Bastiat on The Case for Unilateral Free Trade

The great Frédéric Bastiat makes the case for unilateral free trade. (source Mises Institute)

We have just seen that whatever increases the expense of conveying commodities from one country to another — in other words, whatever renders transport more onerous — acts in the same way as a protective duty; or if you prefer to put it in another shape, that a protective duty acts in the same way as more onerous transport.

A tariff, then, may be regarded in the same light as a marsh, a rut, an obstruction, a steep declivity — in a word, it is an obstacle, the effect of which is to augment the difference between the price the producer of a commodity receives and the price the consumer pays for it. In the same way, it is undoubtedly true that marshes and quagmires are to be regarded in the same light as protective tariffs.

There are people (few in number, it is true, but there are such people) who begin to understand that obstacles are not less obstacles because they are artificial, and that our mercantile prospects have more to gain from liberty than from protection, and exactly for the same reason that makes a canal more favorable to traffic than a steep, roundabout, and inconvenient road.

But they maintain that this liberty must be reciprocal. If we remove the barriers we have erected against the admission of Spanish goods, for example, Spain must remove the barriers she has erected against the admission of ours. They are, therefore, the advocates of commercial treaties, on the basis of exact reciprocity, concession for concession; let us make the sacrifice of buying, say they, to obtain the advantage of selling.

People who reason in this way, I am sorry to say, are, whether they know it or not, protectionists in principle; only, they are a little more inconsistent than pure protectionists, as the latter are more inconsistent than absolute prohibitionists.

The following apologue will demonstrate this.

Stulta and Puera

There were, no matter where, two towns called Stulta and Puera. They completed at great cost a highway from the one town to the other. When this was done, Stulta said to herself, "See how Puera inundates us with her products; we must see to it." In consequence, they created and paid a body of obstructives, so called because their business was to place obstacles in the way of traffic coming from Puera. Soon afterwards Puera did the same.

At the end of some centuries, knowledge having in the interim made great progress, the common sense of Puera enabled her to see that such reciprocal obstacles could only be reciprocally hurtful. She therefore sent an envoy to Stulta, who, laying aside official phraseology, spoke to this effect: "We have made a highway, and now we throw obstacles in the way of using it. This is absurd. It would have been better to have left things as they were. We should not, in that case, have had to pay for making the road in the first place, nor afterwards have incurred the expense of maintaining obstructives. In the name of Puera, I come to propose to you, not to give up opposing each other all at once — that would be to act upon a principle, and we despise principles as much as you do — but to lessen somewhat the present obstacles, taking care to estimate equitably the respective sacrifices we make for this purpose." So spoke the envoy. Stulta asked for time to consider the proposal, and proceeded to consult, in succession, her manufacturers and agriculturists. At length, after the lapse of some years, she declared that the negotiations were broken off.

On receiving this intimation, the inhabitants of Puera held a meeting. An old gentleman (they always suspected he had been secretly bought by Stulta) rose and said, "The obstacles created by Stulta injure our sales, which is a misfortune. Those we have ourselves created injure our purchases, which is another misfortune. With reference to the first, we are powerless; but the second rests with ourselves. Let us, at least, get rid of one, since we cannot rid ourselves of both evils. Let us suppress our obstructives without requiring Stulta to do the same. Some day, no doubt, she will come to know her own interests better."

A second counselor, a practical, matter-of-fact man, guiltless of any acquaintance with principles, and brought up in the ways of his forefathers, replied: "Don't listen to that Utopian dreamer, that theorist, that innovator, that economist, that Stultomaniac. We shall all be undone if the stoppages of the road are not equalized, weighed, and balanced between Stulta and Puera. There would be greater difficulty in going than in coming, in exporting than in importing. We should find ourselves in the same condition of inferiority relatively to Stulta as Havre, Nantes, Bordeaux, Lisbon, London, Hamburg, and New Orleans are with relation to the towns situated at the sources of the Seine, the Loire, the Garonne, the Tagus, the Thames, the Elbe, and the Mississippi, for it is more difficult for a ship to ascend than to descend a river. (A Voice: Towns at the mouths of rivers prosper more than towns at their source.)

"This is impossible. (Same Voice: But it is so.) Well, if it be so, they have prospered contrary to rules." Reasoning so conclusive convinced the assembly, and the orator followed up his victory by talking largely of national independence, national honor, national dignity, national labor, inundation of products, tributes, murderous competition. In short, he carried the vote in favor of the maintenance of obstacles; and if you are at all curious on the subject, I can point out to you countries where you will see with your own eyes road makers and obstructives working together on the most friendly terms possible, under the orders of the same legislative assembly, and at the expense of the same taxpayers, the one set endeavoring to clear the road, and the other set doing their utmost to render it impassable.

The following passage resonates on the political stumbling block, mentioned by Bastiat above, for unilateral free trade:

The compelling economic case for unilateral free trade carries hardly any weight among people who really matter…

But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports—no matter how expensive to produce in terms of other opportunities foregone—is a victory, and an increase in imports—no matter how many resources it releases for other uses—is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense—but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.

