2017/FDM1/004 Session: 1 APEC Development Outlook and the Progress of Regional Economic Cooperation and Integration Purpose: Information Submitted by: Asian Development Bank Finance and Central Bank Deputies Meeting Nha Trang, Viet Nam 23-24 February 2017
APEC Development Outlook and the Progress of Regional Economic Cooperation and Integration Juzhong Zhuang Deputy Chief Economist Asian Development Bank APEC Finance and Central Bank Deputies Meeting 23 February 2017 Nha Trang, Viet Nam
Outline 1. APEC Development Outlook and Risks 2. Progress of Regional Economic Cooperation and Integration Update on Asian Integration Trade Growth Slowdown and Policy Responses 3. Drivers of Foreign Direct Investment 4. Key Messages 2
APEC Development Outlook and Risks 3
Higher Growth in 2017 for APEC as a Whole Real GDP Growth (y-o-y, %) 8 6 6.7 6.4 Advanced APEC APEC Developing APEC-Americas Developing APEC-Asia 6.0 5.9 5.8 4 2 1.7 3.2 3.3 3.3 2.3 2.2 1.9 1.9 2.6 1.5 3.0 2.3 2.0 3.3 2.0 0 2013 2014 2015 2016e 2017f e = estimate, f = forecasts, weighted using gross national income (Atlas method), data as of 17 Feb 2017. Source: Asian Development Outlook Supplement 2016, ADB; World Economic Outlook Database October 2016, IMF; and national sources. 4
Large Variations Across APEC Economies GDP Growth Rates (y-o-y,%, data as of 17 Feb 2017) Economy 2016e 2017f Economy 2016e 2017f Advanced APEC Developing APEC Asia Australia 2.9 2.7 Brunei Darussalam 0.5 2.0 Canada 1.3 1.9 PRC 6.7* 6.4 Japan 1.0* 0.8 Hong Kong, China 1.5 2.0 New Zealand 2.8 2.7 Indonesia 5.0* 5.1 Russian Federation -0.6 1.1 Korea, Republic of 2.7* 2.7 US 1.6* 2.4 Malaysia 4.2* 4.4 Developing APEC Americas Papua New Guinea 2.2 3.0 Chile 1.7 2.0 Philippines 6.8* 6.4 Mexico 2.2 1.7 Singapore 2.0* 2.0 Peru 3.7 4.1 Thailand 3.2 3.5 Viet Nam 6.2* 6.3 * = actual 2016 figures, e = estimate, f = forecast, PRC = People s Republic of China. Note: Developing APEC-Asia based on ADB s definition. For Viet Nam, 2016 figure is actual. Source: Asian Development Outlook Supplement 2016, ADB: World Economic Outlook Database October 2016, IMF: and national sources.
Downside Risks to APEC Development Outlook Fragile global recovery Growing protectionist sentiment Heightening in financial volatility US Fed interest rate hikes, leading to large capital flow and exchange rate movements High private sector debt in developing Asia 6
Progress in Regional Economic Cooperation and Integration 7
Asia s Integration Trends at a Glance (intraregional shares as % of total) FDI = foreign direct investment. a Migration data in 2000. b Remittance data is only available starting in 2010. Note: Migration data available every 5 years. Trade is intraregional share out of Asia s total trade. FDI is intraregional share out of total FDI inflows into Asia. Equity and debt are intraregional share out of Asia s total asset. Migration is intraregional share out of Asia s total outbound stock. Remittances are intraregional share out of total remittance inflows into Asia. Source: ADB calculations using data from Association of Southeast Asian Nations (ASEAN) Secretariat, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, World Bank, and national sources. 8
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Trade Growth Slowing Down Weak global economic recovery PRC s growth moderation and structural transformation Slower growth of global value chains (GVCs) 25 20 15 10 5 0-5 -10 Trade and GDP Growth (%): APEC Increasing use of non-tariff measures -15 Trade: APEC Trade: APEC-Dev Asia GDP: APEC GDP: APEC-Dev Asia 9
Slower Expansion of Global Value Chains GVC Participation Rate (%) 100 80 60 40 World 66.9 69.1 61.8 GVC participation rate increased from 2000 to 2011, but declined from 2011 to 2015 to an even lower level than in 2000 20 0 2000 2011 2015 This pattern applies to various groupings of APEC economies APEC Advanced Economies APEC Developing APEC Developing Asia 80 60 40 20 73.5 67.5 63.9 64.2 63.1 63.5 65.0 56.9 57.1 0 2000 2011 2015 Note: GVC participation rate is calculated by (value added exports using domestically or foreign produced intermediates, excluding double counted terms) / gross exports. Value added decomposition of gross exports data are based on ADB s Multi- Region Input-Output Table.
