Is “Free-trade Zone” Really Free?

The success of special trade zone established in Shenzhen in the late 1900s has given the public much expectation to the Shanghai Free Trade Zone (SFTZ) in 2013. After almost three years from that time, this innovation seems to have little inspiration for the trade partners given the firm control of the authorities and rigid regulations. The free trade zone, from my perspective, has not set business free at all.

SFTZ is located on atrade1
small area on the rural and coastal side of Shanghai. Right from the start, the “negative list” that includes the items foreigners cannot invest in the zone released restrained investors, because instead of a short list of just banning guns, drugs and pornography there were over 1,000 banned sectors. In the end, there were only six sectors opened for business in the zone, including financial, shipping, commercial, professional, cultural and social areas. The first area is the one that the official wanted to pay most attention to. Financial reforms promised to free the currency convertibility and interest rates, in order to trade2promote Chinese currency. However, bankers said they could not find any difference in-and-out of the zone.

However, SFTZ is not without its merits. The zone has cut red tape especially for customs, logistics, shipping and professional services such as education and law. For example, the customs clearing process has been expedited from three to four weeks to several days, which encourages imports. In addition, there were 37 service industries and 17 manufacturing industries permitted in the zone but not elsewhere in China. But these benefits are more visible for small businesses; such as seafood importers that made the local people line up to buy cheap lobsters.

Nevertheless, “there were around three quarters of respondents in a survey believed the free-trade zone offered no tangible benefits for their business.” “Around half said they hadn’t noticed any change for their business since the zone opened in September 2013.” (WSJ) The slowing down of China’s economy and unfavored policies discouraged foreign companies. Also, the obvious laterality towards local firms put foreign investors in a disadvantaged position. SFTZ seems more like a hype that the authority used to attract foreign investors but without much success.

What is more interesting is that nobody really understands about the exact rules, even lawyers. The investors still are willing to open their stores in the zone, having the belief that it is better than nothing. They expect that the benefits could be materialized one day. The unpredictability concerns the investors.

The Free Trade Zone suggests the government’s determination on market liberation. The financial reform is correspondent to recent political movements such as anti-corruption. However, the pilot projects should be sped up since capital control policy will become less and less effective along with the increase of wealth of the public. The government has to regulate the financial sector properly or the accumulated wealth could not be capitalized effectively. At first place, the ambition was to catch up Hong Kong and become the inland financial hub. However, it has fallen far short on a lot of aspects especially legal regulation. Financial investors put more emphasis on risks, which makes them still prefer Hong Kong to Shanghai after the opening of FTZ. There has been no obvious protection and deregulation needed to lure major financial firms to expand their business so far. The failure is originated from the foundational political concerns that make the government is reluctant to free the market.

Lastly, the policies listed that “enterprises engaged in manufacturing business in the FTZ enjoy 15% income tax rate” and for every tax free policy there is a word “may” connected explicitly shows that the Free Trade Zone is never free.

 

Sources:

 

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Trade Sanctions on North Korea’s Nuclear Program – Unique Role of China

In January 2016, North Korean conducted its fourth nuclear test after in 2006, 2009 and 2013, followed by a long-range rocket launch in February. In a signed letter broadcast on state-run media, North Korean leader Kim Jong Un wrote that he wanted to ring in the new year with, quite literally, a BANG. 

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In response to the North Korea’s recent nuclear test and missile launch, the United Nations Security Council imposed tough new sanctions on the Kim Jong Un government on March 2. These punitive measures include restricting North Korea’s mineral trade including coal, gold, and “rare earth metals” used for high-tech products, prohibiting the supply of aviation fuel, and banning the sale of arms and luxury goods to North Korea. These sanctions are believed to be the toughest and will have greater impact on North Korea compared with previous sanctions which were more like ineffective statements.

China Has A Unique Influence Through Trade Over North Korea On Denuclearization 

China is North Korea’s biggest trading partner.China receives 84% of North Korea’s exports, followed far behind by Indonesia, which receives just 2%. While 84.5% of North Korea imports are from China, followed by India with just 5%. North Korea exports roughly $2.7 bn worth of materials every year, 90 percent of trade flows either to or through China. Mining plays a massive role in North Korea’s lucrative trade, with coal and iron constituting over 46% of the nation’s exports. It delivered 20m tonnes of coal last year to China, amounting to $1 billion according to AFP news agency. And $73 million worth of iron ore.

