Economics Politics & government

[2804] TPP exit clause makes sovereignty concerns irrelevant

Text to the Transpacific Partnership came out today. I have yet to go through it fully. It is massive and it can be technical. It is worse than Sejarah Melayu. It will take time.

Nevertheless, I attended a briefing at the trade ministry earlier today and I think I understand the gist of the most important chapters. My somewhat initial impression: there are damn lots of exemptions.

All these exemptions — including the continued maintenance of the Bumiputra policy, flexibility to government procurement for up to 25 years after signing/ratification much to the benefits of local firms and even what appears to be status quo for a lot of GLICs and GLCs — should allay nationalists, protectionists and anti-globalization groups’ fears that Malaysia is surrendering our policy space to foreign governments and multinationals.

In fact, there are so many exemptions that I am unsure I should support the agreement as strongly as I did previously, notwithstanding progress made on market access and tariffs. I have always understood that any FTA is not a real free trade. We live in a imperfect world and I realize that much, but the exclusions Malaysia won exceed my expectations. Hence, my surprise.

But the one clause that blows those ”sovereignty” concerns out of the water is the exit option stated in the last chapter of the agreement. The TPP allows any country to quit the group unilaterally by giving a 6-month notice without incurring any penalty.

The easy exit clause means most of the requirements under TPP, like the extension of copyrights from 50 to 70 years and protections for biologics, are reversible by simply quitting the TPP. I reject the sovereignty argument but, if joining the TPP means losing national sovereignty, then the ability to quit and to reverse those policies must mean Malaysia is always be in control of its policy space.

(Not everything is reversible however. For instance, as I understand it the WTO disallows import tariffs to go up from any point of time and it does seem the TPP’s lower tariffs would be applicable even in the case of exit… I am unsure how post-TPP-exit discriminatory tariffs would work within WTO settings however. We need a trade law expert to answer that hypothetical.)

At the very least, the exit option lowers the cost and risk of joining the grouping.

Whatever it is, I come from the perspective we should always strive to create a rules-based world and then makes the rules as transparent as possible. To say it differently, we should reduce the discretionary powers from the authority as much as possible whenever it makes sense. I suppose, this originates from my libertarian tendency to control powers, be it states, companies or individuals.

In any case, I am a bit disappointed with the concessions Malaysia won, especially in terms of government procurement, state-owned enterprises and Bumiputra policy. I had believed TPP could liberalize Malaysia further more than local politics would allow it. Politics won.

Yet, I think I can stomach that. All this is a process and there will be another time. And right now, the TPP as it is seems okay to me. As I told somebody earlier today, better in than out.

Or, better we set the rules from a position of strength instead of wanting to join later and having to accept the rules from a weaker position.

Touching on the exemptions again, perhaps in retrospect we had too much strength at the negotiating table.


[2703] TPP neutralizes trade diversion caused by other existing trade agreements

Joseph Stigliz argues that the Trans-Pacific Partnership (TPP) will disrupt pre-existing efficient Asian supply chain.[1] That essentially suggests that the TPP creates trade diversion away from non-TPP Asian countries. While this argument is true if it stands in isolation, it is not applicable for Malaysia.

This is because Malaysia already maintains free trade deals with major Asian economies. Either through bilateral means or through Asean, Malaysia has free trade agreement with China, India, Korea and Japan among others (also, Australia), never mind that Malaysia is also a part of Asean Free Trade Area. Combined, they are Malaysia’s major Asian trade partners. Other Asian export destinations are small compared to the combined exports to the aforementioned countries. Major trading Asian countries also have multiple free trade agreements among themselves.

At the same time, Malaysia does not have an FTA with the US. With the TPP, Malaysia will.

So if anything, it is these Asian FTAs that Malaysia maintains which are creating trade diversion away from Malaysia-US trade, contrary to Stigliz’s assertion that the TPP will create diversion away from intra-Asian trade.

That means, if agreed upon and implemented later, the TPP will help in neutralizing some of the trade diversion Malaysia-US trade is suffering from. TPP makes diversion less of a factor and creation, more.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — In the case of the TPP, there is a further concern. Asia has developed an efficient supply chain, with goods flowing easily from one country to another in the process of producing finished goods. But the TPP could interfere with that if China remains outside of it. [The Free-Trade Charade. Project Syndicate. July 4 2013]


[2701] The quantitative aspect of trade diversion; TPP may increase Malaysian GDP

I have previously highlighted the cost of Malaysia not participating in the Trans-Pacific Partnership, which is a proposed free trade agreement among 12 countries across the Pacific. The cost comes in the form of trade diversion. I have only mentioned the qualitative aspect however. While it is good to know that, having quantitative assessment of the TPP will provide a greater case for joining, or not joining for that matter. Indeed, Pakatan Rakyat as well as the anti-TPP camp are demanding the goverment to release a cost-benefit analysis of the TPP. I think that is fair.

