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1
East Asian Regionalism:Managing the Noodle Bowl
Presented by
Theresa CarpenterResearch Fellow
Graduate Institute of International Studies, Geneva and World Trade Institute, Berne
On behalf of
Richard Baldwin
Professor
http:// hei.unige.ch/baldwin
University of Sussex, 30th October 2006
2
Plan of talk• Introduction
– Bottom line: East Asia’s pressing need is for management, not vision.
• Current state of play
• Causes of East Asian regionalism
• Likely trajectory of EA regionalism
• Fragility of the current ‘system’
• Solutions
3
Trade realities• Market size (GDPs)
• Direction of Trade flows
4
Country size• Very uneven market sizes
• 2 big• 1 medium• many small
or tiny• ASEAN-10
is about 9% of EA GDP
• ASEAN-4 & Vietnam
Japan
Korea
China + HK24%
Vietnam
Singapore
Brunei
Cambodia
Philippines
Malaysia
Thailand
Indonesia
Laos
Asean
5
Intra East Asian Trade, 2002(rounded to nearest $10 bill)
Korea
Japan
HK
China
Thailand
Malaysia
Indonesia
Philippines
Myanmar
Vietnam
Cambodia
Laos
Brunei
Singapore
Taiwan
- Dominance of N.E. Asia in regional trade flows.- Hub & Spoke pattern (J, C, K)- Almost no spoke-spoke trade (ex. Singapore)
6
Intra-ASEAN Trade by HS Chapter, 2003
0102030405060708091011121314151617181920212223242526 2728 293031323334353637383940414243444546474849505152535455565758596061626364656667686970717273747576787980818283 84 8586 87888990919293949596979899
0 10,000,000 20,000,000 30,000,000 40,000,000
What do ASEANs trade?
7
8
EXAMPLE: Parts Procurement of a Hard Disc Drive Assembler Located in Thailand
COVERDISKSCREWSEALRAMPTOP CLAMPLATCHPLATE CASELABELFILTERPCBASUSPENSION
Japan
SPNDLE MOTORBASECARRIAGEFLEX CABLEPIVOTSEALVCMTOP COVERPCBAHGAHAS
Thailand
BASEPIVOT SPACERVCMBASECARDTOP CLAMP DISK
COVERSCREW PIVOTPC ADPDISC
Singapore
PCBACARRIAGEHGABASEHEADSUSPENSION
DAMPING PLATECOIL SUPPORTPCBA
TOP CLAMP
DISKHEADSUSPENSION
USA
FILTER CAP
W.SUSPENSIONVCMPCBA
Malaysia Hong Kong
Taiwan
Philippines
Indonesia
China
HEAD
Mexico
9
East Asian Regionalism• The ‘state of play’ in EA is easy to summarise:
• “It’s a mess”
10
Mistaken view of EA regionalism
AFTA
ASEAN-Japan FTA
ASEAN-China FTA
ASEAN-Korea FTA
11
AFTA’s true nature
12
AFTA• AFTA, 1992 to 2010 (2015 for poorer ASEANs)
– At first: ‘conditional MFN’ & partial tariff cutting.– After AC FTA got going ASEANs agree to go to
zero (Bali II).– Each nation’s “sensitive” lists:
• don’t get preferential tariff on items on your sensitive list; • pay the higher of your tariff and ASEAN partner’s.
• Net effect: each bilateral trade flows faces a different tariff structure.
• ERGO, AFTA operates like 45 bilaterals– Some coordination (not as bad as could be).
13
KoreaJapan
China
Thailand
Malaysia
Indonesia
Philippines
Myanmar
Vietnam
Cambodia
Laos
Singapore Brunei
HKTaiwan
Noodle Bowl Syndrome
14
AC FTA• Signed Nov 2004.
• Nation-specific sensitive lists & conditional MFN, so de facto 10 bilaterals.– But AFTA ROOs, maybe common dispute
settlement procedure (so not as bad as it could have been).
• Appears to be some ratification problems in ASEANs. (watch carefully in 2006).
• Has not been notified to WTO.
• Tariff cutting started mid 2005, to zero by 2010.
15
ASEAN Korea FTA• Similar to AC FTA, but more political difficulties
& started later.
• de facto 10 bilaterals.
• Tariff cutting to start in 2006, to zero by 2010 (’09?).
16
ASEAN Japan Bilaterals• Japan-Malaysia signed Dec 05.
– Very different agreement to AFTA & ACFTA; reads like European or US FTA; much more structured.
– Form may matter (watch ACFTA).
• Soon with Indonesia, Thailand, Philippines, likely soon with Vietnam & Brunei.
• In parallel, AJ FTA with ASEAN as whole.
• Tariff cutting to start in 2006, to zero by 2010.