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As one of the UN members, in response to the new sanctions, China has banned on exports linked to any fuel or oil products that could be associated with North Korea’s nuclear program. More importantly, China has prohibited coal and gold imports from North Korea of which proceeds fund the North’s weapons program. As trade with China is the vast majority of North Korea’s trade, the actions taken by China will play a significant role in limiting North Korea’s nuclear activities.

In addition, China is required to inspect all North Korean planes and ships carrying cargo instead of previously inspecting only those with reasonable grounds, to see if tools and parts for missiles and the nuclear program are hidden. Since 90% of trade goes to or through China, this sanction will substantially decrease arms supply for nuclear program.

Tension Over Northeast Asia Influences China’s Attitude Towards North Korea   

The sanctions, however, don’t influence the trade of coal and other natural resources of which are not associated with the nuclear program. China’s commerce ministry said the trade in coal would still be permitted as long as the revenue was intended for “people’s well-being. Critics say that it’s almost impossible to measure the usage of proceeds and it leaves room for China to maintain and manage trade with North Korea.

In the 2016 Nuclear Industry Summit on March 31, Obama met Chinese president Xi Jingping and emphasized the commitment to “denuclearization of the Korean peninsula”. Xi said “As the two biggest economies, China and the U.S. have a responsibility to work together.” Joint efforts of U.S. and China will pressure and isolate the North Korean regime over their nuclear weapons program, which will benefit U.S. allies, South Korea and Japan. However, the situation is complicated by the friction between U.S. and China on South China Sea issue, leading to uncertainty of Chinese support to the states.

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Moreover, Donald Trump, the Republican front-runner, has said repeatedly in recent days that South Korea and Japan may need to develop their own nuclear weapons to confront regional threats, rather than rely on the U.S. nuclear umbrella that has shielded them for decades. This has upended the pillar of U.S. foreign policy which aims to prevent the spread of nuclear weapons, not to encourage it. The advocates by Trump may also adversely influence China’s current coordination with U.N. sanctions.

Further Sanctions On North Korea – Labor Exports

North Korea is believed to have enough plutonium to make eight to 12 nuclear bombs and has a stockpile of highly enriched uranium. In the short term, there seems little the world can do to stop North Korea from conducting a fifth nuclear test in the very near future. However, labor export restriction could be another effective method to constrain the nation’s nuclear program.

Pyongyang’s next serious violation of U.N. resolutions would likely result in restrictions on the export of North Korean labor, according to a South Korean official. North Korea now has over 50,000 people working in China, Russia and countries around the world, and that they send back nearly $ 2 billion a year, most of which goes to the government in Pyongyang. With the U.N cutting down on other North Korean cash flows, the country has been increasing the number of laborers sent overseas to make up for the shortfall in cash it earns from other activities. The $2 bn earning, which is as great as earnings from coal exports, is a critical revenue source for the government, and thus supports the nuclear program.

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If further sanction on labor export took place, China would have a substantial impact on North Korea. 40% North Korean foreign laborers work in China, especially in Dandong, of which one quarter of the population is involved in business with North Korea. 

North Korean government’s sale of labor is quite shady. Laborers are selected through a state-administered process and they are sent abroad to work for the North Korean government as government takes up to 70% of the workers’ earnings as ‘loyalty payments’. Laborers work under substandard living conditions and are in almost complete isolation from the local populations. They are watched and manipulated. They work for long hours, no holidays, and are without injury treatment or compensation, virtually cheap labor or even “slaves”. This is against humanity.

Although U.N. has made efforts to standardize working conditions, middlemen help North Korean and Chinese managers and traders cover their tracks. The further labor exports sanctions will cease the government’s anti-human labor sale, but requiring China working effectively with U.S. and U.N.

