And This is Called Free Trade? On China South Korea’s FTA

From Reuters’s Answers ON:

China and South Korea wrapped up FTA negotiations this month; negotiations that had started back in May of 2012. The agreements made between these two leading Asian economies means the eventual elimination of tariffs covering approximately 90% of the goods in their bilateral trade.

This FTA between China and South Korea is a comprehensive agreement where it will not only impact the trade environments, but also provide benefits to consumers, enterprises, and countries; ultimately a benefit to the entire continent…

Depending on the industry and product, excluding highly sensitive protected goods, all products under this FTA will achieve a 0 import duty until the tariff elimination period is completed. This tariff elimination is expected to provide commodity exporters with price competitiveness in the import market.

Nice. But not so fast…. There's a catch-22 (bold and italics mine)

In order to enjoy this preferential tariff treatment, the key for enterprises will be to master the rules of origin and get familiar with the validation policies of their governments. The Korea-China FTA establishes rules that determine whether products qualify for originating status and can therefore enjoy the benefits of the agreement.

Product specific rules have two main components for determining the status: Regional Value Content (RVC) and a Change in Tariff Classification (CTH). If products fail to meet these rules, they may be ineligible for preferential treatment. For instance, in the agricultural industry, fresh produce and fishery products must meet “wholly obtained or produced” status, whereas processed products are required to comply with a change in tariff heading (known as CTH).

Most steel, petrochemical and electronic products are subject to similar tariff requirements, namely a change in the first four or six digits of the HS code. Some exceptions allow a minimum RVC of 40%. Passenger vehicles (HS 8703) face even more complications; they must satisfy both a CTH and a minimum of 60% RVC threshold in order to receive preferential tariff treatment in China.

Customs validation policy is another critical point in the process of Certificate of Origin (COO) utilization. During the import clearance phase, governments normally focus on documentation review as a first step of authority verification. For example, they may inquire as to how a company arrived at preferential determination in the form of requesting the decision steps of HS codes classification, the conditions of direct transportation and the validations of the COO information. In addition to the document review, the South Korean government is very strict with audits and is known as being one of the most aggressive FTA validation countries in the world.

Auditors require importers to link the certification for origin to exporter sales orders, sales orders to production, production to purchasing information and purchasing information to supplier origin status evidence.

Here is my understanding of SK-China’s FTA: 

Enterprises can avail of preferential treatment ONLY if they conform with government’s prescribed rules, and pass the bureaucracy’s filters: trade mandates such as documentation, and rigid trade conditions such as RVC. 

So firms that comply will benefit, while firms that don’t comply will either be discriminated upon or restricted from trade. So from here, "free trade" will be bestowed to the “insiders”. 

And such government rules essentially “protect insiders” against those firms which have NOT been compliant.

Apparently, such rent seeking formula of trade is "free trade" by government standards. This can be seen in the Orwellian fashion: war is peace, freedom is slavery, ignorance is strength. Add to this: crony capitalism is free trade. And this is also why genuine free trade has been getting such a bad reputation.

Economist Carmen Elena Dorobăț rightly described of the politics of modern Free Trade Agreements  (bold mine)

Anyone reading modern day trade agreements would not be surprised to discover that they focus less and less on reducing import duties, and more on developing national industries, promoting exports, and ensuring domestic policy space. Their true purpose, a position of middle-of-the-road protectionism, is concealed under vague terms such as ‘freer, fair trade’, ‘gradual liberalization,’ ‘reciprocal concessions,’ or ‘development packages.’ However, the benefits of international trade do not lie in moderation and degree of reciprocity. True free trade is a policy of no trade barriers, to be pursued unilaterally by each and every country. If markets were released from the heavy hand of governments, international free trade would follow at one stroke.

