progress of asian economic integrationenglish.boaoforum.org/u/cms/www2/201804/08174730df7h.pdf ·...

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Boao Forum for Asia Progress of Asian Economic Integration

Annual Report 2018

对外经济贸易大学出版社

中国·北京

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图书在版编目（CIP）数据

博鳌亚洲论坛亚洲经济一体化进程 2018 年度报告 = Boao Forum for Asia Progress of Asian Economic Integration Annual Report 2018: 英文. —北京：对外经济贸易大学出版社，2018.3 ISBN 978-7-5663-1906-7

Ⅰ. ①博… Ⅱ. Ⅲ. ①经济一体化−研究报告−亚洲 −2018−英文 Ⅳ. ①F13

中国版本图书馆 CIP 数据核字（2018）第 046854 号

ⓒ 2018 年对外经济贸易大学出版社出版发行

版权所有翻印必究

Boao Forum for Asia Progress of Asian Economic Integration

Annual Report 2018

责任编辑：董黛

对外经济贸易大学出版社北京市朝阳区惠新东街 10 号邮政编码：100029

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成品尺寸：215mm×278mm 6.75 印张 173 千字 2018 年 3 月北京第 1 版 2018 年 3 月第 1 次印刷

ISBN 978-7-5663-1906-7

定价：180.00 元

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Table of Contents

ACRONYMS ···························································································································································· IX

FOREWORD ···························································································································································· XI

LIST OF CONTRIBUTORS ·································································································································· XIII

Chapter 1 Recent Trend of Asia’s Trade and Investment ·········································································· 1

1.1 Trade of Asia in 2016 ·········································································································································································· 1

1.2 Asia’s Trade in Intermediate Goods: Persistence in Slowdown ··············································································· 7

1.3 FDI Inflows and Outflows in Asia ············································································································································ 10

Chapter 2 Trade Interdependence among the Asian Economies ·························································· 17

2.1 Measuring Asia’s Trade Integration ········································································································································ 17

2.2 Trade Interdependence among Key Members: Past and Present ····································································· 19

2.3 Trade Flows among Selected Asian Economies ············································································································ 22

2.4 Direction and Dependence of Intermediate Goods Trade in Asia ····································································· 23

2.5 Basic Facts about Trade in Value Added in Asia ············································································································· 25

Chapter 3 Interdependence of Asian Economies in Factory Asia ·························································· 31

3.1 Pattern of Interdependence Remained Stable ·············································································································· 31

3.2 Product Dependence and Competitive Advantage in the Global Value Chain ········································ 33

3.3 Pattern of Competitive Advantages among Global Factories ·············································································· 36

Chapter 4 FDI Interdependence in Asia ······································································································ 43

4.1 FDI Self-dependence in Asia ····················································································································································· 43

4.2 Inward FDI Interdependence ···················································································································································· 44

4.3 Outward FDI Interdependence ··············································································································································· 46

Chapter 5 Integration in Asia’s Service Sector ··························································································· 49

5.1 Features of Services Content in Asia Trade ······················································································································· 49

5.2 Asia Integration ················································································································································································· 54

Chapter 6 Financial Integration ···················································································································· 59

6.1 Portfolio Investment in Asia: Fragile Recovery amid Continuing Uncertainty ··········································· 59

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6.2 De jure and de facto Financial Openness of Asia ········································································································· 61

6.3 Index of Business Cycle Synchronization ·························································································································· 66

6.4 Asian Financial Market Integration: Saving and Investment Correlation Indices ····································· 68

6.5 Stock Market Correlation Index in Asia ······························································································································· 70

6.6 Inflation Correlation Index in Asia ·········································································································································· 73

Outlook ································································································································································· 77

Appendix Important Events of the Asian Economic Integration ··························································· 79

References ···························································································································································· 91

ACKNOWLEDGEMENTS ······································································································································ 93

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LIST OF TABLES Table 1.1 Merchandise Trade of Major Asian Economies in the First Eight Months in 2017 ···························· 5 Table 1.2 Value and Growth of Intermediate Goods Trade, Selected Asian Economies, 2002-2016 ··········· 9 Table 1.3 Inward Foreign Direct Investment of Asian Economies (USD billion) ···················································· 10 Table 1.4 Outward Direct Investment of Asian Economies (USD billion) ·································································· 14 Table 2.1 Trade Dependence Index, Selected Asian Economies (percent) ······························································ 18 Table 2.2 Trade Dependence Index, Selected Asian Economies, 2016 (percent) ················································ 19 Table 2.3 Trade Flows among Asian Economies, 2016 (USD billion) ············································································ 22 Table 2.4 Intra-regional Exports of Intermediate Goods, Selected Asian Economies, 2016

(USD billion) ··············································································································································································· 24 Table 2.5 Dependency Index for Exports of Intermediate Goods, Selected Asian Economies, 2016 ······ 24 Table 3.1 Index of Interdependence in Factory Asia, 2016 ································································································· 31 Table 3.2 Index of Interdependence in Factory Asia, 2015 ································································································· 32 Table 3.3 Index of Dependence on Factory Asia, Major Asian Economies, 2001-2016 ····································· 33 Table 3.4 Dependence of Trade in Top 22 Parts and Components by SITC Codes, 2016 ······························· 34 Table 3.5 Dependence of Trade in Top 22 Parts and Components by SITC Codes, 2015 ······························· 35 Table 3.6 Major P&C Exports by Asian Economies, 2016 (USD billion) ········································································ 36 Table 3.7 Major P&C Exports by Asian Economies, 2015 (USD billion) ········································································ 37 Table 3.8 Major P&C Exports by EU (27), 2016 (USD billion) ······························································································ 38 Table 3.9 Major P&C Exports by EU (27), 2015 (USD billion) ······························································································ 39 Table 3.10 Major P&C Exports by North America, 2016 (USD billion) ············································································· 40 Table 3.11 Major P&C Exports by North America, 2015 (USD billion) ············································································· 41 Table 4.1 FDI Interdependence Index (inflows plus outflows), Selected Asian Economies, 2016

(percent) ······················································································································································································· 44 Table 4.2 Inward FDI Interdependence Index, Selected Asian Economies, 2016 (percent) ·························· 45 Table 4.3 Asia’s Inward FDI Self-dependence Index, Selected Asian Economies, 2012-2016

(percent) ······················································································································································································· 46 Table 4.4 Interdependence Index for Outward FDI, Selected Asian Economies, 2016 (percent) ··············· 47 Table 5.1a Services (direct and indirect) Value Added to Exports for Selected Asian Economies,

1995-2000 ··················································································································································································· 52 Table 5.1b Services (direct and indirect) Value Added to Exports for Selected Asian Economies,