Overall, as the major trade partner, China plays an important role in constraining North Korea developing nuclear weapons. Besides restricting imports in primary sectors including coal, ore, gold, and other resources, and prohibiting arms and nuclear program associated jet fuel exports to North Korea, China has further impact on North Korea through labor imports channel. Besides, China may need to work closely and effectively with U.S and other Asian countries to maximize the effectiveness of sanctions on North Korea. While there might be conflict of interests and tension between China and other countries, the biggest economies have the responsibility to work together to stabilize and enhance the nuclear security in the Northeast Asia regime. 

References

1. http://www.voanews.com/content/north-korea-accelerates-nuclear-testing-after-sanctions/3290116.html
2. http://www.bbc.com/news/world-asia-35969412
3. http://www.cnn.com/2016/03/02/world/un-north-korea-sanctions-vote/
4. https://www.armscontrol.org/factsheets/UN-Security-Council-Resolutions-on-North-Korea#res2270
5. http://www.nkeconwatch.com/category/statistics/trade-statistics/
6. http://www.reuters.com/article/us-northkorea-nuclear-usa-sanctions-idUSKCN0VZ11V
7. http://www.cfr.org/china/china-north-korea-relationship/p11097
8. http://www.forbes.com/sites/scottasnyder/2015/05/22/north-koreas-latest-export-labor/#25b987ee4e33

 

 

 

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Cutting the Subsidies: Good or Bad?

On April 14, China stopped the subsidies to small exports firms in seven industries. This action is a response to the challenges from U.S. at the beginning of 2015. The cancellation of the subsidies could be a disaster for some companies but possibly brings new opportunities to both countries.

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A shoes manufactory in Zhejiang      Lang Lang/Reuters

In February 2015, U.S. government submitted a trade case to WTO blaming that China supports domestic exporters with huge amounts of illegal subsidies in forms of “demonstration bases”. The exporters have received billions of money and different discount or free policy in nearly 200 demonstration bases these three years, which has violated the subsidy prohibitions from WTO. Besides, Just 16 out of 40 identified bases that produce textiles combined to export $33.3bn of goods in 2012 alone. That same year, six bases that produce seafood exported $3.6bn — 20 per cent of China’s total seafood exports. “In doing so, it injures American workers, farmers, ranchers, and businesses — really anyone who plays by the rules and wants to compete fairly, on the merits of their hard work and the quality of their products.” U.S. Trade Representative Michael Froman said.

The terminal of subsidies involves seven industries: textiles, apparel and footwear; advanced materials and metals (including specialty steel, titanium and aluminum products); light industry; specialty chemicals; medical products; hardware and building materials; and agriculture. Meanwhile, the Chinese government amended or expired 175 legal instruments used to support exports. Although many Americans think it a win to U.S. producers, the real effects could be more complex.

Agriculture industry

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The FAO Food Price Index shows that the world food price continues the downtrend from 2011 reaching to 151.0 points in March 2016, almost 12.0 percent below its March 2015 level. The farm income in U.S. also decreases dramatically since 2013. A study from Iowa shows that U.S. farmers lost almost $653 million per year due to China’s excessive wheat subsidies. Some people blame that the subsidies of China and other developing countries cause this situation. In wheat alone, China provides at least $15.4 billion supports, which makes up 36% of the production revenue, while the limit rate set by WTO should be 8.5%.

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Termination of agriculture subsidies could make American farmers happy and help the food price reverse. As to China, the competitiveness of food exports would decrease to some degree and farmers in China might meet a huge challenge. In the short term, the government could face the loss around $10 billion in crop stock alone. On the other side, the stop of subsidies will narrow down the huge stockpile and promote the transition of the agriculture industry.

Steel Industry

Similar to the agriculture industry, the steel market also experiences a declining price. Since the domestic demand of steel reduces these years, the overcapacity problem is getting severe, and more steel companies in China are relying on the exports. In 2015, China is still the largest steel exporter with 92.9 million tons per year. Subsidies of steel industry could be a reason for the excess supply and also the lower export price. In February 2016, U.S. government was seeking the anti-dumping measures to relief the pressure on the domestic steel companies. 13,500 steelworkers have received layoff notices because of the competition from China.

