Khóa luận tốt nghiệp Kinh doanh quốc tế: The slowdown in Asia’s international Trade and its causes

LIST OF FIGURESFirgue 2.1 | Merchandise Trade and GDP growth in Asia and World Firgue 2.2 | Export and Import volume growth in Asia Firgue 2.3 | Total trade by commodity groups in Asia F

ole)UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF INTERNATIONAL BUSINESS AND ECONOMICS

THESIS

THE SLOWDOWN IN ASIA’S INTERATIONL TRADE

AND ITS CAUSES

TEACHER: NGUYEN THI KIM ANHSTUDENT: TRINH DINH THUONG

CLASS: QH 2014E- KTQT- CLC

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REFERENCES sscossssssscssssssosssssesssssossesenssossssssssessossnssossasssssnssosssssessossnssossssonssnssessesss 46

LIST OF TABLES

Table 2.1 Exporting and importing for the goods in Asian economies (US Dollar)

Table 2.2 Exporting and importing for the services in Asian economies

(US Dollar)

Table 2.4 Commercial services by world and region

Table 2.5 List of products exported by Asia

Table 2.6 List of exporters for the selected service

Table 3.1 Select individual Asian Economies export component (% of total exports)

Table 3.2 GDP growth, shocks, and cost of natural disasters- Asia

LIST OF FIGURES

Firgue 2.1 | Merchandise Trade and GDP growth in Asia and World

Firgue 2.2 | Export and Import volume growth in Asia

Firgue 2.3 | Total trade by commodity groups in Asia

Firgue 2.4 | Intraregional trade shares of Asia, EU and North America

Firgue 2.5 | Trade value growth in Asia by partner

Firgue 3.1 | Number of signed FTAs of Asia (cumulative since 1975)

Firgue 3.2 | Number of trade remedy measures affecting Asia

Firgue 3.3 | Number of SPS Measures

Firgue 3.4 | Number of TBT Measures

Firgue 3.5 | Components of gross exports

Firgue 3.6 | GDP growth, shocks, and cost of natural disasters- Asia

Firgue 3.7 | Global policy uncertainty, January 2014 - February 2017

LIST OF ABBREVIA TIONS

Letter Meaning of the letter

ADB Asia Development Bank

WTO World Trade Organization

GDP Gross Domestic Product

IMF International Monetary Fund

WB World Bank

MNCs Multinational corporation

EU European Union

NAFTA The North American Free Trade Agreement

VER Voluntary export restraint

GVC Global value chain

DVA Domestic value added

FVA Foreign value added

PDC Purely double-counted terms

RDV Returned domestic value added

TBT Technical barriers to trade

SPS Sanitary and phytosanitary

NTB Non tariff barriers

1 Rationale

Over the past recent years, the world economy has many fluctuations The United States’snew president Donald Trump and his decision to make U.S withdraw from TPP, along with

other policies, have significant impacts on many countries The United Kingdom left the

EU (Brexit) and the Industrial Revolution 4.0 has strongly developed, All of these events

have impacted a lot to the world’ economy as long as its international trade

In this context, the trade activities of countries and regions that have a great influence onthe world’s are always concerned Asia a big economy in the world after a decade ofmaintaining a high and stable growth rate According to the International Monetary Fund

(IMF), Asia is the fastest growing region in the world in the past two decades, with an

average economic growth of 4.5% per year Howevers, Asia now has shown signs ofslowdown in both economic growth and international trade growth Recently, internationaltrade in Asia as well as in the world has tended to slowdown there are a number of positive

effects of international trade such as increase in the level of global output; creating greater

opportunities for firms to tap into more and larger markets around the world, leading toaccess to capital flows, technology, human capital; allowing businesses become part of

international production networks and supply chains ADB (2016) indicated that both

export and import growth has slowed in Asia since 2011 The annual growth in export valueand import value between 2012- 2016 in Asia are -4% (Trademap, 2019)

Therefore, recognizing the trend as well as finding out its cause is necessary to realize thecurrent trend of international trade in order to come up with appropriate implications Based

on the above reason, I conducted thesis: “ “The slowdown in Asia’s international Trade andits causes”