This was written by then international trade economist Paul Krugman in 1997 prior to his tergiversation of the free trade doctrine to become consumed by the forces of mercantilism whom he once condemned. (hat tip Professor Don Boudreaux) Given the temptations to power from "the economist who wants to influence that policy", Mr. Krugman reminds me of the transformation of Anakin Skywalker into Darth Vader

Dr Jekyll and Mr Hyde: China and Vietnam to Expand Trade Via Road Network

More signs of China’s love-hate relationship with ASEAN.

Vietnam one of the claimants in the territorial dispute in the South China Sea has forged a “historic” agreement with China to expand trade through a major road network

From ADB, (bold added)

For the first time, buses and trucks will be able to cross overland between the rugged southern regions of the People’s Republic of China (PRC) and the remote northern regions of Viet Nam using a 1,300 kilometer route spanning from Ha Noi to Shenzhen made possible through a road transport agreement between the two countries.

“The new transport agreement will have a profound impact not only on bilateral trade and tourism, but also on Greater Mekong Subregion (GMS) transport facilitation," said Yushu Feng, Principal Economist, Regional Cooperation, at the Asian Development Bank (ADB), which facilitated the bilateral road transport agreement in line with GMS transport facilitation initiatives. “This is a key milestone for regional cooperation.”

The new agreement will ease restrictions on trucks and buses travelling between major economic zones in PRC’s Yunnan province, Guangxi Zhuang autonomous region, Guangdong province and six provinces in Viet Nam, including Lang Son and Quang Ninh provinces, and the cities of Ha Noi and Hai Phong.

Previously, transport operators were only allowed to travel up to 20 kilometers into each other’s territories. Starting August 2012, each country will be able to issue up to 15,100 permits for trucks and buses that travel within the border province area, and each will be able to issue up to 500 permits for trucks and buses than can go to inland provincial areas.

Another significant route, connecting Kunming to Ha Noi and Hai Phong and governed by the same agreement, was inaugurated in Kunming on 16 August 2012.

In 2011, road transport volume between PRC and Viet Nam through the Yuyi-Friendship border gate was as much as 1 million tons for goods and around 726,000 passengers traveled overland between both countries. Transport volume is expected to increase with the newly-implemented road transport agreement. To accommodate market demand, the permit quota for 2013 will be increased, accordingly.

The controversial disputes make it to the headlines and thus fire up emotions that arouse aggression via obtuse (feel good) nationalism.

But these trade agreements which signifies “key milestone for regional cooperation” will be relegated to the business or back pages.Yes the growing trade volume between ASEAN-China are for real.

Overall, China’s seeming antagonistic foreign policies or the gunboat diplomacy has hardly been consistent with her economic policies.

This makes me suspect that one of the two contradicting policies signify as no more than false signals (if not a false flag) aimed at the promotion of concealed political goals.

First Shale Gas Output from China, India to Follow

I previously pointed out that, the Southeast Asian territorial dispute has NOT been about oil as popularly thought.

And since China has the largest reserves of Shale energy in the world, like the US, dependence on external sourcing of oil WILL diminish. So there hardly is any need or incentive for gunboat diplomacy (except to use this as diversion for other unstated reasons).

Also I pointed out that Shale gas revolution is the future of energy which should translate to a worldwide phenomenon.

I would guess that the shale gas revolution will be a worldwide phenomenon which should wean away our dependence on oil. The net effect outside manipulation of money by governments should be to materially bring down or lower prices of energy.

Now some confirmations to this prediction: China will be having its first shale gas output while India is slated to access local Shale energy too.

The roll out of Asia’s shale gas boom has began!

From Bloomberg (bold emphasis mine)

ONGC, India’s biggest explorer, is studying data for shale- gas deposits and awaiting a government policy on commercial drilling for gas trapped in shale rock, Sudhir Vasudeva, chairman of the state-run company, said in a telephone interview yesterday. China Petrochemical Corp. will start pumping the nation’s first shale gas from a project in Sichuan province next month, according to a report on Caixin’s website on May 15, citing the company…

India holds 6.1 trillion cubic feet of technically recoverable shale gas reserves in three basins, the U.S. Geological Survey estimated in a report in January. That was less than 10 percent of the 63 trillion cubic feet estimate made the previous year, in April, by the U.S. Energy Information Administration in a report.

“The U.S. estimates are just estimates, and we’ll have to survey the geology and deposits and drill wells before we know how much shale gas we have,” Vasudeva said. “What we do know is that India does have shale-gas reserves.”

ONGC found shale gas at a well in India’s West Bengal state, according to a Jan. 27, 2011, statement. The company signed an agreement with ConocoPhillips (COP) on March 30 for developing shale resources in India and North America.

India Auction

India has started mapping its shale resources and will have exploration rules in place by 2013, Prime Minister Manmohan Singh said March 23. Blocks will be auctioned next year after the policy is published, G.C. Chaturvedi, the top bureaucrat in the oil ministry, said Dec. 21…

China has 25.08 trillion cubic meters (886 trillion cubic feet) of exploitable onshore shale-gas reserves, the country’s land ministry said March 1. The world’s biggest energy consumer aims to produce 6.5 billion cubic meters of shale gas by 2015 and set a target of 60 billion to 100 billion cubic meters by 2020, the National Development and Reform Commission said.

China Shale

China drilled 50 shale-gas wells in the past year, compared with 1,300 a month in the U.S., Chris Faulkner, chief executive officer of Breitling Oil and Gas Corp., said April 23. It takes “three to five years” for a shale-gas discovery to start commercial production and an extensive pipeline network is needed to transport the fuel to consumers.