“Today we have signed an agreement with China to eliminate export subsidies that the United States challenged because they are prohibited under (World Trade Organization) rules,” Froman said. “This is a win for Americans employed in seven diverse sectors that run the gamut from agriculture to textiles to medical products, who will benefit from a more level playing field on which to compete.”

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However, this is not the first time that China government promised to cut its steel output. Unfortunately, the pledges did not work. Eliminating the steel subsidies could be a real action to solve the overcapacity problem in the perspective of policy. However, the traditional steel companies who rely on the low cost to survive would face the shutdown risk. How to achieve a good transition within the industry and how to protect the employers’ interest are urgent questions the government need to think about.

Overall, the cut of subsidies in these seven industries could balance the supply and demand in the world market. U.S. companies who compete with China will find a new growth change, but the companies who import the low-cost material from China could lose the cost advantages. For China, the companies may face more challenges than opportunities. But what China is really worried about should be how to change their business model and industry structure to adapt the WTO rules.

 

 

Reference

[1]http://www.wsj.com/articles/china-halts-export-subsidy-program-u-s-says-1460643214

[2]http://www.reuters.com/article/us-usa-china-trade-idUSKCN0XB1UQ

[3]http://www.nwitimes.com/business/steel/china-to-end-subsidies-on-steel-exports/article_daa99ef9-1231-5d32-a40e-4bb8f0a1783f.html

[4]http://www.ft.com/intl/cms/s/0/6f7c50de-b210-11e4-b380-00144feab7de.html#axzz45qq32QRa

[5]http://thehill.com/policy/finance/232428-us-launches-trade-case-against-chinas-export-subsidies

[6]http://www.hoosieragtoday.com/chinas-excessive-wheat-subsidies-and-other-policies-increase-u-s-farm-losses/

[7]http://www.chestertontribune.com/Business/usw_and_visclosky_say_china_pled.htm

 

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The Solar Trade Dispute between India and the U.S.

rtr30pztOn Feb. 24th 2016, the United States won a ruling against India at the World Trade Organization after challenging the rules on the origin of solar cells and solar modules used in India’s national solar power program. In a statement, the U.S. Trade Representative’s office called the ruling a significant victory that would hasten the spread of solar energy across the world and support clean-energy jobs in the United States.

Back in 2014, the United States launched a WTO case against India’s ambitious solar program. The United States claimed that the “buy-local” rules of the first phases of the program, which say that power companies must use solar components made in India in order to benefit from the government-subsidized program, discriminate against U.S. solar exports, which had fallen by 90 percent from 2011, when India imposed the rules.

WTO FOOT INDIA

To understand the importance of this case, firstly we have to understand the progress the Indian government has made in deploying solar energy. In the five years since India launched its National Solar Mission, the country has grown its solar capacity from nearly nothing to commissioning nearly 5,000 megawatts, as a result of government subsidies and long-term contracts. This solar expansion has been timely, as the troubled Indian coal industry has been unable to expand to meet power demand. The program aims to reduce the cost of solar energy and achieve 100,000 megawatts of solar power capacity by 2022 – more than the current solar capacity of the world’s top five solar-producing countries combined.

The National Solar Mission also imposed the Domestic Content Requirement (DCR), which required solar power producers to use India contents, mainly solar cells and modules for certain types of solar projects. The following table summarizes the factual aspects of the DCR measures at issue in this dispute.

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The United States claimed that the “buy-local” rules of the first phases of the program, which say that power companies must use solar components made in India in order to benefit from the government-subsidized program, discriminate against U.S. solar exports. In its ruling, the WTO agreed that India’s buy-local rules “accord less favorable treatment” to imported solar components, even while acknowledging that “imported cells and modules currently have a dominant share of the market for solar cells and modules in India.” India has indicated that it may alter its solar program to try to persuade the U.S. to drop the case. It is unclear whether the U.S. will accept the proposed changes, and what impact they may have on India’s solar expansion plans.

India, on the other hand, argues that US has “buy-local” rules inside the country.  Bringing this case is a perverse move for the United States. Nearly half of U.S. states have renewable energy programs that, like India’s solar program, include “buy-local” rules that create local, green jobs and bring new solar entrepreneurs to the economy. The U.S. government should drop this case to avoid undermining jobs and climate protections not just in India, but also at home.

