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National lifters, fencers welcomed back

PSC

THE Philippine Sports Commission welcomed the national weightlifting and fencing teams upon their return from their respective qualifying tournaments in Tashkent, Uzbekistan, last week. The country’s lifters took home two gold, six silver, and three bronze medals at the Asian Weightlifting Championships while the fencers secured a bronze medal. The PSC assured the athletes they will receive incentives under Republic Act No. 10699, or the “National Athletes and Coaches Benefits and Incentives Act’’ for their medal-winning efforts. During the welcome, strict health and safety protocols were followed, the PSC said.

Turn for the worse

For the second season in a row, the Packers dominated the conversation in the National Football League draft for all the wrong causes. Even as they made the right decision in taking cornerback Eric Stokes with the 29th overall pick, it came a year too late for most quarters — and certainly for quarterback Aaron Rodgers. The reigning league Most Valuable Player, notorious for keeping grudges, was obviously still smarting from their ill-advised move to trade up in the 2020 draft in order to latch on to Jordan Love, his evident replacement under center.

Hindsight makes for perfect vision, but it’s clear to all and sundry that, had the Packers chosen to shore up their defense — as they had in the previous nine drafts — last year, they would have been in much better position to take the measure of the Buccaneers in the National Football Conference Championship. Instead, for reasons known only to them even now, they made Love, an iffy proposition at best, their target. What’s worse, they didn’t even bother to give Rodgers, their franchise cornerstone and still the most talented QB in the league, a heads-up.

Not that the advance notice would have mattered to the prickly Rodgers, who had hitherto indicated that he planned to play well into his forties. In any case, the Packers’ bold step sent the wrong message off the field and, just as egregiously, handicapped them on it. In other words, they managed to screw up their immediate future, as the loss to the Buccaneers showed, AND the medium term, as their supposed leader is proving. He no longer wants to wear their jersey, he says, and it seems nothing they do from here on can make him change his mind. Their fate was sealed the moment they made Love their future.

The irony is that the grand design might not even take hold. Love was the third-string QB last year, and he’s supposed to be the backup this season. If Rodgers somehow gets to stay, the transition to him as the lead may well not happen at all. There’s simply no way he will be better than the starter he’s supposed to succeed in the three years he remains guaranteed to be with the Packers. And if the divorce does push through, he will be too raw to take the reins with confidence. Which is too bad, really, because nothing is his fault. The blame lies squarely on the shoulders of general manager Brian Gutekunst, who could have avoided the land mines had prudence taken hold.

Not that Rodgers will automatically be better off leaving. For all the dysfunction, the Packers are built to contend; he has more than enough weapons around him to go deep in the playoffs. At this point, however, he appears dead set against returning to the fold. Only time will tell if he’s bent on seeing his revolt through, but, no matter what happens, one thing’s clear: things will get worse — perhaps much, much worse — before they get better.

 

Anthony L. Cuaycong has been writing Courtside since BusinessWorld introduced a Sports section in 1994. He is a consultant on strategic planning, operations and Human Resources management, corporate communications, and business development.

Lockdown to deal setback to second-quarter GDP growth

PHILSTAR

THE Philippine economy is projected to decline quarter on quarter in the three months to June after business activity in Metro Manila and nearby provinces returning to near-standstill conditions for more than a month, macroeconomic research house GlobalSource Partners said.

“Given the 1.5-month lockdown, we expect to see Q2 output decline sequentially from Q1,” Romeo L. Bernardo, GlobalSource country analyst for the Philippines, said in a note dated April 29.

The second strictest form of lockdown was enforced in Metro Manila, Bulacan, Cavite and Laguna, and then extended for another two weeks until May 14 to ease pressure on the healthcare system. The government started reimposing lockdowns in the region in late March following a surge in coronavirus cases.

Even if it resulted in dampened business activity, Mr. Bernardo said the cautious approach to pandemic management was “positive” if it prevented more widespread transmission of new COVID-19 variants.

“The smarter way in which the current lockdown is being carried out, with fewer mobility restrictions and with businesses and the public learning to adapt, implies that the cost will be less than last year’s strict lockdown,” he added.

Last year at the height of the initial lockdowns, the economy ended up contracting 16.9% year on year in the second quarter.

The Philippine Statistics Authority will report first quarter gross domestic product (GDP) data on May 11.

In 2021, Mr. Bernardo said GDP is unlikely to grow beyond 5%, which is well below the government’s growth target of 6.5-7.5%.

Economic managers are set to meet this month to revise their growth projections, but the National Economic and Development Authority has said the initial GDP target will likely be downgraded because of the impact of the lockdown.   

Despite a slower recovery this year, Mr. Bernardo said his firm has “become more optimistic about 2022 prospects given a more promising vaccination outlook.”

He said they expect to have 50 million people vaccinated this year or in the first quarter of 2022, slightly faster than their initial expectations that this can only be achieved towards the end of next year. He said the help of the private sector will give the much-needed boost to the program.

“The critical assumption of course is that the vaccines will arrive as scheduled or at least that delays will not be overly long. The uncertainty at this time comes from the vaccine export ban by India, the diversion of orders to India, Brazil and other hot spots, possible need for an early booster jab for countries that are advanced in their vaccination program. Adding to this, the US export ban has restricted supplies needed for vaccine production in India, home to the world’s largest vaccine manufacturing plant,” he added.

