How ASEAN Economies Coping with Global Slow Growth and the newly US - - PDF document

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How ASEAN Economies Coping with Global Slow Growth and the newly US Trade Regime

(1st International Conference of Asia Economic Research Institute, Saint Petersburg State University (SPSU), Saint Petersburg, Russia, 30 March 2017)

• Dr. Anggito Abimanyu

Former Chairman Fiscal Policy DG, Ministry of Finance, Indonesia/Professor, Faculty of Economics and Business, Gadjah Mada University, Yogyakarta, Indonesia/Chief Economist, Bank BRI, Jakarta/Special Envoy to Indonesian Ministry of Trade, Jakarta-Indonesia Introduction The global economy remains in a low-growth trap. According to the October 2016 IMF forecast, the global GDP growth is set to be lowered around 3.1% in 2016 and improve modestly to 3.4% in 2017. US and EU are improving, although a slightly lower forecast due to weaker conditions in other major economies. Recent increased in the US FFR has indicated some improvement in the US economy. Weak global trade is remain a particular concern. World trade was growing exceptionally slowly after the financial crisis, and has collapsed in 2015 and 2016. This weak trade growth is both a symptom of and exacerbates the weak global environment. Trade matters for productivity, living standards and inclusive growth. Returning to robust trade growth requires policy action to deepen global integration, but even more importantly to share the benefits. The concern is not just that there has been a gradual rise over the past four years in the number of protectionist measures introduced, but that there is a risk of an anti-trade narrative taking root in the US recently. At the last year Hangzhou Summit, G20 countries were only around half-way to their target

• f 2% additional G20 GDP by 2018 due to sluggish progress on implementation on trade

issues. More worrying with recent US stand point to create uncertainty over global trade that has been a real hurdle for the last hope of a strong recovery from another global financial crisis. The recent failure by the G20 Finance Minister meeting in Germany ended inconclusively after it dropped from its official communiqué language from last year that vowed to resist all form of protectionism. This US policy on trade will change to outlook of the emerging economies. Growth in developing East Asia and Pacific that is expected to remain resilient over the next three

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years might be at risk. The only hope will be the domestic demand to be remain robust across much of the region and investment in infrastructure continue to expand. Continued modest commodity prices will benefit commodity exporters and keep low inflation across most of the region will help the emerging economies in Asia. FTA/RTA in APEC and ASEAN FTAs/RTAs that open trade and advance policy cooperation can be helpful when progress at the multilateral level is slow. But narrow country coverage and the discriminatory application of tariff reductions and other market access provisions limit the benefits. While the application of RTA provisions on a non-discriminatory basis is welcome, the many different RTAs can develop diverging rules. For Asia-Pacific countries, the recent US position toward globalization has brought about a complex scenario where opposition to strengthening economic integration has grown. Moreover, uncertainty the US to support further economic integration and continue engagement in the pursuit of new RTA will be a global risk. Initially APEC members are looking for more ambitious trade agreements. The TPP negotiations, the ongoing intensive negotiations of the RCEP and the preparation of a Collective Strategic Study on Issues Related to the Realization of the Free Trade Area of the Asia Pacific are evidence of the interest by APEC economies to strengthen links to effectively promote a free and open trade and investment system. But with decision of President Trump to pulls US out Pacific Trade pact, the TPP status is now uncertain. Attention in the region has begun to turn to RCEP, which covers Australia, Brunei, Cambodia, China, Indonesia, India, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam will also being questioned. While some TPP members feel that they could create a parallel agreement without the US, the economic benefits will be significantly reduced without the US participating. Therefore, some TPP member countries may prefer to refocus on the RCEP as an alternative large- scale regional trade liberalisation initiative. This development need to be observed in the near future. ***** The ASEAN Economic Community (AEC) officially started at the end of 2015 earlier than the original plan in 2020. Such a goal would have been difficult for nearly any grouping to

• reach. For ASEAN, the gaps in economic development has been significant. To bring

together nations ranging in GDP per capita now, from Myanmar at just over USD$1.265 to Singapore at more than USD$52,000 would have been challenging under any timeline. But ASEAN leaders made the task more difficult by moving the deadline forward by five years. Instead of 2020, the ASEAN Economic Community would take effect in 2015. Thus member states with an ambitious deadline suddenly faced the conclusion five years sooner than

• anticipated. Fortunately, ASEAN has had a mechanism for releasing the pressure. Members

could reach any goal by using pilot projects. In addition, ASEAN works on the ASEAN Minus X system where somewhere between 10 and 0 members actually move forward with