2 Literature review

Current status of international trade slowdown

Gita Gopinath ( 2019 ) indicates the trend of slowdown again in the world economy inrecent years Pointing out the weakness in growth is driven by a sharp deterioration in

manufacturing activity and global trade The research has given some forecasts and some

recommendations to help improve the world's growth rate in 2020

Cristina, Aaditya, Michele (2015), showed that after the recovery from the globalcrisis, trade growth has so far been sluggish, trade growth in recent years has been weak in

advanced economies, particularly in the Eurozone, and moderate in emerging markets and

developing economies The paper indicates that the causes are changes in the pace ofincome convergence across countries and the associate impact on trade patterns and growth,

changes in the composition of world trade, changes in the trade regime, including the rise

of protectionism and changes in the pattern of vertical specialization

Lewis and Monarch (2016) point out many reasons of the slowdown ininternational trade such as a deceleration in the speed of trade openness, the slowing of

supply chain fragmentation, structural changes in Chinese trade, as well as cyclical factors,

such as the weakness in the trade-oriented components of aggregate demand

Petersen (2016) refers five causes of the slowdown: decreasing demand for goods

in Europe and China, the growing importance of services, rising wages in the newly

industrializing countries, increasing protectionism and increasing digitalization

Christophe Bellmann, Trineesh Biswas and Marie Chamay ( 2010) point out theinfluence of the world economic and financial crisis affecting world trade Take a look atthe slowdown in trade activities of some major countries such as China, India, Brazil,

These researches only point out the trade slowdown in the world and some countries

but do not mention Asia

Impacts of trade slowdown to economies

Valentina Romei ( 2019), highlighted the situation of trade slowdown in the

Europeans as long as the world’s.Exports and imports declined across all major EU

economies, with falls of 3.6 per cent and 1.7 per cent respectively in France, and of 0.4 per

exports decreased 1.2 per cent and imports slipped 1 per cent The research pointed out thenegative effects of trade slowdown on the world economies, especially the G20 countries.

However, the study did not show out the causes of the slowdown in world trade as well as

go into detail the other areas except for Europe, especially Asia

Sumedh Deorukhkar & Le Xia (2016) gauge the impact of China’s transition on

emerging economies in Asia amid on-going issues surrounding China’s growth slowdown,

the Yuan depreciation and financial market volatility They find that Taiwan and Korea to

be most vulnerable to a contraction in Chinese imports while Philippines, Indonesia andIndia are least affected The studies only highlight the trade slowdown in a major Asian

country - China as well as the negative impacts of that trend on some neighboring countries

It does not point out trade slowdown picture in Asia as well as the causes and impacts of

this trend

Factors affect international trade

Jan Hanousek, and Evzen Koéenda (2013) analyze how a set of traditional as well

as new determinants affect trade among European countries over the period 1992-2008

The factors encompass variables from the areas of geography, culture, institutions,

infrastructure, and trade direction

Steve Suranovic (2010), Point out six main factors that affect international trade.The first factor is inflation, national income, government policies, subsidies for exporters,

restrictions on imports and exchange rates

The cause of the slowdown in international trade

Fabian Mendez Ramos ( 2016 ), reviews recent patterns in global trade, examinesthe factors affecting trade-distinguishing between transitory and structural components of

the slowdown-and discusses policies shaping the path of future trade, including the rise of

protectionism and the relevance of multilateral and bilateral trade agreements In generalthe research does not indicate the causes of trade slowdown.

Logan Lewis and Ryan Monarch ( 2015), analyzes the striking slowdown in world

trade in recent years, assess its causes, including to what extent it reflects recent cyclicalweakness in global growth versus underlying long-term structural shifts in the worldeconomy What its causes are has important implications for whether or not the trade

slowdown should generates additional concerns in and of itself, beyond general concerns

about the future trajectory of world economic growth The research has pointed out the

slowdown in world trade and its causes,but it doesn’t mention as long as analyze the tradeslowdown in Asia

In general, previous researches have only analyzed the trade in global perspective

However, most researches do not analyze in detail the Asia's international trade growth

picture, so that the reader still cannot totally understand about what is called “slowdown”

of Asia's international trade That’s why it is necessary to do this research This topic will

be further analyzed in terms of Asian trade, from this point out the causes of the trade

slowdown in this region

3 Research objective

General objective: Identify and recognize the changing trends in international trade in

Asia as well as find out the causes of the slowdown in Asia’s trade.