Mr. Bernardo said GlobalSource also expects the government to stop relying on its complex priority system for vaccine recipients to allow more inoculations.

The government aims to inoculate 70 million adults by year’s end. — Beatrice M. Laforga

Redefining Philippine Taxation: CREATE

Fourth of four parts

The first-ever revenue-eroding tax reform package and the largest economic stimulus program in the country’s history, Republic Act No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), provides for major amendments to our tax and incentives laws. These changes are enacted with the goal of helping businesses move into post-pandemic recovery while encouraging more foreign investment. The law took effect on April 11.

The first and second parts of this four-part article discussed the passage and goals of the CREATE Act, as well as the exemption of foreign-sourced dividends, the repeal of improperly accumulated earnings tax, tax-free exchange, additional provisions to consider and provisions that were vetoed.

In the third part last week, we covered the nature of incentives before CREATE, their centralization and administration, and how they become performance-based and targeted. In this fourth and final part, we cover the periods of availment and the kind of incentives registered enterprises may enjoy.

PERIOD OF INCENTIVES
With the intention to make incentives time-bound to encourage growth, CREATE no longer accords registered business enterprises (RBEs) incentives in perpetuity.

Qualified export enterprises may be eligible for a four to seven-year income tax holiday (ITH), followed by either 10 years of 5% special corporate income tax (SCIT) on gross income earned (GIE) or 10 years of enhanced deductions (ED).

On the other hand, qualified domestic market enterprises (DMEs) may be eligible for a four to seven-year ITH followed by five years of ED.

As for DMEs, the grant of 5% SCIT incentives was vetoed since the same, according to the President, is redundant, unnecessary, and weakens the fiscal incentives system. If the government is to grant 5% SCIT to registered DMEs, then homegrown firms that are not registered, and make up most of the country’s micro, small and medium enterprises (MSMEs), will have to pay more taxes than registered DMEs. In the process, registered DMEs will have more legroom to reduce prices and secure more contracts, ultimately taking over the market and potentially threatening to put MSMEs out of business.

An additional two years of ITH will be given to projects or activities of RBEs located in areas recovering from armed conflict or a major disaster.

An additional three years of ITH will also be given to projects or activities registered prior to the effectivity of the CREATE Act that will, in the duration of their incentives, completely relocate from the NCR.

In the interest of national economic development and upon positive recommendation of the FIRB, the President can approve extraordinary incentives for up to 40 years, where the ITH does not exceed eight years, followed by a 5% SCIT.

The modified set of incentives or financial support package favors projects with comprehensive sustainable development plans, complying with set minimum investment capital or minimum local employment generation, among other conditions.

The flexibility and range of authority conferred to the President in granting incentives is not new. ASEAN neighbors like Malaysia, Indonesia, Thailand and Vietnam have been exercising a similar level of discretion in granting incentives to boost their attractiveness and achieve their economic objectives.

KINDS OF INCENTIVES
In computing the taxes due, the 5% SCIT is based on GIE, in lieu of all national and local taxes, just like the old 5% GIT. Nevertheless, the allowable deductions for purposes of computing the GIE must be clarified in the IRR to be promulgated by the DoF after consultations with the IPAs and other government agencies.

Pre-CREATE, the issue on whether the enumeration of direct costs for purposes of GIE computation is exclusive or not has been the subject of various cases brought before the BIR and the courts. For PEZA-registered entities, the issue has finally been settled by the Supreme Court (SC) in the case of Commissioner of Internal Revenue vs. East Asia Utilities Corp. (G.R. 225266, Nov. 16, 2020) wherein the SC confirmed the non-exclusivity of the list of allowable deductions for purposes of computing PEZA-registered enterprises’ 5% GIT. This pronouncement by the SC on the proper interpretation of the allowable deductions for GIE computation, when articulated in the IRR, will, it is hoped, provide clear direction for the guidance of the implementing agencies and taxpayers alike.

Meanwhile, at the regular CIT rate, registered enterprises may claim enhanced deductions that are expected to cushion the income tax effect. These enhanced deductions are: additional depreciation allowance of 10% for buildings and 20% for machinery and equipment; additional 50% direct labor expense; additional 100% research and development cost; additional 100% training expense; additional 50% domestic inputs expense; additional 50% power expense; a deduction of a maximum of 50% of the reinvested undistributed profits or surplus (for those in the manufacturing industry); and an enhanced Net Operating Loss Carry Over (NOLCO) of five years following the year of loss (incurred during the first three years from the start of commercial operations). In addition to the above incentives, all registered enterprises may enjoy duty exemption on the importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity. Registered enterprises may also enjoy VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activities.

INCENTIVES SUNSET PROVISION
To give IPA-registered enterprises ample time to adjust to the new incentives, RBEs with incentives granted prior to the effectivity of the Act are given a transitory period.

Existing registered activities granted only an ITH will be permitted to continue the remaining ITH period.

On the other hand, existing registered activities granted either an ITH and 5% gross income tax (GIT), or are currently receiving the 5% GIT, will be able to enjoy a 10-year 5% GIT. After the expiration of such 10-year 5% GIT transition period, existing registered export enterprises may reapply and enjoy the SCIT for 10 years, subject to certain conditions and performance reviews, and without further extension.