Every country should have the right to set its own clean energy future. “Buy local” rules — a standard policy tool to foster, nurture, and grow new industries — can help push us toward the goal of 100 percent clean energy that our planet needs by cultivating domestic renewable energy firms that promote strong climate policies. “Buy local” policies can also benefit workers and bring in new constituencies to advocate for increased clean energy production. And by bringing more renewable energy goods producers like India to the global market, “buy-local” policies can encourage greater competition and innovation, reducing the cost of renewable energy over time. However, in the meantime, the Indian government is imposing an additional cost, usually passed on to the ultimate consumer as the locally-produced panels and modules are more expensive than foreign-produced ones. The Indian-based solar companies are protected from competition abroad, getting rich at the expense of local consumers.

The panel ruling, however, is not final and reports indicate that India will prefer an appeal. Simultaneously, India may be exploring the option of filing a counter complaint against the U.S., with several states in the U.S. such as Michigan, Texas and California having also reportedly been accused of employing mandatory local content requirements in the renewable energies sector. Let’s wait and see.

 

References:

http://www.forbes.com/sites/timworstall/2016/02/25/us-beats-india-in-wto-solar-case-indian-consumers-win/#1c4f810c761f

http://www.bbc.com/news/world-asia-india-35668342

http://www.huffingtonpost.com/entry/the-wto-just-ruled-agains_b_9307884.html?section=india

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Oil Swap between United States and Mexico

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The bilateral relationship between United States and Mexico has been fostered by The North American Free Trade Agreement (NAFTA). Mexico is currently the 3rd largest trading country of the United States, second largest export market in 2015 and third largest imported goods provider. Agricultural products and service are the main trading products between these two countries. Nowadays, the trading has expanded to crude oil.  U.S. Department of Commerce’s Bureau of Industry approved that United States could exchange light, sweet crude oil for Pemex (Mexico state owned oil company) heavy sour crude in October 2015. Up to 75,000 barrels a day of light oil and condensate can be used for exchange. Light crude refers to petroleum that has low density and could flow freely at room temperature and sweet refers to a low sulfur petroleum. Heavy crude oil can’t flow freely at room temperature and the density is higher. The cost to produce light petroleum is higher than heavy crude and light petroleum yields a higher percentage of useful gasoline.  To get gasoline from heavy crude oil requires more advanced technology as it need to get ride of unwanted by products and contaminants.

 

Ever since 1970s oil crisis, United States has lost oil independence and as a result, forbid exporting crude oil to other countries except for Canada. U.S imported a large amount of heavy oil from Mexico and Canada. According to RBN Energy, U.S refiners imported about 700,000barrel oil from Mexico per day between January and May, 2015 but 1.1 million barrels per day in 2011. The decreasing import was because more Canadian heavy crude production. However, it requires to import similar amount of oil from Canada as well. Oil producers such as ConocoPhillips and Exxon Mobil as well as some members in Congress has argued to abandon this rule. And this swap can be seen as an impetus for this rule and indicates that U.S. Department of Commerce’s Bureau of Industry has be more flexible with existing law.

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Why swap

The crude production from Pemex has decreased for more than 10 years and importing U.S. crude will increase gasoline output. By mixing light and heavy petroleum, Pemex can produce more and higher quality gasoline and diesel. Mexico uses 300,000barrel oil more than it produce partially because Mexico refiners yield about 25% less gasoline per barrel than United States’ refiners. Thus, Mexico benefits from swap because of increased oil production efficiency. This kind of high quality energy will also benefit the environment. Mexico recently opened oil industry to foreign investment and United States may target at the lucrative contracts in Mexico oil industry. For U.S. producers, the price of crude oil keeps falling because of the shrinking demand globally and oversupply within the country. The price of crude within Unites States fell below international benchmark, Brent crude. In a free trade market, the price should be the same but U.S doesn’t allow oil exports and thus, the oversupply of oil lead to an even lower oil price. Some view this swap is a signal for future lifting the ban and if that is the case, the gap between U.S crude oil price and international benchmark price should be narrowed.

