The slowdown in asia’s international trade and its causes

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 ANH STUDENT: TRINH DINH THUONG CLASS: QH 2014E- KTQT- CLC Table of Contents LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS INTRODUCTION Rationale Literature review Research objective 10 Subject of the study and Scope 11 Methodology 11 Research structure 11 CHAPTER 1: THEORETICAL BASIC ON INTERNATIONAL TRADE 12 1.1 Definition of International Trade 12 1.2 International Trade Theory 12 1.3 International Trade Policy 15 1.4 Factors affecting international trade 18 CHAPTER 2: THE SLOWDOWN IN ASIA’S INTERNATIONAL TRADE 20 2.1 An overview of the Asian economy 20 2.2 The overall slowdown in Asia’s international trade value and growth 20 2.2.1 Trade value 20 2.2.2 Trade growth 23 2.3 International trade by commodity group and partners 26 CHAPTER 3: THE CAUSES OF SLOWDOWN IN ASIA’S INTERNATIONAL TRADE AND IMPLICATIONS 34 3.1 The causes of the slowdown 34 3.1.1 Rising protectionism 34 3.1.2 Decreasing Asia’s global value chain participation ratio 37 3.1.3 Instability about political economy 40 3.1.4 The change in components of trade 42 3.1.5 Global growth deceleration 43 3.1.6 World disease (corona) 43 3.2 Implications for Asia 44 CONCLUSION 45 REFERENCES 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 2.3 Merchandise trade by world and region 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 ABBREVIATIONS 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 INTRODUCTION Rationale Over the past recent years, the world economy has many fluctuations The United States’s new 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 on the world’s are always concerned Asia a big economy in the world after a decade of maintaining 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 of slowdown in both economic growth and international trade growth Recently, international trade 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 to access 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 value and 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 the current 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 and its causes” Literature review Current status of international trade slowdown Gita Gopinath ( 2019 ) indicates the trend of slowdown again in the world economy in recent 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 global crisis, 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 of income 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 in international 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 the influence of the world economic and financial crisis affecting world trade Take a look at the 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 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 cent and 1.8 per cent in Germany In Italy trade dropped for the sixth straight quarter: exports decreased 1.2 per cent and imports slipped per cent The research pointed out the negative 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 and India 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 Evžen Kočenda (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, examines the 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 general the 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 cyclical weakness in global growth versus underlying long-term structural shifts in the world economy 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 trade slowdown in Asia In general, previous researches have only analyzed the trade in global perspective However, most researches 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 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 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 10 Source: ADB calculations using data from International Monetary Fund (2016) So, we can see Asia's trade relations is worst with non-Asia, followed within Asia (except PRC) and with PRC 33 CHAPTER 3: THE CAUSES OF SLOWDOWN IN ASIA’S INTERNATIONAL TRADE AND IMPLICATIONS 3.1 The causes of the slowdown 3.1.1 Rising protectionism While trade liberalization is advancing centered on continued efforts to reach bilateral and regional free trade agreements (Firgue 3.1), concern is growing about rising protectionism globally and regionally Firgue 3.1 Number of signed FTAs of Asia (cumulative since 1975) Source: ADB (2016) The rising of trade protectionism, reflected in non-tariff measurement and other trade restriction measurements Instead of tariff barriers, government now tends to use non tariff barriers (NTB) as a powerful tool to restrict imports and exports as well According to a report of WTO (2016), from October 2015 to the end of June 2016, each month, WTO members impose 22 new trade restriction measurements Firgue 3.2 show a fast-growing number of trade remedies amid the slowdown in international trade, this trend continued in 2015 Antidumping duties are the most prevalent trade remedies affecting Asia 34 Firgue 3.2: Number of trade remedy measures affecting Asia Source: ADB caculations based on data from WTO (2016) Other non tarriff barriers are sanitary and phytosanitary, technical barriers An important goal for governments is to guarantee the safety of food for consumers and 