The provision allowing export enterprises to further extend the 10-year SCIT has been vetoed by the President.

Notably, unlike in the CITIRA Bill where existing RBEs were given the option to shift to the new tax incentives regime by surrendering their Certificate of Registration instead of availing of the sunset period, such a provision is wanting in the CREATE Act.

With the passage of CREATE, provisions of the prior laws to the extent inconsistent with CREATE are repealed or amended.

While fiscal incentives are not the only determinant for the country to attract investment, adjusting corporate taxes and modernizing fiscal incentives serve as a means for the country to remain competitive with its ASEAN neighbors. Redefining our taxation puts it in a better position to compete for investments and CREATE a better economic future for the Philippines.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co. 

 

Karen Mae L. Calam-Ibañez and Aiza P. Giltendez are a Tax Senior Manager and Manager, respectively, of SGV & Co.

Focus on health; spend more for relief and COVID-19 containment

Members of the Quezon City Health Department inoculate a senior citizen during their house to house vacination program on April 23. — PHILIPPINE STAR/MICHAEL VARCAS

In these last two months, the country has seen the worst spike in cases and deaths since COVID-19 was declared a global pandemic. For March and April combined, the Department of Health (DoH) reported 393,075 new cases and 3,915 fatalities. March saw the highest number of new monthly cases, only to be immediately surpassed in April. As of this writing (April 30), there are now 73,908 active cases and a total case count of 1,037,460.

These figures are staggering and should convey the sense of urgency in combating COVID-19. The data unequivocally support the need to continue the implementation of community quarantines. Now, more than ever, we must employ the most aggressive and effective strategies against COVID-19.

Furthermore, our political and economic structures and institutions must be rearranged to support vulnerable households, mitigate the resulting social and economic harm, and promote a “new normal” where people can engage in sustainable economic activity with minimal health risk.

Unfortunately, this has not been the case.

The enacted National Government budget for 2021 seems to have been formulated on a business-as-usual approach; and while it was understandable to rely on budget reallocation measures (Bayanihan I and II) to respond to an unforeseen health crisis, these adjustments should have already been proactively incorporated into the 2021 General Appropriations Act (GAA).

While some funds were allocated towards vaccine procurement, there remains much to be desired in terms of funding the pandemic response and recovery strategy. For one, the government signaled its reliance on the altruism of the private sector to procure these vaccines, when vaccination is essentially a public good. Furthermore, not enough public funds have been allocated towards vaccine storage and logistics; health human resources and information systems; social protection and social amelioration; and the restructuring of the economy (mobility and transport, telecommunications, education, etc.).

For the very immediate response, however, the importance of the various forms of ayuda (help or hand-outs) cannot be understated. Ayuda does not just function to mitigate the adverse economic effects but is a necessary enabling mechanism for families to comply with health protocols and quarantines.

ON REOPENING THE ECONOMY
The false tradeoff of health versus economy has muddled the discussion of reopening the economy. This framing is not particularly helpful as health and economics are contingent on each other during this pandemic. While maintaining quarantines to safeguard the health of the community will impose some economic costs, hastily reopening establishments without first containing the pandemic will worsen the long-term prospects of recovery.

Households face long-term health consequences amidst lingering unemployment, poverty, and hunger; but it is unlikely that employment, growth, and investor confidence will return while the threat of a highly contagious virus looms large. Investors and consumers alike will see an effective pandemic response as a positive signal, while an ineffective response will trigger fear and negative expectations. The countries that have best managed COVID-19 are also the ones projected to secure strong economic recovery.

The structural problems of poverty, inequality, and job instability have ailed the country long before COVID-19. However, this health crisis has served to expose these ills more profoundly. The appropriate response is not to “go back to normal,” but rather to implement a new and better normal. This involves a whole-of-government approach and structural changes to the economy.

Furthermore, the idea that we should simply rely on individuals to live with and manage their own risks would be for terrible policy. Individuals have bounded rationality and are prone to overestimate their own ability, while underestimating both the probability of transmission as well as the magnitude of the individual and societal costs.

This is again borne out by experience: countries that took a more laissez faire approach were quickly overwhelmed by community transmission. Even a small minority of individuals engaging in irresponsible behavior (e.g., super spreaders) will wreak havoc to society and undo the incremental progress we make. If we allow individuals to freely go back to normal in the hope that herd immunity will soon be achieved, we will bear the cost of thousands of preventable deaths and an even greater number who will suffer from the life-altering effects of the disease.

ON FISCAL RESPONSIBILITY
Despite the need for an aggressive public sector response to COVID-19, our economic managers wave the flag of fiscal responsibility.

For example, the historic debt crisis of the Marcos regime is cited as a cautionary precedent to avoid overspending. While the Marcos debt crisis does serve as an instructive experience, the economic lesson should not be that government deficits must be avoided at all costs. We must disabuse the notion that deficit spending and debt are always bad. In the context of Marcos, the debt was burdensome not because of the size of the debt itself, but because debt was incurred to finance corruption and unproductive government spending. The overall failure of institutions and lack of productive investment combined with the political crisis led to the deep economic crisis during the Marcos regime.