 

However, I don’t believe that this swap will cause major shift in both United States and Mexico oil market since the 75,000 barrel is too small in both market. This number is less than 1 percentage of current U.S. output. At the same time, U.S. Department of Commerce’s Bureau of Industry rejected other applications for swap with countries in Asia and Europe. However, the swap may further impact energy trade between Mexico and United States or even lead to oil export and import instead of exchanging in the future.

Reference:

  1. United States and Mexico trade https://ustr.gov/countries-regions/americas/mexico
  2. The Reasons for the Mexican-U.S. Oil Swap, Adam Hayes, CFA

http://www.investopedia.com/articles/investing/082115/reasons-mexicanus-oil-swap.asp

  1. S. approves landmark crude oil export swaps with Mexico, Timothy Gardner

http://www.reuters.com/article/us-usa-oil-exports-exclusive-idUSKCN0QJ1RI20150814

  1. Crude oil swaps with Mexico could provide economic and environmental benefits

https://www.eia.gov/todayinenergy/detail.cfm?id=22872

  1. Analysts: Little hope for more oil exports despite Mexico crude swaps, Robert Grattan

Analysts: Little hope for more oil exports despite Mexico crude swaps

 

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How relationship between China and Philippines affect trade

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Recent trade issue between China-Philippines

On 25 March, China customers destroyed 34.78 ton of substandard bananas from Philippines because the carbendazim in sample is almost one time higher than China food requirement. The total value of the destroyed bananas is $33,000. China urged Philippine to take measures to improve the quality of bananas and at the same time, China stopped importing bananas from certain Philippine exporters. These actions were taken after Philippines raised issue against China over South China Sea in the international Court of Arbitration. This is not the first time for China to take actions against Philippine in trade. The first time could be dated back to 2010. Will such actions help to deal with South China Sea issue or just hurt both side instead?

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The bilateral relationship

The bilateral relationship between China and Philippines is most complicated and grim. The dispute over sovereignty and territory of China South Sea has been ongoing for years, with claims of various countries. It is important in territorial integrity, natural resource especially in oil, fishing resource and freedom of navigation. Among these factors, fishing opportunity and oil exploration are most valued by both China and Philippines. The tension has increased recently mainly because China naval patrols in Xisha islands. Philippines, on the other side, asserted that China’s behavior is against international law and expelled Filipinos from fishing.

The Philippines is the 47th largest export economy. China, Japan and the United States are three largest exporter destination and also importer countries of the Philippines. In 2013, Integrated Circuits takes the largest share in Philippine export, followed by computers. Banana is the fifth largest export product and the strongest food product globally, bringing 1.36 billion US dollars for export revenue. More than half of the exported bananas, about 75 million packs, are sold to China every year. In 2011, Philippines bananas took up 84.75% of total China imported bananas. Philippines is the second largest banana producing nation in the world, only followed by India.

Personal view

Personally, I don’t believe it is proper for China to hurt the trade between the Philippines and China just for political reasons. China has kept taking measures against Philippines banana exports in the decade. However, Philippines didn’t make any compromise on the China South Sea issue. There is a trend for Philippines politicians to talk tough with China regarding the maritime issue to win support from citizens. Even though Philippine politicians pretend to be tough with China, they actually didn’t do anything meaningful. Most things they did were seeking the help of Court of International Arbitration and strengthen alliance with the United States. Clearly, the Court doesn’t want to get involved in this dispute and also, China refused to taking this issue to court. For me, it is more like a show among politicians. Also, a large number of Philippines banana planters are Chinese and thus, these measures are hurting Chinese most. Last but not least, China has already become a member of WTO and should obey WTO rules. Even though China has found excuses to reject Philippines bananas, the world know what China is really trying to do. This will undermine the reputation of China as a reliable trade partner.  If China would like to conduct economic sanction on Philippines, it should do it openly, which will have more influence on Philippines’s attitude on China South Sea issue.