Specific objectives:

- Find out how the slowdown in trade is happening in Asia

- Find out the changing trend in Asia's Trade by commodity group

- Find out the changing trend in Asia's Trade by partner

- Find out the causes of the slowdown in Asia’s Trade

- Make policy implications in this context to identify and mitigate the negative impact of

this phenomenon

4 Subject of the study and Scope

Subject of the study: Asia's international trade and factors affecting Asia's international

trade

Scope of the study:

+ Time scope: The Asian economies within 2008- 2019 to see the specific change in

periods before Financial Crisis and after Financial Crisis

(The economy as well as the world trade were severely affected after the 2008economic crisis This is an important milestone in the economic and international tradedevelopment of Asia and the world as well Therefore, the research scope of the topic

focuses on the period from 2008 to 2019)

+ Space scope: The Asia, Trade between Asia countries and partners outside Asia

+ Content scope: Trade perspectives in goods and services of Asia’ international trade

5 Methodology

The research will collect data from different sources such as Asian Development Bank

(ADB), International Monetary Fund (IMF), World Bank (WB) and Trademap.org Thenthe research will conduct statistics, calculations and description analysis to show the status

as well as the cause of the slowdown in Asia’s trade.

6 Research structure

The research consists of three chapters:

Chapter 1: Theoretical basic on International TradeChapter 2: The slowdown in Asia’s International TradeChapter 3: The causes of slowdown in Asia’s international trade and implications

CHAPTER 1: THEORETICAL BASIC ON INTERNATIONAL

TRADE

1.1 Definition of International Trade

Krugman, Obstfeld, Melitz (2012) argued that international trade focuses primarily

on the real transactions in the international economy, that involve a physical movement of

goods or a tangible commitment of economic resources

BusinessDictionary defined international trade as the exchange of goods or servicesalong international borders This type of trade allows for a greater competition and more

competitive pricing in the market The competition results in more affordable products forthe consumer The exchange of goods also affects the economy of the world as dictated by

supply and demand, making goods and services obtainable which may not otherwise beavailable to consumers globally

Briefly, international trade is the purchase and exchange of goods and servicesacross national borders

1.2 International Trade Theory

International trade theory analyzes the basis and the gains from trade (Salvator,2013) There are a lot of international trade theory but in this part, paper will concentrate

in serveral theories: the mercantilists’s theory, the absolute theory, the comparativeadvantage theory, the opportunity cost theory, the Heckscher-Ohlin theory

The Mercantilists’ Views on Trade (TK XV- XVIII)The mercantilists maintained that the way for a nation to become rich and powerful

was to export more than it imported The resulting export surplus would then be settled by

an inflow of bullion, or precious metals, primarily gold and silver The more gold and silver

a nation had, the richer and more powerful it was Thus, the government had to do all in itspower to stimulate the nation’s exportsand discourage and restrict imports (particularly theimport of luxury consumption goods) However, since all nations could not simultaneously

have an export surplus and the amount of gold and silver was fixed at any particular point

in time, one nation could gain only at the expense of other nations (zero sum game) The

mercantilists thus preached economic nationalism, believing as they did that nationalinterests were basically in conflict.

The Absolute Advantage: Adam Smith

In the late 18th and early 19th centuries, first Adam Smith and then David Ricardo

explored the basis for international trade as part of their efforts to make a case for free trade

Their writings were responses to the doctrine of mercantilism prevailing at the time (Thomas

A.Pugel, 2004) In his Wealth of Nations, Adam Smith promoted free trade by comparing

nations to households Every household finds it worthwhile to produce only some of the products

it consumes, and to buy other products using the proceeds from what the household can sell to

others The same should apply to nations

According to Adam Smith, trade between two nations is based on absolute

advantage When one nation is more efficient than another in the production of onecommodity but is less efficient than the other nation in producing a second commodity,then both nations can gain by each specializing in the production of the commodity of itsabsolute advantage and exchanging part of its output with the other nation for thecommodity of its absolute disadvantage By this process, resources are utilized in the mostefficient way and the output of both commodities will rise This increase in the output ofboth commodities measures the gains from specialization in production available to bedivided between the two nations through trade