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any commitment. No one actually checks for implementation. The ASEAN Secretariat is very small and has no capacity to ensure that members follow through on their various commitments. Services are supposed to be opened as well on the way towards the AEC. By 2014, members had agreed on eight “packages” of market opening. Each package is designed to

• pen up a set of subsectors for other ASEAN firms. For example, each member might

decide to open up hotels, clinics or accounting firms. Of the 160 subsectors, ASEAN members have already agreed to open up roughly 65. Not all commitments are likely to be equally meaningful for companies. The AEC also includes free movement of investment. ASEAN members have made limited progress towards meeting this goal. Skill Labor movement and investment are not likely to be significantly opened for the rest of this year. The free movement of goods (other than tariffs), services, investment, skilled labor and freer movement of capital are likely to prove elusive. The US is the number one-two trading partner to ASEAN economies in last two decades. Any trade and investment policy adopted by the US will have a variety impact to ASEAN

• economies. As for the impact of recent higher US interest rate, ASEAN economies are not

homogenous and the impact are unlikely to be uniform. Countries with external financial imbalances or a reliance on external funding would be the most vulnerable to the effects of higher rates. This is why Indonesia for example— have been hit the most since QE reduction started late last year with their currencies weakening as US money flowed back to the US. With an outflow from local currencies into USD, GBP and potentially Yen, downward exchange pressure will come onto local currencies. The result will be either ASEAN governments use their foreign currency holdings to prop up their local currency, or their currencies will depreciate. This stronger dollar increase global commodity prices, such as

• il, mining, mineral and agriculture.

The modest increase in commodity prices together with weaken local currency since last quarter 2016 help commodity export based ASEAN economies, such as Malaysia, Thailand, the Philippines, Indonesia and Vietnam to improve their balance of trades. On the other hand, consumer expectations of higher US and international interest rates may dampen global consumption spending, hence reducing demand for ASEAN exports. Higher interest rates also raise the borrowing cost of and debt burdens on the government and public sector. ***** In anticipating of slow global growth, individual ASEAN, no other choice but to further launched numerous policy reforms, with some sectors – in particular, trade and investment policy – witnessing a shift towards deregulation and more integration. ASEAN economies such as Indonesia, Myanmar, Brunei, Vietnam have improved positions in the World Bank Doing Business 2016-17 ranking. While others, such as Singapore, Malaysia, the Philippines

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and Thailand relatively stable in the world ranking. The 'Ease of Doing Business: Measuring Regulatory Quality and Efficiency' is an annual flagship publication of the World Bank, monitoring the regulations that enhance the ease of doing business in the following areas: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. ASEAN has been quite active in concluding free trade agreements (FTAs). ASEAN had six FTAs in effect, the ASEAN free trade area, AFTA; ASEAN-Australia and New Zealand, ASEAN-China, ASEAN-Japan and ASEAN-Korea FTAs, and ASEAN-India. These agreements mean that ASEAN has FTAs with trading partners that account for of 70 percent of its total

• trade. Individual country within ASEAN, like Indonesia conducted FTA or EPA in-effect with

Japan, Pakistan, began to talk with China, Korea, and CEPA with Australia and EU of total 17 FTAs/EPAs. Singapore will have 33, Thailand 22, Malaysia 22, Philippines 11 and Vietnam 16 FTAs/EPAs in place. This already in the negotiation process need to be intensified. For future negotiation, ASEAN economies also penetrating to non-tradisional markets such as with GCC (Gulf Countries), SACU (Southern Africa), and EAEU (Eurasian Economic Union). Member state of EAEU, including Rusia, Armenia, Belarusia, Kazakthan and

• Kyrgiztan. Many countries in ASEAN wouldlike to have FTA with EAEU because of their

GDP size of 1.600 billion USD, population of 180 million people and their per capita income

• f 23,500 USD. With huge economic size of Rusia, this FTA could also be the entry point of

the ASEAN trade to the wider east Asia and central Asia regions. The EAEU already signed FTA with Vietnam in 2015, and Singapore, Indonesia, Cambodia likely to follow. ASEAN and Rusia has a small intra-trade. Last year, trade turnover was

• nly $13.8 billion.

