Tag: free trade

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Economics

[2570] Abolition of import duties on foreign cars will not increase congestion because there is substitution effect

I advocate the abolition, or at least a significant reduction of import duties (and other excessive taxes) on cars as well as the abolition of the approved permits system that blow up the prices of foreign-manufactured cars to an outrageous level. This should come at no surprise because I am a libertarian. I do generally support freer trade. Make no mistake, the policy on cars is a protectionist policy.

There is a concern that if duties on imported cars are slashed down significantly or abolished entirely, this will exacerbate traffic congestion in Malaysian cities. At first, this sounds like a very big and legitimate concern. It is not.

If one understands that the duties are imposed on foreign marques and that there is such a thing as  substitution effect, one will understand that the concern on worsening traffic congestion is misplaced. I suspect it is almost always raised by those without enough formal education in microeconomics.

Do understand that imposition of high duties are on foreign cars. This is the nuance. Too many talk as if it is applied across the board, including on Proton and Perodua marques. The peril of generalization is that you lose the nuance.

The duties make domestically-produced cars cheaper than foreign cars and this should be a no-brainer.

It is no coincident that a majority of cars on Malaysian roads are Protons and Peroduas. Malaysians buy Protons and Peroduas because those cars are cheap. There are not too many of those who can buy more expensive cars. If I recall correctly, the number of Protons and Peroduas and other locally-produced cars dwarf the number of foreign-manufactured cars in this country. I do not have the statistics at home but I do have it at the office. I will share it tomorrow and correct my assertion if it is proven to be incorrect.

If foreign cars are suddenly competitively priced after the abolition of various pre-exisiting duties imposed, new buyers will be tempted to purchase those foreign cars, which are many ways of higher quality than Proton at least. Perodua probably can stand up within its market niche.

Now, if the duties persist, these new purchasers would probably buy Protons and Peroduas.

Notice that there will be purchases of car anyway.

To put it in clearer terms, if the status quo remains, people will buy local cars. If it does not much to the benefits of Malaysian consumers, they will buy higher quality foreign cars. For those whom would have bought foreign cars anyway, it does not matter as far as traffic congestion is concerned. They would still buy their cars. It is not about discriminated duties that Malaysia has that I along with others like-minded persons want abolished.

So, the concern for traffic will exist as long as Malaysians purchase cars and it really does not matter whether the duties are abolished. The trend for greater quantity of cars on the road is really a secular one. It has to do with affluence growth and population growth more than anything, and the availability of a reliable public transport system within this context.

Those who argue that the traffic condition will worsen if those duties are removed just do not understand that those cars are substitute goods.

This does not mean the abolition of import duties do not matter. It matters in terms of welfare. It matters in terms of competition. It matters in a lot of other more important ways. But not in terms of congestion.

Categories
Economics

[2564] Anti-dumping duty on wire rods has little to do with predatory pricing, more to do with protectionism

It appears that protectionist sentiment within the steel industry just will not just die down. Earlier last year, Megasteel unsuccessfully lobbied for a levy on steel imports. That was shot down because users of steel protested. Megasteel, being the sole domestic producer of flat steel (used mainly for vehicles and major appliances), in its eagerness to protect itself from competition, wanted not only protectionism for domestic flat steel, but lobbied for across the board protectionism. That stepped on a lot of toes and it was good that the protest stopped the protectionist petition dead in its tracks.

In the news today however, the government is considering anti-dumping duty on foreign-produced steel wire rods. Wire rod is considered long steel product and most Malaysian steel manufacturers produce long steel. Contrast the fact about long steel with flat steel, which is only produced by Megasteel: one can immediately understand why the anti-dumping proposal may be more popular than Megasteel’s earlier protectionist proposal. The anti-dumping duty will benefit a lot more manufacturers (if not most in the industry) than Megasteel’s earlier proposal.

According to The Star, the government is mulling anti-dumping duty after an unnamed domestic manufacturer filed a complaint about how foreign steel manufacturers are dumping wire rods in Malaysia.

First, for laypersons’ benefits, what is dumping?

The typical definition of dumping is when a foreign manufacturer priced its products aboard at a price cheaper than the price its sell at its home country. The logic behind this is that foreign firm is flooding the market on purpose to kill off domestic competitor so that it will be a monopoly later. It is predatory pricing. The real concern is predatory pricing and the prices differential is just a proxy to that concern.

The problem is that not all of such pricing is predatory but regulators rely solely on the proxy to decide while disregarding the main concern, which is again, predatory pricing. This is flawed way of looking at the case.

It is all too possible for foreign firms to price their goods at home more expensive than aboard without engaging in predatory pricing.

One reason can be that a foreign firm has monopoly power over its home market while its export market is exposed to fierce competition.