The inherent incompatibility between free trade and increasing domestic government control will thus continue to hinder the dreams of WTO supporters, and the more distant ideal of free trade. Sadly, the golden days of Richard Cobden — who together with Michel Chevalier managed to sway the British Parliament and the French Emperor away from spending money on armaments and toward a free trade agreement — are long lost. All that is needed for flourishing international trade is a sound monetary system and the freedom of private enterprise. However, in a world where states have open-ended budgets for military campaigns and total control over the money supply, the bureaucratic structure in Geneva will only serve political interests.

Quote of the Day: The Difference Between Minimum Wages and Free Markets on Unemployment

Professor Don Boudreaux at the Cafe Hayek provides an awesome explanation: (bold mine)

(1) The unemployment caused by a minimum wage is permanent, in the sense that even in theory it will always exist. Unlike the unemployment that arises when trade becomes freer, the unemployment that is caused by minimum-wage legislation is not the result of transaction costs and other frictions that prevent workers who lose their jobs from finding alternative employment immediately. Put differently, in principle if not in practice, no workers need be rendered even temporarily unemployed by freer trade. In contrast, the minimum wage necessarily (in the absence of genuine monopsony power) causes some workers to lose their jobs and causes these destroyed jobs to remain destroyed for as long as the minimum wage remains in place.

Put in yet another different way, unlike with free trade, the creation of unemployment is not a temporary or incidental consequence of minimum-wage legislation. Lasting job destruction is part of the essential logic of the minimum wage. While in principle, and over time also in practice, free trade does not lead to permanent job losses, job losses caused by the minimum wage, in addition to springing from the very logic of the minimum wage, are indeed permanent.

Second, unemployment caused by free trade is, in reality, simply a particular instance of unemployment caused by changes in the pattern of economic activities. In both principle and practice this unemployment differs not a whit from the unemployment caused by, say, consumers coming to prefer more chicken to beef, more outdoor recreation to indoor entertainment, more wine to whiskey, or living in Arizona to living in Michigan. That is, the unemployment caused by freer trade is inseparable from the very logic of a market economy driven by consumer sovereignty and competition. Far from free trade being an exception to the rules of a market economy, it is protectionism that is an exception. The minimum wage, in contrast to free trade, is emphatically not part of the logic of a market economy; like protectionism, the minimum wage is a suspension of, or an interference with, the logic and principles of a market economy and of consumer and worker freedom. If this fact means nothing else, it means that free trade (like any competition-driven change in the pattern of consumer spending) enjoys a presumption of legitimacy while the minimum wage, which is a restraint on the operation of the market and on voluntary contracting, operates under a presumption of illegitimacy.

Third, economic theory and empirical evidence strongly suggest that the ill consequences of the minimum wage are not randomly distributed. These ill consequences are suffered only by low-skilled workers and, even among low-skilled workers, disproportionately by those who are the least advantaged (for example, by inner-city blacks rather than by suburban whites). The downsides of free trade, in contrast – and in addition to being only temporary and part of the larger logic of the real-world market – are much more random. These ill consequences are not more likely to fall only on low-skilled workers, or on blacks rather than whites.

Video: Why do we Trade or Exchange Things?

Voluntary trading or exchanging are ubiquitous activities for people, unfortunately many don't understand its essence and that's the reason why trading or exchanging has often been subjected to politics. 

In the following video from LearnLiberty.org, Duke University's Professor Mike Munger explains why people trade: (hat tip Professor Don Boudreaux)

How Free Trade Promoted Peace in Mindanao

It is refreshing to read about anecdotes of how the largely unappreciated free markets works unnoticeably in the Philippine setting

Dave Llorito World Bank’s communications officer at World Bank’s East Asia blog writes

“It was a war zone, one of the most dangerous places on earth.” 

That’s how Mr. Resty Kamag, human resource manager of La Frutera plantation based in Datu Paglas (Population: 20,290) in Maguindanao (the Philippines) described the national road traversing the town from the adjacent province.

Residents and travelers, he said, wouldn’t dare pass through the highway after three in the afternoon for fear of getting robbed, ambushed or caught in the crossfire between rebels and government soldiers.