My comments

This should serve as more proof that shale gas is the future of energy.

This also means that the emphasis for acquiring energy reserves will largely be directed to Shale at the expense of alternatives (conventional oil, coal, nuclear, solar, wind)

And this is why energy geopolitics will shift to Shale.

My favorite environmental science and economics author Matt Ridley writes

The campaign to stop shale gas proving its case in the market is political, not scientific. Behind it lies vested interests. The Russian gas industry, which is alarmed at losing its impending near-monopoly on European gas supplies, has been vocal in its criticism of shale gas. The coal and nuclear industries too would like to see this baby strangled at birth, but have been less high-profile.

Most of the opposition, though, has come from those with a vested interest in renewable energy, including the big environmental pressure groups, which are alarmed that the rich subsidies paid to wind, biomass and solar may be under threat if gas gets too cheap and cuts carbon emissions too effectively. Their entire rationale for subsidy, parroted by their dutiful poodle Chris Huhne, when Energy Secretary, is that gas would get more expensive until even wind and solar looked cheap. That was wishful thinking.

Even if you do not think carbon emissions are the highest environmental priority, there is a more fundamental reason why using gas is good for the planet. No other species needs or uses it. Every time you grow a biofuel crop, harvest timber for a biomass power station, pave a desert with solar panels or dam a river for a hydro plant, you are stealing energy from the natural world. Even the wind is needed - by eagles for soaring, by bats for feeding (both are regularly killed by wind turbines). As the only species that uses gas, the more we use it the more we can leave other sources of energy for nature.

And lastly, given all of the above, this is further evidence that many have seduced to the quackery, peddled by politicians and mainstream media, that the Southeast Asian territorial disputes of Scarborough or Spratlys has been about oil.

As a side note, Japan and China has their version of territorial dispute through Senkaku Islands which I earlier pointed out. Yet, in spite of the supposed bickering, Japan-China-South Korea concluded last week what has been labeled as the "Trilateral Summit" covering vast economic and political issues

Part of the rapprochement reached from the conference as noted by Xinhua, ironically China’s official press agency:

On strengthening communication and coordination in regional and international affairs, they stressed the mutually reinforcing and complementary roles of the trilateral cooperation and such regional fora as ASEAN Plus One, ASEAN Plus Three, East Asia Summit, ASEAN Regional Forum and Asia-Pacific Economic Cooperation, said the declaration.

They reaffirmed that the ASEAN Plus Working Groups need to be established without delay to accelerate the discussion on a regional comprehensive economic partnership towards the commencement of negotiations, taking into account the initiatives of East Asia Free Trade Area (EAFTA) and Comprehensive Economic Partnership for East Asia (CEPEA).

So again, the Philippines either has a Dr. Jekyl and Mr. Hyde relationship with China or that all the ruckus about the gunboat diplomacy has been geopolitical vaudeville.

The Philippine Financial Markets Shrugs off the Scarborough Shoal Standoff

The financial markets and politicians backed by mainstream media apparently lives in two distinct worlds.

If one goes through the daily barrage of sensationalist headlines, one would have the impression that the Philippines must be in a state of panic. That’s because media has been projecting what seems as intensifying risk of a full blown shooting war over the contested islands, the Scarborough Shoal with China. And all these should have been sending investors scrambling for the exit doors, if not the hills.

But has such alarmism represented reality?

Of course by reality we rely on expressed and demonstrated preferences and not just sentiment. Over the marketplace, people voting with their money have fundamentally treated the recent geopolitical impasse as pragmatically nonevents.

The Phisix has been little change for the week but importantly trades at FRESH record high levels.

Meanwhile the local currency the Philippine Peso posted its SIXTH CONSECUTIVE weekly gains and has been approaching February’s high, whereas local bonds ADVANCED for the week, amidst the geopolitical bedlam[1]

Contrived Risks and Real Risks

There’s a world of difference between real risk and that of a pseudo, or may I suggest concocted, geopolitical risk.

Media has slyly been luring the gullible public into oversimplified “emotionally framed” explanations based on flimsy correlations which blatantly overlooks the behind-the-scenes causal factors[2]. Emotionalism thus opens the door for politicians to prey on the public by manipulating them through the foisting of repressive policies that benefits them at the expense of the taxpayers and importantly of our liberties. The recent call for nationalism via “unanimity” by a national political figure is just an example[3].

Politicians use fear or what the great libertarian H. L. Mencken calls as endless series of imaginary hobgoblins as standard instruments of social controls meant to advance their agenda or self-interests through the political machinery.

Aside from possible factors for the standoff, such as the smoke and mirrors tactic probably employed by China to divert the world from witnessing the brewing internal political schism[4] and or the promotion of sales for the benefit of the military industrial complex, it could also be that the call for “unanimity” may be associated with the domestic impeachment trial of a key figure of the judiciary where “rallying around the president” would extrapolate to the immediate closure of the case in the favor of the administration.

In doing so, the incumbent administration will be able control three branches of government and impose at will any measures that suits their political goals with hardly any opposition, all done under the sloganeering or propaganda of anti-corruption.