Deficit spending is an important tool that governments can utilize to respond to economic crises. An unprecedented economic shock in the form of a global pandemic certainly demands a substantial response. If the fiscal stimulus is not sufficiently large and strategic, we are likely to face an even deeper economic downturn and suffer the effects of long-term joblessness and chronic poverty.

Notwithstanding the fact that public deficits have been the norm for decades now, the country has had a steadily improving revenue effort and declining debt-to-GDP ratio. Thanks to sustained economic growth, the pursuit of key tax reforms, and the upgrading of the country’s credit rating, we were in the best fiscal position in (pre-COVID) decades. Despite this, we are well below our peers when it comes to the magnitude of policy measures to combat COVID-19.

Our economic managers have taken the responsibility to oversee the government’s financial situation in order to meet the country’s economic needs. There is currently no greater or more pressing need than to minimize the suffering this pandemic has wrought, and to quickly arrest its long-term impact. Besides, what good is fiscal space if not to fund a strong government response during this once-in-a-lifetime health crisis?

 

AJ Montesa is a research associate of Action for Economic Reforms.

Hanapbuhay and the case for sustainable employment creation

PHILIPPINE STAR/ MICHAEL VARCAS

On the first of May in 1903, thousands of workers from the Union Obrera Democratico de Filipinas marched across Plaza Moriones demanding and advocating for independence as well as a fair day’s wage for a fair day’s work. From this movement sprang the official national May day holiday and the signing of Presidential Decree No. 442 — the Labor Code of the Philippines. Now, 118 since and while indeed, national policy planning mechanisms are in place to reach the national target for job generation, is the work or hanapbuhay available for Filipinos trabaho — labor, or pagkakakitaan (profit), as a means of securing the necessities of life?

The most recent official labor statistics from the Philippine Statistics Authority for February 2021 show that the Philippines’ labor force participation rate is at 63.5%, with an unemployment rate of 8.8% and underemployment rate at 18.2%. Among the employed persons in February this year, 7.9 million Filipinos declared themselves as underemployed and expressed their desire to have additional hours of work in their present jobs, have an additional job, or to have a job with longer hours of work. Apart from the double burden of unpaid domestic work, women also had a lower labor participation rate at 50.9% and unemployment rate at 17.6%. The number of unemployed Filipinos who are 15 years old and over were also posted at 4.2 million, a figure steadily growing from the past months with the age group of those 15 to 24 years old comprising 33% of the total number of unemployed.

While much has been said about the problem of employment, underemployment is the quiet and bigger unsolved issue — many workers have no choice but accept lower quality jobs or work in the informal sector. In fact, and despite the massive impact of the negative shock that the COVID-19 pandemic has brought on employment growth and participation rates, over time and albeit at a slower pace than needed, it is possible for the rates to go back to their previous levels. However, underemployment and casual wage jobs remain consistent at 16% to 22% from the last 20 years.

In analyzing the data by industry, the agriculture sector, industrial, and especially the services sector comprise the total of underemployed persons at 49.6% in February 2021. This is significant as much of the labor force in the past two decades has been absorbed in the services sector and, while providing work, it remains casual, informal, and urban based.

Policy reform and action should then be inclusive and sustainable. More than the call to reach the target employment rate for the country, we need to increase the derived demand for labor — or the demand for the goods and services in the sector that needs the workforce. As a start, better investor confidence in the agriculture sector is key to both job efficiency and food security. The Philippines needs to attract investors, both foreign and local, in infrastructure and research development for sunrise industries — agri-business, creative industries, supply chain logistics, and health and wellness to name a few.

Enabling environments are also critical to allow for the main job generators in the country to grow — the small and medium enterprises (SMEs). Credit and financial access to SMEs, with a particular view to impact and gender investing, is a good start in levelling the playing field for the disadvantaged population. Small business and gender procurement from the government and inclusion of sustainability scorecards in corporate governance likewise reinforces the guarantee that capital flows can trickle down to the underserved.

Finally, educational models need to be adapted to modern markets. Strengthening technical training for the youth for in-demand jobs and occupations is a short-term need, with the goal of involving the private sector in curriculum development and apprenticeship programs to solve the mismatch issued through better demand and supply coordination.

The key to tackling this urgent concern is the recognition that hanapbuhay is a source of life and more than poverty alleviation, it also goes into the root of human needs — a loss of freedom, cynicism in relations, motivational learning, and gender and age discrimination. Perhaps, as an annual reminder, May Day is about the aspiration to promote inclusive and sustainable economic growth by providing productive employment and decent work for all. It is a celebration of the quiet dignity of labor and transforming work — hanapbuhay — to livelihood — kabuhayan.

 

Kristine C. Francisco-Alcantara is the Managing Partner of Abad Alcantara and Associates and a Fellow of the Foundation for Economic Freedom.

AAALaw@tradelawyers.ph

www.tradelawyers.ph

The impact of COVID on the tourism industry and the resumption of travel

PIKISUPERSTAR-FREEPIK
PIKISUPERSTAR-FREEPIK

Many of us may not realize the importance of the travel and tourism industry to the economy. In 2019, before the pandemic wreaked havoc on the industry, travel and tourism accounted for 12.7% of gross domestic product or roughly $47.8 billion worth of goods and services. That year, the Philippines welcomed 8.26 million foreign tourists who pumped $11 billion into the economy. Domestic tourism generated the balance of $36.6 billion. In terms of employment, the industry directly employed 1.3 million of our countrymen. Taking all these into consideration, it is hard to fathom how a full economic recovery can be realized without the resumption of travel.