“That was before the company started operations here in 1997,” said Mr. Kamag. La Frutera operates a 1,200-hectare plantation for export bananas in Datu Paglas and neighboring towns, providing jobs to more than 2,000 people.

“Today, the town is peaceful,” he said. “Travelers now come and go without fear of getting harmed. People have better things to do.”

La Fruta Inc. is the Philippines largest banana exporter, whose chairman and president Senen Bacani was conferred the 2006 Entrepreneur of the year award in 2006 by the SGV Ernst and Young (wiki Pilipinas).

And to promote trade, the private sector led by La Fruta and other private firms made huge investments in the region’s infrastructure.

Again Mr. Llorito:

A joint project by foreign investors (Unifruitti group) and Filipinos including Toto Paglas, a charismatic Muslim leader, La Frutera spent millions building roads, bridges, irrigation systems and other facilities.

The company infuses the local economy with 11 million pesos of monthly payroll, encouraging local entrepreneurs to set up retail shops, banks and small businesses. Other companies like Del Monte followed suit establishing agribusiness plantations in other parts of the province.

Today, paved highways cut through thriving towns and fields planted to rice, corn, coconuts, palm oil, rubber trees, and bananas.

The point is that markets on its own will invest and finance on infrastructure projects without the need for taxpayer exposure and for government directive.

Trade reduces war and promotes social harmony and cooperation due to the division of labor.  

As the great Ludwig von Mises wrote (Omnipotent government p.122)

Social cooperation and war are in the long run incompatible. Self-sufficient individuals may fight each other without destroying the foundations of their existence. But within the social system of cooperation and division of labor war means disintegration. The progressive evolution of society requires the progressive elimination of war.

Why the Shale Gas Revolution will go on…

...because the benefits enormously outweigh the costs.

Prolific author Matt Ridley writing at the UK Telegraph enumerates them

1. Cheap and abundant energy should help spur economic growth

Cheap energy is the surest way to encourage economic growth. It was cheap coal that fuelled the Industrial Revolution, enabling British workers with steam-driven machinery to be far more productive than their competitors in Asia and Europe in the 19th century. The discovery, 12 years ago, of how to use pressurised water (with less than 1 per cent kitchen-sink chemicals added), instead of exotic guar gel made from Indian beans, to crack shale and release gas has now unleashed an energy revolution almost as far-reaching as the harnessing of Newcastle’s coal.

2. Environmental Friendly

And if cutting carbon emissions is what floats your boat, you will like shale gas even more. The advent of cheap gas, by displacing coal from electricity generation, has drastically cut America’s carbon dioxide emissions back to levels last seen in the early 1990s; per capita emissions are now lower than in the 1960s. 

3. Market driven energy and less baggage on taxpayers compared to political driven alternatives

Britain’s subsidised dash for renewable energy has had no such result: wind power is still making a trivial contribution to total energy use (0.4 per cent) while most renewable energy comes from wood, the highest-carbon fuel of all.

4. Alter geopolitical environment

Best of all, the shale revolution is causing consternation in Moscow and Tehran, which had expected to corner the natural gas market in decades to come. As a sign of the panic it is inducing, a forthcoming Matt Damon anti-fracking film was financed partly by a company owned by the United Arab Emirates government. (The film’s plot had to be rewritten after the authorities absolved a gas company of causing pollution in a well-publicised case in Dimock, Pennsylvania.)

I might add that the Shale gas revolution will likely compel authoritarian resource rich, or might I rather say resource curse, economies to liberalize, knowing that their stranglehold on energy supplies faces stiff competition.

(chart from Danske Bank)

The Shale boom will also put tremendous pressure on the authoritarian regimes' energy based welfare states, which has been the main source of the political existence.