The Comparative Advantage: David Ricardo

In 1817, Ricardo published his Principles of Political Economy and Taxation, in

which he presented the law of comparative advantage According to the law of comparativeadvantage, even if one nation is less efficient than (has an absolute disadvantage withrespect to) the other nation in the production of both commodities, there is still a basis formutually beneficial trade The first nation should specialize in the production and export of

the commodity in which its absolute disadvantage is smaller and import the commodity in

which its absolute disadvantage is greater

The Opportunity Cost Theory: Haberler

Haberler (1936) explain the theory of comparative advantage on the opportunity cost

theory In this form, the law of comparative advantage is sometimes referred to as the law

of comparative cost According to the opportunity cost theory, the cost of a commodity is

the amount of a second commodity that must be given up to release just enough resources

to produce one additional unit of the first commodity No assumption is made here thatlabor is the only factor of production or that labor is homogeneous Nor is it assumed thatthe cost or price of a commodity depends on or can be inferred exclusively from its labor

content.

Consequently, the nation with the lower opportunity cost in the production of acommodity has a comparative advantage in that commodity (and a comparativedisadvantage in the second commodity)

The Heckscher-Ohlin theory

The Heckscher-Ohlin theory of trade explores some deeper reasons why people trade

This theory emphasizes international differences in the abundance of the “factors of production”(land, labor, skills, capital, and natural resources) Differences in factor abundance are asource of comparative advantage because there are also differences in the use of each factor

in the production of different products

The Heckscher-Ohlin theory predicts that a country exports the products that use its

abundant factor intensively and imports the products using its scarce factor intensively

The H-O explanation of trade patterns begins with why product prices might differbetween countries before they open trade Heckscher and Ohlin predicted that the key tocomparative costs lies in factor proportions used in production If cloth costs 2 bushels a yard

in the United States and less than a bushel a yard elsewhere, it must be primarily because theUnited States has relatively less of the factors that cloth uses intensively, and relatively more of

the factors that wheat uses intensively, than does the rest of the world Let land be the factor

that wheat uses more intensively and labor be the factor that cloth uses more intensively Let

all costs be decomposable into land and labor costs Therefore, the H-0 theory predicts thatthe United States exports wheat and imports cloth because wheat is land-intensive and cloth

is labor-intensive

With no international trade, land should rent more cheaply in the United States thanelsewhere, and labor should command a higher wage rate in the United States than elsewhere

The cheapness of land cuts costs more in wheat farming than in cloth making Conversely, the

scarcity of labor should make cloth relatively expensive in the United States This, according

to H-O, is why product prices differ in the direction they do before trade begins And, thetheory predicts, it is the difference in relative factor endowments and the pattern of factor

intensities that make the United States export wheat instead of cloth (and import cloth instead

of wheat) when trade opens up

1.3 International Trade Policy

Tariff

We can see that free trade maximizes world output and benefits all nations.However, practically all nations impose some restrictions on the free flow of internationaltrade Since these restrictions and regulations deal with the nation’s trade or commerce,they are generally known as trade or commercial policies While trade restrictions areinvariably rationalized in terms of national welfare, in reality they are usually advocated bythose special groups in the nation that stand to benefit from such restrictions

A tariff, as the term is used in international trade, is a tax on importing a good or service

into a country, usually collected by customs officials at the place of entry Tariffs can be advalorem, specific, or compound The ad valorem tariff is expressed as a fixed percentage

of the value of the traded commodity The specific tariff is expressed as a fixed sum perphysical unit of the traded commodity Finally, a compound tariff is a combination of an advalorem and a specific tariff

When imposing tariff, consumer surplus decrease, producer surplus increase,government collect tariff revenue but overall, national welfare decrease

Nontariff Barriers(NTB)Although tariffs have historically been the most important form of trade restriction,

there are many other types of trade barriers, such as export subsidies, voluntary export

restraints, and antidumping actions As tariffs were negotiated down during the postwar

period, the importance of nontariff trade barriers was greatly increased

An NTB reduces imports by operating through one or more of the following

channels:

* Limiting the quantity of imports

* Increasing the cost of getting imports into the market

* Creating uncertainty about the conditions under which imports will be permitted