2000-2014 (USD million; percent) ································································································································ 53 Table 5.2 Dependence Index on Asian Tourism of Selected Economies, 2015-2016 (percent) ·················· 55

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Table 5.3 2016 Interdependence Indices Between Different Asian Economies (percent) ····························· 56 Table 6.1 World Total Capital Inflows in 2016 (USD million) ······························································································ 59 Table 6.2 World Total Capital Outflows in 2016 (USD million) ························································································· 61 Table 6.3 Ranking of De facto Financial Openness by IFIGDP (15 economies) ····················································· 65 Table 6.4 Averaged Gross Saving and Investment Rates in Asia, 1997-2017 ·························································· 69 Table 6.5 Correlation Coefficients for the Sample in 1997-2017 ···················································································· 70 Table 6.6a Stock Market Correlation Coefficients in Asia, 2002-2006 ············································································· 71 Table 6.6b Stock Market Correlation Coefficients in Asia, 2007-2011 ············································································· 71 Table 6.6c Stock Market Correlation Coefficients in Asia, 2012-2017 ············································································· 72 Table 6.7a Inflation Correlation in Asia and US, 2002-2007 ·································································································· 74 Table 6.7b Inflation Correlation in Asia and US, 2008-2017 ·································································································· 74

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LIST OF FIGURES Figure 1.1 Shares of Asia’s Merchandise Trade in the World, 2006-2016 ········································································· 2 Figure 1.2 Shares of World Trade in Commercial Service Taken by Asia and Value, 2006-2016 ························ 3 Figure 1.3 Shares of Asia’s Merchandise Export Markets, 2008-2016 ················································································ 3 Figure 1.4 Merchandise Trade of China and the US, 2003-2016 ·························································································· 4 Figure 1.5 Merchandise Exports of Selected Asian and Emerging Markets ································································· 6 Figure 1.6 Government Interventions that Hurt the Three Regions, 2009-2017 ······················································· 7 Figure 1.7 Trend of Trade in Intermediate Goods, 2001-2016 ······························································································· 8 Figure 1.8 Sectoral Distributions of FDI Inflows into Selected Asian Economies in 2015 and 2016 ·········· 13 Figure 2.1 Asia’s Trade Dependence Index on Asian Economies, 2004-2016 ··························································· 18 Figure 2.2 Trade Interdependence Index for Selected Economies ················································································· 21 Figure 2.3 Average Share of Domestic Value Added in Exports Selected Asian Economies,

1995-2014 ··················································································································································································· 26 Figure 2.4 Shares of Domestic Value Added in Exports, Selected Asian Economies, 1995-2014 ·················· 26 Figure 2.5 Shares of Domestic Value Added in Exports, Selected Asian Economies, 1995-2014 ·················· 27 Figure 2.6 Shares of Manufacturing DVA Content in Manufacturing Exports, Selected Asian

Economies, 1995-2014 ························································································································································ 28 Figure 2.7 Shares of Manufacturing DVA Content in Manufacturing Exports, Selected Asian

Economies, 1995-2014 ························································································································································ 28 Figure 2.8 Sharess of Service DVA Content in Manufacturing Exports, Selected Asian Economies,

1995-2014 ··················································································································································································· 29 Figure 2.9 Shares of Service DVA Content in Manufacturing Exports, Selected Asian Economies,

1995-2014 ··················································································································································································· 30 Figure 5.1 Total Services Value Added Export (direct and indirect) for Selected Asian Economies,

1995-2014 ··················································································································································································· 50 Figure 5.2 Indirect Services Value Added Exports for Selected Asian Economies, 1995-2014 ······················· 50 Figure 5.3 Service Value Added in Manufacturing Exports for Selected Asian Economies,

1995-2014 ··················································································································································································· 51 Figure 5.4 Dependence Index of Asian Tourism for Selected Economies, 2016 ····················································· 55 Figure 5.5 Dependence Index of Tourism Exports on China for Each Economy, 2015-2016 ·························· 57 Figure 6.1 Annual Percentage Change of Portfolio Investment to Asia ······································································· 60 Figure 6.2 Destination of Asia Portfolio Investment ················································································································· 61 Figure 6.3 Source of Asia Portfolio Investment ···························································································································· 61 Figure 6.4 De facto Financial Openness of Selected Countries by IFIGDP Measure ············································ 63

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Figure 6.5 De facto Financial Openness Based on the GEQY ····························································································· 64 Figure 6.6 De facto Financial Openness Based on the EQSH Method ·········································································· 64 Figure 6.7 Business Cycle Synchronization Index over Time······························································································· 67 Figure 6.8 Average Bilateral Correlations with East Asia ········································································································ 67 Figure 6.9 Average Bilateral Correlations with ASEAN ············································································································ 68 Figure 6.10 Trends of CPI in Asia and US during 2008-2017 ·································································································· 75

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ACRONYMS ASEAN Association of South East Asian Nations BRI One Belt and One Road Initiative CPI Consumer Price Index CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership DVA Domestic Value Added EU European Union FAP Feldstein-Horioka Puzzle FDI Foreign Direct Investment GATS General Agreement on Trade and Service GDP Gross Domestic Product GVC Global Value Chain ICIO Inter-country Input-output J-CFA Japan Capital Flow Account M&A Mergers and Acquisitions NAFTA North American Free Trade Agreement NRA Non-Resident Account OECD Organization of Economic Co-operation and Development P&C Parts and Components QDIIs Qualified Domestic Institutional Investors QE Quantitative Easing RCEP Regional Comprehensive Economic Partnership TPP Trans-Pacific Partnership UNCTAD United Nations Conference on Trade and Development VA Value Added

XI

FOREWORD After the outbreak of the global financial crisis in the developed countries in 2008, Asia has been undergoing a series of structural changes in its trade, investment and finance and these changes are having profound impact on the progress of Asia’s economic integration.

We need a cautious attitude to predict the future progress of Asia’s economic integration even though there were some good signs for Asia’s trade performance in 2017. The globalization based on the global value chain development, which has been the most important driver of Asia’s economic integration, is facing unprecedented challenges from two sides. The anti-globalization sentiment that originated from the West is still spreading over the world. Besides this, the market forces seem to be at work to reshape the global value chain— the basis of the globalization. The new innovations in precise machines, robots, 3-D technologies and lower resource costs may bring some manufacturing capacities back to the developed countries. In addition, there is also a tendency for multinational companies to shorten the global supply chains as they involve high risks of interruptions. Finally, an encouraging change in Asia’s global value chain is that most of the Asian economies including China, India, Vietnam, Indonesia and Thailand have significantly increased the capacity to substitute for imports of intermediate goods, which obviously would contribute to the reduction in global trade. The change in the global value chain may geographically lead to relocations of investment in the world and reduce the scale of global trade. This is the background against which Asia’s economic integration is proceeding today. The Asian members need new policies to face these challenges coming both from ideological perspective and from the market side.