So the shale gas revolution will likely bring on more trade, more reforms and lesser welfare states

5. Safe technology

Exploiting shale gas is safe, according to the Royal Society and the Royal Academy of Engineering. Fracking of one kind or another has been used here for decades; the earthquakes it causes are no worse than a bus going past; it does not use much water compared with other industries; it’s not responsible for flammable tap water; and methane leakage is not as bad as has been claimed. Nor, with a mile of rock between the fractures and the aquifers, does it cause groundwater contamination. Last year there were 125,000 fracs in the United States. According to the Environmental Protection Agency, no frac has ever contaminated groundwater.

The Shale gas boom will initially benefit the US and Canada, but will most likely spillover to the rest of the world.

Shale gas reserves can be found in many countries. The Wall Street Journal notes that

U.S.-government contracted study of 32 countries estimated they held 6.6 quadrillion cubic feet of shale gas, more than 50 years worth of current global consumption. The U.S. held 862 trillion cubic feet, or just 13% of the estimated resource

The study didn't offer an estimate of either the volume of oil in global shales or the size of massive shale deposits in Russia and the Middle East. Other estimators have suggested this figure could be high, but nonetheless expect there is vast untapped energy in shales world-wide.

Although the boom has several obstacles to overcome mostly in terms of politics: government ownership of mineral rights, environmental concerns and the lack of infrastructure.

For instance, countries like France and Bulgaria has banned hydraulic fracking. China huge shale reserves are situated in arid or heavily populated areas where accessibility to water poses as constraints.

There are also technology constraints or access to technology which so far has limited market participants.

Nevertheless, the shale revolution has been estimated to shift energy consumption and trade patterns globally.

The US may reach self-sufficiency and become an exporter by 2035

Notes the Economist,

the same technology is unlocking shale oil, which along with fuel efficiency measures, could slash America's dependence on oil imports. With all sources of energy taken together (including nuclear, renewables, etc) the country could hit net self-sufficiency by 2035. The rest of the world is set to rely even more heavily on imports, with the exception of Japan and South Korea, which already import all their oil and gas, and the ASEAN region, which will have less of a surplus to export

Recently I pointed out that Asians have began piling on on Shale gas boom through record corporate takeovers of Shale companies

Mr. Ridley is right, countries that turn their backs on cheap energy will lose out

Quote of the Day: Free Trade is for Common Man, Protectionism is a Rip Off

The cause of free trade has always been about the common man. It is about the right of average people to trade with whomever they want. Protectionism, in contrast, is another way for powerful people to extract money from our pockets and reward their political friends with legal favors. In other words, it’s a rip-off.

 This is from Jeffrey A. Tucker at the Laissez Faire Books

Free Trade Between China and Russia Promotes Peace

“If goods don’t cross borders, then armies will” has been one my favorite quotes from the great French classical liberal or proto Austro-libertarian Frederic Bastiat.

Emerging market investing guru and Franklin Templeton’s Mark Mobius notes of such dynamic in motion between China and Russia. 

From a geographic perspective, Russia and China’s common border along the Amur River is an area of past conflict but also one of potential cooperation. Russia’s side is under-populated but boasts arable land, timber and other resources while the Chinese side is densely populated with limited resources. In 1969, cross-border tensions nearly resulted in a full-scale war, but today the mood is quite different. Reports indicate that most Siberian and Far East officials are positive about the presence of Chinese in their regions since they are suffering from the departure of ethnic Russians from their areas, and the Chinese labor force can help cultivate the land.

Of course, even the friendliest of neighbors can disagree at times, but if neighbors like China and Russia can focus on projects to their mutual economic benefit, I think that’s an approach we might pursue in our own backyards.

It’s really individuals from China and Russia, through the employment of voluntary exchange via the “division of labor” channel, who promotes “mutual economic” interests.

Quote of the Day: The Mercantilist’s Pareto Strawman

The market economy has never been without its critics and enemies.  Those who feel threatened by the market; those who, however unwisely, feel they could do better without it; economists with little imagination; those, like the devotees of Pareto optima, with only too much of it; those who find most entrepreneurs disgusting characters; those attracted by the romantic charm of a feudal order in which they never had to live; social thinkers offended by the raucous tone of modern advertising; and social thinkers who know only too well how to exploit envy and greed in the service of anticapitalistic movements – all these make a formidable array of opponents.