Now, add another factor, which is likely the case for Malaysia since Malaysia steel manufacturers do not have the scale required to make it efficient: foreign steel manufacturers from large economies like China has the economies of scale to be efficient. In a world of pure free market with initial position as it is in the real world, Malaysian manufacturers would not be able to compete with the foreign manufacturers’ price.

Given both factors, efficient but monopolistic foreign firm can engage in such price discrimination across economies. So, a firm pricing its good in its export market lower than its home market is not embarking on predatory pricing at all. Rather, it is only responding to market reality. Under this scenario, anti-dumping measure by any government is highly inappropriate and in fact, protectionist.

The reality is the anti-dumping measure is aimed at protecting inefficient Malaysian steel industry.

This is not just an economic and ideological concern.

Long steel products are used for construction. An anti-dumping duty on long steel, for instance, will eliminate downward pressure on prices of raw material used for construction of houses and offices, even the MRT.

When prices of properties go up unreasonably, you know which policy to blame.

Categories
Economics Politics & government

[2563] Why I do not want to see a Eurozone break-up

I understand the case for the breaking up of the Eurozone. I do appreciate the virtue behind a flexible exchange rate, especially for cases like Greece. There is a need for rebalancing that a monetary union cannot provide. Yet, I am uneasy at the suggestion of a break-up, of Grexit, because deep inside of me, I am more or less an internationalist.

The internationalist sentiment is derived from my libertarian belief. It is about freedom of movement. Free flow of labor. Free flow of capital. All around the world.

I dream of a world where I would not have to present identification whenever I land in some foreign airports. I dream that I would be free to be anyway I choose without the need to ask permission from the state.

Unleash the ideal world and what I call the crazy me would come out as an anarchist. Specifically, an anarcho-capitalist. Freedom unbounded.

But I am not an anarchist because I understand anarchism is inherently unstable. I settle for the second best option available and that is free-market libertarianism.

Just as anarchism is the ideal but unattainable and thus the second-best solution is libertarianism, internationalism is the ideal but the second best approach is regionalism, for now.

This fuels my sympathy for the Eurozone. I want the Eurozone to be intact because of my bias. It has nothing to do about being western or Europe-centric.

I want it intact so that in the future, the Asean version can emerge. An Eurozone failure will likely inform decision on a more integrated Asean. Already the Indonesian President warned Asean of repeating the European mistake. The warning is appropriate but as I have argued, there are appropriate lessons to learn from the European crisis without jettisoning a closer Asean idea.

And I do think Europe will succeed, if recent history is of value.

The end of World War II saw closer cooperation between European countries: observe the Marshall Plan. Not all and definitely it was easy to cooperation when your opponent is dead, but the cooperation happened and that is the point.

The Cold War saw closer integration: observe the European Coal and Steel Community and the European Economic Community.

Post-Cold War saw even more: observe the European Union and its expansion.

The European Exchange Rate Mechanism crisis brought closer cooperation: observe the introduction of the Eurozone.

Now, the latest Eurozone crisis may bring in closer cooperation: observe the fiscal union proposal.

So, do not ring the bell yet. The regionalist game is not over yet and the outcome of death is not certain.

As a libertarian, the issue is the creation of a stronger state but I think, this can be a largely enlightened state, with a federal structure is can be a counterforce to the central government.

Categories
Economics

[2335] Free trade in rice is good for Malaysia

The Food and Agriculture Organisation recently warned food prices are at record levels in both nominal and real terms since the entity first published its Food Price Index in 1990. The International Monetary Fund stated this is unlikely to be a temporary trend.

Rice generally has not shown the kind of increase exhibited by other foodstuffs, however. For Malaysia, where the majority considers rice a staple food, this is good news. Yet, it is probably just a matter of time before prices begin to increase.

Rice prices did hit outrageous levels in the past years. In 2008, it rose so high that it triggered some kind of a panic in a number of rice-consuming countries.

In Malaysia, shortage was reported in some places. The Abdullah administration tried to address the concern by purchasing an emergency supply from Thailand.

Implementation of rice exports ban by several of the world’s largest exporters of rice exacerbated the increase in price. Two particular countries that imposed the ban were India and Vietnam. Both make up more than 25 per cent of the world’s rice exports currently.

The impact of high rice prices, the role of rice as staple food and the implementation of exports ban are important while considering the following fact: According to the agriculture and agro-based industry deputy minister, imports fulfilled 30 per cent of Malaysia’s domestic rice consumption in 2010. Malaysia sources some of its rice supply from India and Vietnam.

The protectionist policy works for exporting countries by isolating domestic prices from international ones, if the goal is to have low prices in the domestic market. With less competitive demand for domestic rice, domestic prices will fall or at least it will not rise as fast as world prices given specific circumstances.

Governments around the world are aware of the adverse effects of high food prices for their respective society. Examples are aplenty.