Yet the brinkmanship geopolitics in Asia, has not been limited to the controversial territorial claims in Scarborough and Spratlys, as well as Japan claimed Senkaku Islands[5]. Recent events includes the recent widely condemned missile test by North Korea, as well as, missile tests of former archrivals India and Pakistan[6]

Yet market’s responses to these events have disparate.

Pakistan’s Karachi index (KSE:100 orange) trades at the highest levels since 2009 and seems on the way to knock on the doors of the 2007 highs, whereas India’s BSE (SENSEX green) has struggled since peaking late February.

In short, the recent missile tests by both countries hardly influenced financial markets for the two South Asian giants.

The reason for this has been due to substantially improving trade relations[7] that has dramatically eased political tensions between them.

This validates the great free trader Claude Frédéric Bastiat[8] prediction centuries ago.

if goods don t cross borders, armies will

North Korea as the Real Geopolitical Risk

The North Korea-South Korea tiff cannot be seen in the same light.

Since the North Korea’s announcement of a missile test last March 16^th, South Korea’s KOSPI has been struggling. (chart from stockcharts.com)

The South Korean currency, the won, has also wobbled in the face of Nokor’s actions. (chart from yahoo.com)

Nokor’s largely embarrassing failed missile launch[9] last April 13^th has not deterred the new regime under Kim Jong Un from threatening to do another nuclear blasting test[10]

The fundamental difference from the abovementioned instances, including the unfortunate Scarborough-Spratlys affair, has been the near absence or the lack of trade linkages of Nokor which has not fostered social cooperation or goodwill with other nations.

Instead, Nokor’s despotic communist government’s survival has long been dependent on the ‘blackmail diplomacy’ in securing foreign aid. Yet uncertainty shrouds on the direction of Nokor’s foreign policy under the new leadership which appears as being manifested on the markets.

The good news is that so far there has been no sign of panic. This means South Korea’s consolidating markets could be digesting or has been in the process of assessing the political and security risks from Nokor’s new regime.

Otherwise if the worst option does occur, where posturing turns into armed confrontation the ensuing violence will spillover the world markets. But again Nokor has been more of a paper tiger than a real military power considering their dire economic status. A war is likely to cause the Kim regime to disintegrate under its own weight as famished and ill equipped soldiers are likely to defect to the South or a coup will force down the leadership.

The Free Trade Factor and Geopolitical Linkages

The same premise tells us why domestic politicians and media live in a different world from the citizenry. And this is why I hardly touch on mainstream news, except when scouring for the facts. I avoid from reading “opinions”, especially from so-called experts. That’s because mainstream’s opinions blindly represents the interests of the establishment[11].

China ballooning trade with ASEAN, which includes the Philippines[12], represents a very important deterrent from aggression.

As the great Professor Ludwig von Mises wrote in his magnum opus[13],

Man curbs his innate instinct of aggression in order to cooperate with other human beings. The more he wants to improve his material well-being, the more he must expand the system of the division of labor. Concomitantly he must more and more restrict the sphere in which he resorts to military action. The emergence of the international division of labor requires the total abolition of war.

So aside from her thrust to use the yuan as region’s foreign currency reserve as evidenced by the push for wider Free trade zone (including the ASEAN China Free Trade Agreement which began operations in 2010[14]) hardly squares with the bellicosity that has been publicly portrayed.

Free Trade agreements in Asia has exploded since China’s Deng Xiaoping opened China to the world bannered by the famous catchphrase “To get rich is glorious” (which according to some has been misattributed to him)[15]

Claude Barfield of the American Enterprise Institute points out that[16]

In 1975 there was one free trade agreement in the region but in 2011, there are now currently 245 free trade agreements that have been proposed, under negotiation or concluded.

Besides it is naïve to see events in the lens of a single prism.

An outbreak of military conflagration will likely draw in various major players that could lead to a world war, an event which hardly any party would like to indulge in (despite the politicians arrogant rhetoric), considering the today’s age of NUCLEAR and DRONE warfare, standing armies have been rendered obsolete, and mutually assured destruction[17] will likely be the outcome.

So aside from some missile tests by Asian countries, recently Vietnam hosted a joint naval exercise with US[18] while on the other hand China and Russia also recently completed naval war games[19]. While these may look like a show of force for both parties, they could also just be pantomimes.

Yet for me all these seem like watching a movie that gives you the vicarious effect, especially from the 3D vantage point. However when the closing or end credit appears or when the curtains fall, we come to realize that this has been just a movie.

So far the financial markets seem to be exposing on the exaggerations of the so called gunboat diplomacy, or perhaps too much of yield chasing activities may have clouded people’s incentives that has led them to underestimate such a risk.

While I believe the yield chasing factor has functioned as a substantial contributor to the current state of markets domestically and internationally, I also think that the local market has rightly been discounting the territorial claims issue for reasons cited above.

So unless politicians here or abroad totally losses their sanity, the issue over territorial claims will eventually fade from the limelight.

So be leery of politicians calling for patriotism or nationalism, that’s because as English author Samuel Johnson famously warned on the evening of April 7, 1775[20]

Patriotism is the last refuge of a scoundrel.