This quote is from Ludwig Lachmann’s 1978 essay “An Austrian Stocktaking: Unsettled Questions and Tentative Answers,” Chapter 1 in Louis M. Spadaro, ed.,New Directions in Austrian Economics (1978) page 11 lifted from Professor Don Boudreaux of Café Hayek’s Quotation of the Day 

Anti-capitalists critiquing the societal benefits of voluntary exchange through the Pareto efficiency strawman have been presumptive of the possession of omniscience of the summation or aggregation of interpersonal evaluations or interpersonal utility comparisons from which to clearly establish the parameters where “no one can be made better off without making at least one individual worse off” from a “perfectly competitive equilibrium” environment.

If I go to my neighborhood sari-sari store to buy beer/s, who is to say and under what objective technical-ethical-welfare framework will they determine if my actions (as buyer) or of the sari sari store’s (as seller) are Pareto efficient or not? The government ‘expert’ or some appointed institutional economist? Duh!

Free trade have always always a function of individual actions coursed personally or through varying forms of organization where geographical or political boundaries are irrelevant.

Yet these romantic and self-absorbed (deluded) anti-capitalists utopians fail to account that in as much as the markets, which are an expression of actions constituting individual subjective value scales and time preferences, are imperfect, governments likewise operated by a cadre of individuals also should be measured by the same Pareto efficiency effected through their policies.

The appropriate question, measured relatively, should be: Which is more Pareto efficient: decentralized voluntary exchanges or centralized government coercive redistribution?

Unfortunately for the utopians there is such a thing as the law of unintended consequences: government failures.

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

Video: The Power of the Undervalued $10 Trillion Informal Economy

Author Robert Neuwirth of Stealth of Nations: The Global Rise of the Informal Economy makes a great talk at the TED anent the vastly underrated informal or shadow economy

The TED introduces Mr. Neuwirth for his "out-of-the-box" thinking, or as challenging

“the conventional thinking by examining the world's informal economy close up. To do so, he spent four years living and working with street vendors and gray marketers, to capture its scope, its vigor--and its lessons. He calls it “System D” and argues that it is not a hidden economy, but a very visible, growing, effective one, fostering entrepreneurship and representing 1.8 billion jobs worldwide.

Mises Institute’s Jeff Riggenbach quotes Mr. Neuwirth’s definition of the informal economy based on his book…

This "informal economy," he writes, "produces, cumulatively, a huge amount of wealth.… It is how much of the world survives, and how many people thrive." And he has a name for it: System D.

"System D," he quickly explains, “is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call them débrouillards. To say a man (or woman) is a débrouillard(e) is to tell people how resourceful and ingenious he or she is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self-starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of 'l'economie de la débrouillardise.' Or, sweetened for street use, 'Systeme D.' Thisessentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself or DIY economy.

The video from TED Ideas Worth Spreading (hat tip Professor Mark Perry)

Some highlights:

-“Something like this is totally open, it’s right there for you to find. All of this is happening openly and above board there is nothing underground about it. It is our prejudgment that it is underground”

-Governments dislike this

-“We are all focused on the luxury economy” ($1.5 trillion per year)

-“It excludes two-third of the workers of the world, 1.8 billion people work in an economy that is unregulated and informal”

-It is where employment is

-It engenders a more egalitarian world

In reality, the so called “prejudgment” of the informal economy has been part of orchestrated government campaign propaganda to derogate them, for the simple reason that the existence of the informal economy diminishes the importance of the role of governments.

More significantly, the informal economy represents the stark account of government failure

As John Sullivan of the Huffington Post writes,

The informal sector -- those businesses and entrepreneurs who work outside of the formal market economy -- is huge and largely undocumented in most developing economies. Almost everywhere, the root cause is the same: cumbersome, unresponsive, unfair, and overwhelmingly status quo-driven bureaucracy. People simply cannot get through the wall of red tape or the maze of regulations to gain access to the formal economy.

