I was talking to a friend about the impact of protectionism on the Philippine economy and how foreign investments can generate new jobs and new sources of wealth. She indicated that she didn’t realize how protectionism hit Filipinos close to home. I said if you just stop and looked at your monthly bill – electricity, telephone, water, internet, fuel, food, entertainment – behind your high cost of lousy goods and services AND the lack of choices is the hand of protectionism . Protectionism hits you every day – the lousy and expensive telephone service from PLDT, the slow but expensive DSL from globe, the frequent network outages by Globe and Bayantel which you are paying for, the rude overworked telecom customer service employees of MAYNILAD and MERALCO, the expensive electric water utilities – the sheer lack of a choice in careers, even. Are you tired of working for PLDT? Well your only alternative in the telecom industry is, Bayantel… oops… they have interlocking corporate directors – meaning.. sila lang, na naman.
For instance, seen a broken home because one of the spouses works abroad? The spouse looked for another job abroad, because the jobs available locally paid dirt-cheap wages, had no benefits, had no prospects for career growth, and no prospects for becoming a full-time employee. So ayun, nag-abroad. Nagkalayo. Natukso. Nagkahiwalay. Sounds eerily familiar? Protectionism and broken home doesn’t sound that distant anymore.
The Arguments for Protectionism
In another blog about the global south, Walden Bello makes an argument for Protectionism, here’s what he wrote:
Assuming that the Philippines does not descend into chaos but moves toward the consolidation of a system of governance that is more genuinely democratic and responsive to development, what would be the elements of a post-EDSA system of social and economic transformation?
More State, not less
High up on the list is adopting the dictum that what we need for development is not less state but more. The Philippine state must be given a greater relative autonomy vis-a-vis the elite. It must be able to discipline the private interests that have constantly hijacked it for particularistic ends. In this regard, the problem with protectionism as it has been practiced in the Philippines is not protectionism per se but that it has been opportunistic–one simply oriented to promoting narrow vested interests and without reference to a strategic plan to deepen the economy.
Yet this prescription must be taken in the light of the experience of the newly industrializing countries with a strong state. In Korea and Taiwan, development was accompanied by authoritarianism, by regimes whose lack of democratic accountability resulted not only in human rights abuses but in the adoption of strategies that resulted in the degradation of the environment and the sacrifice of agriculture. In any future arrangement, both the private sector and the state must be checked by the participation of civil society in both political and economic decisionmaking. Owing to its recent history, in particular, the struggle against dictatorship, a not insignificant organized civil society has developed in the Philippines. It is now time to institutionalize its participation in any future political arrangement. Democracy does not contradict the development of an effective state. Indeed, democracy promotes an effective state by endowing it with legitimacy.
The Domestic Market as the Driver of Growth
A second element of a post-EDSA development strategy is focusing on the internal market as the driver of development. Export oriented growth of the kind that was pursued by the NICs is no longer possible in an era of tremendous manufacturing overcapacity and the resulting protectionism in developed country markets that this has spawned. And even if developed country protectionism were not a problem, export oriented manufacturing would not be an advantageous strategy today, given the tremendous advantage that China has in labor costs. Given the renewed centrality of the internal market, the imperative for massive income distribution to create consumers with purchasing power becomes very critical. Concretely, this means renewing the drive for effective land reform. It would also mean effective programs of taxation of the richer parts of the population, in order both to increase mass purchasing capacity through transfer payments, as well as to accumulate the capital necessary for strategic investments.
Creating a viable internal market is one priority. Protecting it from artificially cheap imports that stem from subsidization or overexploitation is another. However, protectionism can longer remain opportunistic, an incoherent policy that is simply dictated by vested interests. Protectionism must be strategic, one that is linked to deepening the country’s industrial and manufacturing structure through selective tariffication or selective liberalization. Building up capital intensive industries such as steel, transportation equipment, and computers will necessitate a flexible tariff policy, coupled, of course, with investment incentives and state-sponsored technological development.
Taking Sustainable Development Seriously
A fourth important dimension of a post-EDSA economic strategy is sustainable development. The pillage of our natural resources has proceeded to the point where the economic future of future generations of Filipinos has been severely threatened. The high 6-8 per cent growth of the NIC model simply is not possible to replicate without inviting more environmental dislocations. The key lies in opting for a strategy of lower, sustainable growth rates, which is only possible if there is much more equitable sharing of the fruits of a sustainable economy (meaning, you can’t have sustainable development without radical social reform), a reinvigoration of agriculture along the lines of a smallholder systems producing mainly for local and national markets with environmentally friendly agro-technology, and the greening of manufacturing technology. It will also mean reinvigorating local manufacturing and agricultural industries through flexible application of the principle of subsidiarity, meaning whatever can be produced at least cost at the local level should be undertaken at that level Strong central leadership of the strategic planning process must be coupled to decentralized, sustainable production in key areas like agriculture. This is the challenge of development in a Philippine context in the 21st century.