Since the global financial crisis, many of Asia’s vulnerabilities emerged. The narrowness of the internal markets increasingly becomes a barrier to the expansion of the global value chain. Traditional model of Asia’s global value chain is: China sourced intermediate parts and components from the Asian partners including Japan, Korea and ASEAN and had these P&Cs assembled in China before the final goods were exported to the US and EU. With deteriorating economic growth and growing trade deficits in the US and some EU members, this model is faced with more difficulties. To expand Asia’s internal markets is very crucial to sustain the further growth of the global value chain and provide new momentum to the global trade growth. For many years, major Asian economies have excess savings. But these excess savings have not been effectively mobilized locally due to the underdeveloped financial markets. Instead of being intermediated in the local financial markets, they were mainly flowing to the developed countries. As noted in this Report, the United States and EU absorbed 96 percent of the world total portfolio investment in 2016. This pattern of capital flows would expose Asian economies to high risks of capital flight and higher cost of financing. The problem has become more prominent with volatile internal and external environments in recent years. Firms and individuals in the Asian economies have used the financial markets as a vehicle for “flight to safety”. With its rapid economic growth, Asia should have strong demand for capital and this requires an efficiently integrated financial markets. Some studies have shown that the local demand was very high, particularly for the infrastructure and the conservative estimates put the demand over USD 8.3 trillion before 2020 (Bhattacharyay 2010). The Asian economies should spare no efforts to take advantage of the opportunity to move collectively toward creating a world-class integrated local financial market throughout determined reforms. However, what is worrying us is that various indicators such as

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local saving-investment correlations, stock market correlations and capital account controls suggest that Asia is experiencing fallbacks in financial integration recently. In addition to these, there is also a problem of wide discrepancy between financial openness measured restrictive rules and the actual flows. For example, by regulations, ASEAN is less open than Japan and Korea. But in terms of actual flows, ASEAN appeared to more open than these two countries.

Looking ahead, Asia needs to tackle a number of challenges in its way forward. First, it should work out clear policies to deal with the structural changes of global value chain and find new and innovative ways to grow (as noted in the theme of the forthcoming Boao for Asia Annual meeting in 2018). Second, it should work collectively to develop a common approach to external pressures both in macroeconomic side and in trade to reverse the tendency of “flight to safety” and resist the protectionist pressures from the Western developed countries. Third, it should spare no efforts to deepen the financial reforms of individual economies in a coordinated manner so as to release the region’s potentials of growth. While the ultimate goal is to create an efficiently integrated local financial market, it may focus, but not limited, on several short-term goals such as eliminating the excess savings to boost the region’s demand, making collective solution to each individual economy’s potential financial risks, coordinating the progress of capital account reforms and promoting local entrepreneurship to boost investment. Finally, it should actively engage in conflict management. Security issues such as nuclear weapons, territorial disputes and fear of rising powers are beginning to have impact on Asia’ s economic development and cooperation. Asia economies should first establish a strong sense of community and develop skills and guidelines to manage the potential conflicts. Economies should abandon the “one-sided-win” mentalities and deepen the understanding of and listening patiently to the concerns of the other side through active dialogues and communications. It also requires economies to stand up against using war as means to resolve conflicts. Peace is the fundamental basis of Asia’s greater prosperity and to ensure peace, the Asian economies should use the region’s economic integration as a stabilizer and the Asian leaders should work together to steer the region in this direction.

Zhou Wenzhong

Secretary-General

Boao Forum for Asia

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LIST OF CONTRIBUTORS

Lin Guijun, Lead Writer, University of International Business and Economics Deng Shizhuan, Beijing University of Civil Engineering and Architecture Huang Xiaoling, University of International Business and Economics Jiang Ping, University of International Business and Economics Jing Ran, University of International Business and Economics Li Yang, University of International Business and Economics Pei Jiansuo, University of International Business and Economics Ren Liang, School of International Business, Beijing Union University Shu Jinghong, University of International Business and Economics Sun Mengyang, School of Tourism, Beijing Union University Xue Yi, University of International Business and Economics Wang Chunrui, University of International Business and Economics Wang Fei, University of International Business and Economics

Chapter 1 Recent Trend of Asia’s Trade and Investment

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1.1 Trade of Asia in 2016

1.1.1 Asia’s Trade in the World

Similar to 2015, 2016 remained a tough year on merchandise trade in value terms. Trade on merchandise goods worldwide kept declining in current dollars following the previous year’s trend. The world merchandise exports fell by 3.1 percent in value terms in 2016. With deep integration into the global economy, Asia’s trade made no escape to follow the global trend in 2016.1 The merchandise exports fell by 3.7 percent, while the imports by 4.7 percent. However, even though Asia's merchandise exports and imports contracted in absolute terms, the fall was more moderate than that in the previous year. This may be a good signal for the recovery in the near future.

Two features are worth highlighting for Asia’s merchandise trade in 2016. First, Asia’s share in the global merchandise trade remained at a historical high of the past 10 years. Second, the merchandise trade of Asia and the world had actually increased in volume terms in 2016 as the exports of the world grew by 1.3 percent in 2016 whereas

———————————————————————— 1 As a geographic definition, we follow its definition given by the

WTO in its International Trade Statistics 2015. Asia includes Afghanistan, China’s Hong Kong, China, Malaysia, Papua New Guinea, Tonga, Australia, India, Maldives, the Philippines, Tuvalu, Bangladesh, Indonesia, Mongolia, Samoa, Vanuatu, Bhutan, Japan, Myanmar, Singapore, Vietnam, Brunei Darus- salam, Kiribati, Nepal, Solomon Islands, Cambodia, Republic of Korea, New Zealand, Sri Lanka, Laos, Pakistan, China’s Taiwan, Fiji, China’s Macao, Palau, and Thailand. Other territories in the region are not elsewhere specified.

that of Asia increased by 1.8 percent.2 In other words, there was a discrepancy between trade measured in volume and in value terms in 2016. This phenomenon is not common although the same happened in 2015. The discrepancy could be attributed to low commodity prices as well as the appreciation of the US dollar.

While the value of Asia’s merchandise trade declined in 2016, its importance in the world merchandise trade was unaffected. Figure 1.1 shows the value and shares of Asia’s exports and imports over the last 11 years. The bars represent exports and imports with values shown on the left axis. The points connected by lines represent Asia’s shares in the world. The values of the points can be found on the right axis.