COVID-19’s disruption to travel and tourism is far more severe and longer lasting than the 9/11 attacks of 2001, SARS of 2003, and the global financial crisis of 2008, combined. For context, SARS had a six months effect that caused industry net losses of $7 billion. COVID has so far paralyzed the industry for 15 months and running, and accumulated losses of $47.7 billion as of end March.

Airlines based in the Asia Pacific region declared a combined net loss of $10.5 billion in 2020. Our very own Philippine Airlines booked a loss of $617.65 million for the first nine months of that year while Cebu Pacific booked a loss of $457 million for the entire year. The number of international flights from Manila plummeted from 10,769 in 2019 to 2,975 in 2020 while domestic flights plunged from 13,392 to 3,739. That’s a 75% decline!

Losses are also mounting for those connected to the travel and tourism industry including hotels and resorts, tour operators, restaurants, spas, and entertainment venues. Aid provided by the government was practically insignificant, coming in the form of longer credit terms for permits, a few tax breaks, and financial aid for small and medium scale enterprises. Airlines and large hotel chains have not received the financial lifeline they need. More than 11% of tourism enterprises have declared insolvency, with more to come unless tourism and travel open up.

The International Air Transport Association (IATA) is the trade association of the world’s airlines. Their mission is to save airlines and all related tourism enterprises from sinking further. In collaboration with the World Health Organization (WHO) and the International Civil Aviation Organization (ICAO), IATA is aiming to lift all travel restrictions across nations by Dec. 31, 2021. This means, no more pre-departure testing, no quarantine requirements for arriving passengers and no more travel or flight bans.

This will be made possible through the use of the IATA Travel Pass. Think of the travel pass as a digital passport that comes in the form of an app installed to one’s phone. The app will contain one’s COVID test results and vaccination details as well as all related health certificates. It will declare if one is “ok to travel” or not. Airlines and immigration control will use this as a basis of accepting passengers.

The app will provide passengers with information on the testing and vaccination requirements of all IATA member airlines and country destinations. It will also enumerate the nearest accredited testing centers, wherever you are. Laboratories will automatically transmit test results and vaccination details to the IATA server. Hence, no one can tamper with their test results.

The challenge to IATA, the WHO, and ICAO is unifying travel protocols across nations. Today, 69 types of testing protocols are used around the world; 92 countries require pre-departure tests while 103 do not; 41 countries require testing upon arrival. Thus, a new, unified, health protocol must be established that is acceptable to all countries. Vaccination will not be a prerequisite for international travel.

Waiting for countries to achieve herd immunity before borders are opened is not an option, asserts IATA. Herd immunity can take anywhere from two months to three years and the travel and tourism industry (and most economies) cannot wait that long. According to the Economist Intelligence Unit, the Philippines is expected to achieve herd immunity by the 4th quarter of 2023, the last among ASEAN-6 to do so. IATA recommends that borders should open as soon as people belonging to high risk categories are vaccinated.

Most major international airlines, including Philippine Airlines and Cebu Pacific are adopting the IATA travel pass system. The Philippine Bureau of Immigration and Deportation is still reviewing IATA’s proposal.

Although IATA is targeting to roll out its travel pass by Dec. 31, it is safe to assume that the travel pass will be adopted by most countries by the 3rd or fourth quarter of 2022. Hence, normalization of travel will likely happen in 2023. Businesses that depend on travel and tourism, including airlines, hotels and restaurants, must hold on and/or find other ways of survival until then.

COVID-induced travel bans have caused massive layoffs and business closures, and consequently, untold suffering among tourism stakeholders around the world. In the Philippines, 33% of all travel and tourism employees have been laid off. The IATA travel pass gives us hope that domestic and international travel will open sooner, rather than later. With this, we can begin rebuilding our lives and our economies again.

 

Andrew J. Masigan is an economist

andrew_rs6@yahoo.com

Twitter @aj_masigan

Mapping the Cold War II

KJPARGETER-FREEPIK

(Second of two parts)

COLD WAR I resulted from the competition between the Soviet Union and the United States over which Great Power would drive the direction of post-World War II Europe. West Berlin was the symbol and the center of the conflict. The interests and the alliances of the contending rivals ensured that the contest would be global. An early defining event in its history established the major Asian front-line. A hot civil war triggered by Communist North Korea’s attack on South Korea, where American troops were still deployed, became international with the UN involvement to defend South Korea and Communist China’s intervention to prevent a North Korean defeat.

Cold War I thus chilled Asia as well. The threat that the Korean War could escalate and turn nuclear helped persuade the protagonists that a Cold War was the preferable option, especially after the Soviet Union acquired its own nuclear armaments and could threaten Mutually Assured Destruction. But a large part of the Asian continent rejected involvement in the conflict. The Asia Africa Bandung Conference in 1955, attended by 29 countries, constituting 54% of the world population, laid the basis for the Non-Aligned Movement (NAM). The cardinal principle of the movement committed its members to avoid participation in American or Soviet military alliances and the subordination of their foreign policies to the interests of the two Great Powers.