Development in a Regional Context
A fifth critical element is coordinating our national development strategy with those of our neighbors. The reality of international economics in the 21st century is the existence of large economic blocs, the most important of which are the European Union, the United States, and China. It is difficult to see small and medium nation states being able to effectively develop or participate in the international economy without becoming part of a larger formation, whether this is based on common interests as developing countries—for instance, the Group of 20—or being part of a regional bloc such as ASEAN.
The problem with ASEAN, however, is that its most important economic project, the ASEAN Free Trade Area, or AFTA, is one that is strategically directionless. The aim of AFTA is to reduce and eliminate tariff barriers among participating economies, but whether this is for the purpose of serving as a step towards global free trade or as one towards a regional market protected by tariffs and quotas to serve as base for regionally coordinated import substitution has not been decided. This indeterminacy has left the regional formation unable to effectively undertake planning, technology sharing, and institutionalizing a division of labor at a regional level. Without such a program, the different national economic actors will see tariff reductions as leading to a zero-sum game in which the more advanced industrial elites will end up dominating the regional market.
An even greater concern is the democratic deficit in ASEAN. This regional formation was a creation of government elites that was done with no consultation of peoples in the region. Not surprisingly, being part of an entity called ASEAN is not in the consciousness of the peoples of ASEAN. This means that projects that technocrats agree to in the name of ASEAN unity such as AFTA enjoy little legitimacy and binding power. Democratizing ASEAN is essential if it is to become an effective participant in a world marked by the dynamics of big economic blocks.
Transforming ASEAN should just be one of several cooperative initiatives the Philippines must engage in. The Philippines is already part of the Group of 20, a larger formation that also includes India, China, Brazil, and South Africa. The potential of this group in terms of coordinating the policies of its members beyond the immediate issue that brought them together in Cancun—opposition to agricultural subsidies maintained by the developed economies—is great and can extend to technology sharing, transborder industrial policy, shared investment policies, and common environmental strategies. The organizational framework for what has been called, in the language of development economics, “South-South development cooperation” is present in the G 20. A forward-looking Philippine government can make an invaluable contributing in translating this potential into reality.
I came across a blog about ASEAN intervention on human rights issues. Then something out of left field:
Just like other international organizations, the ASEAN has also had its share of missteps. For one, the thrust towards economic integration via globalization has proven to be detrimental to underdeveloped countries like the Philippines. Initiatives like the ASEAN Free Trade Area (AFTA) and ASEAN Investment Agreement (AIA) are essentially meant to fast-track the processes of liberalization, deregulation and privatization ahead of most deadlines imposed by the World Trade Organization (WTO). It must be stressed that even if it is not explicit in the policy pronouncements of the ASEAN, the latter is biased for globalization as economic thrust. The kind of integration it wants is removal of protection and other trade barriers which may be necessary for underdeveloped countries like Myanmar and the Philippines to industrialize.
Indeed, the ASEAN should reorient itself in a way that would protect instead of “globalize” the region. It should protect the 10 member-countries from the onslaught of globalization.
As founding member, the Philippines should take the lead in promoting self-sufficiency and sustainable development but its credibility in doing so can only be apparent with a change in administration and even economic direction. In the context of protectionism, the Philippines could present itself as a case study of wanton globalization and the consequent underdevelopment due to such economic thrust. Even if it is currently “championing” human rights in the region, there are issues about its moral ascendancy owing to the culture of impunity prevalent in the country.
In essence, the Left’s position as articulated by Walden Bello in his paper entitled “In the Shadow of Debt”
The stagnation of the Philippine economy has now lasted over 25 years. Between 1990 and 2005, the Philippines’ average annual GDP growth rate was the
lowest in Southeast Asia, being lower than even that of Laos, Cambodia, and Myanmar. Explanations rooting the country’s failure to launch in overpopulation,
corruption, protectionism, and non-competitive wags are examined in this article and found grossly inadequate. The central bottleneck is the gutting of the government’s capacity to invest owing to the policy of prioritizing debt repayments and the severe loss of government’s revenues due to trade liberalization. In contrast to the Philippines, our neighbors promoted policies that saw state investment synergized private investment. This accounted for their superior economic performance, especially before the Asian financial crisis. Until the reigning policy framework is overturned the country will not be able to emerge out of stagnation.