The total merchandise exports of Asia were USD5,262.02 billion in 2016, lower than the value of USD5,463.68 billion attained in 2015. Consequently, Asia’s merchandise exports decreased by 3.7 percent compared to the previous year. However, this decline was more moderate than that in the previous year as the merchandise exports dropped by 7.7 percent in 2015. In fact, Asia's performance in 2016 closely followed the global trend. During the same period, the value of the world exports decreased by 3.1 percent. As a result, the share of Asia in the world total merchandise exports remained at 34 percent, close to the ratio of 34.2 percent achieved in 2015.

Asia’s imports were USD4,781.18 billion, accounting

———————————————————————— 2 The data was obtained from Table A2, World Trade Statistics

Review 2017, WTO.

Boao Forum for Asia Progress of Asian Economic Integration Annual Report 2018

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for 30.26 percent of the world total in 2016, a moderate decline from the recorded 30.8 percent in 2015. Relative to the import value of merchandise

goods in 2015, the decline of Asia’s imports slowed to 4.7 percent in 2016 compared to 8.5 percent in 2015.

Figure 1.1 Shares of Asia’s Merchandise Trade in the World, 2006-2016 Source: International Trade Statistics 2007-2016 and World Trade Statistics Review 2017, WTO.

Trade in commercial service is gaining impor-

tance worldwide in recent years. In contrast to the downward trend in the global merchandise trade, the growth of commercial service trade started to be positive in 2016. Global service exports increased by 0.4 percent and the imports increased by 1.1 percent in 2016. The Asian economies were part of the global upward trend. As shown in Figure 1.2, Asia’s exports of commercial service increased by 0.9 percent over the previous year to reach the level of USD1,215.2 billion in 2016 while the imports increased from USD1,383.3 billion in 2015 to USD1,420.2 billion in 2016.1 Asia accounted for 25.3 percent of the world’s total commercial service exports and 30.3 percent of the total imports in 2016 (see Figure 1.2). Despite the rising importance of Asia in the global commercial service trade, its trade deficit on commercial service widened in 2016. However, given that the service trade is an important part of the global value chains, the widening deficit may represent the region’s growing demand for the relevant services.

———————————————————————— 1 The data was obtained from Table A60, World Trade Statistics

Review 2017, WTO.

1.1.2 Who Bought the Merchandise Goods from Asia?

For the destinations of Asia’s merchandise exports, four patterns are shown in Figure 1.3. First, North American market, Asia’s largest market outside Asia, has well recovered. In 2016 as in the previous year, 19.5 percent of Asia’s merchandise exports went to North America. Second, the share of Asia’s exports to Europe kept recovering. In 2016, 16.1 percent of Asia’s exports went to Europe compared to a lower share of 15.6 percent the year before. Third, Asia’s intra-regional trade still plays a dominant role, and the share strengthened in 2016. In 2015, the share of exports within Asian economies (intra-regional exports) was 51.4 percent. This ratio increased to 52.1 percent in 2016. Last, the market share by the rest of the world in 2016 continued on a downward trend. In 2016, 12.4 percent of Asian economies’ exports went to the rest of the world and the share decreased from 13.5 percent registered in 2015.


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Figure 1.2 Shares of World Trade in Commercial Service Taken by Asia and Value, 2006-2016

Source: International Trade Statistics 2007-2016 and World Trade Statistics Review 2017, WTO.

Figure 1.3 Shares of Asia’s Merchandise Export Markets, 2008-2016 Source: International Trade Statistics (2009-2016) and World Trade Statistics Review 2017, WTO.

1.1.3 Two Largest Merchandise Traders of the World

China's merchandise exports continued on a downward trend in 2016. However, despite the drop of 7.8 percent, the country kept its position as the world largest merchandise exporter, with the total exports amounting to USD2,098 billion in 2016. It is useful to read this number in comparison with the growth rates of the world and Asia during the same period. In 2016, the world merchandise exports

decreased by 3.1 percent while the Asia’s exports fell by 3.7 percent. The US ranked as the second largest exporter, followed by Germany. On import side, China remained as the second largest trader, next to the US, importing USD1,587 billion of goods, and Germany followed China to remain as the world third largest merchandise importer.

China’s merchandise trade surplus narrowed from USD593 billion in 2015 to USD511 billion in 2016. However, the size of China’s surplus far


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exceeded that of Germany—the second largest surplus economy in the world, which were recorded at USD285 billion in 2016. Despite the fact that China’s merchandise exports fell faster in value terms than that of the world and Asia in 2016, the existence of trade surplus still gave the markets some confidence on the stability of the Chinese economy.

The US was still the world largest merchandise trader in 2016, importing USD2,251 billion and exporting USD1,455 billion of goods. The trade deficit slightly reduced from USD803 billion in 2015 to USD797 billion in 2016. As Figure 1.4 shows, the merchandise trade of the US seemed to be more

stable than that of China in 2016. The exports of the US fell more moderately and stayed more closely in line with the global trend. In 2016, the US exports shrank by 3.3 percent compared to China’s 7.8 percent reduction.

In terms of export shares of both China and the US, their leading positions remained quite stable. In 2016, China’s share of the world’s total exports was 13.3 percent, a slight retreat from 13.96 percent attained in 2015. The US accounted for 9.2 percent of the world’s total exports in 2016 and the share had remained unchanged compared to that attained in 2015.

Figure 1.4 Merchandise Trade of China and the US, 2003-2016 Source: International Trade Statistics 2017, WTO.

1.1.4 Asia’s Trade in the First Eight Months of 2017

Compared with 2016, 2017 is a good year for Asia’s trade. The merchandise trade increased in the first eight months in 2017 for most of the Asian economies. The first 10 rows of Table 1.1 show the trade performance of top Asian economies as ranked by their export values. All economies in the table began to show positive growth rates in their exports. A good number of Asian economies even achieved two-digit growth rates, such as Indonesia, Australia, China’s Hong Kong, etc., far exceeding the world average of 9.6 percent. On the import side, the performance of the Asian economies was also

impressive in the first eight months of 2017. Among the 10 Asian economies in Table 1.1, 9 of them were able to have two-digit growth rates in contrast to the average of growth of 8.4 percent for the world. Compared to the negative growth rates of 3.7 percent for the exports and 4.7 percent for the imports in 2016, Table 1.1 suggests a strong recovery of Asia’s trade for the whole year in 2017. It should be noted from Table 1.1 that except China’s Hong Kong and India, all the other Asian economies ran surplus on their merchandise in the first eight months of 2017.

