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2016/FMM/006 Session 1

Challenges for Trade and Financial Integration

Purpose: Information Submitted by: Asian Development Bank

23rd Finance Ministers’ Meeting Lima, Peru

14-15 October 2016

Challenges for Trade and Financial Integration

Cyn‒Young Park Director, Regional Cooperation and Integration Division

Economic Research and Regional Cooperation Department (ERCD)

Asian Development Bank

APEC FINANCE AND CENTRAL BANK DEPUTIES’ MEETING

“Strengthening Public Policy for an Integrated and Resilient Asia-Pacific Region”

Session 2: GLOBAL AND REGIONAL ECONOMIC AND FINANCIAL OUTLOOK

Lima, Peru | 14 October 2016

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Outline

• Economic outlook for APEC and Business Cycles

• Progress of Regional Economic Integration

• Intra-Asian Trade: the PRC’s Role and Vertical Supply Networks

• Trade in Services

• Trade Protectionism: Non-tariff Measures

• Bilateral Investment Treaties

• Financial Integration and Spillovers

Economic Outlook in APEC

and Business Cycles

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Growth in APEC economies remains robust

Real GDP Growth (y-o-y, %)

Note: f = WEO forecasts; weighted using gross national income (Atlas method).

Source: WEO 2015.

Large variations across economies

e = estimate, f = forecast, PRC = People’s Republic of China.

Note: Developing APEC—Asia based on ADB’s definition.

Source: Asian Development Outlook Update 2016, ADB and World Economic Outlook 2016, IMF.

GDP Growth Rates (y-o-y,%)

Economy 2016e 2017f Economy 2016e 2017f

Advanced APEC Developing APEC─Asia

Australia 2.5 3.0 Brunei Darussalam 1.0 2.5

Canada 1.4 2.1 PRC 6.6 6.4

Japan 0.3 0.1 Hong Kong, China 1.5 2.0

New Zealand 2.0 2.5 Indonesia 5.0 5.1

Russian Federation -1.2 1.0 Korea, Republic of 2.6 2.8

US 2.2 2.5 Malaysia 4.1 4.4

Developing APEC─Americas Papua New Guinea 2.2 3.0

Chile 1.5 2.1 Philippines 6.4 6.2

Mexico 2.5 2.6 Singapore 1.8 2.0

Peru 3.7 4.1 Thailand 3.2 3.5

Viet Nam 6.0 6.3

APEC business cycles increasingly less correlated with US, more with PRC

Note: Developing APEC-Asia includes the People’s Republic of China; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; Philippines; Singapore; and

Thailand. Developing APEC-Americas includes Chile, Mexico, and Peru. Advanced APEC includes Australia, Canada, euro area, Japan, New Zealand, and Russian

Federation. Three-year moving correlations based on cyclical Hodrick-Prescott filtered seasonally-adjusted gross domestic product at constant prices.

Source: ADB calculations using data from Haver Analytics and national sources.

Intra-Asia Trade: PRC’s Role and

Vertical Supply Networks

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PRC’s Export and Import Share By Commodity Groups

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PRC’s Export and Import Share By Partner

Trade in services

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Service sector’s share remains low compared to advanced economies

Source: World Development Indicators, World Bank.

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Note: Total Asia balance calculated by subtracting debits (imports) from credit

Source: ADB calculation using data from Balance of Payments Statistics, International Monetary Fund.

Lower service trade restriction is associated with higher income level

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Note: Includes all countries in the Overall Services Trade Restriction Index.

Source: Borchert, Gootiz, Matoo. 2014. Policy Barriers to International Trade In Services: Evidence from a New Database. World Bank Economic

Review. Vol. 28(1). 162-188.; World Development Indicators, World Bank.

Trade Protectionism:

Non-tariff Measures

Rising NTMs: SPS and TBT

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Tariff Rate (weighted mean) SPS & TBT measures

Overview of SPS and TBT Measures

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Sanitary (human and animal health)

and phytosanitary (plant health)

measures

Technical Barriers to Trade

(products or processes)

Purpose - guarantee the safety of food for

consumers

- prevent or limit the spread of pests,

outbreak of diseases among plants

and animals, and other health risks

arising from residues (of pesticides

or veterinary drugs), contaminants

(heavy metals), toxins or disease-

causing organisms in foods,

beverages or feedstuffs

- addresses greater product

safety and stricter

environmental protection

- define either the specific

characteristics of a product (e.g.

shape, size or design and

performance)