Increasing Use of Nontariff Measures Number of measures in force against Developing APEC Asia 10,000 9,000 8,000 7,000 6,000 5,000 Sanitary and phytosanitary rules Technical barriers to trade Tariff-rate quotas Antidumping measures Quantitative restrictions Special safeguards Other NTMs Total 5,601 8,992 4,000 3,000 2,000 1,000 2,670 3,265 0 2000 2005 2010 2015 Note: A stock approach is used wherein measures in force at the selected date are recorded. Nontariff measures include antidumping actions, countervailing duties, quantitative restrictions, safeguards, sanitary and phytosanitary rules both regular and emergency, special safeguards, regular technical barriers to trade, tariff-rate quotas, and export subsidies. Source: World Trade Organization. Integrated Trade Intelligence Portal. www.wto.org (accessed 6 Feb 2017). 11
Policy Responses to Trade Growth Slowdown Continue to deepen global/regional value chains In economies with low GVC participation, reforms can improve business environment and facilitate GVC participation Promote service trade by reducing restrictions in market access and skill gaps, among others Continue to liberalize trade and resist protectionism Reduce residual import tariff Reduce non-tariff trade barriers and promote greater cooperation in trade facilitation Conclude mega-regional trade agreements such as RCEP and APEC free trade area. Improve regional connectivity to reduce trading cost. 12
Drivers of Foreign Direct Investment 13
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Inward FDI flows to Developing APEC-Asia are large Inward FDI flows to APEC members (% of GDP) Advanced APEC Developing APEC-Americas Developing APEC-Asia World 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Source: UNCTAD and IMF. Inward FDI flows, 2015 ($ billion) Dev APEC-Asia 438 (25%) ASEAN4 + VIE 55 (3%) NIEs 248 (14%) PRC 136 (8%) Dev APEC- Americas 57 (3%) Advanced APEC 457 (26%) World 1,762 (100%) 14
Determining Factors of Inward FDI Institutional qualities proxied by perception-based measures of regulatory quality, government effectiveness, and rule of law; and ease of doing business matter significantly for attracting FDIs, especially M&As along with market size, geographical proximity, low labor costs, and infrastructure quality. Regional trade agreements help attract FDI, especially from north to south, by improving business environment, reducing trade costs, and granting non-discrimination (such as national treatment) status. Bilateral investment treaties (BITs) facilitates FDIs. In particular, investor-state dispute mechanism (ISDM) is a critical enabler. 15
Trade-Investment Nexus FDI in Developing APEC Asia (specifically INO, MAL, VIE, THA) is closely related to global value chains (GVCs) in the manufacturing sector, with abundant labor, low trade barriers, and downstream specialization helping attract GVC-linked FDI, often geared to reexporting intermediate and final goods to home/third country. 57% of all foreign owned firms in Asia (and 70% in the manufacturing sector) are engaged in GVC-related activities, compared with only 11% of domestically owned firms. Asian owned firms are engaged more in GVC related activities (67%) compared to those owned by non-asian multinationals (45%) Japan is the largest source of GVC-linked FDI in Asia followed by Republic of Korea, while PRC is the most popular host. Multinationals from India and PRC are also internationalizing rapidly, with 32% and 21% of Indian and PRC owned firms engaged in GVC related activities. 16
Key Messages APEC development outlook Higher growth in 2017, but fragile global recovery, rising protectionist sentiment, financial volatility pose risk Slowdown in trade growth There are cyclical and structural factors Requires appropriate policy responses Sound institutional quality, regional trade agreements, bilateral investment treaties, and participation in GVCs can help attract FDI. 17
Thank You! ASIAN ECONOMIC INTEGRATION REPORT 2015 18