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 food, beverages, or feed Policies with these objectives are generally referred to as sanitary (human and animal health) and phytosanitary (plant health) measures, more commonly known as sanitary and phytosanitary (SPS) measures, which include all relevant laws, decrees, regulations, requirements and procedures In response to consumer demand for greater product safety and stricter environmental protection, governments have tightened existing rules or implemented new policies These regulations and standards, also known as technical barriers to trade (TBTs), define either the specific characteristics of a product (for example, shape, size, or design and performance) or can pertain to the process and methods used in production (WTO, 2012) SPS and TBT measures is unexpected procedures concerned could harm trade flows, due to high compliance costs for businesses and the perishable nature of some exported products The incidence of SPS and TBT measures has grown Figures 3.3 and 3.4 show 35 the number of notifications to the WTO and the number of notifying economies since 1995 for SPS and TBT measures- both trending upward Firgue 3.3: Number of SPS Measures Source: ADB caculation (2016) Firgue 3.4: Number of TBT Measures Source: ADB caculation (2016) 36 SPS and TBT measures are estimated to forge significantly negative impact on exports from developing economies, particularly on Asia’s intraregional trade in agricultural product Following Hufbauer, Gary, and Euijin Jung (2016), after the crisis in 2008-2009, micro-protectionism rises as a consequence of political purposes of gaining votes as they promise to create more jobs and protect domestic firms and industries Also according to these authors, 117 local content requirement measures were applied since 2008, affecting $928 billion of global trade in goods and services in 2010, and potentially reducing global exports by $93 billion 3.1.2 Decreasing Asia’s global value chain participation ratio Global Value Chains (GVCs) is a network of interlinked stages of production for goods and services that straddles international borders Typically, a GVC involves combining imported and domestically produced goods and services into products that are then exported for use as intermediates in the subsequent stage of production or as final consumption products (ADB, 2015) Among the components of gross world exports, the value of DVA increased 2.6 times between 2000 and 2011 and 1.1 times between 2011 and 2015 For the same periods, foreign value added (FVA) increased 2.8 and 0.8 times Respectively, returned domestic value added (RDV), 2.1 and 0.9 times and purely double-counted terms (PDC), 3.2 and 0.5 times While DVA still increased between 2011 and 2015, all other components that capture an expanding production network through multiple border-crossing have decreased in absolute value As a major contributor to international trade and the deepening of the GVC, Asia is no exception Value added decomposition of Asia’s gross exports also points to deepening integration into the GVC between 2000 and 2011, which reversed the direction between 2011 and 2015 (Figure 3.5) 37 Firgue 3.5 Components of gross exports Source: ADB (2016) DVA= domestic value added FVA= foreign value added PDC= purely double-counted terms RDV= returned domestic value added GVC= global value chain 38 Asia’s GVC participation as measured by the share of value added contents of gross exports used for further processing through cross-border production networks also attests to this The GVC participation ratio rose from 63.2% to 65.5% between 2000 and 2011 but declined to 58.7% in 2015 (see Figure 3.5) Among the components of gross world exports, the value of DVA increased 2.6 times between 2000 and 2011 and 1.1 times between 2011 and 2015 For the same periods, foreign value added (FVA) increased 2.8 and 0.8 times, respectively: returned domestic value added (RDV), 2.1 and 0.9 times, and purely double-counted terms (PDC), 3.2 and 0.5 times We can indicate some country that increase DVA and decrease FVA in Asia like Korea, Malaysia, Thailand (table 3.1) Table 3.1: Select individual Asian Economies export component (% of total exports) 2000 China Korea India Japan Indonesia Malaysia Thailand Vietnam DVA (%) 81,6 69,4 85,1 89,1 85,1 47,6 59,2 75,6 FVA (%) 13,8 22,8 11,9 6,6 11,9 40,1 33,6 20,4 2015 China Korea India Japan Indonesia Malaysia Thailand Vietnam DVA (%) 81,5 72,8 86,1 83,9 86,1 68,8 71,1 65,7 FVA (%) 14,1 21,4 11,8 12,1 11,8 25,3 24,7 31 Source: ADB caculations (2016) Thus, we can see that global value chain is a factor impacting the slowdown in Asia’s trade 39 3.1.3 Instability about political economy Natural disasters, economic and financial crises, and oil and food price shocks affected Asian economies over the last half-century Some of these shocks ended in loss of lives, economic and social dislocations, and financial losses and economic costs (Figure 3.6) The frequency of these shocks appears to have increased, with nine shocks hitting the region since 2005 Firgue 3.6: GDP growth, shocks, and cost of natural disasters- Asia Source: ADB caculation (2016) These and other risks are reflected in indices of policy