The bottom of Table 1.1 shows the merchandise trade of Russia, the US, EU, and the world from January to August in 2017 for the


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purpose of comparison. During this period, the exports from the US increased by 6.1 percent and the imports expanded by 6.5 percent on a year-on-year basis. However, the US growth was slightly weaker than that of the world. Similar to the US, EU’s merchandise trade growth was also slightly slower than the world average. In the first eight months of 2017, EU’s exports increased by 6.8

percent while the imports by 7.2 percent. Russia’s exports and imports enjoyed a full recovery in the first eight months of 2017. Its year-on-year growth rates of exports and imports during the first eight months in 2017 were 26.3 percent and 26.6 percent, respectively, in sharp contrast to -16.2 percent for exports and -6.1 percent for imports attained in 2016.

Table 1.1 Merchandise Trade of Major Asian Economies in the First Eight Months in 2017

Economy

Exports Imports

Value (USD billion)

Growth (percent)

Value (USD billion)

Growth (percent)

China, People’s Republic of 1,443.71 5.3 1,157.43 15.8

Japan 450.39 8.0 437.08 10.6

Korea, Republic of 363.23 12.6 307.54 17.6

China’s Hong Kong 354.80 21.5 376.20 9.5

Singapore 236.42 9.4 208.17 13.2

India 191.64 11.0 278.14 22.9

Thailand 153.45 9.1 146.45 15.8

Australia 150.86 26.8 146.34 11.0

Malaysia 141.55 15.8 126.18 14.5

Indonesia 108.81 23.4 97.93 12.1

Russia 222.02 26.3 142.44 26.6

US 1,007.95 6.1 1,529.03 6.5

EU 3,782.74 6.8 3,714.85 7.2

World 11,277.11 9.6 11,427.83 8.4

Source: Direction of Trade Statistics (DOTS), IMF, accessed in December 26, 2017.

1.1.5 Merchandise Trade of Selected Asian and Emerging Economies

Figure 1.5 shows the merchandise exports of selected Asian and emerging economies in the first eight months of 2017. The exports of Brazil, Russia and India are represented by dashed lines in the figure. They are BRIC countries. Other selected Asian emerging countries are represented by solid lines.

Three observations could be made from Figure 1.5. First, all the economies covered in the figure demonstrated strong and positive growth rates.

Except that Thailand grew at 9.1 percent, all the economies increased at double-digit rates. Second, Vietnam maintained its stable and strong growth momentum. In the first eight months of 2017, Vietnam’s exports reached USD140.19 billion, up by 17.5 percent compared to the same period in 2016.1 Third, among the BRIC countries, Russia, India and Brazil all picked up their growth momentum on

———————————————————————— 1 Direction of Trade Statistics (DOTS), IMF, accessed in January

5, 2018.


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merchandise exports. As mentioned in subsection 1.1.4, Russia’s exports expanded by 26.3 percent during the first eight months of 2017. During the

same period, India’s exports rose by 11 percent, and Brazil’s exports expanded by 18.8 percent.

Figure 1.5 Merchandise Exports of Selected Asian and Emerging Markets Source: Direction of Trade Statistics (DOTS), IMF, accessed in December 26, 2017.

1.1.6 The Rise of Protectionism and Uncertainty

The US withdrew from the Trans-Pacific Partnership (TPP) in January 2017 after the US President Donald Trump took office. In March, 2018, the 11 remaining signatories of the TPP, excluding the US, will officially sign the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The US decision to withdraw from the TPP could be regarded as a good demonstration of the anti-globalization trend in the developed economies. As highlighted in the US media, jobs in the US were outsourced to developing economies, and the employment in manufacturing sectors kept shrinking over the years. The withdrawal of the US from TPP shows the ambiguity in the direction of the US trade policy. More importantly, it indicates that the protectionism in the developed economies focusing on the competition from the developing economies could be a big concern in the global economy today. Figure 1.6 shows the

number of government interventions that have been implemented and almost certainly discriminate against foreign interests after 2009. They are reported by Global Trade Alert. The figure focuses on the harmful interventions that had been implemented by all countries and thus hurt the countries in discussion.1 Harmful interventions include but not limited to import tariffs, trade finance, anti-dumping, etc. Figure 1.6 shows that the overall numbers of harmful interventions kept on increasing from 2010 to 2015. Their negative impact could be a great concern if it takes some time for the impact to be

———————————————————————— 1 The number of harmful interventions on Asia is the simple

summation of the harmful interventions of the 42 Asian regions whose data are available from Global Trade Alert. This simple summation may double-count interventions that influence multiple economies simultaneously. However, this method allows us to make proper comparisons with North America and EU.


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manifested. Figure 1.6 also shows that the number of harmful interventions reduced from 2015 to 2017. However, we may not conclude that the harmful interventions were decreasing over the last three years because it takes time to record interventions. The more recent interventions would have a higher probability of not being recorded. However, if it is assumed the data are missing equally across regions, the contraction rates could be compared across

regions. From 2015 to 2017, the numbers of harmful interventions affecting Asia reduced by 60.6 percent. The interventions affecting EU dropped by 61.5 percent and the interventions negatively affecting North America reduced by 53.7 percent. To put differently, harmful interventions dropped at a slightly faster rate for the EU members than for the Asian economies.

Figure 1.6 Government Interventions that Hurt the Three Regions, 2009-2017 Source: Sorted from www.globaltradealert.org, accessed in January 24, 2018.

In addition to the CPTPP, several TPP countries

are also participating in the Regional Comprehensive Economic Partnership (RCEP). RCEP was launched in November 2012 and negotiations among 10 ASEAN countries and their 6 FTA partners started in May 2013. Compared with CPTPP, RCEP negotiations are less comprehensive since CPTPP emphasize more on investments, intellectual properties, labor standards, etc., and the agreements on these areas are more useful for the developed countries to exploit their competitive advantages. 1 If RCEP were to move forward, trade among RCEP members is expected to increase as the tariffs among its members are reduced. RCEP will benefit the stabilization of regional trade environments and the development of intra-regional global value chains in Asia. However, it is important to keep in mind that the trade creation effect of RCEP will be limited as 6 countries

———————————————————————— 1 It is summarized from Petri, Plummer, and Zhai (2017).

participate both CPTPP and RCEP2, and the Spaghetti bowl effect could be a potential concern.

1.2 Asia’s Trade in Intermediate Goods: Persistence in Slowdown

This Report began to follow closely the changes in the global value chain (GVC) after 2014. In recent years, the growth of the global value chain trade has been diminishing. As shown in Figure 1.7, this trend persisted into 2016 at both the global and the regional levels. Between 2015 and 2016, the total intermediate goods trade of the world continued to fall by 4.8 percent from USD16.538 trillion to USD15.744 trillion. However, when compared to the sharp decline of 14.0 percent recorded for 2015, the

———————————————————————— 2 The six economies include Japan, Vietnam, Malaysia, Australia,

Singapore and New Zealand.


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fall in 2016 is modest. Both Figure 1.7 and Table 1.2 indicate that the growth of global trade in intermediate goods had remained negative for five years.