---

[1] Bloomberg.com Philippine Peso Completes Sixth Weekly Gain on Growth Outlook, April 27, 2012

[2] See The Scarborough Shoal Standoff Has Not Been About Oil April 16, 2012

[3] See Scarborough Shoal Dispute: The Politics of Nationalism April 28, 2012

[4] See China’s Political System Reeks of Legal Plunder, April 20 2012

[5] See From Scarborough Shoal to Senkaku Islands April 19, 2012

[6] Globalspin.blogs.time.com Will Pakistan and India’s Back-to-Back Missile Tests Spoil the Mood?, April 25, 2012

[7] Thehindubusinessline.com Pak may be allowed to invest in India February 16, 2012

[8] The Freeman.org Claude Frédéric Bastiat

[9] See See North Korea’s Failed Missile Launch Reflects on Dire Economic Status, April 14, 2012

[10] Bloomberg.com North Korea Poised to Rattle Region With Nuclear Blast April 27, 2012

[11] See The Toxicity of Mainstream News March 13, 2012

[12] networkideas.org China, India and Asia: The Anatomy of an Economic Relationship (Draft Copy) 2009

[13] von Mises Ludwig 4. The Futility of War XXXIV. THE ECONOMICS OF WAR Human Action

[14] Wikipedia.org ASEAN–China Free Trade Area

[15] Wikipedia.org Deng Xiaoping

[16] Barfield Claude TAIWAN AND EAST ASIAN REGIONALISM American Enterprise Institute, November 10, 2011

[17] Wikipedia.org Mutual assured destruction

[18] Telegraph.co.uk Vietnam begins naval exercises with the US, April 23, 2012

[19] Abs-cbennews.com China, Russia end naval exercises, April 27, 2012

[20] Wikipedia.org The Patriot Samuel Johnson's political views

Quote of the Day: ASEAN Free Trade Agreement

ASEAN+6 and the Trans Pacific Agreement could serve as starting points and become the basis of a future free trade agreement encompassing all of Asia and the Pacific.

That’s from ADB President Haruhiko Kuroda

Even multilateral institution as the ADB are discovering the importance of free trade.

The Aquino Government’s View of Free Trade

Is the incumbent Philippine political regime pro-growth via free trade?

Clues to this answer from the Japan Times, (bold emphasis mine)

A senior Philippine trade official said Wednesday his government has to study the U.S.-backed trans-Pacific free-trade initiative carefully before joining it because his country, like Japan, has sensitive sectors like agriculture to protect.

"We are also just exploring the TPP (Trans-Pacific Partnership Agreement) and studying it, because the TPP agreement is quite an ambitious agreement," Undersecretary for Trade Adrian Cristobal said in an interview on the sidelines of the Asia-Pacific Economic Cooperation forum meeting in Yokohama…

"So these are some of the real constraints that the Philippines has, and other countries have similar constraints," Cristobal said. "We have to look at our own legal and regulatory structure, even our own constitution . . . as part of our own evaluation. From there we need to do some stocktaking also of our own sensitive products, our own industries. Of course we have to consult our own people, business sectors and economic sectors of what their views are."

Blunt interpretation or euphemism from the political lingo: We have to look at the interests of our cronies first.

Is it a wonder why the Philippine economy continues to lag?

JETRO: Rapid Globalization To Spur Emerging Asia’s Outperformance

In the latest monthly outlook “Japan Looks for Economic Growth in Emerging Asia” by Japan External Trade Organization (JETRO), a Japan government owned trade organization, JETRO cites Emerging Asia’s economic prospects as very promising. (hat tip: Keith Rabin of KWR International)

The reason: (bold emphasis mine)

The dynamics of the global economy are changing. During the past century, global economic growth was primarily driven by activity in the “the three locomotives,” the US, EU and Japan.

Rapid globalization, however, is leading to new innovations, such as the proliferation of highspeed telecommunications and enhanced logistical infrastructure. This is resulting in a more connected, multi-faceted world. Economically, these changes allow companies to coordinate over long distances to optimize their supply chains and reduce their cost structure by moving production to developing economies. Building from a lower income baseline, stronger growth is helping to raise living standards and turn these developing economies into markets in their own right. As a result, they are now becoming the primary incremental drivers of global consumption and production.

And Emerging Asia's thrust towards deeper globalization have been anchored on manifold Free Trade Agreements (FTA) which would not only integrate Asia but foster more free trade with the world.

Integrating Asia: Japan-India Trade Pact

More signs that Asia continues to deepen her trade ties with each other.

This from the Japan Times

Prime Minister Naoto Kan and visiting Indian leader Manmohan Singh officially agreed Monday in Tokyo to activate an economic partnership agreement as soon as possible and to speed up talks on civilian nuclear cooperation.

The deal to strengthen economic ties between Japan and India, a fast-growing democratic nation with a population of 1.2 billion, comes at a time when Asian nations are becoming increasingly concerned about China's activities in the East China and South China seas….

The two countries will continue working-level preparations for signing the EPA. Tokyo aims to sign it around the end of the year so it can be submitted to the Diet early next year for ratification, Japanese officials said.

Under the EPA, the two countries will abolish a wide range of tariffs on products ranging from car components and electronic goods to bonsai plants. Broader than a free-trade agreement, the EPA is a more comprehensive pact on economic and trade cooperation that also includes promoting investments.

"This is a historic achievement that signals the economic alignment of two of the largest economies in Asia," Singh said. "It will open up new business opportunities and lead to a quantum increase in trade and investment flows between our two countries."

