Comments on Asian Trade and Regional Integration David Roland-Holst, UC Berkeley Three topics: • Regionalism’s Rationale • Structural Trade Barriers and Infrastructure • Demand Side Perspective Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 1 2 June 2006
Asian Trade and Growth Patterns A Schematic View of ADB People’s Rep. of China Developing Member Hong Kong, China Countries Republic of Korea Taipei,China Central Asia East and Mongolia Central Asia Southeast India South Asia Asia Nepal ASEAN Pakistan Oceana Sri Lanka Bangladesh Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 2 2 June 2006
Macro Conditions, 2005 Population Population East and Central Asia Southeast South Asia Asia GDP GDP I mports Trade East and East and Central Asia Central Asia South Asia South Asia Southeast Southeast Asia Asia Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 3 2 June 2006
Asian Trade Flows, 2005 (percent of total Asian trade) Extra-regional 29.3 demand 22.1 East and remains a Central Asia primary 14.2 0.5 5.0 economic driver. 4.6 0.4 Intra-Asian 0.4 Southeast South Asia 2.4 Asia trade is far 0.1 3.2 6.9 from reaching 0.2 its potential. 2.0 8.8 Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 4 2 June 2006
Baseline Per Capita GDP Growth (annualized percent change, 2005-2025) On a global basis, Asia continues to represent superior growth. -1 0 1 2 3 4 5 6 7 8 PRC Sri Lanka Philippines Thailand Viet Nam Hong Kong, China Malaysia India Korea Indonesia Bangladesh Taipei,China Singapore Australia, NZ United States Latin America Rest of World Europe 17 Sources: DRI, Oxford Econometrics, IMF. Japan Real GDP/Cap Pop Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 5 2 June 2006
Four Virtues of Asian Regionalism Asian regional integration offers three opportunities: 1. Immense new market potential 2. Diversification toward superior growth rates 3. Structural differentiation – more rapid evolution from established North-South patterns of trade and specialization 4. Convergence – Leveraging regional dynamism for the poorest neighbors Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 6 2 June 2006
Beyond WTO, FTA, etc… Structural Barriers to Trade • Structural barriers to regional trade are now more important than tariffs. • Policies and investments that reduce trade margins and transactions costs can accelerate regional growth dramatically. • Infrastructure, both hard (roads and bridges) and soft (“Asian OECD”), is the key to meeting this challenge. Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 7 2 June 2006
Trade Costs Have Fallen, but Remain High Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 8 2 June 2006
Structural Barriers Matter More than Tariffs/NTBs (2025 Real GDP, percent change from Baseline) 160 East and Southeast South 140 Central Asia Asia Asia 120 100 Global 80 AsiaFTA AsiaFTA2 60 2% annual reduction in 40 trade margins 20 0 C a n d a a a h a s e m a a n i R a e i n n e r s k i d s a p r i s o i a e n P h n y n o h N e a p l d C i a a i I K C n p J a a L t a l o , a p g h e , l i g g i e d M i i n T r l V n p i n S n i h S o a i I a P K B T g n o H Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 9 2 June 2006
Structural Barriers and Infrastructure Infrastructure’s contribution can be seen from three perspectives: 1. Keynesian – Aggregate demand and employment stimulus. 2. Ricardian – Reducing trade margins and intensifying comparative advantage. 3. Neoclassical – Endogenous growth benefits. Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 10 2 June 2006
Keynesian Stimulus • Infrastructure spending is a popular means of direct long term or transitory employment stimulus – Examples: WPA (US), Work Relief (PRC), Japan (heavy counter-cyclical and recurrent fiscal commitments) • Because of its generality, this kind of spending can be targeted across a wide spectrum of regions and socio economic groups • For public good infrastructure multiplier effects are generally quite substantial Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 11 2 June 2006
Ricardian Stimulus By reducing trade margins, infrastructure: 1. Intensifies comparative advantage + P M ⎯ ⎯ ⎯ ⎯ → H 1 + → ∞ M P M F 2. Improves international terms of trade − + PWE M PWM M ↓ ⇒ ↑ ↓ M and P P D D 3. Improves rural terms of trade (pro-poor) ∂ ρ − R P P P M = − ρ = = D 2 R D and ∂ + + 2 R M ( P M ) P P M D U D 4. Extends the horizon of profitable investment and marketing Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 12 2 June 2006
Neoclassical Stimulus Modern economic theory recognizes many endogenous growth factors, and these can be greatly facilitated by infrastructure: – Productivity enhancement – Technology diffusion – Information diffusion – Supply chain articulation and other network externalities – Human capital development (migration) Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 13 2 June 2006
Demand as a Regional Growth Driver: Regional Import Demand Composition(2005) SEAsia South Asia PRC Hong Kong, China Taipei,China Korea South Asia E&C Asia Indonesia Malaysia Philippines Singapore Thailand Viet Nam E&C Asia SE Asia Bangladesh India Sri Lanka Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 14 2 June 2006
East Asian Trade Triangle 2000 Roland-Holst 15 Pan Asia Conference, SCID and SIEPR, Stanford 2 June 2006
East Asian Trade Triangle 2020 Roland-Holst 16 Pan Asia Conference, SCID and SIEPR, Stanford 2 June 2006
Petroleum China’s Net Oil Exports 60 40 20 Million Metric Tons 0 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 -20 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 -40 -60 -80 -100 -120 Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 17 2 June 2006
Oil Imports Now Equal China’s Trade Surplus 8 6 4 Percent of GDP 2 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 -2 -4 Oil Imports Trade Suplus Surplus Before Oil Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 18 2 June 2006
Soy Products Roland-Holst 19 Pan Asia Conference, SCID and SIEPR, Stanford 2 June 2006
China and East Asia • Head-to-head export global competition with China will continue to be difficult. • More attention should be given to leveraging opportunities presented by East Asia’s fastest growing internal market. • In these areas, the best strategy for East and Southeast Asia is to pursue globalism through more comprehensive regionalism. Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 20 2 June 2006
Other Issues • ASEAN and Japan • The Role of Private Agency • China, India, and Initial Conditions – a cautionary perspective Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 21 2 June 2006
Roland-Holst 22 Thank You Pan Asia Conference, SCID and SIEPR, Stanford 2 June 2006
The Asian Trade Triangle • My own forecasts indicate the emergence of a systematic pattern of triangular trade between China, the Rest of East and Southeast Asia, and the Rest of the World • This Trade Triangle reveals that China’s export expansion offers significant growth leverage to its neighbors. • Chinese absorption will emerge to dominate regional demand. Provided Asian economies do not isolate themselves from this process, the net effect of China’s growth can be hugely positive. Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 23 2 June 2006
Private Agency and Network Externalities • Supply chain decomposition has been a salient trend in recent Asian growth • The corresponding intermediate trade linkages are increasingly responsible for the majority of value creation • The foreign capital, technology, and demand allocation accompanying this propagates growth and, because of wage competition, can promote convergence • Infrastructure is a prerequisite for effective participation in this regional production sharing Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 24 2 June 2006
A Regional Example - Bamboo Capitalism • Network externalities in local production and finance allow complete markets to sprout from nodes in a global root system of intermediate supply. • This culminating aspect of global supply chain decomposition has created a diverse and vibrant population of independent local industries around the East Asian region. • Many emergent enterprises are still bound to their roots by ownership or contracts • But increasingly they arise independently, promoting the dynamics of global competitiveness and innovation. Pan Asia Conference, SCID and SIEPR, Stanford Roland-Holst 25 2 June 2006
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