In 2015, Asia’s intermediate goods trade dropped sharply by 15.2 percent. However, the situation improved in 2016 and the decline was mild at only 0.6 percent. The growth of Asia’s intra-regional trade in intermediate goods began to slow down around 2012 and decreased by 1.3 percent in 2016, following the more drastic drop of 9.8 percent. But it is still early to make any judgment about the long-term directions of the intermediate goods trade for Asia as well as for the world.

Most of the Asian economies as shown in Table 1.2 saw negative growth in their intermediate goods trade. China, being the hub of Factory Asia,

saw a 3.8 percent decline in its intermediate goods trade in 2016. Japan and Korea, the two headquarter economies in Factory Asia, also experienced a negative growth of 2.6 percent and 6.4 percent, respectively. While India has been praised as a more promising economy with comparative advantage in low labor costs, it was not able to escape the catastrophe. Following the sharp decline of 16.8 percent in 2015, India’s trade in intermediate goods continued to fall by 7.8 percent in 2016. However, Vietnam is the only outstanding economy in Table 1.2 that had been able to maintain a positive and a rather high rate of growth in its intermediate goods trade. Vietnam’s trade in intermediate goods increased by 7.8 percent in 2016 as compared to 8.4 percent in the previous year.

Figure 1.7 Trend of Trade in Intermediate Goods, 2001-2016 Note: Trade in intermediate goods is estimated through the UN Broad Economic Categories (BEC) classification. Intermediate goods include

industrial food and beverage (BEC 111 and BEC 121), industrial supplies (BEC 21 and 22), fuels and lubricants (BEC 31 and 322),

and parts and accessories of capital goods and transport equipment (BEC 42 and 53).

Source: UN ComTrade Database.


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1.3 FDI Inflows and Outflows in Asia

1.3.1 FDI Inflows

Globally, foreign direct investment (FDI) slightly fell by 1.6 percent in 2016, while FDI flows to developed economies continue to increase. In Asia, the FDI flows to Asian developed economies rebounded to the highest level since 2012 due to sharp increase to Japan and Australia, as shown in Table 1.3. In 2016, FDI inflows to Japan changed from a negative value to the highest positive since 2010. In contrast, FDI flows to Asian developing economies fell by 14 percent due to a sharp decline in East and South-East Asia.

In 2016, China’s Hong Kong showed an inverse V-type development of FDI inflows and lost its position as the largest recipient of FDI in Asia to

the Chinese mainland. China ranked the third in the world after the US (USD391 billion) and the UK (USD254 billion), with a small dip of negative 1.4 percent1. However, Korea and China’s Taiwan made significant gains in their FDI inflows in 2016 compared to 2015.

FDI inflows to ASEAN decreased for two consecutive years from the 2014 peak. Indonesia and Thailand suffered the deepest recession. However, FDI flows to the Philippines, Cambodia and Vietnam kept the upward trend. Foreign investment in South Asia and Central Asia also increased, especially in Iran and Kazakhstan. FDI flows to West Asia had been falling for five consecutive years with a declining rate.

——————————————————————— 1 UNCTAD, World Investment Report 2017, p12.

Table 1.3 Inward Foreign Direct Investment of Asian Economies (USD billion)

Economy

Inflows Net Cross-border

M&A Sales

Greenfield Investment

Project (as destination)

2014 2015 2016 Growth

(percent) 2016 Growth


(percent)

World 1,323.86 1,774.00 1,746.42 -1.55 868.65 20.40 827.67 8.09

Developed Economies 563.33 984.11 1,032.37 4.90 794.32 25.91 247.08 -5.5

Asia-Pacific 60.20 28.40 74.19 161.23 38.25 142.40 31.92 16.41

Israel 6.74 11.51 12.32 7.04 5.05 61.34 1.37 372.41

Japan 10.61 -2.25 11.39 .. 20.09 527.81 8.46 -4.94

Australia 40.33 19.48 48.19 147.38 12.68 39.49 21.14 26.59

New Zealand 2.52 -0.34 2.29 .. 0.43 19.44 0.95 -37.5

Developing Economies 703.78 752.33 646.03 -14.13 69.32 -14.61 515.74 10.06

Asia 467.17 529.49 445.44 -15.87 41.81 -9.96 388.64 17.94

East Asia 251.15 314.15 248.59 -20.87 20.58 -30.94 82.03 1.27

China, People’s Republic of 128.5 135.61 133.7 -1.41 5.89 -39.03 62.5 5.20

China’s Hong Kong 113.04 174.35 108.13 -37.98 7.57 -68.23 6.25 45.01

Korea, Republic of 9.27 4.1 10.83 164.15 -0.37 .. 9.9 6.11

Mongolia 0.34 0.09 -4.07 .. .. .. 0.6 -88.72


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(continued)

Economy


M&A Sales



2014 2015 2016 Growth

(percent) 2016

Growth(percent)

2016 Growth

(percent)

China’s Taiwan 2.84 2.42 8.33 244.21 7.49 .. 2.78 5.30

South-East Asia 130.39 126.59 101.10 -20.14 7.73 -19.84 127.86 10.16

Brunei 0.57 0.17 -0.15 .. .. .. 0.19 137.5

Cambodia 1.72 1.70 1.92 12.94 0.11 -63.33 5.17 28.29

Indonesia 21.81 16.64 2.66 -84.01 -1.24 .. 22.26 -42.24

Laos PDR 0.72 1.12 0.89 -20.54 0 0 1.35 -41.81

Malaysia 10.88 11.12 9.93 -10.70 3.91 682.00 19.9 46.21

Myanmar 0.95 2.82 2.19 -22.34 0.07 -87.5 10.49 -3.58

The Philippines 5.74 4.94 7.91 60.12 0.79 75.56 10.74 22.88

Singapore 73.99 70.58 61.60 -12.72 4.45 -10.64 12.35 49.52

Thailand 4.81 5.70 1.55 -72.81 -1.89 .. 8.48 4.05

Vietnam 9.20 11.80 12.60 6.78 1.53 118.14 36.93 72.09

South Asia 41.05 50.32 53.10 5.52 8.40 415.34 89.23 -1.37

Bangladesh 1.55 2.24 2.33 4.02 0.06 200.00 6.38 42.09

India 34.58 44.06 44.49 0.98 7.84 456.03 62.85 -0.93

Iran 2.11 2.05 3.37 64.39 - - 12.22 394.74

Pakistan 1.87 1.29 2.01 55.81 0.40 150.00 4.93 -73.92

Sri Lanka 0.94 0.68 0.9 32.35 0.10 100.00 2.85 143.59

Central Asia 13.53 10.17 14.56 43.21 .. .. 42.47 265.18

Kazakhstan 8.41 4.01 9.07 126.18 .. .. 40.27 637.55

Kyrgyzstan 0.25 1.14 0.47 -58.77 .. .. 0.12 -89.38

Tajikistan 0.41 0.55 0.43 -21.82 .. .. 0.33 0

Turkmenistan 3.83 4.40 4.52 2.73 .. .. 0.15 -85.00

Uzbekistan 0.632 0.065 0.067 3.08 .. .. 1.6 -56.76

West Asia 31.05 28.26 28.09 -0.60 5.10 -4.32 47.05 54.97

Bahrain 1.52 -0.80 0.28 .. 0.02 0 3.8 89.05


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(continued)