Burma (Myanmar), India, Sri-Lanka, and Indonesia were among the organizers, and its most visible leaders included Sukarno, Indonesian host of the conference and India’s Jawaharlal Nehru. The group also included the People’s Republic of China (PRC), an ally of the Soviet Union, thus raising a question about the meaning of “non-alignment” in Cold War I. Now that China stands as one pole of the Cold War II conflict, NAM-oriented Asian members confront a bigger problem.

The US and the Soviet Union have both established a footprint in Asia. Since the Soviet Union fragmented in 2001, Russia has diminished to the economic size of South Korea. Although sometimes caricatured as a big gas station with nuclear weapons, it is still a powerful country, but, like the US, is only distantly present at the continental periphery. Easier for Southeast countries to maintain a policy distance from antagonists who are also far away. The PRC is the rising Asian Power in the East and Southeast Asian neighborhood. The map makes a difference. The 20 countries with which China shares land or maritime boundaries include seven of the ASEAN 10.

Beyond the fact of geography, China had been for thousands of years the dominant power in Asia, rivalled only by India in its civilizational impact. It was the Middle Kingdom, claiming suzerainty over all countries under Heaven, so advanced in state organization, wealth, and military power that it had no interest in bothering with neighboring lands like Luzon, only populated by “snakes and barbarians.” Needing nothing from foreigners, the Empire entertained no missionary or military or mercantile objectives. It graciously accepted tribute from its neighbors and allowed them to partake of its goods and its culture. But poor, enterprising Chinese migrated to Southeast Asia in search of livelihood, eventually sinking roots to settle permanently in the region and to serve as a major avenue for cultural transmission.

This historical context of cultural and blood connections with China and the NAM sympathies made the virtual March 12 summit meeting of the “Quad” (US, Australia, India, Japan) “historic,” as all the participating leaders affirmed. While the agenda covered many issues, including the pandemic, the discussions on Indo-Pacific strategy, cyberattacks, and security issues in the South China Sea, circled the unmentioned dragon in the room.

Japan’s 1947 constitution had “[renounced] war as a sovereign right of the nation and the threat or use of force as means of settling international disputes.” It also forbade Japan from maintaining a military organization and acquiring offensive military weapons. These constitutional constraints limited Japan’s participation in the 1990 Gulf War to providing financial support. Efforts to remove these restrictions since the 1990s have not succeeded. The Quad initiative signals the willingness to build up Japan’s defense capabilities. Biden’s meeting on April 16 with Yoshihide Suga, his first with a foreign leader, directly raised the need “to take on the challenges from China… to ensure the future of a free and open Indo-Pacific.”

Speculation that a robust Quad might be the magnet to pull into its orbit countries like Sri Lanka and Indonesia, who, along with India, had been original NAM advocates, would mark a shift in these countries’ policy perspective. Despite current concerns about the PRC, however, non-alignment in Great Power Cold War II confrontations is still the preferred option for the Asian countries. They want to avoid making a choice between China and the US, not only for ideological consistency in the case of NAM members, nor because of the economic benefits that the China market and Chinese investments bring.

Aligning with the US will obviously earn the enmity of the PRC, with all the concomitant risks. And yet, as Vietnam and the Philippines have experienced, their interests, not to speak of their values, do not conveniently align with those of China. Will a policy of non-alignment suffice to protect them from the aggressive, “wolf warrior” and “sharp power” diplomacy that the PRC has lately been displaying? Non-alignment was easier to preach and practice when the critical Great Power flash point was in Berlin and the Soviet Union was far away.

The core of the Cold War II contest has moved to the South China Sea and Taiwan. Do our leaders, present and prospective, possess the vision, competence and courage to address the potential crises it will bring?

(Part 1 of this piece can be found here Cold War II? — BusinessWorld (https://www.bworldonline.com/cold-war-ii/).)

 

Edilberto C. De Jesus, PhD is a Senior Research Fellow at the Ateneo School of Government.

N. Korea says Biden policy shows hostile US intent, vows response

North Korean leader Kim Jong Un attends a ceremony in Pyongyang, North Korea, in this photo released March 24, 2021 by North Korea’s Korean Central News Agency (KCNA). — KCNA VIA REUTERS

SEOUL — North Korea lashed out at the United States and its allies in South Korea on Sunday in a series of statements saying recent comments from Washington are proof of a hostile policy that requires a corresponding response from Pyongyang.

The statements, carried on state news agency KCNA, come after the White House on Friday said US officials had completed a months-long review of North Korean policy, and underscore the challenges US President Joseph R. Biden faces as he seeks to distance his approach from the failures of his predecessors.

In one statement, a Foreign Ministry spokesman accused Washington of insulting the dignity of the country’s supreme leadership by criticizing North Korea’s human rights situation.

The human rights criticism is a provocation that shows the United States is “girding itself up for an all-out showdown” with North Korea, and will be answered accordingly, the unnamed spokesman said.

In a separate statement, Kwon Jong Gun, director general of the Department of US Affairs of the Foreign Ministry, cited Mr. Biden’s first policy speech to Congress on Wednesday, where the new president said nuclear programs in North Korea and Iran posed threats that would be addressed through “diplomacy and stern deterrence.”