Bello argues that Protectionism is not the culprit because the Philippines liberalized it’s tariff structure:
The Neoliberal Explanation
Another favorite explanation is that stagnation stems from the “strong” protection offered to domestic industry. The Philippines, it is said, has not been exposed enough to market forces that would have shaken it out of its “inefficiency.”
The problem with this analysis is that, in fact, the Philippines was subjected to radical tariff liberalization in the 1980’s and 1990’s. Under programs imposed by the World Bank and International Monetary Fund (IMF) in the 1980’s, the average tariff rate was brought down from 43 per cent in 1980 to 28 per cent in 1985 while quantitative restrictions were removed on more 900 items between 1981 and 1985. 10
This process of liberalization was accelerated in the mid-1990’s under the Ramos administration’s Executive Order 264, which sought to drive down tariffs on all but a few sensitive products to between 1 and 5 per cent in 2004. Moreover, the liberalization program in the Philippines was often more profound than those of our neighbors, which were growing by leaps and bounds while we stagnated. For instance, by the end of the eighties, the average tariff rates in Indonesia and the Philippines were just about equal while Indonesia had a greater proportion of goods subjected to non-tariff barriers than the Philippines. 11 Compared to Thailand, which was, in many ways, the best performer among the Southeast Asian “newly industrializing countries” (NICs) in the 1985-1995 period, the Philippines was much farther along the liberalization road: by the end of the eighties, the effective rate of protection for manufacturing in Thailand was 52 per cent, compared to 23 per cent
In fact, in the 1980’s and 1980’s, the strategy of our neighbors was not one of indiscriminate liberalization such as that pursued by Philippine technocrats but one of strategic protectionism cum selective liberalization that was designed to deepen their industrial structures. As one wag who was trying to drive home the contrasting outcomes in the Philippines and our neighbors put it, the crucial difference was that our technocrats preached free trade and practiced it, while our neighbors boasted of their free trade credentials while practicing protectionism. In other words, in world ruled by economic realpolitik, it is often not a virtue to practice what you preach.
What Bello and the Philippine Left missed is that Protectionism isn’t just about tariffs – it also includes restrictions on foreign ownership of real estate. Even though the constitutions od Indonesia, Thailand, and the Philippines do not allow foreigners to own land – the Philippines has the strictest restriction against foreign ownership of land. In contrast, Thailand and Indonesia are more liberal and have legal pathways for foreign business to own the land where they do business.
For example, IT education and certification – it is so expensive to get globally recognized certification. The current model uses the concept of franchises. Filipino citizens enter into franchising agreements with foreign schools – and pass on the cost to the students PLUS their margin. Aha… Now you know why, bakit, ngano… IT education and certification is expensive. Consider this scenario when foreigners are allowed to own the land on which they put their investment – you got it… you need local labor, supplies are purchased locally – it allows the retailer to pay the employees who in turn spend the money on the household – consummables. Sa construction pa lang yun. Then they hire instructors and train/upgrade the instructors – technology transfer na, you get paid to learn! Then since they have prior licenses in their origin country they don’t have to pay franchising cost. Therefore the cost is lower – and they charge lower tuition. That’s “bad” for the local company if he does not adjust but it’s good for the Filipino students because they have a choice.
The protectionist will complain it is unfair instead of getting a similar license in the competitor’s country of origin. Nor does he want to have a merger with the foreign company – kasi dapat siya ang boss – forget getting access to a global knowledge base for the most number of people kapag hindi siya lamang. Ayun, ok manlamang, wag lang malamangan. That’s the mindset. Ayaw magcompete, protectionism na lang, sigurado ang kita nila, paano naman tayo?
Dudes, if that’s our mindset – given that our competitors are operating as extended supply chains – we are missing a whole lot from the efficiencies of scale – and the downstream and lateral linkages that are a source of opportunities. For now we are left with limited choices. By pushing the limits of innovation including new ownership structures in the Philippine economy we can begin the process of competing globally. The protectionism in the Aquino Constitution has got to go because it only benefits the companies owned by the oligarchs.
The Indonesian Model
To answer the question, I searched the Internet for information on whether foreigners can own land in Indonesia. A sample of the results is presented below:
Can foreigners own land in Indonesia?
This is a quite common question being asked to lawyers. The answer is “no”. Under the 1945 Constitution Article 33 land and water, and the natural resources found therein, shall be controlled by the state and shall be exploited for the maximum benefit of the people. Thus, foreigners are barred from having Right of Ownership/Hak Milik (somewhat equal to the common law’s freehold title) to land.
