Regional Challenges: A view from Asia (Part 1) - OECD Global Parliamentary Network meeting, Tokyo, Japan

13 April 2016

Randall S. JonesHead, Japan/Korea Desk, OECD

OECD Global Parliamentary Network Meeting in Tokyo

Regional Challenges – A View from Asia

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1. The slowdown in world trade: what is causing it?

2. Cost and benefits of regional integration.

3. Asian integration was initially driven by trade and investment, creating global value chains.

4. The number of free trade agreements in Asia have risen sharply in recent years.

5. Challenges to promote Asian regional integration.

Outline of presentation

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Dramatic slowdown in global trade growth

Note: World trade is the volume of goods plus services. World GDP growth is measured at purchasing power parities.Source: OECD Economic Outlook Database.

Growth of global trade volumes and GDP

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The ratio of world trade growth to GDP growth has been unusually low in recent years

Source: OECD, Economic Outlook Database.

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1. Slower growth in China’s trade. 2. Weaker investment, which is more

trade-intensive.3. Sluggish trade within the euro area.4. Less scope for further trade

liberalisation. 5. Protectionist trade policies?6. The rise of 3-D printing?

Reasons for the slowdown in world trade growth

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China’s world trade growth has slowed sharply since 2011

Source: OECD, Economic Outlook Database.

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China’s share of world trade volume edged down in 2015

China’s trade as a per cent of the world total

Source: OECD, Economic Outlook Database.

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Rebalancing in China is dragging on global demand

Composition of growth in ChinaIn China, growth is slowing and rebalancing from manufacturing to services

This is proving to be challenging, along with managing financial risks

Note: Manufacturing (secondary) includes construction.Source: Chinese National Bureau of Statistics.

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Global investment has been weak since the 2008 crisis

Ratio of global investment to GDP (Index: 2007=100)

Source: OECD, Economic Outlook Database.

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t 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 2880

90

100

110

120

130

140

150

80

90

100

110

120

130

140

150

t=1973Q4 t=1981Q4 t=2000Q3 t=2008Q1

Quarters since the peak

The rebound in business investment in the OECD area since 2008 has been sluggish

Business investment in different cyclesCyclical peak in OECD real business fixed investment=100 (date of peak

indicated)

Source: OECD, Economic Outlook database.

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Trade within the euro area has been slow to recover since the 2008 crisis

Index: 2008=100

Source: OECD, Economic Outlook Database.

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The ratio of intra-euro imports to euro area GDP has stagnated since the crisis

Index: 2007=100

Source: OECD, Economic Outlook Database.

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Benefits from connectivity & wider opportunities• Gains from freer and less costly movements of goods,

services, capital, information and people• Efficiency gains from comparative advantage • Gains from scale economies and network externalities

Managing costs of regional integration• Costs of industrial adjustment (temporary unemployment)• Negative spillovers and externalities

Promotion of regional peace and stability• Deeper economic integration does not guarantee political

peace and security, but reduces the likelihood of conflict

Benefits and costs of integration in the Asia-Pacific region

The cost of isolation and autarky: North Korea

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Comparison of North and South Korea in 2014

1. North Korean exports to the South in Panel A, and South Korean exports to the North in Panel B. Source: Statistics Korea.

  (A) (B) Ratio (B/A)  North Korea South Korea  

Population (millions) 24.7 50.4 2.0

Gross National Income (trillion won) 34.2 1 496.6 43.7

Gross National Income per capita (million won) 1.4 29.7 21.4

Total trade (billion US$) 7.6 1 098.2 144.3

Exports¹ 3.2 572.7 181.2

Imports 4.5 525.6 118.1

Of which: inter‑Korean exports 1.2 1.1 0.9

Industrial statistics (2014)      

Power generation (billion kWh) 21.6 522.0 24.2

Steel production (million tonnes) 1.2 71.5 58.6

Cement production (million tonnes) 6.7 47.0 7.0

Agricultural production (2012)      

Rice (million tonnes) 2.2 4.2 2.0

Fertilizer (million tonnes) 0.5 2.3 4.6

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1. The slowdown in world trade: what is causing it?

2. Cost and benefits of regional integration.

3. Asian integration was initially driven by trade and investment, creating global value chains.

4. The number of free trade agreements in Asia have risen sharply in recent years.

5. Challenges to promote Asian regional integration.

Outline of presentation

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1. International production, trade and investments are increasingly organised within so-called GVCs, where the different stages of the production process are located across different countries.

