymakers and government officials have been doing for almost the past decade is to say they will engage in free trade, then either executes the policy badly or do the opposite (i.e., revert to protectionist measures), and then blame free trade for the bad things that happened to our economy. In the end, our people suffers, our country suffers.

So, after all the hoopla, praise, and congratulations for a well run Summit (ignoring for the moment the food poisoning that downed nearly a hundred), we should take a step back and re-examine how we proceed on trade, trade in ASEAN and (more importantly) at the WTO.