Can Asia Grow Trade More? New Sources of Growth

Thank you Dr. Nicholas Fang. Good morning, ladies and gentlemen, distinguished guests. Before I begin, I would like to thank SIIA and Dr. Simon Tay for this invitation. I will be keeping this short and have five main points to share.

First, let’s define how important trade is to Asia? By saying that trade is the lifeline of Asia is stating the obvious, but I will say it anyway: “trade is the lifeline of Asia.” Three of the world’s 10 largest economies (America, China, and Japan) are in the Asia-Pacific. More than half of the world’s top 20 trading economies are here too. Trade drives economic integration in this region. Nearly half of intra-Asia trade is conducted within the region – it is comparable to the EU and it is a much higher share of the intra-regional trade within NAFTA, and ASEAN-7 economies. Certain economies in Asia are heavily trade dependent, for instance, the levels of exports of goods and services are higher than the GDP for economies such as Singapore, Malaysia, and Hong Kong .

Next, trade and growth are mutually reinforcing. Economic growth will have an immediate and direct impact to trade in the short-term. During the aftermath of the 2008-9 global financial crises, trade levels in Asia free-fell by nearly 20 percent. However by 2010, there was a record expansion of trade and economic activity. China made a sizable contribution to the recovery. Its GDP grew 10.3 percent and its exports and imports increased by 28 percent and 22 percent respectively.

Trade in the Asia Pacific bounced back to pre-crisis levels – with exports worth US$5.5 trillion and imports of $5.1 trillion last year. Similarly, the level of investment in the Asia Pacific is also nearly back to its pre-crisis levels. Ten APEC economies had FDI inflows above $10 billion and 12 APEC economies had FDI outflows above that amount in 2010.

From a long term perspective, trade is a vital component for advancing long-term economic growth and development. For instance, between 1989 and 2010, APEC has seen a five-fold increase in economies’ total trade (goods and services), from US$3.1 trillion to US$16.8 trillion. There was a similar increase in output, employment and decline in poverty levels. GDP of APEC economies grew by 28 percent between 1999 and 2009, employment by 14 percent between 1996 and 2009, while poverty was reduced by 43 percent between 1994 and 2009.

What is the outlook in Asia?

Trade expansion opportunities will depend, on one hand, on the growth of demand for goods and services, and on the other, on trade creation and promotion efforts. With regard to the economic outlook, the IMF forecasts that the world economy will grow at about 4.3 percent in 2011 and 4.5 percent in 2012. ADB forecasts that emerging East Asia will grow by 7.9 percent in 2011 and 7.7 percent in 2012. ASEAN is predicted to grow by 5.5 percent in 2011 and 5.7 percent in 2012. For the APEC economies, positive real GDP growth across all economies is predicted for 2011, ranging from 3.1 percent to 9.6 percent for emerging APEC economies and from 0.9 percent to 3.0 percent for advanced APEC economies.

However, the recent series of important events around the world lend some degree of uncertainty to any forecast – lingering economic problems in the U.S. and debt issues in the euro zone; and inflation, to name some.

Next, I would like to take this opportunity to highlight some developments in the trade policy area.

The chances of a mini-Doha happening by end of this year are slim. You will have heard of WTO Director General Lamy’s characterization of the paralysis in global trade talks .

On the other hand, the appetite for regional trade cooperation is there. Currently, there are 123 free trade agreements involving APEC members, 48 of them between APEC economies. This is not unrelated to a regional clustering of the supply chain that is developing, based on close industrial interconnection, paving the way for closer regional integration. In fact, just a couple weeks ago at the ASEAN meetings in Bali, Dr. Surin Pitsuwan called for a 5 – 10 percent increase in intra-ASEAN trade by 2015.

As supply chains become increasing globalized, we observe that economies are becoming “specialists in tasks” along the value chain. From a trade perspective, the fragmentation of the value chain will drive the increase in the trade flows in intermediate goods, and the volume and diversity of products exchanged across borders. Already by 2009, trade in intermediate goods – like parts, components and accessories – already accounts for 50 percent of non-fuel world merchandise trade. Economies have to recognize that in order to maintain their comparative advantage; they have to push through with further liberalization, structural and regulatory reforms, and supply chain connectivity improvements.

Indeed, with the decline in trade barriers such as tariffs and quotas, behind-the-border and across-the-border issues are become increasingly important and have surfaced in many of the trade discussions amongst many economies and businesses. APEC has been working on these issues for quite some time.

This brings me to my last point – what APEC is doing to liberalize and facilitate trade.

APEC’s Trade and Investment Liberalization agenda focuses on reducing tariff and non-tariff barriers, whereas APEC’s Business Facilitation agenda aims to reduce the cost and improve the ease of doing business in these three areas: Behind-the-border, At-the-border, and Across-the-border (to promote supply chain connectivity). APEC’s Economic and Technical Cooperation agenda aims to help member economies, their businesses and citizens build the necessary capacity to take advantage of trade and investment liberalization.

What are some of the results? Average tariffs in the region have fallen from 17 percent when APEC was established in 1989, to 6.2 percent in 2009. Average tariffs (at 2008 levels) for the 5 industrialized economies and 8 developing economies assessed by APEC last year were 5.4 percent. Tariffs for APEC's industrialized members are lower than that, averaging 3.9 percent. All of this data compares very favorably to the MFN average applied tariff of 10.4 percent (as calculated by the WTO).

As tariffs declined significantly over time, APEC’s focus has shifted to tackling non-tariff barriers through trade facilitation, structural reform and removing regulatory obstacles.

APEC's first Trade Facilitation Action Plan contributed to a 5 percent reduction in trade transaction costs across the region, which accounted for significant progress in this area between 2002 and 2006. APEC's second Trade Facilitation Action Plan (TFAP II) aimed to reduce trade transaction costs by 5 percent during the period 2007-2010. A preliminary assessment by the APEC Policy Support Unit indicates that costs within APEC reduced 5.1 percent in real terms during that period.

Going forward, APEC has agreed to focus on enhancing SME participation in global production chains as part of APEC’s agenda this year to tackle “next generation” trade and investment issues. Two other issues were also agreed as priorities for action in this context; promoting effective, non-discriminatory and market-driven innovation policy and facilitating global supply chains.

Ultimately, APEC’s core work on trade and investment liberalization and facilitation also translates to the advancement of free trade for Asia Pacific prosperity for all.

Thank you. I look forward to a good discussion.