The Evolving Role of Trade in Asia: Opening a New Chapter Fall 2018 REO Background Paper
Outline Trade Tensions and Spillovers: Spotlight on Asia Gains from Liberalization 2
Trade tensions have escalated. 3
Two modeling frameworks Global Integrated Monetary and Fiscal model (DSGE) a dynamic stochastic general equilibrium model that sheds light on short- and medium term macroeconomic consequences. Channel Calibration Trade Confidence Financial Lower relative demand for imports, also investment and consumption effects Lower private business investment Higher corporate spreads lead to lower private business investment Current and proposed tariff actions Economies trade openness relative to that of the U.S. Historic episodes and current credit ratings Ricardian Trade Model (CGE) additional detail on how individual 44 economies and 35 sectors would be affected in the long term while also accounting for global value chains. 4
Tariffs would have a significant impact on Asia. 5
Tariffs would have a significant impact on Asia (cont d). Trade Tension Scenarios: Peak Impacts on Real GDP (Percent deviation relative to before trade tensions) 0.4 0-0.4-0.8-1.2-1.6-2 China United States Korea Indonesia Trade Confidence Financial India Source: IMF staff calculations. Note: Trade includes baseline, escalation, and auto sector tariffs with confidence and financial market effects as separate layers. Peak responses are generally from 2020. Japan Philippines Thailand Malaysia Australia New Zealand Asia 6
Aggregate labor displacement would be limited, but some sectors could be hit hard. Total Labor Reallocation in Rising Trade Tensions Scenario (Percent of initial employment) 0.5 0.4 0.3 0.2 0.1 0 United States Source: IMF staff estimates. China Japan Korea Taiwan Indonesia Australia Province of China India Major Sectors with Large Labor Shedding in the Trade Tensions Scenario (Percent of sector's initial employment) 0-2 -4-6 -8-10 -12 Transport Agriculture Transport Japan USA Taiwan Province of China Source: IMF staff estimates. Transport Textile Mining Metals Mining Korea China India Indonesia Australia 7
What can Asia do to address these headwinds?
The potential for gains from liberalization What if Asia liberalized? What could we assume? Goods tariffs reduced to zero; NTBs in services are lowered by up to 30 percent; and FDI restrictions are reduced to the global average. Channels for gains Trade; Productivity (i.e., from lower costs, better allocation of resources, etc.); and Additional productivity gains from complementarity between FDI and liberalization. How do we quantify the gains? GIMF (+ tradable services) & the Ricardian trade model
Asia would benefit from liberalizing intraregional trade and investment, especially in services... Trade Liberalization for Tariffs, NTBs, including FDI Regimes (Impact on GDP, percent) 25 20 China with the World Within Asia Asia with the World 15 10 5 0-5 India Philippines Malaysia Thailand Korea Indonesia China Japan New Zealand Australia 10
with positive, but smaller, effects even if only goods tariffs are liberalized. Trade Liberalization Scenario Comparison with Liberalization of Only Goods Tariffs (Impact on GDP, percent) 20 18 16 14 12 10 8 6 4 2 0 Asia with the World Asia with the World - Goods Tariffs Only Asia Advanced Asia Emerging Asia (w/o China) China 11
Asian economies trade and investment regimes could be liberalized further Figure: Overall Trade and FDI Regime of Asian Economies (Year of data in square brackets)
especially in FDI within services. OECD FDI Regulatory Restrictiveness Index 0.4 0.3 0.2 0.1 Agriculture Manufacturing Service OECD Service FDI Regulatory Restrictiveness 0.6 0.5 0.4 0.3 0.2 0.1 Wholesale & retail Media Telecommunications Professional 0.0 Advanced Asia Emerging Asia Europe North America LAC 0.0 Advanced Asia Emerging Asia Europe North America LAC Sources: Organization for Economic Cooperation and Development, FDI Regulatory Restrictiveness Index; and IMF staff calculations. Note: FDI = foreign direct investment; LAC = Latin America and the Caribbean. Sources: Organization for Economic Cooperation and Development, FDI Regulatory Restrictiveness Index; and IMF staff calculations. Note: FDI = foreign direct investment; LAC = Latin America and the Caribbean.
The sharp rise in trade openness from the late-1990s has also plateaued, and in some cases declined, post-gfc... Trade Openness 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1995 Asia excluding China Europe SSA MENA SA NA China 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: IMF, World Economic Outlook; IMF, Direction of Trade database, and IMF staff calculations.
Asian Value Added in Exports of Goods and Services by Final Destination (Percent) and most of Asia s final exports are destined for markets outside the region. Rest of the world 23% Advanced economies in other regions 37% Asia 40% Sources: Organization for Economic Cooperation and Development, Trade in Value Added database; and IMF staff calculations.
Service exports have boomed from a lower base, but are also largely directed to other regions. Percent Change in Services Trade vs. Initial 2005 Level Asian Value Added in Exports of Services by Final Destination (Percent) Percentage change in services trade 160 140 120 100 80 60 40 20 0 Africa LAC Africa Asia LAC North America Asia North America Imports Exports Europe Europe 0 500 1000 1500 Initial level, billions of US dollars Sources: UN ESCAP Services Trade database; and IMF staff calculations. Note: Travel services are excluded. LAC = Latin America and the Caribbean. Rest of the world 32% Advanced economies in other regions 34% Asia 34%
Conclusions Asia continues to be the main engine of a global economy fueled by trade. However, rising trade tensions pose headwinds to sustaining Asia s strong growth momentum. Together with the decline in trade openness, maturation of global value chains, and high NTBs, tensions point to a need for Asia to liberalize further.
Policy Implications Focusing on service sector liberalization and the easing of FDI restrictions would have the greatest impact on Asia. Low-income and high NTB barrier countries have the most to gain. There will be winners and losers across sectors; proactive policy support and communication is needed to smooth the adjustment and limit resistance. Liberalization does not require the buy-in of other countries.
The future is in Asia s own hands. 19
Appendix
Accounting for the gains from liberalization Complementarity with foreign direct investment (FDI) (Ahn and others IMF WP/16/77) ˆ TFP FDI FDI FDI FDI ˆ out out output in in input n, j n, j j n, j n, j j n, j For a broad 1 ppt tariff increase, TFP is lower 1.7 ppts for mean FDI restrictiveness vs baseline. Countries where FDI regime is less restrictive are more sensitive to this channel. Tariffs and FDI restrictiveness: Asia-Pacific and ROW Main