Export Subsidies

An export subsidy is a payment to a firm or individual that ships a good abroad Like

a tariff, an export subsidy can be either specific (a fixed sum per unit) or ad valorem (aproportion of the value exported) When the government offers an export subsidy, shipperswill export the good up to the point at which the domestic price exceeds the foreign price

by the amount of the subsidy

In the exporting country, consumers are hurt, producers gain, and the governmentloses, the net welfare loses So an export subsidy unambiguously leads to costs that exceedits benefits

Import Quotas

An import quota is a direct restriction on the quantity of some good that may beimported The restriction is usually enforced by issuing licenses to some group ofindividuals or firms An import quota always raises the domestic price of the imported good.When imports are limited, the immediate result is that at the initial price, the demand forthe good exceeds domestic supply plus imports This causes the price to be bid up until themarket clears In the end, an import quota will raise domestic prices by the same amount as

a tariff that limits imports to the same level The difference between a quota and a tariff is

that with a quota, the government receives no revenue When a quota instead of a tariff is

used to restrict imports, the sum of money that would have appeared with a tariff asgovernment revenue is collected by whoever receives the import licenses License holders

are thus able to buy imports and resell them at a higher price in the domestic market The

profits received by the holders of import licenses are known as quota rents In assessing thecosts and benefits of an import quota, it is crucial to determine who gets the rents When

the rights to sell in the domestic market are assigned to governments of exporting countries,

as is often the case, the transfer of rents abroad makes the costs of a quota substantially

higher than the equivalent tariff

Voluntary Export Restraints

A variant on the import quota is the voluntary export restraint (VER), also known as

a voluntary restraint agreement (VRA) A VER is a quota on trade imposed from theexporting country’s side instead of the importer’s The most famous example is thelimitation on auto exports to the United States enforced by Japan after 1981 A VER isalways more costly to the importing country than a tariff that limits imports

by the same amount The difference is that what would have been revenue under a tariffbecomes rents earned by foreigners under the VER, so that the VER clearly produces aloss for the importing country

Local Content Requirements

A local content requirement is a regulation that requires some specified fraction of

a final good to be produced domestically From the point of view of the domestic producers

of parts, a local content regulation provides protection in the same way an import quotadoes From the point of view of the firms that must buy locally, however, the effects aresomewhat different Local content does not place a strict limit on imports Instead, it allowsfirms to import more, provided that they also buy more domestically This means that theeffective price of inputs to the firm is an average of the price of imported and domestically

produced inputs The important point is that a local content requirement does not produce

either government revenue or quota rents Instead, the difference between the prices of

imports and domestic goods in effect gets averaged in the final price and is passed on to

consumers.

1.4 Factors affecting international trade

According to Steve Suranovic (2010), there are six main factors that affectinternational trade The first factor is inflation: If a country’s inflation rate increases relative

to the countries with which it trades, consumers and corporations in that country will mostlikely purchases more goods overseas (due to high local inflations), while the country’sexports to other countries will decline

The second factor is national income: If a country’s income level increases by ahigher percentage than those of other countries, its trade balance is expected to decrease,

other things being equal As the real income level rises, so does consumption of goods A

percentage of that increase in consumption will most likely reflect an increased demand forforeign goods

The third factor is government policies: A country’s government can have a majoreffect on its foreign trade due to its policies on subsidizing exporters, restrictions on

imports, or lack of enforcement on piracy

The fourth factor is subsidies for exporters: Some governments offer subsidies totheir domestic firms, so that those firms can produce products at a lower cost than theirglobal competitors Thus, the demand for the exports produced by those firms is higher as

a result of subsidies

The fifth factor is restrictions on imports: If a country’s government imposes a tax

on imported goods (often referred to as a tariff), the prices of foreign goods to consumersare effectively increased Tariffs imposed by the U.S government are on average lower

than those imposed by other governments Some industries, however, are more highly

protected by tariffs than others American apparel products and farm products have

historically received more protection against foreign competition through high tariffs onrelated imports.