Mr. Kwon said it is illogical and an encroachment upon North Korea’s right to self-defence for the United States to call its defensive deterrence a threat. “His statement clearly reflects his intent to keep enforcing the hostile policy toward the DPRK as it had been done by the US for over half a century,” he said, using the initials for North Korea’s official name.

Mr. Kwon said US talk of diplomacy is aimed at covering up its hostile acts, and its deterrence is just a means for posing nuclear threats to North Korea.

Now that Mr. Biden’s policy has become clear, North Korea “will be compelled to press for corresponding measures, and with time the US will find itself in a very grave situation,” he concluded.

‘FUNDAMENTAL DIFFERENCES’
Talks aimed at persuading Pyongyang to surrender its nuclear weapons program have been stalled since a series of summits between Mr. Biden’s predecessor, Republican Donald Trump, and North Korean leader Kim Jong Un failed to result in a deal.

The Biden policy attempts to strike a middle ground between Mr. Trump’s efforts, as well as those of Democrat Barack Obama, who refused serious diplomatic engagement with North Korea absent any steps by Pyongyang to reduce tensions.

The White House and State Department did not immediately comment on the latest North Korean statements.

The North Korean statements appear to echo comments by the ministry in March saying relations with the United States would be shaped by the “principle of power for power and goodwill for goodwill,” said Jenny Town, director of the US-based 38 North program, which tracks North Korea.

“So for the US to keep emphasizing the threat, it keeps focus on the negative aspects of the relationship and will elicit negative responses,” she said.

Markus Garlauskas, a senior fellow with the Atlantic Council and former US national intelligence officer for North Korea, said Pyongyang’s rhetoric is a reminder that the problem is bigger than terminology or tactics.

“The differences between the Kim regime and the United States are much more fundamental,” he said.

Kim Jong Un does not intend to give up nuclear weapons nor reform North Korea’s political system and it is hard to see how Washington could embrace a nuclear-armed North Korea that abuses human rights, Mr. Garlauskas said.

INTER-KOREAN TENSION
In a third statement on Sunday, Kim Yo Jong, a senior official in the government and sister of leader Kim Jong Un, sharply criticized South Korea for failing to stop defector activists from launching anti-North Korea leaflets.

An activist group in South Korea said on Friday it had released balloons into North Korea carrying dollar bills and leaflets denouncing the government in Pyongyang, defying a recently imposed law banning such releases after complaints by the North.

“We regard the manoeuvres committed by the human wastes in the south as a serious provocation against our state and will look into corresponding action,” Kim Yo Jong said.

Last year, North Korea blew up an inter-Korean liaison office in Kaesong, North Korea, after Kim Yo Jong led a campaign of criticism over the leaflet launches.

On May 21 Mr. Biden is due to have his first meeting with South Korean President Moon Jae-in, who has pushed for more engagement with North Korea.

Mr. Moon’s efforts were frustrated by the failure of denuclearization talks under Mr. Trump, which left sanctions in place that block most economic engagement with the North.

Mr. Biden’s skepticism toward meeting personally with Mr. Kim, and his administration’s renewed focus on spotlighting North Korean human rights abuses present new hurdles for Mr. Moon as he seeks to make progress with Pyongyang in the last year of his presidency. — Reuters

Indian scientists flag virus mutations that could ‘evade immune response’

REUTERS
A MAN suffering from the coronavirus disease is comforted by his daughter as he receives treatment inside the casualty ward at a hospital in New Delhi, India, May 1. — REUTERS

NEW DELHI — A forum of scientific advisers set up by the Indian government has told authorities about minor mutations in some samples of the coronavirus that could “possibly evade immune response” and require more study, a leader of the forum has told Reuters.

However the advisers said while they were flagging the mutations, there was no reason currently to believe they were expanding or could be dangerous.

Scientists are studying what led to the current surge in cases in India and particularly whether a variant first detected in the country, called B.1.617, is to blame. The World Health Organization has not declared the Indian variant a “variant of concern,” as it has done for variants first detected in Britain, Brazil and South Africa. But the WHO said on April 27 that its early modelling, based on genome sequencing, suggested that B.1.617 had a higher growth rate than other variants circulating in India.

The forum of advisers, known as the Indian SARS-CoV-2 Genetics Consortium, or INSACOG, has now found more mutations in the coronavirus that it thinks need to be tracked closely.

“We are seeing some mutation coming up in some samples that could possibly evade immune responses,” said Shahid Jameel, chair of the scientific advisory group of INSACOG and a top Indian virologist. He did not say if the mutations have been seen in the Indian variant or any other strain.

“Unless you culture those viruses and test them in the lab, you can’t say for sure. At this point, there is no reason to believe that they are expanding or if they can be dangerous, but we flagged it so that we keep our eye on the ball,” he said. INSACOG brings together 10 national research laboratories.

India reported more than 400,000 new coronavirus disease 2019 (COVID-19) cases for the first time on Saturday. The rampaging infections have collapsed its health system in places including capital New Delhi, with shortages of medical oxygen and hospital beds. — Reuters

Retail investors vow war if short sellers end South Korea stock rally

REUTERS
TWO MEN walk past an electronic board showing the Korea Composite Stock Price Index (KOSPI) at a dealing room of a bank in Seoul, South Korea, March 13, 2020. — REUTERS/KIM HONG-JI

RETAIL traders who drove record gains in South Korean stocks during the darkest days of the pandemic are bracing for a new threat — the return of institutional players betting on share-price declines.