Japan and India began discussing the possibility of a civilian nuclear energy deal in June that would allow Tokyo to export its nuclear power technology to New Delhi. But India is not a signatory member of the Nuclear Non-Proliferation Treaty, and it is unclear how soon the two nations can conclude a deal, given the strong antinuclear sentiment here…

The EPA will eliminate tariffs on 94 percent of two-way trade in 10 years after the pact takes effect. The tariffs to be abolished include those on Indian exports of car components, DVD players, video cameras, peaches and strawberries to Japan, while Japan would improve access to most industrial products, as well as durian, curry, tea leaves and shrimp.

If there is anything to be bullish about, it is that the direction of geopolitics seems headed towards embracing broader ‘free’ trade.

Prospective Philippine Stock Market 'Decoupling' Due To "Economic Success"?

One suggestion is that a "decoupling" of the Philippine assets with the US is likely for reasons of relative "economic success".

I doubt the cogency of this premise, for the simple reason that the rigidities from the current political economic structure has been rendering the Philippines as "less competitive", which equally translates to a high "hurdle rate" for investors.

The table from CATO.org, reveals that economic freedom has lagged or has marginally regressed in 2007 compared to the earlier years.

And worst, the Philippines ranked in the bottom half among 141 nations in the CATO study, particularly on the aspects of Legal Structure & Security of Property Rights (91th) and Regulation of Credit, Labor, and Business (102nd).

Where property rights isn't secured, the risk premium is high. That's because investment returns may be subject to political appropriation.

And the labyrinth of regulations similarly translates to high transaction and business costs.

So rigidities from an "unfree" economy results to a big informal or shadow economy and the inefficiency of wealth distribution which are mostly skewed towards the minority who operate in the ambit of the political class. This called crony capitalism.

And according to the following charts from CATO, economic freedom has been strongly correlated with.....

economic growth and

per capita income

Yet one should not mistaken rising stock markets as signs of "economic success". That's because equities may rise even if the economy slumps or is in a recession, as in the recent case of Hungary or Venezuela which was discussed earlier. Or as in the case of Zimbabwe in 2008 or in Weimar Germany in the early 1920s.

The reason is that equity prices in such instances were driven MAINLY by inflation. Equity assets, thereby, assimilate the function of money's "store of value" as governments ravage by stealth society's wealth by debasing currency's purchasing power during these circumstances.

As spelled out in my last post "Why The Philippine Phisix Will Climb The Global Wall Of Worries", decoupling is a relative term.

Barring another bout of liquidity seizure from a banking crisis elsewhere, the reason the Philippines (as well as major ASEAN economies) have been manifesting signs of partial decoupling is that the local markets and the economy seem to be more receptive to current globally coordinated "inflationist" policies.

Relative to globalization, the lack of depth in global integration appears to amplify local developments, which overshadows international events, since the country's shortcomings have turned into "blessings" by virtue of being less to susceptible to extraneous shocks.

So we may be witnessing the ramifications of inflationist policies overwhelming developments abroad where relative liquidity is proving more beneficial to the domestic asset class.

Although as we have earlier pointed out the ASEAN Free Trade Agreement along with China and major Asian nations should help bolster economic reforms and increase the breadth of market activities that should be beneficial to the Philippine economy in the long run. Again this is a medium to long term proposition and will depend on the new adminstration's willingness to abide by the pact.

Moreover, another prospect for a decoupling to occur is when Americans become ostensibly cognizant of inflationist policies that would send their local investors scampering for a safehaven outside their currency. But that has hardly been the case today yet. There is indeed a debt problem in the US (chart below from Bloomberg), but prospective policies will determine the outcome.

In short, this is an ex-ante proposition. Therefore the outcome hasn't been fixed.

Besides, what happens in this scenario is merely a transference of one bubble to another, which hardly makes the case for a sound paradigm of "economic success".

Japan, for instance, was deemed as an "economic success" story in the early 80s, until the illusion from inflationism was popped which only revealed the false sense of prosperity.

Major ASEAN nations also benefited from the bust in Japan's bubble as Japanese money reportedly sought returns in ASEAN assets, which was accommodated by loose policies in the region as well as abroad. The boom eventually imploded in 1997, popularly known as the Asian Crisis.

In sum: Economic success comes with more economic freedom. Inflationism doesn't exhibit signs of a sound and sustainable economic growth. Stock market activities don't necessarily reflect on the health of the economy. And economic development will depend on the prospective direction of policies.

Thus, the assumption that the Philippines will diverge from the US based on relative economic performance could be seen more from an angle of endowment effect- "where people place a higher value on objects they own than objects that they do not" or a form of cognitive bias rather than an objective assessment.

Philippine Election Myth: New President Will Determine Direction of Economy And Markets

The notion that an elected political leader will "determine the fate of the economy or the markets" is a popular myth.

It is a myth which is repeatedly peddled by government to present accomplishments. And it is an illusion because the essence of government is to redistribute and consume resources forcibly extracted from productive sectors of the economy.

In the monumental words of Frank Chodorov, ``The intrusion of politics into the field of economics is simply an evidence of human ignorance or arrogance, and is as fatuous as an attempt to control the rise and fall of tides. Since the beginning of political institutions, there have been attempts to fix wages, control prices, and create capital, all resulting in failure. Such undertakings must fail because the only competence of politics is in compelling men to do what they do not want to do or to refrain from doing what they are inclined to do, and the laws of economics do not come within that scope. They are impervious to coercion. Wages and prices and capital accumulations have laws of their own, laws which are beyond the purview of the policeman."

