If you make a boxer fight with one hand tied behind his back, the chances are he’s not going to perform as well as if he had both hands free. Irrespective of his fitness, his energy resources and his fighting ability, his potential to win will have been seriously compromised. And, correspondingly, his opponent will have been given a huge advantage. That, very basically, is what happens when a government shackles its economy with market restrictions and stifles trade freedom.
Let’s first define what free trade really is. In practice, it’s when a government allows buyers and sellers from other economies to enter its domestic market without limits, controls and conditions – in other words, without applying tariffs, quotas, subsidies of prohibitions on their goods and services. It’s a laissez-faire policy that makes no distinction between imports from and exports to foreign markets.
Its antithesis is trade protectionism and economic isolationism – policies guaranteed to kill economic growth and development. Closed and protectionist markets have few trade opportunities and depend on their ability to produce all the goods and services required by the domestic population which in turn must support the economy and all its requirements through consumerism. We don’t know of a single country that’s ever achieved that.
China is a good example of the beneficial effects of market opening. Prior to 1978, the Mainland had spent nearly quarter of a century in economic isolation under the leadership of Chinese Communist Party Chairman, Mao Zedong. That year, just two years after Mao’s death, the new helmsman, Deng Xiaoping, announced his ‘Open Door Policy’ – allowing foreign businesses to set up in China. Deng knew that for China to rebuild its economy, it needed to modernise, and to do that it needed Western knowhow and Western cash. In short, it needed to open-up to the world.
It scrapped the communist economic blueprint of interventionist central planning, introduced reforms, embraced the principals of a market economy and within a handful of years became the fastest-growing economy in the world.
The 2017 Economic Freedom Index (EFI) – produced by the prestigious Washington-based think tank, The Heritage Foundation – evaluates the ‘Open Markets’ of 186 countries world wide.And one indicator it uses to measure that is ‘Trade Freedom’.
Heritage Foundation data show a strong correlation between trade freedom – the absence of tariff and non-tariff barriers that affect two-way trade – and a variety of positive results, including economic prosperity, growth, low poverty rates, and clean environments.
Here from the EFI we’ve extracted the global results for the ‘Trade Freedom’ of the 10 states of the Association of Southeast Asian Nations (Asean) to show how the Philippines ranks with its main regional competitors. The results are: Singapore, 4th; Brunei, 6th; Vietnam, 64th; Thailand, 67th; Malaysia, 73rd; Indonesia, 77th; Cambodia, 78th; Philippines, 103rd; Laos, 110th; Myanmar, 113th.
The Philippines, then, in triple-digit territory globally. More importantly, it ranks third from last in Asean, ahead of just two of the region’s three frontier economies while the third of these, Cambodia, beats it significantly.
Our description of the hampered boxer fits the Philippines well in respect of trade freedom. This is an island nation that’s dependent on trade. And yet, while it reduced import tariffs and liberalised its trade regimen – the Philippines joined the World Trade Organization in 1995 – its customs and trade-related rules are among the most complicated in the region.
Moreover, goods imported to the Philippines are subject to a host of levies including import tariffs, excise duties, value added tax, and various customs fees and related charges. There are also non-tariff barriers in place relating to pre-shipment inspection and quality standards which present further challenges to foreign exporters.
In the 2016 Enabling Trade Index, compiled by the World Economic Forum in association with the Global Alliance for Trade Facilitation, the Philippines was beaten by every other member of Asean with the exceptions of Laos and Cambodia. Time for the government to untie the other hand and see what the Philippines can really do.