The world’s longest ban on short-selling stocks comes to an end on Monday, and it’s got individual investors scrambling for strategies to protect their portfolios.

Some have cashed out large chunks of their holdings over recent weeks, while others are toying with the idea of trying short selling themselves. One influential group, the Korea Stockholders Alliance, has even vowed to gather day traders into a force to fight short sellers — much the same way their US peers took on Wall Street over GameStop Corp. — if equities begin to tumble.

“I agree in theory that we need short-selling because it reduces bubbles and helps the market find the right price of assets,” said Hong Seung-jae, a 32-year-old office worker who gets his trading tips from YouTube and the internet during his 40-minute commute to work on the Seoul subway. “But individuals are at a huge disadvantage given the amount of information and deep pockets institutions have.”

Korea is the last key market with a prohibition on short selling and is allowing the practice again after the economy bounced back to its pre-pandemic peak last quarter.

The resumption is also coming at a time when the Kospi Index is near a record high, having climbed about 10% this year, after surging by almost a third in 2020 in the best performance among major world indexes. And the resumption is accompanied with heavy penalties for wrongdoing, including jail for anyone who sells shares they haven’t actually borrowed.

But none of this is enough to quell concern among the nation’s individual traders, who have had relatively free rein since foreign funds pulled back after the ban took effect in March last year. They’ve got a lot at stake, having snapped up about 95.5 trillion-won ($86 billion) of local equities in net buying in the period since then, according to Korea Exchange data.

“If the Kospi falls back into the 2,000s level, we will mobilize a huge number of retail investors to rally against short sellers,” said Jung Eui-jung, head of the Korea Stockholders Alliance, which led the unsuccessful K-streetbets campaign to keep the ban in place permanently.

While retail traders have historically found it difficult to go head-to-head with institutional money, GameStop’s dramatic run-up in January may have changed the dynamic. Investors on WallStreetBets — the Reddit forum that inspired K-streetbets — encourage users to dive into GameStop stock and also bid it up using a sophisticated options strategy, creating a short squeeze that was painful for hedge funds like Melvin Capital Management.

The Kospi closed at 3,147.86 on Friday, about 5% above the level that would put the alliance on alert.

While retail traders have grown to account for more than three-quarters of daily turnover, that doesn’t mean they could inflict losses on hedge funds like those sustained in the US GameStop’s surge, said Hwang Sei-woon, an economist at the Korea Capital Market Institute.

“There is no clear consensus on who short sellers would be and who to target,” said Mr. Hwang, who started wearing a protective vest when commuting to work after receiving death threats for advocating short-selling.

It won’t just be hedge funds from abroad that employ strategy, Korean mom-and-pop traders will be among them.

Chae Ae-kyung, a 62-year-old homemaker who began buying stocks during the pandemic, said she plans to take a mandatory 1.5 hour online training course so she is allowed to short sell. At its simplest, the practice involves borrowing a stock and selling it, betting that the price will have gone down by the time you need to buy it back.

“I got into the stock market out of nowhere, without much understanding of it,” said Ms. Chae, whose first purchases included Samsung Electronics Co., Kia Corp. and SK Biopharmaceuticals Co. “I’ll do the training. I’m sure it will help.”

Hana Financial Investment Co. is launching short-selling to retail investors for the first time on Monday and nearly 30 firms are expected to be offering the service by year end, compared with just six in early 2020. Most are making the move without any fanfare, to minimize the risk of a backlash.

Goldman Sachs Group, Inc.’s John Kwon and Tim Moe suggest that worry over short selling may be overblown.

Allowing investors to hedge their risk through the strategy may spur net foreign inflows, according to the pair.

The last two times short selling was restored after a ban, there was initial volatility and declines, but the lost ground was regained after about a month, they wrote in a report in April.

Mr. Hong, the 32-year-old office worker, isn’t taking any chances though.

He recently scanned Korea Exchange’s website, looking for companies that have come into the sights of short sellers, and found that LG Display Co. was among them.

“I cut my LG Display holdings by about half,” he said. “I also sold shares of other companies for profit, just in case.” — Bloomberg

China says its carrier group conducts exercise in South China Sea

PHILSTAR

BEIJING – China’s Shandong aircraft carrier task group recently conducted an exercise in the South China Sea, the country’s People’s Liberation Army (PLA) said on Sunday.

China has repeatedly complained about United States Navy ships getting close to islands it occupies in the South China Sea, where Vietnam, Malaysia, the Philippines, Brunei and Taiwan all also have competing claims.

U.S. carrier groups have sailed near Chinese-controlled islands in the disputed waters several times this year, drawing denunciation from China.

The exercise was described as routine training and part of the Chinese navy’s annual work plan. The Shandong entered service in 2019 and is the newer of China’s two carriers.

“It is completely legitimate and beneficial in improving the country’s ability to uphold national sovereignty and security,” Gao Xiucheng, a spokesman from the PLA navy said in a statement.

Gao said China hopes the world will see the exercise from an objective and rational viewpoint. He said the Chinese navy will continue conducting such exercises according to its schedule.

China’s navy said last month similar drills will come more regularly amid escalating tensions with the island of Taiwan, which Beijing claims as its sovereign territory. — Reuters

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