But, of course there is always a way to get around it.
The first way is to purchase and indirectly ‘own’ land through nominee agreement. This way the foreigner gives an amount of money to an Indonesian citizen (the “nominee”) to buy a land, through a power of attorney (PoA). The PoA must clearly and specifically elaborates that the money belongs to the foreigner and that the nominee is a mere executor. It must also specify that the foreigner has the rights to enjoy and execute all rights commonly attached to the land — including but not limited to — lease, sale, rent, etc without the consent with the nominee. The nominee must waives all of its rights normally accorded by land titles.
The second way is by establishing an Indonesian company, and the company owns the land through the right to build title/HGB. Foreigners can own up to 100 per cent of shares in a company provided that the initial share distribution has to be 95:5 (5% to be owned by the Indonesian Partner). Owning through a company is relatively safer as all liabilities are protected by a shield of legal entity. Through this scheme the company can own the land for an initial 30 years and it is extendable up to 20 years.
All transactions above must be conducted by notarial deeds and to be executed before a land deed official. Right to use land, right to build and right to exploit land is regulated through Government Regulation No. 40 Year 1999, available here (in Bahasa).
The Thai Model
Likewise, I looked up whether foreigners can own land in Thailand. A sampe result is also presented below:
Own land in Thailand
Saturday, 13 January 2007
Foreign Ownership of Land in Thailand
As a general matter, Thai law prohibits foreigners from owning land in Thailand. The prohibition applies to foreign individuals and juristic entities (e.g., companies or partnerships). Additionally, it applies to Thai registered juristic entities, which are owned or controlled by foreigners. This law note describes generally the Thai law prohibiting land ownership by foreigners, as well as exceptions to and strategies for operating under the prohibition.
Prohibition on Foreign Ownership of Land
1. Thai Land Law:
Under Sec. 86 of the Thai Land Law, a foreigner may own land in Thailand only if permitted by treaty. In fact, Thailand does not have a treaty with any country permitting foreigners from that country to own land. Therefore, foreigners are effectively prohibited from owning land in Thailand. Under Sec. 97 of the Land Law, the definition of a foreigner includes Thai registered companies or partnerships in which more than 49% of the capital is owned by foreigners or of which more than half the shareholders or partners are foreigners.
As a practical matter, it is often difficult for a Thai company with foreigners having substantial minority ownership (e.g., 51% Thai, 49% foreign) to acquire land in Thailand. The policies of Land Offices vary throughout Thailand, but often they require that Thais own at least 60% or 70% of a company in order to register land ownership.
Under former Land Office policy, Thai nationals who married foreigners were prohibited from ownership of land in Thailand. This prohibition was based on principles of community property law and a general presumption that the Thai spouse was holding the land for the benefit of the foreigner. However, under current Land Office policy the Thai spouse can own land in Thailand, provided that the foreign spouse signs a letter declaring the property to be the separate property of the Thai spouse and waiving any interest in the property.
2. Condominium Act (No. 2) of 1990:
Sec. 19 of the Condominium Act effectively prohibits ownership of condominium units by a foreigner unless the foreigner qualifies for foreign ownership as described below.
3. Alien Business Law:
The Alien Business Law, which regulates foreign investment in Thailand, can have an indirect impact on the ability of foreigners to own land. For example, under the terms of the Alien Business Act of 1999, “land trading” is considered a Schedule One activity and is generally prohibited to foreigners.
Exceptions to the Prohibition
1. Board of Investment (BOI) incentives:
Sec. 27 of the Investment Promotion Act authorizes the Board of Investment (BOI) to grant a foreign owned company permission to own land for the purpose of conducting the promoted activity. The area of the land must be approved by the BOI, which will review the land and proposed construction plans to determine that the land’s size is suitable for the promoted activity. The use of the land must be limited to the promoted activity, and if the promoted business is later dissolved the land must be sold within one year of the termination of that business. The BOI exception to the prohibition against foreigners owning land is primarily limited to the ownership of land and factory for a promoted manufacturing activity.
In addition to permitting foreign ownership of land for the purpose of conducting a promoted business, BOI privileges can authorize a foreign owned company to conduct business activities which would otherwise be prohibited under the Alien Business Law. Thus, the indirect impact of the Alien Business Law on foreign land ownership can be reduced under BOI privileges.
