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Trade wars

Trade wars"Over the long term, as and if the contagion of protectionism spreads, we will not be able to escape its baleful effects."

 

The recently passed new law to open up rice imports and replace quantitative restrictions with tariffs is a breakthrough that Finance Secretary Dominguez has rightly claimed bragging rights to.

Rice tariffication is a reform that Sec Sonny recalls pushing for, but failing at, during an earlier stint as Agriculture Secretary. Today, under the muscular administration of President Duterte, the rice market has finally become a true market—to the dismay only of rich farmers, import-license hawkers, and rent-seekers at certain government agencies.

As more rice enters the country at lower prices made possible by lower production costs in exporting countries like Thailand and Vietnam, starvation and poverty are being beaten back. If annual inflation turns out to be the lower 3 percent now being projected, a large part of the credit for that will have to go to lower rice prices.

As for the poor—never mind the rich—rice farmers who may end up selling less rice, they will benefit from billions of pesos in rice import tariff revenues that government should be directing toward social safety nets, improving their productivity, even helping them to transition to other crops or other livelihoods.

What’s important is that those tariffs aren’t set so high as to (i) wipe out the price advantage of imported rice or (ii) discourage rice exporters from selling to us. The second issue will require sophisticated management that monitors what’s going on in other rice importing countries who might compete with us, locks in long-term price and supply agreements whenever the market looks favorable, and effectively regulates smuggling.

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Rice tariffication here is an example of “good” tariffs: when the main—though not the only—objective is for domestic consumers to benefit from lower prices abroad.

For “bad” tariffs, however, an excellent example comes from the trade war initiated against China by US President Trump, who has finally decided to double the tariffs on over $200 billion of Chinese goods imported every year by the US.

In fairness, Trump says he’s just responding to a last-minute decision by China to abandon many of their initial commitments towards a new trade pact between both countries. As I predicted in an earlier column, some of the opening-up promises recently made by President Xi will prove difficult to keep—although I was still surprised by the extent to which the Chinese have dropped the ball.

Tariffs driven by retaliation against perceived protectionism of trading partners may be the only practical solution in some cases. But they will still incur a net cost to the importer and, more importantly, to the long-run health of a globalized economy generally being run on free trade principles.

Trump has been talking up his counter-protectionism by tweeting that the US will be “taking in tens of billions of dollars in tariffs from China”. There are at least three caveats to this proposition:

One: Who in fact pays for these tariffs? Trump assumes that the Chinese will docilely continue to sell a $100 pair of shoes tariffed at say 20 percent for the same price, instead of adding $25 so they net the same revenue. If a comparable US-made pair sells at $150, the US importer can pass on the tariff cost to the US buyer, who now has to pay a higher $125 for his Chinese shoes.

Two: What if the Chinese sell elsewhere? If the Chinese retaliate and stop selling those shoes to the US, American buyers are left with a more limited range of higher-priced shoes to choose from. American shoemakers of course can always try to match the Chinese at $125 per pair. But the higher cost structures of the American economy today for many traded goods make that proposition dubious.

Three: What if the Chinese buy elsewhere? They’re already talking about buying their soybeans from Latin America. If there are enough other soybean suppliers where the price-quality combination is still attractive to the Chinese, a large swathe of American farmland is hung out to dry. With the US historically running a horrendous trade deficit against China, the comparatively smaller US export sector will be hit harder.

Countries like ours may possibly benefit in the short run: as an alternative importer of Chinese goods and as an alternative exporter to the US. But this is limited by the constraints and requirements of our own productive capacity. Over the long term, as and if the contagion of protectionism spreads, we will not be able to escape its baleful effects, especially on our direct (through OFWs) and indirect (through BPO) export of labor.

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Today being the Feast of St. Matthias, the first reading (Acts 1: 15-17, 20-26) describes the selection of Matthias by the remaining eleven apostles to take the place of Judas their fallen colleague. Matthias was selected because he had witnessed Jesus’ ministry from the time of His baptism by John the Baptist all the way to His resurrection.

This reading tells us that Jesus’ followers during His lifetime numbered more, perhaps many more, than the Twelve. It was a fellowship bound together by love—for each other and between them and the Master—as enjoined by Him in the luminous words of today’s Gospel (John 15: 9-17), including this beloved verse 13: “No one has greater love than this: to lay down one’s life for one’s friends”.

Jesus set a very high standard for such love: “This is my commandment: love one another as I love you.” This from a man who walked His talk and willingly went to His crucifixion for our sakes. In today’s rancorous times, these are words that reverberate.

Readers can write me at [email protected]

Topics: Carlos Dominguez III , Department of Finance , rice tariffication , Rodrigo Duterte
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