- pertain to the process and

methods used in its production

Requirements - Six on technical regulation including

hygiene and post-harvest

requirements

- one requirement on conformity

assessments

- one on SPS measures not

elsewhere classified

- Six on technical regulation

including product and process

requirements

- one requirement on conformity

assessment procedures

- another covering TBT measures

not elsewhere classified

17 Source: ADB calculations based on WTO Integrated Trade Intelligence Portal (I-TIP).

SPS Measures TBT Measures

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Gravity Model Estimation Results

Dependent variable: Log (Imports)

(1)

SPS

(2)

TBT

(3)

SPS:

Agriculture

(4)

TBT:

Agriculture

Importer All WTO Members Developing Asia

Exporter All WTO Members All WTO Members

Bilateral applied tariff AVE -0.02*** -0.02*** -0.03*** -0.04***

SPS dummy -0.03 0.42

TBT dummy 0.33*** 1.00***

Exporter dummy (base = OECD)

Developing Asia 1.30*** 0.89* -20.42*** -21.43**

Non-DevAsia, Non-OECD 1.82*** 2.82*** -18.38** -19.55**

SPS/TBT dummy X exporter dummy

Developing Asia -0.50*** 0.20*** -0.81*** 0.06

Non-DevAsia, Non-OECD 0.47*** -1.07*** 0.81*** 0.19

No. of Obs. 271,280 271,280 4,855 4,855

R-squared 0.38 0.38 0.27 0.27

Panel Regression on Bilateral Imports, 2012-2014

AVE = ad valorem equivalent.; **, and *** denote significance at the 1%, 5%, and 10% confidence levels. For brevity, the results of coefficients for usual gravity factors are not presented. Note: Panel regression includes exporter, importer, and sector (two digit level) fixed effects (no interaction).

Bilateral Investment Treaties

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Rising number of BITs

BITs RTIA

Source: UNCTAD.

BITs grant foreign investors more substantive rights than RTIAs

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Average scores of provisions in BITs and RTIAs (2000-2015)

Asia-World

Key findings from BIT/RTIA analysis

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Heterogeneity of BIT has increased over time but BIT in

general has positive impact on FDI

Investor-related dispute mechanism in BITs is the

most important factor in inducing FDI

RTIA has started to increase in number recently

National treatment and most-favored nation

provisions in RTIAs are the most important factors in

inducing FDI

Financial Integration and

Spillovers

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Business cycle synchronicity peaks during crisis times

PRC, PRC = People's Republic of China, JPN = Japan, US = United States.

Note: Developing APEC includes ASEAN4, NIEs, PRC, Chile, Mexico, Peru. Based on the methodology of Abiad et al (2013).

Source: ADB calculations using data from Oxford Economics and national sources.

Developing APEC: Median Instantaneous Quasi-Correlations

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Conditional Correlations of Equity Returns in

Developing APEC-Asia

Note. Methodology based on M. Hinojales and C.Y. Park. 2011. Stock Market Integration: Emerging East Asia’s Experience. In

M. Devereux, et al., eds. The Dynamics of Asian Financial Integration. New York: Routledge. Developing APEC-Asia includes

ASEAN4, NIE4, and the PRC.

Source: ADB calculations using data from Bloomberg.

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.81990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Series6 Intra-Asia AXC w/ PRC Asia w/ JPN Asia w/ EUA Asia w/ USA

US

recession

Mexico

crisis

Turkish stock

market crash

Argentine

debt crisis

SARS

Outbreak

1st Greek

bailout

Taper

tantrum

PRC

sell-off

Brexit AFC GFC Euro

crisis

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Conditional Correlations of Bond Market Returns

in Developing APEC-Asia

Note. Methodology based on M. Hinojales and C.Y. Park. 2011. Stock Market Integration: Emerging East Asia’s

Experience. In M. Devereux, et al., eds. The Dynamics of Asian Financial Integration. New York: Routledge.

Developing APEC-Asia includes ASEAN4, NIE4, and the PRC.

Source: ADB calculations using data from Bloomberg.

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Series6 Intra-Asia AxC w/ PRC Asia w/ JPN Asia w/ EUA Asia w/ USA

Global Financial

Crisis

1st Greek bailout

Euro crisis,

Egypt and

Indian

economic

woes

Taper

Tantru

m

PRC currency

devaluation, and

stock market crash

US Policy

Normalization

Brexit

External Shocks: Variance Decompositions of Asian Output Growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Post-GFC

US Factor - GDP US Factor - MP PRC VIX Local

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Pre-GFC

US Factor - GDP US Factor - MP PRC VIX Local

MP = monetary policy.

Thank you!

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