2. Condominium Act (No. 2) of 1990 (as amended April 27, 1999)
Sec. 19 of the amended Condominium Act authorizes qualified foreigners to own individual condominium units provided that the total area of foreign-owned units within the condominium project does not exceed 49 percent of the total area of all units within the project. In Bangkok and other municipalities to be designated in ministerial regulations, the 49% limitation does not apply. The following foreigners qualify for condominium unit ownership:
a. Individuals having permanent residence status in Thailand.
b. Individuals who have been permitted to enter Thailand under BOI privileges.
c. Juristic entities registered in Thailand but being classified as “foreign” under the Land Act.
d. Juristic entities, which have been granted investment privileges by the BOI.
e. Individuals or juristic entities, which have brought foreign currency into Thailand for the purpose of purchasing the condominium unit.
Despite the broad scope of the prohibition on foreign ownership of land and condominiums in Thailand, and the narrow scope of the exceptions, a variety of tactics can be used to minimize the impact of the prohibitions. These include, for example:
a. Forming joint venture companies with majority Thai ownership but adequate safeguards for the foreign minority interest.
b. Long term leases with rights to renewal.
Recently there have been many proposals trying to liberalize land ownership by foreigners, and indeed in April 1999, after several years of rumors the rules on foreign ownership of condos were liberalized. Often the proposals are reported as having already taken effect long before they actually become law or official policy. A foreigner who is considering acquiring an interest in land in Thailand should check carefully the current status of laws and policies before taking action.
The Left Overemphasized Tariffs and Overlooked the Land Ownership Component as a Driver for Attracting Foreign Investments
These shows that while the Philippines joined Indonesia and Thailand in liberalizing tariffs – these tariffs were not as effective in attracting foreign investments compared to providing a legal mechanism for allowing foreigners to own the land where they do business – as in the case of Thailand and Indonesia.
In the case of the Philppines, the Constitution has an outright prohibition such that Thai and Indonesian style exceptions are considered unconstitutional. The left’s dismissal of the neoliberal position was premature, incomplete and therefore, mistaken because the analysis only accounted for tariff barriers but did not include non-tariff factors specifically, land ownership by foreign investors.
Fidel Ramos, has vowed to reverse some of the longstanding policies that have sent so many Filipinos abroad–a promise that the Philippine people have heard many times before. Ramos’s biggest obstacle was a reluctance among the Philippine establishment to admit that its self-perpetuating economic policies are largely responsible for the country’s descent into poverty. Ramos finished the presidency without making a dent on protectionism.
Over the years, Philippine leaders have ascribed their abysmal economic failure to any number of root causes, including their colonial heritage, Marcos-era greed, and a series of natural disasters. The truth, however, is that the country’s poverty is no accident and the quandary in which Filipina maids find themselves owes itself almost directly to the most pernicious of economic sins: protectionism. For the past 40 years, under the guise of ensuring the country’s economic sovereignty, successive Philippine governments have enacted laws that have discouraged foreign investment, concentrated wealth in fewer and fewer hands, and diminished the standard of living for the average Filipino to the point where less than 50 percent of the country earns a subsistence wage.
Nowhere is this clearer than in a comparison between the Philippines and Hong Kong, just a two-hour flight from Manila and the destination of so many Filipino laborers desperate for work. Just as the Philippines owes its current status as “the sick man of Asia” to longstanding protectionist policies, Hong Kong owes its stupendous wealth today to an ongoing commitment to open markets and a hands-off approach to business. For the past decade, Hong Kong has boasted an unemployment rate of under 2 percent, and its residents purchase more each year than the Japanese, other Asians, or Europeans. In 1993, Hong Kong’s per-capita income even surpassed that of its colonial protector, Great Britain.
The Arguments Against Protectionism
The various arguments against protectionism are:
Protectionism is frequently criticized as harming the people it is meant to help. Many mainstream economists instead support free trade. Economic theory, under the principle of comparative advantage, shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage. Protectionism results in deadweight loss; this loss to overall welfare gives no-one any benefit, unlike in a free market, where there is no such total loss. According to economist Stephen P. Magee, the benefits of free trade outweigh the losses by as much as 100 to 1.
Most economists, including Nobel prize winners Milton Friedman and Paul Krugman, believe that free trade helps workers in developing countries, even though they are not subject to the stringent health and labour standards of developed countries. This is because “the growth of manufacturing — and of the myriad of other jobs that the new export sector creates — has a ripple effect throughout the economy” that creates competition among producers, lifting wages and living conditions. Economists have suggested that those who support protectionism ostensibly to further the interests of third world workers are in fact being disingenuous, seeking only to protect jobs in developed countries. Additionally, workers in the third world only accept jobs if they are the best on offer, as all mutually consensual exchanges must be of benefit to both sides, else they wouldn’t be entered into freely. That they accept low-paying jobs from first world companies shows that their other employment prospects are worse.