Moreover, author Robert Neuwirth points to the survivorship bias by public of focusing on the “luxury” economy (euphemism for consumption economy) which has been much smaller than the informal economy.

Again this represents the indoctrination by the mouthpieces of government conduits particularly through mainstream media.

Take the Philippines, hardly any serious study dwells with the informal economy. Every news exaggerates on the contributions of OFWs to the economy whose remittances accounts about 10% more or less of the economy.

When it comes to the informal economy, even when we deal with them or see them daily as a fact of life, they become a vacuum in mainstream’s eyes

The following excerpt is an example of one distorted perspective relative to OFW’s contribution to property development, the Global Property guide writes,

Overseas Filipinos’ remittances are powering the low-end to mid-range residential property market. They are snapping up housing projects and mid-scale subdivisions in regions near Metro Manila such as Cavite, Batangas and Laguna Provinces, while the expansion of the upper residential market, including the luxury market, is due to increased housing demand from BPO employees and expatriates, according to the World Bank.

Overseas Filipino Workers (OFW).account for around 17% to 18% of residential sales of Ayala Land, one of the country’s major developers. In the next five years Ayala Land President Antonio Aquino expects to double this, by branching out to the affordable and low-end market segment.

If OFWs account for say 20% of the housing or property demand, so what happened to the 80%? Which is mathematically bigger 20% or 80%? Since when has 20% become a dominant factor?

Let me add that OFWs also contributes to the informal economy, that is if the recipient families engage in unregulated or untaxed commerce.

This is why I have been repeatedly pointing out that for a country, whom according to mainstream has supposedly been living in Third World and has been allegedly 'poor', the Philippines hosts three of the largest malls in the world (Forbes 2008). Yet these malls, have not been like those ghost malls in China, as they have near full occupancy (which means profitable retail enterprises)

Further, the thrust of mall development in the Philippines has been spreading to the rural area which I recently argued, as suggesting of the deepening role of decentralization and of signs of the plateauing or the reversal of urbanization.

All these can HARDLY be supported by consumption spending by OFWs alone (or even if you add exports, which has been the favorite source of Keynesian influenced media).

The fact is that the informal economy has far been a larger contributor to the Philippines’ economic growth than has been projected.

Remember since the informal economy has been largely undocumented thus statistical estimates will bear significant errors.

Despite the survivalship bias practiced by the mainstream, Mr. Neuwirth’s putting into perspective of the real state and of the potentials of the informal economy appears to have been indirectly acknowledged by the World Bank,

the shadow economy has reached a remarkably large size with a weighted (unweighted) average value of 17.2 (33.1)% of official GDP. However, equally important is the clear negative trend of the size of the shadow economy over time. The unweighted average size of the 162 countries decreased from 34.0% of official GDP in 1999 to 31.0% in 2007; for the 21 transition countries from 36.9% in 1999 to 32.6% in 2007.

While the World Bank says the trend has been slowing, this has, I think, has mostly been a result of recent trends of globalization and economic freedom which tend to increase participation of the some erstwhile segments of the informal sector to the formal sector.

But such dynamics should not be construed as past performance determining future outcome. If the informal or shadow economy has signified as the public’s response to the politicization of the markets, then increased politicization means the tendency to shift economic activities towards the informal sector.

A quote from this Forbes article nails it…

“These are not really people oppressed by poverty,” says writer Stewart Brand. “They are getting out of poverty as fast as they can.” This isn’t to say that cellphones are about to save the world. But they have become the tool of choice for people who are determined to save themselves.

The informal economy, thereby represents free trade in motion and has been about people’s natural recourse to survival.

As the distinguished Austrian economist Percy Greaves Jr. once said,

For men, life is a series of choices by which we seek to exchange something we have for something we prefer. We know what we prefer. No other man or bureaucrat is capable of telling us what we prefer. Our preferences are our values. They provide us with a compass by which we steer all our purposeful actions. Because few people fully understand this, we have some serious economic problems…

Anything that raises cost or hinders the free and voluntary transactions of the market place must keep human satisfactions from reaching their highest potential. Today the greatest obstructions to the attainment of higher human satisfactions are the well-meaning but futile political interferences with the mutually beneficial transactions of a free market economy.