Well, they and all of us are in luck.

Inkyo Cheong of Asian Development Bank Institute recently published a working paper that comes close to a CBA. In the paper, the author does provide the impact on GDP of various countries:[1]

TPP impact on GDP
As you can see, most countries that join the TPP, if the TPP is agreed upon, are expected to enjoy positive impact on their GDP. Most which do not are projected to suffer some reduction in its GDP. That reduction is caused by trade diversion.

For Malaysia in particular, the implementation of the TPP is projected to increase the GDP by 0.7% (see the TPP12 column). As you can see, Malaysia is expected to be one of the biggest winners of the TPP.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — [Comparing the Economic Impact of the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. Inkyo Cheong. Asian Development Bank Institute. July 2013]


[2698] Missing the TPP boat can be costly

As negotiations progress, opposition to the Trans-Pacific Partnership (TPP) is getting louder in Malaysia.

The opposition camp is focusing on possible loss of policy independence arising from the implementation of the TPP and its potential cost to ordinary Malaysians. While their concerns are legitimate and deserve attention, it is also important to know that there are possible losses from not joining the TPP.

The TPP is a proposed multilateral free trade agreement (FTA) among 12 diverse countries across the Pacific region. Those countries include Malaysia and the United States. Several other countries with reasonably large populations like Thailand have expressed interest in joining the TPP as well. If negotiations are successful, it will create the largest free trade area in the world in terms of gross domestic product.

The immediate primary purpose of having an FTA is to increase trade volume by reducing cost. That can be done by liberalizing trade tariffs or by standardizing regulations, among others. The ultimate aim of having greater trade volume is to improve the population’s average welfare. Greater trade volume means greater opportunity for increased income and more job creation.

That certainly has been true for Malaysia. In the years after the formation of Malaysia, the country embraced an import substitution industrialization policy (ISI), where imports were discouraged and actively replaced by domestic production. It did industrialize some parts of the economy but with a small population therefore small demand, industrialization efforts did not go far enough to push overall income and general welfare up convincingly. Furthermore, it was an expensive way to industrialize.

Malaysia and several other Asia-Pacific countries, most notably the four Asian Tigers, only really began to grow rapidly upon the adoption of an export-oriented industrialization policy (EOI) in the 1970s and the 1980s.

While the ISI looked inward and had limited trade, the EOI explored the world for growth to cater to global demand apart from domestic demand. With the explosion of trade volume, these countries grew rapidly soon after.

New jobs that did not even exist before were created. Average incomes of Malaysians zoomed up in a way no one had ever seen before. The result was the Asian Miracle: where others took centuries to achieve, these Asian countries took only a few decades thanks to trade.

The FTA helps support the EOI by granting low-tariff access to the international market.

Now, there are at least two effects of trade. One is the creation of new trade, which is good because it benefits the trading partners without hurting a third party. The other is trade diversion, which benefits the trade partners but hurts a third party.

There is an aphorism in support of free trade: a rising tide lifts all boats. That means trade is not a zero-sum game and the benefits outweigh the costs after all things are considered. The truth is that happens only if new trade is created.

Right now, the best way to create new trade is through a global trade agreement where every country co-ordinates with each other to liberalize its trade. Unfortunately, that global effort in the form of the Doha Round has been dead for some years now. In its place, countries are resorting to bilateral and regional trade arrangements.

While these bilateral and regional arrangements, which the Asean Free Trade Area and the TPP belong to, can create new trade, they can also create some diversionary effect to hurt countries which are not party to the arrangement. In some ways, such FTA can be thought as a preferential trade agreement, especially if the trade diversion effect is stronger than the trade creation effect.

A dramatic example effect of trade diversion would be China before it joined the WTO in late 2001. While the WTO is not exactly an FTA in a traditional sense, it functions as such.

All WTO members must treat each other equally and there is no requirement to treat non-members equally. That leads to a situation where trade barriers imposed by a member state against another member state are generally lower than that imposed on non-members. Since most countries in the world are WTO members, non-members are screwed… to put it simply.

A lot of trade flows circumvented China, the non-member. That was not because China had nothing to offer to the world but it was only because of trade diversion.