17
Korea
Japan
China
Thailand
Malaysia
Indonesia
Philippines
East Asian Trade, rounded to nearest 1%, 2002; Width proportional to %.
Myanmar
Vietnam
Cambodia
Laos
Singapore Brunei
HK & Macao
18
Korea
Japan
China
Thailand
Malaysia
Indonesia
Philippines
East Asian Trade, rounded to nearest 1%, 2002; Width proportional to %.
Myanmar
Vietnam
Cambodia
Laos
Singapore Brunei
HK & Macao
Eliminate flows without international FTAs
19
Korea
Japan
China
Thailand
Malaysia
Indonesia
Philippines
Hub & Spoke system with 3 hubs
Myanmar
Vietnam
Cambodia
Laos
Singapore Brunei
HK & Macao
Eliminate flows without international FTAs& well-functioning FTAs
20
Asian Manufacturing Matrix• Add back complexity
21
East Asian Trade, 2002(rounded to nearest $10 bill)
Korea
Japan
HK
China
Thailand
Malaysia
Indonesia Philippines
USA
RoW
EU
USARoWEU
USA RoWEU
USA
RoW
EU
- The hubs all care more about extra-regional markets.- Same for most small nations in the region.
22
Causes of East Asian Regionalism• Triggers & Dominos
23
Dynamic development of Noodle Bowl• FTAs spreading like wildfire, but recently EA
only region with them.– Trigger = China’s approach to ASEAN in Nov 2000, – Domino theory but important precursors.
• Three phases of East Asian regionalism.
24
Phase I (1980s to 1990) • “Rampant unilateralism”• Unilateral tariff cutting
– competition for jobs and investment linked to development of “Asian Manufacturing Matrix.”
• 3 key factors in development of the Asian Manufacturing Matrix
• 1. Erosion of Japan’s comparative advantage in manufacturing.– EA divides into “HQ economies” (Japan only to start with) &
“Factory Economies” (Advanced ASEANs). – Korea, Taiwan, Hong Kong & Singapore join later– “Triangle trade” becomes important.
• 2. Reduced cost of moving goods and ideas. • 3. China’s emergence & domestic reforms
25
Phase II (1990 to 2000)• “Regionalism delayed”
– Accelerated the widening and deepening of Asian Manufacturing Matrix;
– intra-EA begins to matter. – Malaysian Premier Mahathir’s EAEC.
• US’s APEC diversionary tactic.– Classic tactic (UK used in Europe in 1950s)
• Setting stage for Phase III:– 1997 Asian Crisis: APEC’s hollowness & brotherhood– China’s impeding WTO membership: end of status quo. – A new player was joining the game; all must re-evaluate their
tactics and strategies.
26
East Asian input-output matrix, 1985, 1990, 2000
1985 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan Indonesia 8% Malaysia 16% Philippines 0% Thailand 0% China 2% 14% Taiwan 3% Korea Singapore 3% 7% Japan 3% 12% 14% 4% 9% 12% 7% 8% RoW 15% 19% 19% 14% 11% 10% 16% 8% 1990 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan Indonesia Malaysia 5% Philippines Thailand China 3% Taiwan 3% 4% 3% 3% Korea 2% 2% Singapore 7% 2% 3% Japan 8% 10% 8% 14% 18% 10% 8% RoW 8% 23% 20% 21% 22% 44% 17% 13% 5% 2000 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan Indonesia 2% Malaysia 3% 4% 12% 2% Philippines Thailand 4% 3% 3% China 2% 3% 4% 5% 2% Taiwan 5% 5% 3% 3% Korea 2% 3% 4% 8% 3% 4% 4% Singapore 13% 6% 4% Japan 2% 7% 15% 20% 16% 19% 14% 7% RoW 4% 16% 20% 20% 17% 38% 15% 11% 4%
Manuf’d gds from
Manuf’d gds to manuf’d sector of:
27
Rampant Unilateralism
02468
101214161820
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Philippine
Thailand
Korea
Malaysia
China
Indonesia
Singapore
Unilateral tariff cutting in Phases I &II.%
28
Phase III (2000 to now)• “Rampant regionalism”
29
Trigger Nov 2000• Chinese premier Zhu Rongji broached the idea
of an FTA between China and ASEAN at ASEAN-China summit.– Surprise move.– Why?
• ASEAN are receptive; study grp formed.
• Red lights begin to flash all over region.
30
Actual & projected “vulnerability indices”Export dependence of Column nation on row market
Japan Korea
2003
ASEAN 17% 13%
ASEAN+China 36% 43%
Japan 10%
Korea 8%
2015
ASEAN 18% 14%
ASEAN+China 47% 56%
Japan 7%
Korea 8%
Japan and Korea “HAD” to have a plan to redress ACFTA discrimination, if it should arise.
