Bantah TPPA is an anti-TPP group, comprising of various groups of differing interests. The Malaysian Aids Council for one has legitimate concerns about drug patents but others like the Maljis Tindakan Economi Melayu and similar organizations are reeked with self-interest openly preferring protectionist policy for the few packaged as affirmative action, benefiting certain producers in a discriminatory way. The strongest lobbyists in the anti-TPP camp are the pro-affirmative action/protectionist camp. These are the ones closest to the ruling party, and UMNO needs to take care of its bases at the moment. With rising conservative forces in UMNO, UMNO leadership, PM Najib Razak especially, has to listen to the pro-protectionist camp. As for the rest in Bantah, let us not have any wild imagination and be real about it; they are the liberals (some are pseudo-liberals), unfortunately of secondary political forces within the anti-TPP camp. And they are riding on the conservative effort.
There are multiple claims and I am generally sympathetic to drugs and tobacco issues. What I oppose is the overtly protectionist stance aimed at protecting certain businesses (and nothing to do with health, environment, etc) and misleading arguments or downright lies applied.
One claim made by Bantah belonging to the latter categories is that free trade agreements will hurt a country’s trade balance. This is based on their assumption that free traders claim that FTA will increase trade balance.
But, “free trade” itself says nothing about trade balance. “Free trade” has an agnostic a priori assumption on trade balance. In fact, if one trades, somebody has to have a surplus and somebody has to have deficit at any particular point of time. To say free trade/FTA increases trade balance ignores the fact there are at least two sides trading. “Free trade” does not make that argument that Bantah opposes. Bantah is opposing a straw man here.
The traditional argument is that free trade increases total trade (not trade balance). That means the sum of exports and imports for a country increases (not the net of the two, which is net exports). Bantah misunderstands this.
I have pointed this out to somebody in Bantah. In return, they changed the argument into “it is a myth that free trade creates more trade”.
As you can see below, they changed the slogan, but not the substance of the argument:
The poster (created by a Bantah-friendly entity Blindspot) misrepresents the data through graphics. Sexy graphics defeats hard data sometimes, sadly.
The poster tries to debunk the “more trade” narrative as false… by highlighting trade balance instead of total trade. That is a first signal something is wrong with their logic. This graphics confuses total trade with trade balance.
This annoys me to no end. Bantah TPPA is parading this flawed argument to government and opposition politicians. They even do it in the media. And people buy it. After being tired explaining this to people that I have met over and over again, and ranting on Twitter, this is a more systematic effort by me to correct the wrong, publicly.
If you look at the poster by Blindspot, it ironically disproves its own point. Blindspot/Bantah does not even realize it. Despite its slogan “FTA = More trade? It is a MYTH” in the poster… total trade actually increases!
Consider Chile. Take a calculator. In 2003, total trade (sum of exports and imports) was $6.4 billion according to the chart. In 2012, it was $28.2 billion. Look at the poster. This is true from all countries shown there. Trade increases. All you need is your summation skill and that immediately answers Bantah’s rhetorical question in the affirmative. It is a case of Bantah shooting itself in the foot. There is indeed more trade, even from Bantah’s own poster!
But let us go to the original argument by Bantah, which states that free trade agreement tends to worsen trade balance, which is what the poster actually tries to show. That is the spirit of the poster anyway. Ignore the silly mistake of confusing trade balance with total trade.
Let us check general trade balance pattern of the four countries more closely. Rather than choosing two data points only, we will look at all of the relevant points, from 2001 to 2012. It gives us more context, and make analysis less susceptible to manipulation.
I obtain all data here from the International Trade Center, a United Nations body and from the US Census Bureau. You can search for it online. ITC requires some registration and if you are from Malaysia, then you can access it for free. US Census Bureau data is free but it is tedious to read unlike ITC’s.
All numbers are in US dollar, but from US trade partners’ perspective.
Chile, FTA in 2004
First is Chile, which signed an FTA with the US in 2003. The agreement came into force in January 2004.