uncertainty, which have increased sharply since 2015 (firgue 3.7) 40 Firgue 3.7: Global policy uncertainty, January 2014 - February 2017 Source: policyuncertainty.com In Europe, challenging negotiations between the United Kingdom and the rest of the European Union will increase uncertainty about the shape of their trade relations in the future After more than 40 years of membership, the British people voted for change and the establishment of a new type of relationship with the EU Refer to Wood, Jang (2017), these fears of uncertainty were compounded by signs of a slowing Chinese economy, which had been a key driver of economic growth since the global financial crisis of 2007–2009, and the increased visibility of far-right nationalism within several prominent European countries According to estimations given by the IMF (2016), the global economy is expected to lose about 0.2% of its current GDP outlook for 2017 due to Brexit Brexit and the European tariff and regulatory environment may limit Asian headquartered European subsidiaries or counterparties from the current full access across UK and Europe markets Recent political events- such as the Trump’s victory in the US election- suggest a rising tide of antiglobalization and anti establishment sentiment among parts of the electorate worldwide As of public record, Trump outlines steps that he will immediately take in order to economic growth within the United States such as withdrawing from the Trans-Pacific Partnership (TPP), imposing a 45% tariff on a broad swath of imports from China, 35% tariffs on items produced in Mexico, and arbitrary tariffs of between 15% 41 45% for any country deemed to be a currency manipulator, instructing the U.S Trade Representative to bring trade cases against China addressing violations of the World Trade Organization (WTO) rules and restrictions These protectionist would be the precursor to a destructive chain of events that would harm manufacturers and consumers in both the U.S and Asia and would lead to disrupted supply chains, imploded trade relationships and, ultimately, trade wars Thus, these events could increase global uncertainty and erode confidence on global institutions that also impact the slowdown in Asia’s trade 3.1.4 The change in components of trade The world has seen strong growth in trade in services while stagnating in trade in goods (Table 3.2) Table 3.2: Merchandise trade by world and region 2010-2016 Trade in goods Trade in services Export Import Export Import World 0,6 0,7 3,6 3,8 Asia 1,9 0,9 4,4 6,1 Source: WTO Secretariat (2017) Sebastian (2016) indicated “as the world economy becomes richer, it shifts naturally from manufacturing to services, and services are traded less, partly because of higher protectionist barriers in service industries” Lewis and Monarch (2016) argued that an expenditure components explanation turning to the first potential mechanism for the trade slowdown in more detail, it is notable 42 that recent weakness in global demand has been concentrated in expenditure that are highly traded, such as investment goods and durables Briefly, the change in shift from manufacturing to service, weakness in global demand are the factors impacts the slowdown in Asia’s trade in recent years 3.1.5 Global growth deceleration The annual pace of global GDP growth has peaked and a phase of deceleration is expected to lie ahead From a peak of 4% year-on-year in Q4 2017, there could be a cyclical slowdown to 3.5% by Q4 2018 and to 3.1% by Q4 2019, weakening world trade volume growth Moreover, a resilient US economy is unlikely to offset headwinds affecting AEJ Asia’s domestic financial conditions are also starting to tighten with interest rates rising in India, Indonesia and the Philippines and the higher costs of financing in corporate debt markets in China could soon spread to other countries 3.1.6 World disease (corona) Pandemics top national risk-management frameworks in many countries and continients The coronavirus disease 2019 (COVID-19) is no exception The disease - an epidemic that could become a global pandemic - emerged in a densely populated manufacturing and transport hub in central China and has since spread to 29 other countries and regions (as of 20 February 2020), carried along by Chinese New Year and international travel The COVID19 pandemic affects the manufacturing industry resulting in commodity scarcity Ana Boata, an expert from the Allianz Research Center, said the Covid-19 outbreak could push the global manufacturing sector into recession "Electronics and computers are at the highest risk," she said China - a trading power in Asia is the first victim of the covid19 pandemic The Covid-19 outbreak is radically attacking Chinese exports and disrupting global supply chains China still close factories, cargo ports are also much quieter than usual China holds a central position in the global supply chain, causing 43 disruptions in its economy to other countries The economies in Asia also suffered considerable losses More than one third of goods imported into Korea, Vietnam, Indonesia and Philippines come from China The Asian countries gradually closed their borders, restricting or even canceling all international flights, making it difficult