Improving thinking on Philippine trade policy

my Trade Tripper column in the 20-21 March issue of BusinessWorld:

Despite the extremely parochial topics with which Philippine national discussions have been confined to (a situation that will most likely remain until well after the 2016 elections), international trade goes on. Naturally, movement in this area has unsurprisingly stagnated, particularly the continued simplistic binary way of thinking that divides policy lines into that of protectionism and liberalization. Incidentally, this passé kind of analysis also dominates how we look at competition policy.

However, as Simon Lester of the International Economic Law and Policy Blog points out, in the area of free trade agreements, the analysis has moved beyond such bleak duality: “What is the core purpose of trade agreements? [Some simply explain that] governments make trade agreements to reduce protectionism. That is the story most people are familiar with, and take for granted. We’ve all heard of protectionism; we all have a sense of what it is, although definitions may vary.”

There is another view: “Trade agreements will never reduce protectionism as we normally understand it. Rather, the sole function of trade agreements in the Bagwell-Staiger/Grossman-Helpman model is to eliminate terms-of-trade manipulation, unilateral trade policy that aims at improving the home country’s terms of trade. Terms-of-trade manipulation is a completely distinct phenomenon from protectionism, reflecting a different governmental motivation.”

Mr. Lester further states that “there are actually some additional theories about the purpose of trade agreements. There’s the domestic commitment theory (a trade agreement ‘can serve as a commitment device for a government to close the door to domestic lobbies’), and several new theories: ‘firm-delocation’ externalities in the presence of free entry, ‘profit-shifting’ externalities, and trade-volume externalities when prices are determined by bilateral bargaining.”

The distinction in perspectives is subtle but utterly significant: “With anti-protectionism as its goal, the system can use traditional and familiar provisions... to identify and prohibit protectionist measures.”

“By contrast, with terms of trade manipulation, the scope of the system is a lot less clear... Keep in mind, the optimal tariff... is not the only measure the proponents of this view have in mind. They also envision that domestic laws and regulations could be used for terms of trade manipulation. So how would the trading system address such measures through specific legal obligations? How would the Seal Products measure, or the Tuna-Dolphin measure, or plain packaging laws be examined if the issue was whether they constitute terms of trade manipulation?”

The foregoing lays the ground for reminding us of a misunderstood (hence oft abused) reality of international trade. This is best described by former World Trade Organization Director-General Pascal Lamy when he visited the Philippines: for a country to do well in the international trade system it must have, “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.”

Verily, the overriding context is always national interest. Which a country formulates on its own and by itself.

Regarding the foregoing, one can’t help but be further reminded of a memorable “white paper” issued by the Australian government that analyzed Australia’s place in a future Asia: “There was acceptance that the big changes that had to be wrought in the Australian economy and society to manage a world in which the new Asian powers will be a dominant force in the global order was a task beyond the capacity of government or policy alone. It required participation from across the community -- including business, educational institutions, community leaders, unions -- and nothing less than a change in national mindset. There was no quick policy fix to the problem. It was a long-term task on which a national consensus had to be patiently forged, and an ongoing national conversation must be had.”

Notably, “an important element was the priority of building deeper, more comprehensive relationships with the three big new emerging powers in the region -- China, Indonesia and India. These relationships were still significantly underdone. Getting it right with China, Indonesia and India was not just a matter of tweaking established arrangements at the edge of economic, political and security exchanges. It was a far bolder ambition that required energies and talents not confined to government and shifting the culture in which these exchanges were conducted.”

Nevertheless, care must be taken that we ourselves not fall into the policymaker’s or economist’s obsession with numbers. In the end, trade agreements begin and end with people. And the Philippines has not been ideal in properly caring for the senior population and the youth. Finally, like any discussion involving law, we must recognize trade’s effect on a country’s morals, values, and culture.