So any obstacles placed against activities which facilitates people’s survival will intuitively lead to the informal economy.

This is common sense.

Unfortunately common sense has been unavailable to politically brainwashed mindsets.

ASEAN Experts: Yuan to Replace U.S. dollar, Euro

From Xinhua,

China's currency could be eventually used as an alternative to the U.S. dollar and Euro by southeast Asian countries, experts said.

Phathanaphong Phusuwan, a senior official of the Bank of Thailand, said in a seminar on Thai-Chinese trade, investment and finance relations on Saturday that the yuan would likely be used more between China and ASEAN member states in the long run.

In the panel discussion co-hosted by the National Research Council of Thailand, Huaqiao University and the Thai-Chinese Culture & Economy Association here, the official of the Thai central bank commented the Chinese currency could possibly replace the U.S. dollar and Euro when it comes to trade, financial and money-exchange dealings throughout the ASEAN community, due in part to the unresolved economic and financial problems in the United States and the European Union.

"In the long run from 2015 onwards, trade with Asia will largely increase under the ASEAN-China Free Trade Area agreement, which will influence the use of the yuan and the local currencies. The yuan is then a good alternative for the international trade in the future," said the official, referring to the year in which the regional bloc will become an ASEAN Economic Community.

Nevertheless, he said, the role of the Chinese currency in Thailand and other ASEAN states will remain limited in the short and medium terms.

Thai merchants have increased their use of the yuan in trade, following the easing of restrictions by the Chinese government, he said. A dozen Thai commercial banks and foreign banks' branches here currently offer yuan-based services, including foreign currency deposits, money exchange, fund transfers and purchases of Chinese banknotes.

The Chinese currency has accounted for 10.8 percent of China's trade dealings with the world during the first half of this year, according to a report of the Thai central bank.

ASEAN’s plan to embrace free trade with China should be welcomed.

Yet the above again reveals of the (economic) love –(geopolitical) hate relationship between ASEAN and China.

While free trade may increase the usage of China’s yuan for trade and finance within the region, the role of the yuan as ASEAN’s reserve currency is not guaranteed. This will ultimately depend on the interplay or action-reaction feedback by global participants, not limited to politicians.

For instance, if China’s slowdown turns into a hard landing, what will be the response by the Chinese political authorities? If China inflates as massively as their counterparts in the West, then the likelihood of concerted massive inflation by major economies may mean, hardly a yuan standard for ASEAN, but of a potential return of the role of gold as money (I just don’t know how this would take shape; perhaps a modified Bretton Woods standard?).

Or if China adapts protectionism or goes into a shooting war over territorial claims with ASEAN neighbors then the free trade agreement will simply evaporate or reneged upon. [As a side note, the geographical claims dispute, for me, has most likely been a False Flag]

Given that current political and economic events remain so fluid and sensitive or vulnerable to dramatic changes, it would be a mistake to read present trends into the future.

Although I am hopeful that the technology backed globalization and decentralization will become the dominant force overtime. As well as, I am hopeful of the return of sound money or the de-politicization of money.

Video: I, Smartphone (Made Everywhere)

This is video is the modern day representation of Leonardo Read's must read classic I, Pencil.

Two points here:

One, nobody knows how to make a product on their own or the folly of self-reliance as peddled by politicians. This emphasizes the importance of the division of labor (or Prof. Kling's Patterns of sustainable trade and specialization).

Second, division of labor implies that products have been "made everywhere", which today, extrapolates to the global supply chain networks or "globalization"--which is why politically colored claims of "Made in China" have been utterly fallacious.