If government can defeat the law of scarcity then poverty and inequality would have long been vanquished from this world and everyone can just have fun! But this simply isn't so.

And applied to elections, as author and professor Steve Landsburg in his blog aptly writes, ``The primary problem with representative democracy is that our representatives are captured by special interests." (bold highlight mine)

Election is, thus, a question of, redistribution for whose benefit? Or asked differently, which among the special interest groups will the new leader be working for?

What we are trying to say is the political winds will tend to blow into three basic directions:

1. increased socialism (which is deemed high risk because the distribution of resources is heavily politicized by the leadership; this means that such actions are likely to be influenced by favoritism, affiliations, patronage, cognitive biases, subjective interpretation of events, or etc... than public weal. In short, special interest groups have big influence in shaping the economy)

2. status quo

3. increased liberalization (lesser impact on the actions of leadership, because markets play a greater role in the distribution of resources than special groups)

And it is the same set of questions that needs to be asked relative to the forthcoming Philippine elections, for whose special interest group will the new leader/s be working for?

If we exclude the "election spending" factor and instead base our extrapolation on historical trends of Philippine politics and merge this with the qualifications (or previous records) of the frontrunners and present political realities, our guess is that the policy imperatives by the new President will be to maintain the status quo and work for the changes at the margins for 'special groups'.

In addition, considering the reported "tightness" in the race for the top spot in the current presidential derby, the new President is likely to get exhaustively engaged in "horse trading" just to be able to generate a coalition from various parties to support such "changes". This means alot of political concessions.

Think of it, in the US even if the Democratic party holds the majority in both Congressional houses, political dominance hasn't equated to successfully ramming down the political reforms on the throats of public, as in the health and climate bills. What more if there is no significant political support?

Alternatively, political straddling implies heightened odds of a status quo, which chimes with our historical political trends.

As Joe Studwell rightly argues, ``The lesson of the past decade has been that the relationship between political and economic elites in Southeast Asia is more enduring than almost anyone imagined."

And how has this worked in the past?

Adds Mr. Studwell, (bold emphasis mine)

``To this day, there are precious few Southeast Asian tycoons whose wealth is not rooted in some form of state-sanctioned monopoly. (The exceptions are a couple of lesser Hong Kong billionaires, Patrick Wang of micromotor maker Johnson Electric and Michael Ying of clothing business Esprit, whose money was made in recent years in manufacturing in mainland China.) Soft-commodity monopolies for consumer items like sugar and flour produced early cash flows for Indonesia's Liem and Malaysia's Robert Kuok. Gaming licenses primed Stanley Ho in Macau and Lim Goh Tong, Ananda Krishnan and Vincent Tan in Malaysia, and lumber concessions made Mohamad (Bob) Hasan, Prajogo Pangestu and Eka Tjipta Widjaya in Indonesia.

``In Hong Kong and Singapore, real estate became an effective cartel because of the way British colonial regimes structured the land market—selling off "crown land" in large lots that created a barrier to entry for all but a few big players. In the 1990s land packages in Hong Kong were commanding prices of about US$1 billion. The city-states also restricted access to their banking markets, creating other huge rents for local players; the biggest of all went to the institution that is now known as HSBC.

``After access to concessions, access to capital was the second prerequisite of Southeast Asian tycoons. Elsewhere in the region, tycoons used their political influence to secure credit lines from state banks or opened their own institutions, which served as private piggy banks. The Philippines has lurched from one banking crisis to the next for almost a century, some based around state banks and others around private banks set up by tycoons. The country has never recovered from the financial-sector meltdown in the mid-1980s, when Marcos went into exile."

Looking at the roster of publicly listed companies in the Philippines one can observe such traits (state monopolies, cartels, and etc.).

And as a political force, the economic elite is likely to be among the top contributors to financing the present elections. So in our view, the odds for a radical transformation is not imminent and is unlikely to pose as a threat.

Finally, the direction of political winds in the Philippines is likely to get influenced more by our deepening interactions with external forces-particularly, the new free trade zone (with ASEAN and China), China's growing role as a major political force as regionalism deepens, a deeper impact from globalization buttressed by technology and OFWs (or migration flows) and deepening financial globalization which includes transmission effects of inflationism, steep yield curves, bubble policies and etc. as we previously discussed in [Why The Presidential Elections Will Have Little Impact On Philippine Markets]

Since political forces are inherently reactive, the new President will respond to and not determine economic and market actions.

Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone

Finally, the dream for an Asian regional integration has finally got the ball rolling.

This from the AFP/Google, (all bold highlights mine)

``China and Southeast Asia establish the world's biggest free trade area (FTA) on Friday, liberalising billions of dollars in goods and investments covering a market of 1.7 billion consumers.

`Eight years in the making, the ASEAN-China FTA will rival the European Union and the North American Free Trade Area in terms of value and surpass those markets in terms of population.

``Officials hope it will expand Asia's trade reach while boosting intra-regional trade that has already been expanding at 20 percent a year....

``China has just overtaken the United States to become ASEAN's third largest trading partner, and will leap Japan and the EU to become "number one" within the first few years of the FTA, said Pushpanathan, Deputy Secretary-General for the ASEAN Economic Community.