Bantah picks the 2003-2012 period to prove its point in its poster. But here is a case where graphics is used to misrepresent the statistics.
Here is the annual trade balance between Chile and the US, from Chilean perspective, in full, from 2001 till 2012:
- The first is the improvement in trade balance and its spiked in 2006, which happened after the FTA was enforced. You cannot see that improvement in Bantah poster… because they showed only two data points. If Bantah was right, it should not be any improvement at all. But there was. That immediately raises a flag.
- The second is the trade deficit from 2008 onward. While Bantah may relish this fact, correlation is not causation, Any good undergraduate economics student would tell you. Indeed, the deficit has nothing to do with the FTA but rather, it was caused by the recession in the US, which by the way, was the worst recession since the 1930s, in case anybody needs reminding.
The year 2008 was when the Great Recession hit us all, with the US and Europe facing the worst of the crisis. US consumers and corporations pulled backed on its consumption and that meant they imported less from all around the world, including from Chile.
Others were more or less, affected less severely by the Great Recession compared to the US. The US is still recovering from the 2008 recession but others like Malaysia are mostly out of the pit. That means, countries export less to the US but they import more from the US. Remember, in recession, imports fall. In boom years, imports tend to go up. Remember this point. It is a recurring trend in almost all countries I am showing below.
Another important factor is the quantitative easing, which makes the US dollar weaker compared to the rest. Here is a simple exchange rate dynamics: a weak dollar encourages imports from the US, and discouraging exports to the US. In other words, a weak dollar means US goods are becoming cheaper compared to local goods, and vice versa from US perspective.
Here is a proof of that, showing US overall imports from the world falling due to the recession:
Why is this chart important? It shows US imported less because of the recession it suffered. Look at import growth: it slowed beginning from 2004. US imports only went back to it 2008 peak in 2011 and import growth has not been encouraging so far. This will be the driver-chart in this whole write-up.
Shorter explanation: US demand slumped and so, US imports slumped. That means exports to the US from everywhere, on average, must have fallen. That affects all countries that trade with the US, with or without FTA.
In case of Chile, clearly, Bantah’s argument fails. FTA did not worsen balance in the immediate years after enforcement year. On the contrary, it improved before the 2008 recession caused the trade balance to go south. It is important for me to stress that I am not claiming FTA raised Chile’s balance. I am pointing out that it did not pan out as Bantah claims. To claim FTA increase trade balance is another argument that I am not willing to make in general.
In fact, Bantah is relying on recession-related trade deficit to justify its claim. And the recession is completely unrelated to the FTA.
So, in the case of Chile, Bantah is wrong. Bantah confuses the causal relationship. Its use of Chile to support its case highlights its ignorance of trade and the wider world.
Peru, FTA in 2009
Peru signed the FTA in in 2008 and it came into force in 2009. Here is the balance:
Here is a problem from Bantah’s narrative too. The trade balance went down before the FTA came into force. But, did you know what happened in 2008?
You are right. Recession.
You could see it better if this was done with quarterly data but that is too much work for me, especially I am doing this for free. You can check the trade data yourself. In fact, I encourage that. Do not trust me or Bantah. Look at the data yourself.
You may say, in the case of Peru, there are two competing narratives: one of Bantah and that of recession happening at the same time. But as you can see below, countries without FTA with the US also had its trade balance worsened in the same period (see Brunei, Japan, Malaysia, New Zealand), suggesting FTA has no to little role in the matter.
Australia signed its FTA with the US in 2004 and it was enforced in 2005.
Something is going on here because Australia has been having trade deficit with the US for the longest time. The recession does exacerbate it, but remember, post-US recession, there was QE and the Australian dollar achieved parity some time in 2010-2011. Strong Aussie dollar encouraged imports. That has nothing to do with FTA.