2. The growth of GVCs has increased the interconnectedness of economies and led to a growing specialisation in specific activities and stages in value chains, rather than in entire industries.

3. There are two types of linkages to GVCs:• Using foreign inputs for export production (backward linkages).• Providing inputs for foreign countries for their export production

(forward linkages).

4. Over 70% of global trade is in intermediate goods and services and in capital goods. The income created within GVCs has doubled over the last 15 years.5. GVCs are becoming increasingly influential in determining future trade and FDI patterns, as well as economic growth opportunities.

Global value chains (GVCs)

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There is significant variation in countries participation in GVCs

Note: The index is calculated as a percentage of gross exports and has two components: the import content of exports and exports of intermediate inputs used in third countries. Source: OECD (2013), Implications of Global Value Chains for Trade, Investment, Development and Jobs.

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1. Market size: The larger the size of the domestic market, the lower the share of foreign inputs in its exports (countries with large markets can draw more on domestically-produced inputs) and the larger the share of intermediate products in its exports.

2. Level of development: The higher the per capita income the higher is its involvement in GVCs. Developed countries tend to source more from abroad and sell a have a higher share of intermediate products in their exports.

3. Industrial structure: The higher the share of the manufacturing sector in GDP the higher the share of foreign inputs in its exports and the lower the share of intermediate products in its exports.

4. Location: GVC activity is organised around large manufacturing hubs—the larger the distance to the main manufacturing hubs in Europe, North America and Asia, the lower the share of foreign inputs in its exports, suggesting that there is a premium to locating close to large “headquarter” economies.

Countries participation in GVCs depends in part on structural factors

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Factors that promote involvement in GVCs:• Openness to inward FDI.• High-quality logistics.• Measures to facilitate trade• Appropriate intellectual property

protection• Low import tariffs • Engagement in regional trading

agreements

Involvement in GVC also depends on a countries’ policies

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1. The slowdown in world trade: what is causing it?

2. Cost and benefits of regional integration.

3. Asian integration was initially driven by trade and investment, creating global value chains.

4. The number of free trade agreements in Asia have risen sharply in recent years.

5. Challenges to promote Asian regional integration.

Outline of presentation

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• As noted above, economic integration in Asia has been driven by trade and investment, leading to the development of regional supply chains and production networks. This has led to the emergence of Factory Asia.

• In recent years, integration has been accelerated through regional free trade and investment agreements.

• Asian regionalism has distinctive features—open, multi-speed, multi-track, pragmatic, and bottom-up.

Economic integration in Asia driven by market forces and FTAs

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The number of FTAs in Asia has risen sharply

Note: Does not include FTA initiatives only proposed. Refers to FTAs either under negotiation, signed but not in effect, or in effect. Numbers are cumulative as of January 2013. Asia excludes Oceania (Australia and New Zealand).Source: ADB, Asia Regional Integration Center.

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The number of FTAs has increased in all countries

Source: ADB, Asian Regional Integration Center.

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AFTA-ASEAN Free Trade Area, APEC--Asia-Pacific Economic Cooperation; ASEM--Asia Europe Meeting; CEPT--Common External Preferential Tariff; EAS-- East Asia Summit ; FTAAP—Free Trade Area of Asia and the Pacific; RCEP—Regional Economic Comprehensive Partnership; TPP =Trans-Pacific Partnership.Source: ADB, Asian Regional Integration Center. Notes: (*) Under Negotiation; (**) Proposed.

Main regional economic cooperationforums and FTAs involving Asian countries

Trans-Pacific Partnership

27Source: http://dfat.gov.au/trade/agreements/tpp/Documents/tpp-overview.pdf.

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• Stalemate in the Doha Round

• It is a coalition of the willing

• It is based on the rule of law and a democratic form of government

Why the Trans-Pacific Partnership?

Source: The Government Headquarters for the TPP, Cabinet Secretariat, Tokyo.

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1. Evolution of global economic integration. 2. Flow of investment, technology, goods and

services, and people. 3. New means of economic activity: Electronic

commerce is now indispensable. 4. Expansion of global supply chain. Stagnant

global economy caused by diminishing demand 5. Volatility and gloomy prospect of global economy6. In case of Japan, aging society and shrinking

population

Why the TPP now?