Reference

1. China and the Philippines: Asia’s Most Toxic Relationship, Richard J. Heydarian   http://www.huffingtonpost.com/richard-javad-heydarian/china-and-the-philippines_b_7997158.htm
2. China destroys 35 tons of bananas from Philippines Reuters
http://news.abs-cbn.com/business/03/26/16/china-destroys-35-tons-of-bananas-from-philippine
3. Philippine Overview http://atlas.media.mit.edu/en/profile/country/phl/
4. Philippine’s view on China South sea http://news.sohu.com/s2012/shijieguan-280/
5. Overview of Philippines – China relations, Embassy of the Philippines, http://www.beijingpe.dfa.gov.ph/phl-china-relations
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BREXIT – not a good deal? Not an easy deal.

“It took Britain 12 years to get in and I think it would take six to 12 to get out,” said Peter Ludlow, a Brussels-based historian and chairman of the Euro Comment research firm. “And it won’t be a nice getting-out.”

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A heated debate keeps going on about BREXIT these days. Trade is very important to the European Union. Supporters of Brexit claim that Brexit would not affect trade for a long run because Britain, the Europe’s second-biggest economy, will negotiate new “free-trade” deals with the EU anyway. Brexiteers claim that Britain’s market is very important to the EU because it has a large trade deficit with the rest of Europe. Thus, Britain could rely on World Trade Organization (WTO) rules or try to get free-trade deals between Britain and EU, just like Canada’s.

Yet, the anti-Brexiteers argue that if Britain does exit from the EU, it will be hard for Britain to negotiate any good trade deals. The opponents for Brexit are worried that if Britain leaves the EU, the EU may fear that other countries will copy this action, and thus the EU won’t be friendly to Britain. Moreover, the history shows that EU is better at dealing with smaller countries but not efficient to deal with bigger ones. This might due to the resistance from Europe protectionists when dealing with bigger economy markets. To explain more, if Britain wants to achieve trade deals with EU after leaving, it needs the approval of the European Parliament and all the other 27 member countries.

Britain has benefited a lot from joining the EU. See the chart below as one evidence.  And currently, 45% of British exports goes to other EU countries, while only 7% of their exports comes to Britain. Thus, EU countries, considering trade deficit, could see few benefits or no interest in making a trade deal.  Furthermore, the WTO option or trade offer like Canada’s deal would not remove non-tariff barriers or the terms will not cover all goods.

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In addition to obstacles of getting a new deal after Brexit, many scenarios are made to analyze the economic consequences of Brexit.

The best outcome is that Brexit undergoes an orderly process which avoids short-term turmoil and brings greater prosperity in the long run to Britain. However, most economists question the underlying assumptions in this scenario. In this scenario, four assumptions should be met: 1) Britain repeals EU regulation to reduce the regulatory burden; 2) a new immigration policy is set to restore control over its borders; 3) Britain needs around £13bn a year in budget to cut down on the cost of membership; 4) Britain needs to negotiate agreements with not only the EU but also non-EU countries, such as the US, China, Japan, India, and Australia. However, in reality, as we discussed above, it’s hard for Britain to meet all of these requirements. Thus, the best outcome is not promising.

Another scenario may be that Britain’s economy suffers after Brexit. Trading relationship with Europe becomes worse than before. Benefits could not offset the loss and Britain’s economy begins to fall behind the country’s European partners. This scenario is consistent with the logic, to some extent. Acrimonious negotiations could drain confidence from the British economy. Movement of labor is curtailed, even Britain obtains a looser trade deal with EU, the price becomes weaker. Britain loses competitiveness to the EU market for goods and particularly services. And Britain will find it difficult to sign beneficial trade deals with other countries. Less foreign direct investment will flow into Britain, and fewer immigrants and unsure impact of changing regulation will harm the economy.

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So far, most economists think that practical problems and uncertainty over future trade will make Brexit not an easy deal.

References

Chris Giles, “What are the economic consequences of Brexit?”, Financial Times, February 22,2016,_accessed March 24, 2016  https://next.ft.com/content/70d0bfd8-d1b3-11e5-831d-09f7778e7377

James G Neuger, “Hangover at Teatime: Why ‘Brexit’ Breakup Is So Very Hard to Do”, Bloomberg, February 29, 2016_accessed April 7, 2016 http://www.bloomberg.com/news/articles/2016-02-28/hangover-at-teatime-why-brexit-breakup-is-so-very-hard-to-do

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