Quote of the Day: Economics versus Social Darwinism

Economics doesn't point to people and say, "Look what they can't do." Economics instead asks, "Well, what can they do?" If the answer is "something productive," then the Law of the Comparative Advantage implies gains to trade. Economics, known for its hard-headed methods, culminates in an optimistic and humane conclusion: Regardless of their Darwinian "fitness," the existence of people - even those well below average - makes the world a better place.

This is from Professor Bryan Caplan at the Econolog.com [hat tip Prof Don Boudreaux]

China-Chile Plans to Double Trade in 3 years and Use the Yuan as Medium

China continues to promote her currency, the yuan, as an international currency reserve through a package of trade and investment bilateral deals.

China and Chile plans to double trade within 3 years through free trade. Wow.

From Xinhua,

China and Chile agreed Tuesday to upgrade their bilateral ties to a strategic partnership, and double trade in three years.

Chinese Premier Wen Jiabao and Chilean President Sebastian Pinera announced Tuesday the establishment of China-Chile strategic partnership and the completion of negotiations on investment-related supplementary deals to a bilateral free trade agreement.

During their talks, Wen urged speedy signing and ratification of these supplementary deals and called for the finalization of the China-Chile free trade area…

Meanwhile, Wen suggested that the two sides launch currency swaps and expand settlement in China's renminbi.

Aside from Chile, as Zero Hedge points out, the list of China’s trading partners who now use the yuan as medium (including setting up of currency swaps) includes Japan, Russia, Iran, India and Brazil.

The world is in a gradualist path of bypassing the US dollar, which I believe, aside from the yuan as global forex reserve, could be partly motivated as insurance against a currency crisis

And as I have been saying, China’s supposed gunboat diplomacy and promotion of the yuan (or the seeming Dr. Jekyll and Mr. Hyde relationship with Philippines) just doesn’t add up.

Quote of the Day: Global Competition is the 21st Century Reality

instead of pursuing a 20th century trade policy model that seeks to secure market-access advantages for certain producers, policy should be recalibrated to reflect the 21st century reality that governments around the world are competing for business investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and regulatory barriers, etc. This global competition in policy is a positive development because — among other reasons — its serves to discipline bad government policy.

That’s from Daniel Ikenson at the Cato Institute.

How Italian Renaissance Bankers Bought off the Church

From at Mary Tao at the New York Fed Research Library (hat tip Bob Wenzel)

What do the Italian Renaissance and the Great Depression have in common? Commissioned works of art, Italian Renaissance methods of fresco painting, and themes of banking and money.

During the fourteenth through the sixteenth centuries, many Florentine bankers hired artists to produce devotional paintings and then donated those pieces to the Catholic Church to offset the Church’s disapproval of interest-bearing loans. Since usury was very much frowned upon, this practice of buying penance did not sit well with one Friar Girolamo Savonarola. He was such a vocal critic of the donations that he arranged for bonfires of “vain, lascivious, or dishonest things” (including many Renaissance artworks) in 1497 and 1498. The Medici Bank, the largest bank at that time, had much success in evading the ban on usury; its collapse in 1494 gave Savonarola leverage in his cause. The recent Florentine exhibit Money and Beauty. Bankers, Botticelli and the Bonfire of the Vanities depicts “how the modern banking system developed in parallel alongside the most important artistic flowering in the history of the Western world.”

Buying penance is as relevant today as it has been during the Renaissance. Many wealthy citizens indulge in huge donations to their respective churches or lavish on pilgrims in the hope of acquiring spiritual salvation.

While the activities of Italian bankers in the renaissance may not be about salvation, it had been about political influence peddling. It could also be seen as the natural impulse to arbitrage politics.

Of course flourishing of trade has been a critical factor in the “artistic flowering” or the “rebirth of learning” in the history of the Western world.

To quote the late Professor Sudha Shenoy,

It was the Muslims who saved the Latin and Greek texts during the European dark ages. This led to the Renaissance in due course. The Italian merchants learned their business methods from Islam. There is a commercial history, and a history of tolerance, that needs to be recaptured.

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