Source: The Government Headquarters for the TPP, Cabinet Secretariat, Tokyo.

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1. Korea, Taiwan Taipei, the Philippines, Thailand, Indonesia and Columbia are indicating interest.

2. China?

3. Two years since signature (February 2016) if all Parties complete necessary domestic procedures.

4. If not, six countries comprising 85% of TPP economies, after two years.

5. U.S.?

Details concerning the TPP

The TPP will require gradual reform of Japan’s agricultural sector

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1. Producer support is the annual monetary value of gross transfers from consumers and taxpayers arising from policies that support agriculture, regardless of their nature, as a per cent of the value of gross farm receipts.

Source: OECD Economic Survey of Japan, 2015.

Producer support in 2011-13¹

Japan’s elderly farm workforce creates an opportunity for fundamental reform

32Source: Ministry of Agriculture, Forestry and Fisheries, 2010 Census of Agriculture and Forestry.

83% of farmers were over 60 years old in 2010

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The Korea-China FTA was signed in 2015

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1. The slowdown in world trade: what is causing it?

2. Cost and benefits of regional integration.

3. Asian integration was initially driven by trade and investment, creating global value chains.

4. The number of free trade agreements in Asia have risen sharply in recent years.

5. Challenges to promote Asian regional integration.

Outline of presentation

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Estimates of world GDP in 2050: Asian Century Scenario

Source: Asia 2050: Realizing the Asian Century, Asia Development Bank.

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Estimates of world GDP in 2050: Middle Income Trap Scenario

Source: Asia 2050: Realizing the Asian Century, Asia Development Bank.

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A comparison of intra-regional trade shares

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1. Financial integration remains more limited than trade and investment integration due to regulatory controls on financial services opening and on international capital flows

2. Varying degrees of financial market development and deepening also prevent Asia-wide financial market integration

3. Nonetheless, intra-regional financial integration through portfolio investment has been rising—partly due to policy efforts to develop Asian-currency bond markets

4. Asia also faces the issue of intra-regional exchange rate variability

Financial integration in Asia is much more limited than in Europe

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AFTA-ASEAN Free Trade Area, APEC--Asia-Pacific Economic Cooperation; ASEM--Asia Europe Meeting; CEPT--Common External Preferential Tariff; EAS-- East Asia Summit ; FTAAP—Free Trade Area of Asia and the Pacific; RCEP—Regional Economic Comprehensive Partnership; TPP =Trans-Pacific Partnership.Source: ADB, Asian Regional Integration Center. Notes: (*) Under Negotiation; (**) Proposed.

Main regional economic cooperationforums and FTAs involving Asian countries

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Larger regional FTAs lead to larger benefits

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1. RCEP: ASEAN+6 initiative with ASEAN centrality; special & differential treatment for LDCs; US excluded

2. TPP: APEC initiative; US-driven; high-standard liberalisation; China excluded for now

3. Both RCEP and TPP are open to new members

4. Developing or emerging economies ready for a certain degree of liberalization can join RCEP first; those that can liberalize more can join TPP at a later stage

5. An Asia-Pacific FTA (FTAAP) can be forged by (1) combining RCEP and TPP, (2) convergence of the two, or (3) absorption of advanced members of RCEP by TPP (while RCEP may continue to draw other Asian developing countries)

Two tracks in Asia: RCEP and TPP

Masahiro Kawai and Ganeshan Wignaraja. “Patterns of Free Trade Areas in Asia.” Policy Studies 65 (2013), East-West Center.

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1. Mega regionals (RCEP, TPP, etc) and the global multilateral system (WTO) are likely to continue to coexist for the foreseeable future

2. The key is how best to pursue coherence between them, creating a path towards multilateralization

3. A step is needed to make regional trade rules in mega-regionals and mega cross-regionals compatible with multilateral trade rules under the WTO

4. Though FTAs discriminate against third parties and diverge from one another, they do have some common features, for instance in anti-dumping, SPS and TBT

5. Ultimately, common rules in mega regionals should be established through multilateral harmonization

Multilateralising regionalism

Source: Richard Baldwin and Masahiro Kawai. “Multilateralizing Asian Regionalism.” ADBI Working Paper No. 431 (August 2013).

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OECD Better Policies Series: Japan 2016

http://www.oecd.org/japan/japan-boosting-growth-and-well-being-in-an-ageing-society-9789264256507-en.htm

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