In 2007, Mexicans took to the streets protesting against rising corn prices. Rising food prices — specifically bread — is partly fuelling the ongoing protests and revolution in the Middle East.

In short, at the macro level, a ban benefits the exporting countries at the expense of the importing ones.

What solved the issue of rising world prices was the financial crisis that began soon afterward. The protectionist policy gave way to other pressing concerns.

The respite from expensive rice is appearing to end. Eventually, the concern for rice supply and prices will take centre stage again and so will the protectionist policy of exports ban.

The concern is not theoretical. India continues to maintain an exports ban on non-basmati rice. Myanmar recently imposed a ban to slow the rising price.

For importers of rice, it is in their interest to have exporters remove the exports ban. That will mitigate the rise of global prices. This is a concrete example of how free trade benefits Malaysians and how protectionist policy hurts.

There is a silver lining to all this, if it could be called that. Rising prices coupled with the prevalence of exports ban is causing countries like Malaysia to boost its own rice production. Yet, a domestic production boost is at best a second best alternative to the free trade scenario.

The free trade scenario is cheaper in terms of opportunity cost. Trade enables specialization and that frees up resources for other more productive endeavors that Malaysia might embark upon.

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 Malaysian Insider on March 24 2011.

Categories
Economics

[2136] Of import quota policy is irrelevant to the objective of low stable prices

On December 7 in the Parliament, based on the Hansard, Deputy Minister for International Trade and Industry Jacob Dungau Sagan was asked whether the government intends to abolish a policy that grants exclusive permits for imports to limited entities and effectively, the granting of monopoly power to several companies over certain commodities such as sugar and rice. He effectively said no and went on to defend the policy.[1] I find the defense problematic.

He began his defense of the policy by stating it is the responsibility of the government to ensure that prices of such commodities, and specifically sugar, remain at affordable levels while promoting the sugar industry in Malaysia. According to him further, due to the fact that prices in Malaysia are lower than prices in neighboring countries, there is possibility that producers will not import sugar when prices in the international market are higher than local ones.

Approved permit policy however is an very suboptimal solution to the problem. His answer is similarly so.

Firstly, prices are lower because of price control. Remove the control and prices will go higher. If the local prices without price control mechanism is higher than international prices, then there will be no problem of flow. In fact, the approved permit restricts flow into the local market. If it is the other case, then while there might be problem with flow, the policy of approved permits does not address the problem. This brings us to the second issue I want to raise.

Second, import quota is useless when international prices are higher than local prices sans free trade. It is a redundant policy. Why is it redundant? The rationale is the same as having a minimum wage that is lower than all other wages paid by the market. Higher international prices compared to local price however does introduce the issue of flow. There is a way to address that concern and this is why I make the third point.

Third, the existing subsidy system alone is more than capable of ensuring that there is no large major outflow of sugar under the price control mechanism. How? Just pay (really, subsidize) the importers to bring in the sugar.

I wish to veer off course for a moment or two here. Do note that this does not mean that I support a subsidy system. Rather, it is only a demonstration of positive economics. It is not an exercise at proposing the best policy but merely an effort at proposing a better policy. The best policy remains one that returns to the principle of free market.

Returning to the issue at hand, another unsatisfying point the Deputy Minister made in defending approved permits policy for sugar involves price fluctuation. Again, the subsidy system already in place is able to confront that. There is an existing system in place: the previously used fuel subsidy regime.

Really, the import quota policy is redundant in addressing fluctuating prices. Quota itself does not lessen fluctuation of prices. Any considerable fluctuation in the international price of sugar will translate into fluctuation of local prices regardless of permits, unless a country is a complete natural autarky, which Malaysia is not. What it does is merely to increase average local unsubsidized prices. It does not decrease variance around the local average. In other words, quota just makes prices fluctuating at the same magnitude at higher levels.

The relevant policy should be only price control and subsidy to producers and importers. Two tools alone are sufficient to achieve both objectives of affordable and low prices.

I want to harp on this point again, just in case if it had not driven the point home. While it is important to understand that these two policies suffer grave weaknesses — two examples are smuggling and shortage; also opportunity cost — when juxtaposed alongside free market environment, import quota in no way addresses those weaknesses. Therefore, import quota is really an irrelevant policy, if the objective is low stable prices.

The real reason for import quota is to protect domestic producers. The Deputy Minister did mention this as a reason and he should mention only this as the reason without stating that the policy is there to ensure that prices are affordable and to ensure the availability of sugar. The import quota raises price of sugar, with or without subsidy, much to the benefit of importers and producers of sugar.

It is worth highlighting that there are only four sugar factories in Malaysia owned only two entities. These entities also monopolize the quota. Never mind that these two entities are closely linked.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — See page 18 the Hansard dated December 7 2009.