The wider deficit that began from the very beginning probably has to do with the make-up of the Australian economy, which lacks manufacturing and heavily dependent on its primary, low-value added industries. The US on the other hand produces a lot of high value-added things Australia does not produce. So, Australia imports a whole lot of high-value goods, consistently, and exporting… Wolverine? I am speculating and I do not really know. So, feel free to correct me.
In any case, one has to be very bold to say it is due to the FTA. In fact, like in the case of Chile, Bantah is relying on deficit caused by the recession and the QE to make its case. With Bantah’s simple poster, you cannot see that.
Again, a case of using graphics to trick others.
Finally, the country Bantah likes to cite the most, Singapore. Singapore signed the FTA in 2003 and enforced it in January 2004:
Singapore may fit Bantah’s story. But remember the earlier statement I wrote about in a trade, somebody would have a surplus and another deficit at a particular point of time?
You do not want to be right because it is a coincidence.
A brief comment on the four
Out of four countries, only Singapore fits into Bantah’s narrative perfectly. Maybe Australia, if you want to stretch it. The rest, upon closer inspection beyond just two data point, do not.
Anyway, why limit to just the four countries when the US have 20 FTAs in total up to 2013? Why should we cherry-pick?
You know exactly why Bantah cherry-pick. Let us have a run through the 20 countries, which are (along with the year the FTA came into effect):
- Chile, 2004
- Peru 2009
- Australia 2005
- Singapore 2004
- South Korea 2012
- Canada 1994
- Mexico 1994
- Costa Rica 2009
- El Salvador 2006
- Guatemala 2006
- Nicaragua 2006
- Honduras 2006
- Colombia 2012
- Israel 1985
- Jordan 2010
- Morocco 2006
- Panama 2012
- Oman 2009
- Dominican Republic 2007
- Bahrain 2006
We will also see countries with no FTA with the US (and the negotiating members of the TPP), just to show, they too had their balance worsened, curiously, at the same time as the countries above:
- New Zealand
The Korea-US FTA negotiation took a very long time to complete. It was only enforced in 2012.
In the first year of FTA, there was a spike, meaning higher trade surplus for South Korea.
It is hard to say whether the spike was caused by the FTA. After all, it is just one data point. Nevertheless, it is not a good start for Bantah’s narrative.
Canada and Mexico
Does free trade hurt trade balance of US trade partners?
Here are the series for Canada and Mexico’s trade balance.
The NAFTA experience says no. If trade balance was the sole criterion of the success of a trade agreement (which it absolutely is not), then NAFTA would be wildly successful for both Canada and Mexico, and terrible for the US.
Trade surplus for the US neighbors has improved tremendously since 1994. NAFTA came into effect in 1994. And hey, Mexico maintained trade deficit with the US prior to 1994. After NAFTA, its trade balance swung into positive territory and it has been hitting record high ever since in nominal terms. Go to US Census Bureau website and you will see exactly that.
Bantah is wrong here. Have they ever talked about this?
They will not.
Central America (Costa Rice, El Salvador, Guatamala, Honduras and Nicaragua)
Out of the five Central America countries, only two showed deterioration in trade balance after the enforcement of FTA: Honduras and Guatemala.
Notice how Nicaragua and Costa Rica’s trade balance progressively improved after the FTA, especially after the recession. I am not implying that the FTA caused the trade surplus to grow. What I have saying it does not support Bantah’s narrative.
For El Salvador, a slight deterioration but it is mostly stable. So no real positive and negative effect from FTA, judging from trade balance perspective.
(The US has an FTA with the Dominican Republican, a Caribbean country. You can find details about that particular FTA in a section somewhere below.)
Colombia enforced its FTA with the US in 2012:
Not much to say. One data point, just like Korea.
Now, here is Malaysia’s favorite country. Israel enforced its FTA with the US in 1985:
Did you say something about FTA and its negative impact on trade balance?
From the US Census website, Israel had on-off deficits with the US but it began to experience large, growing trade surplus since 1996. I am unsure it has anything to do with FTA. I do not why myself without reading into Israeli economy further.