31
Japan’s options in 2000-2002• Plan A; join ACFTA
– Domino theory & history predicts, BUT– 1. ad hoc nature of ACFTA rules out enlargement (ACFTA is
not a group, so it cannot to be joined).– 2. China & ASEANs fear Japanese industry
• Lock in as Factory Economy status; prevent development of new Sonys, Hondas, Samsungs.
• Plan B? Two classic responses– Form own trade bloc with other excluded nations.
• EFTA in 1959; Mercosur 1991.• => JKFTA
– Sign FTA with smaller partner.• Chile, Caricom with Mexico.• =>AJ FTA
32
Table 1: Actual and projected “exclusion indices” Japan Korea China Malaysia Thailand Indonesia Philippines Singapore Vietnam
2003
ASEAN 17% 13% 8% 29% 22% 11% 19% 31% 15% ASEAN+China 36% 43% 8% 43% 36% 22% 34% 45% 23% Japan 10% 14% 10% 15% 25% 14% 6% 15% Korea 8% 4% 4% 2% 8% 4% 4% 2%
2015 ASEAN 18% 14% 11% 31% 25% 14% 21% 35% 17% ASEAN+China 47% 56% 11% 51% 46% 30% 45% 55% 31% Japan 7% 12% 8% 12% 20% 11% 4% 13% Korea 8% 5% 1% 3% 9% 4% 4% 3% Note: The exclusion index shows that share of a nation’s exports that would be discriminated against by an FTA among the listed partners. Figures show share of column nation’s exports to the markets listed on the rows. Projections are based on standard gravity model estimates of the impact of importer and exporter GDP growth on bilateral trade. Projections assume no change in trade policy. GDP growth rates equal to IMF’s projected growth rates for 2007 for all the major trade nations in the world.
Source: Author’s projection
JKFTA redresses discrimination?
33
Likely Trajectory?• AK FTA will get done• Japan bilaterals with big ASEANs will get done• AJ FTA ??
– Opportunity for largesse– Fast or slow, doesn’t matter much to other nations; basically
more GSP.
• Next round of dominos (if any)– Hub-hub (JK, KC, JKC)– US moves? (K US?)
• If domino theory is right, it will spread beyond EA.– cf. EU has preferences with 141 of 148 WTO members.
34
Conjectures about hub-hub FTAs• JK FTA is most likely, but still difficult
– Pressure to finish depends upon whether ACFTA turns out to be ‘for real’ i.e. create discrimination for J & K exporters.
• Possible counter by China is to push forcefully for JKC talks on a long deadline for talks and long deadline for transition.– Might be a good idea to diffuse tensions.– No one “in charge” talks would be long & slow but
better than not talking.
35
Fragility of the Current situation • 1. Extreme interdependence of ‘Factory Asia’
– Worrying asymmetry of interdependence
• 2. Lack of WTO discipline– ‘tariff bindings overhang’
36
2000
0% 10% 20% 30% 40% 50% 60% 70% 80%
Indonesia
Malaysia
Philippines
Singapore
Thailand
China+HK
Taiwan
Korea
Japan
RoW Japan Taiwan ASEAN5 Korea China+HK
Interdependence (asymmetric)- Source of manufactured intermediate inputs of
manufacturing sector:
2. Natural leaders care less.
1. Collective action problem.“Linked competitiveness”
37
Lack of WTO discipline
Binding Coverage Final bound Applied
Import duties as share of total imports
Japan 99.6 2.3 2.5 n.a.
Korea 94.5 10.1 6.7 3.2
China 100.0 9.1 9.5 2.7
Malaysia 83.7 14.9 9.1 3.1
Thailand 74.7 24.2 13.3 3.4
Indonesia 96.6 35.6 6.7 1.2
Philippines 66.8 23.4 5.8 5.4
Vietnam
Taiwan 100.0 4.8 5.5 n.a.
Singapore 69.2 6.3 0.0 0.3
Disciplined
Not disciplined
38
System Fragility• Think of East Asia as a magnificent factory.
• Think of regional trade as “conveyor belts” in fantastically complicated, just-in-time factory.
• If a few ‘conveyor belts’ break down, whole factory suffers.– Competitiveness of Japanese firms in US market
depends upon intra-regional trade. – Ditto Korean & Chinese firms.
39
System Fragility• Set up and run by companies (middle-level
managers).– They’ve done a great jobs, but
• Where is the top-level management?
• East Asia’s collective action problem.
• Asymmetric dependence makes matters worse.– ASEANs are more dependent on the conveyor belts
than are China and Japan.
40
Emerging pressures• East Asian trade has worked wonderfully for 2
decades (even 1997 shock), so why worry?