Alan Greenspan, former chair of the American Federal Reserve, has criticized protectionist proposals as leading “to an atrophy of our competitive ability. … If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer.”
Protectionism has also been accused of being one of the major causes of war. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantilist and protectionist, the American Revolution, which came about primarily due to British tariffs and taxes, as well as the protective policies preceding both World War I and World War II. According to Frederic Bastiat, “When goods cannot cross borders, armies will.”
However, one of the most powerful arguments against protectionism, which I have come across is provided in the Freeman blog – by an economist. The call for protectionism became very loud when Americans felt that they were losing their jobs to foreigners – the very same bogeyman paraded by the protectionists in the Philippines.
The Myths of Protectionism
Despite the obvious achievements of open trade and the costs associated with restricted trade, protectionist myths persist.
Myth #1: An economy with high labor costs must protect itself because it cannot compete with an economy benefiting from “cheap” labor.
The benefits from trade depend only upon relative production costs, not on the level of production costs. Every economy has a relative cost advantage in some activity. For example, if you compare U.S. production costs in each of its industries with those of a low-wage country, say South Korea, you will find that those activi ties with relatively high U.S. costs will mostly be undertaken in Korea, while those with relatively low U.S. costs will be undertaken here. Higher labor productivity and lower capital costs allow us to have lower relative production costs in some activities, while lower labor costs allow South Korea to have lower relative production costs in other areas.
This myth suggests that we can only benefit from trade by trading with those countries that are “similar” to us. In fact, the gains from open trade are greater the more dissimilar the economies with whom we trade—our relative cost advantages and their relative cost advantages are greater and as a consequence the positive effects on per capita income in both economies will be greater.
It should also be noted, as an empirical matter, that the U.S. is not being driven from the international market place by “low” wage competition. The vast majority of our trade occurs with Canada and the European Economic Community, both of which have wage patterns comparable to our own. Even the wage pattern in Japan, our next largest trading partner, is closer to our own than to those in the less developed areas of the world. Conversely, little trade occurs with most of Africa, an area of truly low wages.
Myth #2: Import restrictions save American jobs.
In fact, import restrictions destroy American jobs. Free trade will move jobs from high relative cost sectors of an economy that cannot compete to low relative cost sectors that can. This occurs because imports undermine high-cost domestic activities, but since imports are paid for with dollars, when those dollars are spent by foreigners in the U.S., they increase employment in exporting sectors. It is true that when there is protection, there will be more people employed in the protected activities, but this will be at the cost of fewer people employed elsewhere in the economy.
Moreover, because real per capita income is higher with free trade, the average worker will have a smaller real income under protectionist policies. Indeed, estimates of the annual costs to consumers of distorting the distribution of jobs through protectionist policies are generally between $100,000 and $300,000 per job. More bluntly, we are paying well over $100,000 to maintain the jobs of people earning considerably less than $100,000.
Finally, it should be noted that the effect of trade on long-term employment is generally small when compared to other determinants of employment, even though in a protectionist environment all job losses are attributed to trade. For example, recent estimates indicate that in the steel industry, 209,000 jobs were eliminated between 1976 and 1983 because of a long-term decline in the demand for steel while only 37,000 jobs were lost (reallocated) because of import competition. The recessionary difficulties of the late 1970s and early 1980s accounted for the loss of another 27,000 jobs.
Myth #3: Temporary protection can provide a breathing period for an industry to modernize and become more competitive.
While temporary protection does create higher returns in activities under competitive pressure, it also reduces the incentives for adjustment. If there are technologies or organizational changes that will make an industry competitive, the expected profits will provide the necessary capital for such investments, regardless of protectionist barriers. If, on the other hand, no technology or organizational change will make an industry more competitive, then the increased income that temporary protection creates will not be reinvested by a rational manager but will be devoted to other activities. Consequently, the evidence indicates that once protection is granted, productivity and unit costs generally deteriorate even further relative to other industries. It is no surprise that the steel industry has enjoyed some form of protection for the past 15 years without notable recovery or that protectionist policies have not returned the U.S. to its once dominant position in the manufacture of televisions and footwear. Textiles have been provided temporary protection in anticipation of finally becoming viable in the international and open national market since the 1820s, giving new meaning to the word temporary.