But, Bantah will not use Israel as an example. The most powerful lobbyists in Bantah are the Malay conservatives, you can bet they will not mention Israel.
FTA with Jordan came into effect in 2010:
I do not see how FTA could explain the trade balance change, particularly because the FTA started only in 2010. But one thing is certain: the decline began in 2007, with the US economy on the verge of recession. There was a switch in direction, but only in 2011. In the first year of FTA, trade balance improved from last year.
Note that the trend is similar to Peru and Chile’s, and later as you will see, similar to Brunei’s too, who has no FTA with the US.
FTA in 2006. Recession in 2008. You decide.
You may want to say the negative effect of FTA and recession are not mutually exclusive. This brings us to Panama.
Panama only enforced its FTA with the US in late 2012, in October in fact. So, that does not explain the large deficit in 2012. In fact, it does make you wonder, what caused the deficit to widen drastically, right?
Recession. In fact, this trend of deteriorating deficit from 2007-2012 is being repeated in a lot of countries, with or without FTA. It makes you wonder why.
Compare this to Australia and Singapore. Remember, there is effectively no FTA to explain the Panamanian experience here, yet, it mirrors Australian and Singaporean balance. You have to ask why.
I wonder what happened in 2011. And note 2008-2010
FTA enforced in 2007:
Remember the story of recession. Remember also trends in other countries, Panama especially.
Bahrain’s agreement came into effect in 2006. A jump in trade balance.
And in 2008, recession.
Countries with no FTA with the US
It is good to compare what happened in other countries which have no FTA with the US. If their trend is similar to countries with FTA, like what happened in Panama, then that is a proof that FTA has no t0 little role in trade balance changes.
I want to escape the accusation of cherry-pick, which I am accusing Bantah of. So, let us look at negotiating TPP countries which have no FTA with the US.
No FTA here:
Malaysia has its trade surplus eroded considerably lately. No FTA here:
Note the erosion beginning from 2007. It happens in countries with FTA too. Why does it happen in Malaysia too despite no FTA?
Answer: systemic trend, which is the recession in the US.
Vietnamese trade balance appears very resilient, but it did not escape the systemic factor:
There was an erosion in trade balance in 2009. Note that in other countries as well.
Japan also got hurt by the recession. Note the years, which are references to be used when reading other countries’ trends that you see above:
Note the years. I cannot stress this enough.
This is getting tedious. I will do one more, and that is Brunei, which is, like Japan and Malaysia, are parties to the TPP.
Here is Brunei:
No FTA, but trade surplus turned trade deficit, at around the same year it happened in countries with US FTA where surplus turned deficit too. The main reason has to be recession. It is the only systemic factor and it happens everywhere. It almost makes FTA, whether it improves or worsens trade deficit, a distant concern only.
Makes you wonder about Bantah’s argument, does it not?
I rest my case.
Some house cleaning.
All data was taken from the US Census Bureau, which is available here. All figures there are denominated in US dollar and are listed from US perspective. The signs here are inverted because I want to see the trade balance from the perspective of the relevant US trade partners.
There is also data from the International Trade Center, a body under the United Nations and the World Trade Organization. It is available here but the database is gated and you need to register with ITC. You can access the trade database for free if you are registering from poor and emerging countries. If you are registering from an advanced economy, tough luck.
The numbers from the Census Bureau and the ITC differ by a bit (sometimes, the signs even change). It is possible currency fluctuation caused that. In the end, I mostly used the figures from the US Census Bureau. This is not much of an issue because from the US perspective, it is all in dollars and that controls the exchange rate fluctuation. So, really, all of those numbers are trade balance the US directly experiences, and indirectly faced by the trade partners of the US.
And, data from the Census Bureau is free and non-gated. It makes the verification process easy, if you want to verify those numbers that I am showing you. I want this to be as transparent as possible so even a layperson can go through the data.
For those with access to paid databases, like CEIC, you know what you can do to verify what I have written here.