President BBM’s state visit to the US bears more significance than traditionally attracting US investors to consider the Philippines as investment site or to obtain more trade access for our exports. It symbolizes a shift of the current US paradigm of her foreign relations, which for us we may also want to consider.
The US apparently has broadened her dealings with trading partners from one simply based on exchange of trade concessions to an expanded one where we go along with deepening our military relations with the US, or to whatever aspect of our partnership which helps strengthen it.
The current Biden administration appears to have rethought the contribution of trade to her economy and global growth. The US has led the world in strengthening the multilateral trading system since the 1960s. Her major push for a rules-based global trading system was embodied in the establishment of the World Trading Organization (WTO) in 1995. With the WTO came all the new rules in trade or stronger rules of existing ones, all aimed at effectively implementing the agreed trade concessions of trading partners. Those rules are packaged in the Uruguay Round Final Act.
Because of the WTO, we had to liberalize, among other reforms, our agricultural markets and implement agriculture and food standards to ensure food safety and protect the world’s agriculture from pests and diseases which trade may inadvertently disseminate.
The 1990s and 2000s, following that paradigm of free trade based on underlying comparative advantage, gave way to further deepening of trade relations among a subset of the WTO members. The ASEAN member nations agreed to form a free trade area among its economies, and that trend got replicated elsewhere in the world with scores of preferential trade agreements.
Preferential trade relations further expanded with ASEAN agreeing to form free trading rules with her key trading partners like China, Japan, Australia, and New Zealand, in what we now know as ASEAN Plus One trade agreements.
As the 2010s unfolded, East Asia, under US leadership, had formed a mega trade deal called the Trans-Pacific Partnership or TPP. That agreement is practically half of the world economy, and thus many of us in the region wanted to be part of it or be left behind.
The rival country to the US in economic leadership in East Asia, China, had offered a similar package to the same countries. She led the establishment of the Regional Comprehensive Economic Partnership or RCEP, another mega trade deal. We had just recently ratified RCEP, with advocates of it thinking that the mega trade deal is going to bring prosperity and growth to our country.
RCEP pushed up China as an economic leader in East Asia, particularly because of the Trump administration. Former President Trump cancelled US sponsorship of TPP, signaling to the world his administration had rethought US leadership of her foreign trade relations.
However, China’s gain got scuttled by a two-year COVID pandemic which essentially slowed down global trade and pushed countries to more inward-looking policies. The country where COVID started, China’s economy had contracted because of the global disease, along with those of her trading partners. When the world bid goodbye to COVID, global supply chain problems continued to slow down trade.
When the US elected President Biden in 2020, I had thought that perhaps his administration was going to resurrect the TPP agreement and would exert US economic leadership again in East Asia. I was mistaken on the paradigm of free trade.
Ideas had changed in the US, from a pure embrace of the principle of free trade to one of fair trade.
On April 27, US National Security Adviser Jake Sullivan articulated the US assessment of how the rules-based trading system of the 1990s had impacted the US economy. He deplored the fact that after decades of globalization, US industrial base had been “hollowed.” He further noted the growing inequality in the US and what that does to democracy. The ascendancy of former President Trump was rooted in his promise to address the loss of jobs in the US. Even now, the continuing appeal of Trump is testimony of how globalization had adversely affected the US economy.
According to Sullivan, “much of the international economic policy of the last few decades had relied upon the premise that economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative — that bringing countries into the rules-based order would incentivize them to adhere to its rules. It didn’t turn out that way. In some cases, it did, and in lot of cases it did not.”
In response to these challenges, the US appears to be adopting a pragmatic approach to engaging international relations. The paradigm is inclusive, in my view, of the rules-based trading system but would include new aspects of those relations that the US needs to address her economic weaknesses after decades of globalization. Two other challenges Sullivan had noted down are climate change and geopolitical and security competition.
I see in the state visit of President BBM to the US the realization of the new US paradigm. Simple trade agreements are a thing of the past, or, shall I say, the world just has all the rules it needs to push for global economic integration. But rules are not enough. Trading partners must abide by them.