By 2018, Vietnam-EAEU, 144 more tariff lines will be eliminated, raising the number of zero-tax lines to 5,103, or 54 percent of the total. The pact is expected to increase trade revenue between Vietnam and the EAEU to 10 billion USD in 2020 from the current yearly average of 4 billion USD. Trade between Russia/EAEU and the Association of Southeast Asian Nations (ASEAN) grew by around 15-20 percent in 2016. Russia is increasing exports of machinery, parts, iron, wheat and metals. Russia imports Palm oil, textiles, tyres, wooden furniture, coconut, coffee, margarine from ASEAN. ASEAN is the only regional association Russia had positive trade dynamics with, in dollar terms. Russia doubled its trade turnover with ASEAN nations in the past five years. Russia suggested establishing an "integrated network" of free trade zones with ASEAN nations. Experts say trade liberalization between EAEU and ASEAN would assist further economic cooperation. The information was released by Russian Minister of Economic Development after the Russian and ASEAN economic and trade ministers met in Laos’ capital city of Vientiane last

• year. The announcement to establish an FTA between ASEAN and the EAEU was made at

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the Russia-ASEAN Summit in Sochi in May 2016, but the ministers of participating countries have just agreed to start the work. The minister stressed that agreements reached at Sochi will play a key role to develop the FTA, adding that an EAEU-ASEAN study group will be formed under the guidance of “leading leaders” to ensure an effective

• utcome. Currently, all involved countries are interested in the project, however some

ASEAN countries need more information about the EAEU cooperation mechanism. For ASEAN, though, there at least two positive outcomes to be derived from further regional trade agreements. The first is an expansion in investment. While the direct impact

• n trade might be debatable in the beginning, rising investment usually follows. Second,

regional agreements can drive unilateral domestic reforms. In the case of ASEAN, an improving of ease of doing business and further trade integration, are two products of domestic reforms driven mainly by regional commitments. Conclussion The World trade policy debate is now focus on the US stand. If protectionism is going to be adopted by a country as large and as powerful as the US, this is definitely going to change the global economic landscape. With the upcoming G20 Leaders Summit in July, this will be a test of credibility for G20 leaders. The intention of the US administration for insisting on the importance of “fair” trade without clarifying what that meant create uncertainty. They say they are not isolationist, that they believe in trade and globalisation, but only if it is fair. They follow that by saying they want to scrutinize any country that has a trade surplus with the US to see if it is fair. Like many of its Asian counterparts — including “tiger” economies such as Taiwan, South Korea, Hong Kong and Singapore — the country of 250 millions of people has benefited from the US-led liberalization of trade and capital flows in recent decades. This definitely will be a serious concern by these countries. Indonesia was not immune to the “anxiety and uncertainty” provoked by the changing US stance on global trade, but that its large domestic economy provided a cushion. But this is not the case for some other commodity- producing countries and other emerging economies, particularly by some ASEAN economies. What next? In my view, the next G20 Leader Meeting in Hamburg will definitely be a forum to voice this

• concern. Leaders should ask Washington not to stand against tides of globalization that had

allowed Asia’s emerging economies to rise. The failure by the G20 leader of the biggest economies to address the rise of protectionism in next July will create a crisis of credibility, leaving some African countries and other emerging economies vulnerable. While growth in developing East Asia and Pacific is expected to remain resilient over the next three years, role of Japan and China continue to be the key. China is expected to

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continue its gradual transition to slower, but more sustainable, growth, from 6.7 percent this year to 6.5 percent in 2017 and 6.3 percent in 2018. Overall, developing East Asia is expected to grow at 5.8 percent in 2016 and 5.7 percent in 2017-2018. In ASEAN, we expect domestic demand to remain robust across much of the region. Continued modest higher commodity prices will benefit some ASEAN economies while keeping inflation low across most of the region. Countries should take further measures to reduce financial and fiscal vulnerabilities, as a sharp global financial tightening. ASEAN economies should continue to pickup the rising of regional trade and the success of efforts to improve the investment climate and increase cooperation. FTA dan RTA helps ASEAN to improve investment climate and business competitiveness. The existing negotiation of ASEAN economies FTA with other region or individual country need to be intensified. ASEAN should penetrating trade cooperation with the non-tradisional markets such as EAEU because of the size of their market and economy as well as the products complementarity of the two regions. Pressing ahead with anti-trade protectionism policy and not let the US creating uncertainty

• ver trade is the key to defeat the last hope of strong recovery from the global financial
• crisis. Looking back of the 2008 experience, the global economy is still in a very weak

recovery eight years after the global financial crisis. *****