• No real discrimination yet– ASEAN China & ASEAN-Japan, not yet
implemented.– AFTA implemented but not used
41
0
1
2
3
4
5
6
7
8
Indonesia Malaysia Philippines Thailand Total
Form D Utilisation (% of Intra-ASEAN trade)
1998
1999
Low utilisation rates• Almost no one uses the AFTA preferences• “Utilisation rates” for AFTA under 10%
– JETRO (2003): 11.2% of Thailand's imports from AFTA used CEPT.
– 4.1% of Malaysia's exports to AFTA used CEPT.
Source: PriceCooperWaterhouse
42
Solutions
43
Solutions• What East Asia needs now:
– Management, not vision
• Urgent– Discrimination is a source of conflict.– Discrimination is scheduled to start 2006 – 2010.
• New East Asian Management Effort:– 1. Use ASEAN+3 group & add a Secretariat.
• Management is a ‘club good’; • Membership should be limited to those most involved in
the collective action problem.• Reduce likelihood of free-rider or strategic behaviour.• Include all that are most affected.
44
Solutions• 2. Management priorities:
– #1: Bind the MFN applied rates.• Get credit in DDA.
– #2: Transparency and confidence building deliverables
• information clearinghouse, • ASEAN+3 compliant standards for new FTAs, • ROOs & cumulation (European example, PECS).• customs cooperation, • trade facilitation, • Keep talking.• etc.
45
Solutions• Longer term goals:
• Set up a proper organisation akin to EFTA.– EU’s institutions are too supranational.– NAFTA’s institutions are too intergovernmental.– EFTA’s are in between.
• Begin trilateral talks, CJK– Aim to finish talks by 2010 with FTA within 15 years
later.• Long, long horizon reduces resistance.
– Keep talking; no one nation ‘in charge’– Avoid tensions from next hub-hub domino effect.
46
Bottomline• East Asian regionalism based on a grand vision
would have been best.– Window of opportunity was missed.
• Concrete foundations of EA regionalism have already been poured and are hardening.
• What East Asian needs now is management, not vision.
• Need is urgent since discrimination is about to begin to emerge & discrimination can foster tensions.
47
End.Thank you for listening.
48
AFTA didn’t work• Utilisation rates for AFTA under 10%
– JETRO (2003) 11.2% of Thailand's imports from AFTA took advantage of the CEPT. Malaysia's data suggest that just 4.1% of its exports to AFTA enjoyed the CEPT preference.
Table 3: Intra-ASEAN exports as a share ASEANs total exports, 1985 to 2000
1985 1990 1995 2000
Intra-ASEAN exports 16% 17% 21% 19%
Source: DOTS database.
49
Why didn’t AFTA work?• Political economy of failure is easy
• Facts suggesting this happened.
50
MFN v. CEPT on MachineryTable 1: Intra-East Asian preference margins vis-à-vis EU and North America
Exporter to East Asia Preference margins:
Sector:
East Asia North
America EU
over N.Amer. Exporters
over EU Exporters
Mining products (HS25-27) 1.7 2.6 1.7 0.9 0.3
General machinery (HS 84) 1.5 1.9 2.5 0.4 1.4
Electrical machinery (HS 85) 1.4 1.5 2.2 0.1 -0.3
Others 1.4 1.7 2.6 0.3 -0.6
Wood and paper 1.4 1.3 1.5 -0.1 0.5
Precision apparatus 1.2 1.3 2 0.1 0.7
Agriculture 41 29.7 30.9 -11.3 10.7
Light industry 26.8 8.3 12.8 -18.5 4.1
Food and beverages 21.8 26.4 25.8 4.6 9.8
Textiles and clothing 7.3 7.6 7.8 0.3 -3.1
Transportation machinery 4.6 2.8 8.6 -1.8 5.3
Pottery products 2.9 3.6 4.4 0.7 -1.3
Chemicals 2.4 3 2.7 0.6 -1.4
Basic metals 1.8 2.6 2.3 0.8 -0.7
All products 7.4 5.5 7.2 -1.9 1.5 Note: Tariff data for 2002; see the paper for aggregation schemes.
Source: Author’s reorganisation of data drawn from Freudenberg and Paulmier (2005), Table 3.
51
DOT & Composition
45% 57% 58%
29%
59%
0%
20%
40%
60%
80%
100%
Direction ofAggregate
Trade
Machinery'sshare of each
flow
Direction ofTrade,
MachineryParts
Direction ofTrade,
MachineryFinal Gds
RoW
Intra-EA
• About ½ of EA exports are to EA.
• About 60% of EA-EA & EA-RoW exports are Machinery
• EA-EA, parts are dominante
• EA-RoW final goods dominant
• =>
Source: Ando & Kimura (2005)
“Triangle Trade”
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