Economy


M&A Sales



2014 2015 2016 Growth

(percent) 2016

Growth(percent)

2016 Growth

(percent)

Iraq -10.34 -7.75 -5.91 .. .. .. 3.95 381.71

Jordan 2.18 1.6 1.54 -3.75 0 -100.00 3.32 606.38

Kuwait 0.95 0.29 0.28 -3.45 2.78 219.54 1.29 706.25

Lebanon 2.9 2.35 2.56 8.94 -0.31 .. 0.11 37.5

Oman 1.51 -2.70 0.14 .. 0.05 -54.55 3.42 288.64

Qatar 1.04 1.07 0.77 -28.04 0.14 .. 0.74 -20.43

Saudi Arabia 8.01 8.14 7.45 -8.48 0.48 -36.00 11.78 19.47

Turkey 12.46 17.26 11.99 -30.53 1.85 -37.92 8.84 42.58

United Arab Emirates 10.82 8.8 8.99 2.16 0.09 -80.00 9.8 9.375

Notes: .. = not available; negative value of FDI inflow = net outflow; Net cross-border M&A Sales in a host economy = Sales of companies

in the host economy to foreign TNCs (-) Sales of foreign affiliates in the host economy. According to World Investment Report, data

of FDI flows (UNCTAD FDI/TNC database), cross-border M&As (UNCTAD cross-border M&A database) and green-field

investment projects (based on the information provided by FDI markets of Financial Times) are from different sources, and the value

of M&As and the value of greenfield investment projects may include investments that are not qualified as FDI. Thus, FDI inflows≠

M&A sales + greenfield investment project (as destination) in the report.

Source: UNCTAD, World Investment Report 2017.

Several features of the FDI inflows into Asia are

summarized below. First, major Asian economies still maintained their

attractiveness for foreign direct investment, such as China, Japan, Korea, India, Australia, Kazakhstan and some ASEAN members in 2016. UNCTAD business survey also found the outlook for Asian FDI activity optimistic, especially in major recipients such as China, India and Indonesia, where strengthening policy efforts to attract FDI could guarantee a continuous increase of FDI inflows in 20171.

Second, internal investment within the region is still the dominant source of Asian FDI inflows. The intra-Asia inward FDI dependence index increased sharply from 43.9 percent in 2015 to 52.5 percent in 2016. It is worth noting that over 70 percent of FDI inflows to China and ASEAN came from Asia while

———————————————————————— 1 UNCTAD, World Investment Report 2017, pp 3-5.

the share of intra-Asian investment into India increased from 21.6 percent in 2012 to 45.7 percent in 2016.2

Third, the green-field investments were the main form of the FDI inflows to developing Asia and the value announced increased by 18 percent in 2016. The green-field investments were mostly concentrated in ASEAN, India and China. However, the fastest growth in the green-field investments took place in the Central Asia and West Asia. The increase in the announced value of green-field investments in Asia may contribute to more optimistic development of FDI inflows in the near future and also to strengthen their position in the regional production network of ASEAN, India and China.

Fourth, the share of FDI inflows to service industries in major Asian economies increased

———————————————————————— 2 See Table 4.3 of Chapter 4 (FDI Interdependence in Asia).


13

further in 2016. As shown in Figure 1.8, the distribution of FDI inflows in services increased in the main Asian economies, except for Indonesia whose FDI flows to manufacturing increased substantially in 2016. According to the statistics from China’s Ministry of Commerce, the FDI stock in manufacturing still accounts for two thirds of all the cumulated FDI inflows by the end of 2016, while to FDI inflows in 2015 and 2016, service sector accounted for about 70 percent.1 For Korea and India, the share of FDI

inflows in services increased from about 60 percent to over 70 percent. Around 60 percent of FDI inflows were targeted at manufacturing sectors in Japan and Indonesia. For Australia, the share of FDI inflows in service, manufacturing and primary sectors were around 50 percent, 10 percent and 40 percent, respectively. ——————————————————————— 1 Ministry of Commerce of China, Statistics on FDI in China

2017, http://www.fdi.gov.cn/, December 2017.

Figure 1.8 Sectoral Distributions of FDI Inflows into Selected Asian Economies in 2015 and 2016

Source: Calculated on the data from the Statistical Bureaus of the individual countries.

1.3.2 FDI Outflows

Globally, FDI outflows decreased by 8.9 percent while the performance of Asian economies was remar- kable, as shown in Table 1.4. The share of FDI outflows from developing Asia in the total from the developing world reached a new record of 93 percent, which could be a good indication of the dynamics of these economies. In 2016, China became the largest source of outward direct investment in Asia and the second in the world with a total value of USD183.1 billion, an increase of 43.5 percent over the previous year. FDI outflows from Israel, Japan, Korea and China’s Taiwan also increased by over 10 percent. However FDI outflows from China’s Hong Kong decreased for two consecutive years, down to only half of the value recorded in 2014. The outward direct investment from ASEAN, South Asia,

Central Asia and West Asia also followed a downward trend.

In 2016, the outward direct investment from Japan and Israel mainly took the form of the cross-border M&A transactions, while other Asian economies focused on green-field investment projects. However, China, Korea, China’s Taiwan, Thailand, India (a negative value in 2015) and United Arab Emirates saw rapid growth in the cross-border M&A purchases. According to the estimates by Asian Development Bank, Asian investments to locations outside the region were mostly taking the form of M&As for market-seeking2. ——————————————————————— 2 Asian Development Bank, Asian Economic Integration Report

2017, p 32.