The world may need to expand the capability of trading nations to trade, address challenges of climate change, ensure that the benefit of global trade accrues to most of the world’s population, and sustain world peace. After all, what good do trade agreements give us if we have underlying geopolitical differences with our trading partners. We have problems with China trying to take over part of our territory in the West Philippine Sea. What net good will expanded trading with China because of RCEP give us if we lost that part of our country?
LESSONS FOR US
Like the Biden administration, we too must rethink how global trade relations ought to be implemented. Trade should not be a palliative to problems that emanate from the structural weaknesses of our economy.
Consider our agriculture sector. Its contribution to economic growth had lagged the rest of the economy, and that spawns rural poverty and food shortages. Structurally, that is because we had broken up our farmlands and left owners with no access to capital and weak capability to exploit economies of scale. How then can we expand and diversify our agricultural exports if we don’t address this problem? How can we benefit better from RCEP or ATIGA in food and agricultural trade with the low productivity of our farming sector?
Consider another problem: the African Swine Fever (ASF). I have followed the implementation of government programs to address the ASF problem. What we have are circulars based on “clinical” observations of sick pigs. Our authorities have not been proactive and have not used improved technologies such as conducting more frequent onsite examinations using affordable onsite examinations. After three years of ASF, previously ASF-free provinces in the Visayas — Iloilo and Cebu — are now suffering from this disease.
And why have we not been as proactive? Ironically because of pork imports. This is using trade as a palliative.
There are some of us who want to close our country to trade. I think they are mistaken. What we must do is strike a balance between accessing pork trade and, at the same time, addressing the underlying structural problem which continues to spread ASF in our country.
Generally, we must promote consolidated management of our farmlands, or, better still, raise the farm ownership ceiling to, say, 25 not five hectares so that more enterprising Filipinos would be able to make our agriculture sector more productive. But, at the same time, we must be ready to use imports to relieve food shortages, and the easy way of assuring this is to liberalize farm trade.
Just consider another problem. The Food Safety Act of 2013 had transferred the regulation of veterinary medicines and related devices from the Bureau of Animal Industry to the Food and Drugs Administration (FDA). The FDA’s capability is low, since obviously it has still to understand this part of the economy. Worse, the FDA regulators are less appreciative of the urgency of the problem than the farm owners who must attend to the livestock diseases of their businesses. Animals would need veterinary medicines, and if supplies cannot come in readily because the FDA has not approved import licenses of these medicines, producers cannot effectively address problems and productivity goes down. Why can’t the government address this problem speedily?
Economists, like me, have explained that those who had been displaced by global trade will find other sources of income in the economy. If they had been rice producers, and rice tariffication had displaced them, they may consider producing other farm products. But shifting has a cost which rice farmers may not be able to afford. Without overcoming this cost, those farmers become displaced, and, like the US industrial sector, our farming industries would become “hollowed.” Global trade, used as a palliative to our food shortages, aggravates rural poverty and income inequality worsens. Farmers, small as they are, cannot address this structural problem. Had our farmlands been consolidated in management, their managers would have been likely more capable than individual small farmers of shifting to other uses of the land in response to trade liberalization.
The government should assist — but I would not advocate for it as the main driver of change. In my view, the public incentive of the government to address structural problems is weaker than owners.
Economic pragmatism requires us to know the structural problems and addressing these, even as the economy is open to international trade. Those of us who believe that we must solve the structural problems first before opening our country to trade are fundamentally wrong. We have seen this in the rice sector. We were supposed to tarrify our rice imports in 1995, but for a quarter of a century we somehow managed to postpone this because our farmers were not ready for the competition, or we must solve the structural problems in the rice industry. This had caused rice insecurity. Our farmers continue to be unable to avail themselves of scale economies.
We must do both at the same time: address our structural problems and open the economy to trade. The private sector has the comparative advantage over the government in addressing the structural constraints of our agriculture sector.
Ramon L. Clarete is a professor at the University of the Philippines School of Economics.