However, while temporary protection does little to assist a domestic industry to adjust to international competition, many forms of protection, particularly those that currently are being employed, help foreign producers because they enable them to increase the prices they charge for imports to the United States. In both the automobile and steel industries, so-called voluntary agreements to limit exports to the United States have increased substantially the profits of foreign producers. For example, the external quotas imposed by the U.S. during the 1970s are estimated to have increased the annual profits of Japanese steel firms by about $200 million, or about one-half of Japan’s annual expenditure on research and development in steel. Our assistance to the domestic automobile industry has benefited the Japanese producers and dealers by at least $2 billion per year. Best estimates are that the external quota arrangement with the Japanese increased the price of Japanese cars by about $900 per car and the price of U.S. cars by about $350 per car—a total cost to consumers of $4.3 billion, or about $160,000 per year per job “saved” in the automobile industry.
Myth #4: Bilateral trade should be balanced.
Of particular concern these days is the $35 billion or so trade deficit with Japan. Even if one could argue that a trade deficit, per se, mattered, it certainly cannot be argued that a deficit with any particular country matters. Suppose, for example, that we purchase $10 billion in manufactured goods from the Japanese, who purchase $10 billion in raw materials from the Indonesians who, in turn, purchase $10 billion in food from the United States. Each country would be running a deficit with at least one other country, but the total trade deficit for each would be zero since each is also running a surplus with at least one country. More important, our ability to run an export surplus with the Indonesians would depend fundamentally on our export deficit with the Japanese. If we eliminated trade with the Japanese in order to get rid of the bilateral trade deficit, we would make it impossible for the Indonesians to run a surplus with us. More precisely, a refusal to import goods from Japan, demanding bilateral balanced trade, would result in a decrease in U.S. exports to other countries. It is important to understand that trade restrictions ostensibly directed at imports are always restrictions on exports as well; a tariff is always a tax on exports even though it appears to be a tax on imports alone.
It should be emphasized that where we have made large international loans (to Brazil, Mexico, South Korea, et al.), it would not be possible for those countries to pay off the loans unless we ran trade deficits with them, that is, unless they export more to us than we do to them—with the difference being equal to the payment on the loan. Part of the current international debt crisis is a direct result of our refusal to accept in payment (i.e., to import) the goods these debtor nations produce.
There is an important sense, then, in which trade is always balanced: If we import more goods than we export, we must be exporting dollars or the ownership of dollar denominated assets. This is an essential fact in understanding international trade. We can only import more goods than we export if foreigners willingly accept and hold these pieces of paper, and they can only get these pieces of paper if they exchange real goods and services for them. Except for possible adjustment costs associated with changing foreign preferences to hold these pieces of paper, this arrangement cannot possibly hurt us.
Myth #5: The United States will one day become a debtor nation if it continues to have large trade deficits.
This myth is true, but empty. Indeed, the U.S. became a net debtor during 1985, but here the word “debtor” gets in the way of understanding. If you incur a personal debt, you must produce income to pay off the debt. If our government runs a domestic deficit, it must also produce income to make payments on the debt. If a foreign country borrows dollars from the United States, that country must produce a dollar income to make payments on that debt. In each of these cases, domestic and foreign, the debt implies some future obligation, an IOU.
The U.S. trade deficit implies no such obligation. In the simplest case, we trade dollars for goods. Dollars are not IOUs, and they can only be spent in one economy, our own. Moreover, we can trade dollars for goods only so long as foreigners are willing to hold dollars. When they are unwilling to do so, we will have to trade goods for goods as foreigners use the dollars they have accumulated in the only way that they can, to purchase U.S. goods. If they do not want U.S. goods and do not want U.S. dollars, then an adjustment will occur in the value of the dollars that foreigners are holding so as to limit the amount of importing the U.S. can do. This is the only potential cost—that at some point in the future we will not be able to consume more than we produce as we have been able to for the past several years because of the willingness of foreigners to hold dollars.
Myth #6: We should protect U.S. industries from subsidized foreign goods that hurt American industries and consumers.
While it is difficult to know when a price difference is the result of a difference in efficiency rather than an explicit subsidy by a foreign government, there is little doubt that many governments subsidize the production of goods that enter the international markets. It is important to understand what this means, however. It is simply this: A foreign government taxes its citizens, thereby cutting their consumption, so that it can subsidize the consumption of people living in the richest country in the world. While paternalistic instincts may lead us to discourage this activity, we should not do so on the grounds that this activity is hurting Americans. If the rest of the world wants to provide welfare payments to us, we probably ought to humbly accept their largess. Our real income is certainly higher as a consequence.