Once China joined the WTO, the trade diversion effect was reduced. Proof: China is now the factory of the world and that may not be just a figure of speech. It is worthwhile to take note that China became a global economic powerhouse when it opened up.

Here, we return to the TPP. It has the potential of becoming the largest FTA in the world. Because of its sheer size, the trade diversion effect from Malaysia missing the TPP boat can be so big that it can hurt, never mind the lost opportunity for new trade creation. It means job and income growth could be at stake, making Malaysia’s effort to catch up with the developed Asian Tigers harder than it should be.

This however does not mean the worry of the anti-TPP camp should be shoved aside. Certain provisions within the TPP may provide too much monopoly power to foreign corporations as the proposed agreement tries to put in place overly strong intellectual property rights that seem to turn the debate into the issue of market monopoly. Malaysia is already struggling to address pre-existing monopolists throughout its economy. The TPP may just exacerbate the situation by creating more monopolies in more sectors.

Nevertheless, those concerns and several others are sectoral in nature. It is wise to move out of the respective silos and look at the bigger picture from time to time.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail Online on June 27 2013.


[2571] Cars, duties, congestion, pollution, revenue and income effect

Several new points were raised with regards to my post on duties and cars yesterday. One was pollution, two was government revenue and three, in one way or another, income effect. It is not exactly income effect but close enough.

Concern number one is easy. But let us state the pollution concern. The concern is that there is already too many cars on the streets and there is a need to reduce pollution, which I take as carbon and other greenhouse gases emissions. I also take that as actually reducing the number of cars. But here is the thing, substitution to foreign cars may actual reduce emissions without having to reduce the number of car on the roads. The reason is that comparable foreign cars-European, Japanese and possibly Korean-have higher emission standard than locally-produced cars. With more competition, consumers have a chance to choose emission-efficient cars over relative gas-guzzlers without too much price variation. End result: less emission given the quantity of cars.

Concern number two deserves a very libertarian answer. Cut government spending instead. The duties on foreign cars were always meant as protectionist measure, not primarily for revenue-generating purpose. The revenue derived from the duties should really be considered as a bonus. Except that the government is so used to it, that it forgets. With the fiscal discipline, they need the bonus. One way to cut spending is to cut fuel subsidy. In fact, tax it. Yes, tax fuel purchase.

Concern number three is harder to address and I actually thought about it but ultimately decided to not touch it. As try to explain it below, you will understand why I decided against touching it.

Income effect (not exactly but close) or specifically, the new competitive environment may push prices down across the board. This may be true and I have alluded to this in an article I wrote for The Malaysian Insider earlier. In turn, this may increase vehicles on the road as more are able to purchase cars. Or it may not. There is a sound theoretical case for an increase, but there is also a sound theoretical case for the opposite.

Initially, I wanted to address this in terms of stickiness and temporally. In English, prices will adjust only slowly to a new reality. More technically, all-in prices of domestic cars are sticky and that of foreign cars are not.

Why do I apply stickiness on domestic cars but not foreign cars? It is because the abolition or the reduction of duties is easy to calculate. It is on top of the car price in the sense that pre-duties prices are associated with the way companies run their business. It is this pre-tax, pre-duties prices that are sticky.

Most of domestic car prices are made up of sticky components. For foreign-manufactured cars, a significant portion of its end prices are made up of non-sticky components, i.e. the tax and the duties. This is why I apparently apply stickiness only on domestic cars. In truth, I am applying stickiness on both domestic and foreign cars while taking into account domestic cars have significantly less portion of non-sticky components than foreign cars, within the context of import duties abolition.

Also, consider this. The net earnings of Proton in 2011 was not even 2% of its revenue. How much room Proton has for a serious price war? Not much in the near future. This, I think, is an indication that there is a price floor: there is not much incentive to push price of sedans down too much beyond whatever Proton is charging. Proton cannot charge less anyway.

So, in the short term, the specific income effect will not be present. And no traffic congestion issue.

The long term issue is hard to say. It depends on non-cooperation (it is quite possible for firms to achieve implicit understanding in price settings without getting into trouble with anti-trust law).

Ultimately, it depends on how efficient those under pressure can be. What is certain is that that takes time.

It also depends on how low prices would get. I have not done the calculation but I have a feeling, both Proton’s small margin and game theory will provide a floor how low prices can get. And foreign manufacturers definitely would not want to price their cars so low as to earn a loss. Furthermore, that would be dumping and they will get into trouble with that.

So, in the long run, it may, or it may not have effect on congestion.

Besides, if there would be worse congestion, it would be very naive to think there is no other accompanying policy to address it. I have one immediately in my mind: congestion fee within the cities.