In addition to tariffs, a government can reduce its country’s imports by enforcing aquota, or a maximum limit that can be imported Quotas have been commonly applied to avariety of goods imported by the United States and other countries

The last factor is exchange rates: Each country’s currency is valued in terms of other

currencies through the use of exchange rates, so that currencies can be exchanged to

facilitate international transactions

Besides six internal factors above, the development of global economy is the

external factor that also contributes to international trade If global economy growths with

high rate, it will increase demand for goods, therefor boosting import and export On theother hand, if global economy slowdown, demand for goods will decrease, which lead to

decrease in export The same situations also happen (with smaller impacts) if there is any

change in the economic growth of countries that contribute largely to global trade such as:

United States, China, EU, Japan, etc

CHAPTER 2: THE SLOWDOWN IN ASIA’S INTERNATIONAL TRADE

2.1 An overview of the Asian economy

The economy of Asia comprises more than 4.6 billion people (60% of the world

population) living in 48 different nations Inclusing three Developed couuntries Japan,

Australia, New Zealand and 45 developing countries, they are:

Central Asia comprises Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz

Republic, Tajikistan, Turkmenistan, and Uzbekistan

East Asia comprises the People’s Republic of China; Hong Kong, China, theRepublic of Korea, Mongolia; and Taipei, China

South Asia comprises Afghanistan, Bangladesh, Bhutan, India, the Maldives,Nepal, Pakistan, and Sri Lanka

Southeast Asia comprises Brunei Darussalam, Cambodia, Indonesia, the Lao

People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore,

Thailand, and Viet Nam

The Pacific comprises the Cook Islands, Fiji, Kiribati, the Marshall Islands, the

Federated States of Micronesia, Nauru, Papua New Guinea, Palau, Samoa,Solomon Islands, Timor-Leste, Tonga, Tuvalu, and Vanuatu

The nominal GDP of total Asian economy is 31.58 ( trillion of $) accounts for

about 35,8% of world GDP (IMF, 2019) and the total Asia’s trade accounts for 34% ofworld trade (WTO, 2017) So Asian economy plays an important role in the world economy

in general and world trade in particular

2.2 The overall slowdown in Asia’s international trade value and growth

2.2.1 Trade value

Trade in goods

Asian merchandise imports account for about 36% of the world's imports of goods

(Table 2.1) Import value value has decreased significantly from 2008 ($ 5145 billion) to

2009 ($ 3997 billion) From 2010 to 2014, Import value increased slightly little by little from 5214 billion to $ 7111 billion However, in the next period, it tend to fall sharply form

$ 7111 billion in 2014 to $ 5895 billion in 2016 and $ 6719 in 2017 In 2018, the import

value increased slightly to $ 7520 billion, but it has fell down again in 2019 to $ 5321

billion

Asian merchandise exports account for about 40% of the world's exports of goods(Table 2.1) Export value has decreased significantly from 2008 ($ 5667 billion) to 2009

($ 4350 billion) From 2010 to 2014, Asia export value rose slightly year by year, from

$ 5657 billion in 2010 to & 7673 billion in 2014, but we can see a decrease from 2014 to

2017, from $ 7673 billion to $ 7221 billion Althought threre is a slight rise in 2018, it

appears to fall deeply again in 2019 from $ 7983 billion to $ 5801 billion.

Table 2.1: Exporting and importing for the goods in Asian economies (US Dollar)

Year Asia World

The value of Asian service imports increased sharply from 2008 ($/,126,771,528 ) to 2014

($ 1,760,375,109), but tends to slowdown over the period from 2014 ($ 1,760,375,109 billion) to 2018 ($ 1,935, 704,993 ) (Table 2.2).

The same as import value, the value of Asian service exports increased sharply from 2008

($ 946,459,022 ) to 2014 ($1,437,174,560), but tends to slowdown over the period from

2014 ($ 1,437, 174,560) to 2018 ($ 1,675,443,243) (Table 2.2).

2.2.2 Trade growth

After a strong 7.3% growth recovery in 2017, Asia’s merchandise trade volume grew

a slower 4.0% in 2018 (Figure 2.1) Ongoing trade tensions between the United States (US)

and the People’s Republic of China (PRC), along with slowing global economic growth,curbed the upward trajectory of the region’s trade growth, which fell below the 4.6% outputgrowth The expansion of global trade volume also slowed from 4.6% in 2017 to 3.0% in

2018, falling slightly below the 3.1% global economic growth (Firgue 2.1) Several Asian

economies recorded slower export growth due to weaker external demand from developedcountries and the potential negative effect from persisting trade tensions, which largely