It should be noted, though, that we are not without dirty hands in this matter. For example, while we undoubtedly have a comparative advantage in the production of agricultural commodities, the Department of Agriculture’s budget, which has fluctuated between $18 and $35 billion over the past several years, is almost to tally a subsidy to agricultural production that we are anxious to export. This is an indirect but very large subsidy of the goods that we expect other countries to buy from us. Moreover, we have directly subsidized exports of, for example, wheat to Egypt and shipping services. In the latter area, the U.S. merchant marine fleet, which competes in the international shipping market, stays afloat solely because of governmental subsidies.
Myth #7: Free trade for a country can only be beneficial if it is reciprocal, that is, if others are protectionist, we should be protectionist.
What happens if we trade freely with a country that is protectionist? If a country refuses to allow U.S. goods to penetrate domestic markets but exports aggressively to the U.S., it trades real goods (e.g. cars, televisions, clothing) for paper money (U.S. dollars). This poses no problem for the country getting the real goods; we should be concerned only if the U.S. were pursuing a policy that resulted in a long-term systematic surplus.
It is important to point out, however, that we have an interest in freer trade by our trading partners since to the degree that restrictive or mercantilist policies by others lower the amount of trade that occurs, we are not as well off as we might be. In this sense, reciprocity matters. The gains here are only on the upside, however, and a nation that is freely trading with others only hurts itself with protectionist policies. The benefits of a unilateral movement toward free trade by the British in the last century were noted earlier.
It may also be the case that reciprocity is necessary to create an open or free trade political coalition where trade liberalization is sold on the notion that with reciprocity, foreign markets will become open and that we cannot expect to export without importing. Essentially, reciprocity arguments may be used to play off the mercantilist sentiments that exports will be increased more than imports in order to create a more open trading environment.
Myth #8: The effects of protectionism are isolated to the industry protected.
For virtually every country except possibly the U.S. (because of our unique position as the world’s banker), decreasing imports decreases exports, and a tariff, quota or voluntary agreement on imported steel, for example, is essentially a tax on all exports.
The effects are even more direct than this, however. In 1985 the U.S. steel industry felt a sense of triumph because our government had persuaded the Japanese to “voluntarily” decrease their exports of steel to the U.S. The effect of this agreement, and others like it that we have forced on virtually all the steel producing nations of the world, will be to increase the price U.S. manufacturers pay for steel. While this may be advantageous to steel producers, there is more than one way to import steel: You can either import it as steel to be used in the production of final goods here, or the final goods, embodying steel, can be produced abroad and imported. Because of the potential for this kind of substitution, all U.S. manufacturers of goods using steel are now at a competitive disadvantage with foreign producers of those same goods; and while we will import less raw steel, we will now begin to import more steel embodied in final goods. The effect of this “advantageous” agreement is to place all U.S. industries that use steel in a “disadvantageous” position.
As another example, it is clear that protectionist measures that increase the price of domestic copper relative to foreign copper will lead to the destruction of more jobs in copper fabricating industries (because products with copper will be fabricated abroad) than will be saved in the copper mining industry. It is likely that these industries will then go to the government complaining about import competition and seeking relief. Like a cancer, protectionism will then spread.
Myth #9, Finally, it is often asserted that we must protect “basic” industries or, as a variant of this myth, those essential to national defense.
The vitality of the economy as a whole is not linked with the prospects of any particular industry. Indeed, the hallmark of a robust and growing economy is that the basic industries change through time. Railroads and agriculture were basic industries a hundred years ago. If we had pursued more aggressively domestic and international policies that protected these industries, 80 per cent of us would still live on the farm and none of us would easily be able to drive or fly. Because of the relationship between importing and exporting, when we adopt a trade policy that preserves our historical industrial base and freezes structural change, we impede structural change, not just in the U.S. but around the globe.
There are certainly legitimate national security needs, but protectionism is the most inefficient method of providing for them.
It makes sense at this juncture that I restate the previous question – “Is Philippines a case study of Wanton Globalization And the consequent underdevelopment due to such economic thrust? ”
— The Philippines is a case study of Wanton PROTECTIONISM And the underdevelopment that follows it… including… a high incidence of overseas workers, and broken homes.
What can be done?
Amend the constitution to remove the protectionist clauses. That means engaging in the constitutionally prescribed processes to remove these clauses.
Given the coming elections – vote for a senator and congressman who will work to repeal the protectionist clause of the Aquino Constitution.
Keep our families together by keeping the jobs home, remove the protectionist clauses of the current charter.