``Under the agreement, China and the six founding ASEAN countries -- Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand -- are to eliminate barriers to investment and tariffs on 90 percent of products.

``Later ASEAN members, including Vietnam and Cambodia, have until 2015 to follow suit...

``Average tariffs imposed on Chinese goods by ASEAN states will fall to 0.6 percent from 12.8 percent.

``ASEAN-China trade has exploded in the past decade, from 39.5 billion dollars in 2000 to 192.5 billion last year, Pushpanathan said.

``At the same time, ASEAN-China trade with the rest of the world has reached 4.3 trillion dollars, or about 13.3 percent of global trade.

Well the trend towards the deepening economic and financial integration has already been in place (see above charts from ADB), in spite of the just concluded pact.

This means that the implementation of the regional trade agreement has been merely a furtherance of an existing trend and that would likely get more entrenched in region's pursuit of freer markets.

Yet, this flies in the face of rabid mercantilists who continue to predict protectionism as imbecilic outcomes (actually desired solutions) in response to today's crisis.

According to ADB's Emerging Asian Regionalism, ``Asia is now broadly as interdependent in trade as the EU and North America each is. Indeed, Asia now trades more with itself than either the EU or North America did at the outset of their integration efforts."

Here are the benefits of the a regional trade integration as enumerated by the ADB:

"An integrated Asia can:

• link the competitive strengths of its diverse economies in order to boost their productivity and sustain the region’s exceptional growth;

• connect the region’s capital markets to enhance financial stability, reduce the cost of capital, and improve opportunities for sharing risks;

• cooperate in setting exchange rate and macroeconomic policies in order to minimize the effects of global and regional shocks and to facilitate the resolution of global imbalances;

• pool the region’s foreign exchange reserves to make more resources available for investment and development;

• exercise leadership in global decision making to sustain the open global trade and financial systems that have supported a half century of unparalleled economic development;

• build connected infrastructure and collaborate on inclusive development to reduce inequalities within and across economies and thus to strengthen support for pro-growth policies; and

• create regional mechanisms to manage cross-border health, safety, and environmental issues better."

While freer trade doesn't necessarily guarantee everyone's success, this should enhance opportunities in trade, investments, financing and migration flows aside from the benefiting consumers via lower prices and a greater array of choices of available products and services in the marketplace.

In short, benefits enjoyed by society would likely be immensely greater than the costs.

In addition, increased competition should bring about greater technological advancements via innovation, expands the division of labor and comparative advantages of producers which allows for more pricing and resource allocation efficiency.

As Austrian economist Hans F. Sennholz wrote, ``Surely, it is no easy task; it requires continuous changes in economic structure and adjustment processes. Labor markets need freedom and flexibility in order to create ever new employment opportunities that offset unavoidable job losses. Workers must have the opportunity and incentive to acquire knowledge and ability needed in a globalized economy. General education and vocational knowledge are becoming ever more important as are entrepreneurship, research, and development. But above all, the economic future of many businesses in a globalized economy greatly depends on the margin of political and social freedom they enjoy."

Nevertheless competition and greater choice translates to lower rates of inflation.

This has seen with the price of gold in the 1990s where the greater degree of global integration has resulted to what has been known as the "great moderation"

As we wrote in Gold: An Unreliable Inflation Hedge?, ``Global Exports sharply accelerated during the 1990s, which underpinned almost the same degree of expansion in Global GDP per capita.

``So increased global trade meant more US dollar financing, as manifested by the burgeoning trade deficits, yet the increased output from the world resulted to higher productivity and thus generally growth deflation or “disinflation”. Ergo, lower gold and commodity prices."

Of course, vested interest groups or economic rent seekers who profited from political privileges are exasperated,

Again the AFP/Google, ``Not everyone is happily singing the free-trade anthem, however.

``At the 11th hour, industry groups in Indonesia, Southeast Asia's biggest economy, and the Philippines are frantically pressing their governments to keep tariffs on vulnerable sectors until 2012."

SO it is yet unclear whether such trade pact will turn out successful because of the vast diversity of culture and political structures which could be sources of pressures or conflicts, aside from the required recalibration and standardization of trade and investment policies, to conform with and enforce on the trade pact.

Finally and importantly, the trade pact reinforces what we see as China's attempt to bolster or flex her geopolitical muscles by advocating that the world's largest free trade zone to utilize her currency, the yuan or the remimbi as the region's medium of settlement or transaction currency.

According to Xinhua, ``Beijing had embarked on the first step on a long road toward making the yuan one of the world's top currencies, allowing Chinese exporters and importers to start settling trade in yuan rather than dollars.

``Wichai [Wichai Kiatrengsuk, vice president of the Bangkok Bank] believes that after the launching of the ASEAN-China FTA in January, how to push forward the RMB-dominated trade settlement would become an immediate issue in this area." [emphasis added]

In short, the FTA appear to be a stepping stone for the yuan or the remimbi's long term path towards the goal to challenge the US dollar hegemony as a major international currency reserve as repeatedly discussed in this blog, such as in Central Bank Policies: Action Speaks Louder Than Words, The Fallacies of US Dollar Carry Bubble.

Bottom line: The fate of the China-ASEAN FTA would likely determine the success of China's tacit plan to become the world's premier geopolitical power. And this likewise could be reflected on her key trading partners.