to transfer goods in other countries 3.2 Implications for Asia The WTO forecasts that global trade will expand by 2.4% in 2017; however deep uncertainty about near-term economic and policy developments make the forecast risk The unpredictable direction of the global economy in the near term and the lack of clarity about government action on monetary, fiscal and trade policies aises the risk that trade activity will be stifled Greater trade can provide a host of economic benefits, including enabling the pursuit of comparative advantage, fostering more competition, generating technological and knowledge spillovers, and facilitating import of key capital goods Given that trade benefited the Asian economies, it seems that the slowdown in global trade, whatever its causes, could lead to some loss of dynamism and growth in the region So what’s an Asian economies to do? Firstly, instead of trying to restore growth through enhancing external surpluses, under the circumstances it makes more sense for emerging Asia to focus on domestic demand as an engine of its growth Encouraging domestic demand and allowing for downward adjustment of these surpluses in emerging Asia, would provide a much needed injection of demand into the global economy and also support economic growth in the region Secondly, reforms aimed at reducing trade costs could lead to efficiency gains by improving access to markets and expanding global value chains Trade costs could be reduced by cutting tariffs and non-tariff barriers to trade in both goods and services, and addressing distortions and inefficiencies in transport and logistics In the 1990s and early 44 2000s, applied tariffs fell from averages of nearly 30% to less than 15% in emerging and developing countries, from 10% to less than 5% in industrial countries suggest that trade policies, which shape the costs of the international exchange of goods and services, are still relevant With other factors, notably weak investment, already weighing on trade, resisting all forms of protectionism and reviving the process of trade liberalization to dismantle remaining trade barriers would provide much needed support for trade growth, including through possibly kicking off a new round of global value chain development Thirdly, participating deeper in global value chains through increasing the level of knowledge and technology embodied in production and exports, making a country an attractive location for economic activities can help attract foreign direct investment and foster new areas of economic activities improving the functioning of labour, products and financial markets are also necessary for successfully moving up the value chain Fourthly, the increasing share of the service sector in Asian economies also suggests its potential to further expand and create high quality employment together with expansion of infrastructure services and development of human capital will facilitate a greater ability to adjust to changing labour market situations Fifthly, while there are signs of anti-globalization, Asian economies should actively integrate into the world economy extensively because of the benefits it brings CONCLUSION The thesis analyzes the current status of the slowdown in Asia’s trade By volume, both export and import growth has slowed in Asia since 2011 and it also fell further below GDP growth By commodity group, the largest proportion in Asian trade is intermediate goods, followed by consumption goods and capital goods Asian trade is declining mainly due to the decline in trade in goods, while trade in services is still growing steadily Asia's trade relations is worst with non-Asia, followed within Asia (except PRC) and with PRC 45 The thesis has pointed out the main causes for the decline of Asian trade are The downward trend in the growth of key Asian exporters, Rising protectionism, Decreasing Asia’s global value chain participation ratio, Instability about political economy and The change in components of trade From these, thesis offer the following implication: focus on domestic demand as an engine of its growth, encourage technological and knowledge spillovers, reforms aimed at reducing trade costs with the hope to mitigate the decline in Asian’s trade and imporving service sector REFERENCES ADB (2015), Key Indicators for Asia and the Pacific 2015, part IV: Global value chains indicators for international production sharing ADB (2016), Asian economic integration report 2016: What drives foreign direct investment in Asia and the Pacific, Asian Development Bank Albrow, Martin and Elizabeth King (1990) Globalization, Knowledge and Society London: Sage ISBN 978-0803983243 p Cristina; Aaditya; Michele (2015), The Global Trade Slowdown: Cyclical or Structural? 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Theoretical basic on International Trade Chapter 2: The slowdown in Asia’s International Trade Chapter 3: The causes of slowdown in Asia’s international trade and implications 11 CHAPTER 1: THEORETICAL... 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. .. affecting international trade 18 CHAPTER 2: THE SLOWDOWN IN ASIA’S INTERNATIONAL TRADE 20 2.1 An overview of the Asian economy 20 2.2 The overall slowdown in Asia’s international trade