14

Table 1.4 Outward Direct Investment of Asian Economies (USD billion)

Economy

Outflows Net Cross-border M&A Purchases

Greenfield Investment Project (as

source)

2014 2015 2016 Growth



(percent)

World 1,253.16 1,594.32 1,452.46 -8.90 868.65 20.40 827.67 8.09

Developed Economies 707.64 1,172.87 1,043.88 -11.00 707.53 20.77 496.04 2.15

Asia-Pacific 133.49 136.95 163.71 19.54 131.45 113.81 62.93 -9.07

Israel 3.67 9.88 12.50 26.52 41.73 1,085.51 2.07 -8.00

Japan 129.04 128.65 145.24 12.90 80.65 60.08 48.45 -14.14

Australia 0.31 -1.67 6.01 .. 8.86 -23.16 11.24 13.88

New Zealand 0.47 0.09 -0.04 .. 0.21 .. 1.17 77.27

Developing Economies 472.75 389.27 383.43 -1.50 149.86 25.87 321.22 21.30

Asia 431.00 333.69 356.97 6.98 143.59 30.19 300.94 24.07

East Asia 288.07 237.86 290.68 22.21 102.53 57.76 176.21 43.82

China’s people’s Republic of 123.12 127.56 183.10 43.54 92.22 111.27 110.36 84.49

China’s Hong Kong 124.09 71.82 62.46 -13.03 0.09 -99.50 12.8 -28.09

Korea, Republic of 28.04 23.76 27.27 14.77 4.76 750.00 32.2 22.15

Mongolia 0.106 0.011 0.009 -18.18 .. .. 0.01 ..

China’s Taiwan 12.71 14.71 17.84 21.28 5.46 90.91 20.84 12.41

South-East Asia 88.81 56.00 35.41 -36.76 12.87 -55.98 64.1 14.08

Brunei -0.456 0.058 -0.06 .. .. .. 0 ..

Cambodia 0.032 0.05 0.12 140.00 .. .. .. ..

Indonesia 7.08 6.25 -12.46 -299.36 0.17 -92.92 0.20 -71.43

Laos PDR 0.002 0.002 0.002 0.00 .. .. .. ..

Malaysia 16.45 9.9 5.6 -43.43 1.64 -56.73 20.17 147.48

Myanmar .. .. .. .. .. .. 0.21 ..

The Philippines 6.75 5.54 3.70 -33.21 0.36 -75.68 0.53 -72.40

Singapore 52.22 31.41 23.89 -23.94 6.19 -70.71 26.03 -1.29

Thailand 5.58 1.69 13.23 682.84 4.46 913.64 14.72 4.25

Vietnam 1.15 1.10 1.39 26.36 0.05 .. 2.24 -51.30

South Asia 12.01 7.82 5.55 -28.93 8.65 .. 20.61 30.53

Bangladesh 0.044 0.046 0.041 -10.87 .. .. 0.12 50.00

India 11.78 7.57 5.12 -32.36 8.58 .. 18.13 21.19

Iran 0.003 0.12 0.104 -13.33 .. .. 1.72 437.50


15

(continued)

Economy

Outflows Net Cross-border M&A Purchases

Greenfield Investment Project (as

source)

2014 2015 2016 Growth

(percent) 2016

Growth (percent)

2016 Growth

(percent)

Pakistan 0.12 0.025 0.052 108.00 0.01 0.00 0.36 227.27

Sri Lanka 0.067 0.054 0.237 338.89 0.06 20.00 0.28 -15.15

Central Asia a 3.82 0.89 -5.37 -703.37 0.03 .. 0.17 1,600.00

Kazakhstan 3.82 0.89 -5.37 .. 0.03 .. 0.17 1,600.00

West Asia 38.29 31.12 30.69 -1.38 19.51 15.65 39.85 -17.08

Bahrain -0.39 0.497 0.170 -65.79 -0.7 .. 0.08 -98.08

Iraq 0.242 0.150 0.304 102.67 .. .. .. ..

Jordan 0.083 0.001 0.003 200.00 0.01 .. 0.09 -72.73

Kuwait -10.47 5.41 -6.26 .. 0.37 -49.32 1.39 -64.18

Lebanon 1.26 0.662 0.773 16.77 0.05 400.00 0.62 100.00

Oman 1.36 0.294 0.862 193.20 -0.11 .. 3.26 503.70

Qatar 6.75 4.02 7.90 96.52 6.59 -25.45 0.72 5.88

Saudi Arabia 5.40 5.39 8.36 55.10 0.97 -70.87 6.5 -51.96

Turkey 6.66 4.80 2.87 -40.21 0.76 61.70 3.47 36.61

United Arab Emirates 11.74 16.69 15.71 -5.87 11.57 123.36 23.72 7.38

Notes:a= only Kazakhstan’s data is used for lack of data for other central Asian economies. .. = Not available; negative value of FDI outflow = net inflow;

Net cross-border M&A Purchases by a home economy = Purchases of companies abroad by home-based TNCs (-) Sales of foreign

affiliates of home-based TNCs.

According to World Investment Report, data of FDI flows (UNCTAD FDI/TNC database), Cross-border M&As (UNCTAD

cross-border M&A database) and greenfield investment projects (based on the information provided by FDI markets of Financial

Times) are from different sources, and the value of M&As and the value of greenfield investment projects may include investments

that are not qualified as FDI, so FDI outflows≠M&A purchases + greenfield investment project (as source) in the report.

Source: UNCTAD, World Investment Report 2017.

Since China introduced One Belt and One Road

Initiative (BRI) in 2013, investment dynamism has built up and more financial resources have been mobilized for outward investment1. According to China’s Ministry of Commerce, the Chinese enterprises invested in 53 BRI related economies in 2016, with a total investment of USD14.53 billion, a slight fall of 2 percent after a nearly 20 percent increase

———————————————————————— 1 UNCTAD, World Investment Report 2017—Investment and the

Digital Economy, p 19.

in 2015, accounting for 8.5 percent of China’s total FDI outflows to the world. A number of countries located along the major economic corridors, such as Cambodia, Pakistan and Kazakhs- tan have started to attract a significant amount of FDI flows from China as a result of their active participation in the Initiative. According to Cambodian statistics, Japan (33.5 percent), China (31.6 percent) and China’s Hong Kong (13.9 percent) were the top three investors


16

in Cambodia in 20161. South Asia is benefiting from a number of ongoing projects along the China- Pakistan Economic Corridor, which had brought in a large amount investment in infrastructure development. The Chinese investment in the industries other than natural resources in Central Asia is helping diversify the economic structure of various host countries.

———————————————————————— 1 Ministry of Commerce of China, Guidance to Foreign Invest-

ment Cooperation (Cambodia) 2017.

According to UNCTAD business survey, China and developed countries would remain as the top investors and United Arab Emirates, Korea and Turkey have improved their standings as attractive sources of FDI2. Asia’s emerging role as a global investor could further increase its own trade and investment linkages within the region and with the rest of the world.

———————————————————————— 2 UNCTAD, World Investment Report 2017, p 8.

Chapter 2 Trade Interdependence among the Asian Economies

17


2.1 Measuring Asia’s Trade Integration

Following the previous issues of this Report, Asia’s trade integration indicator is updated. The degree of trade integration is measured by proportion of one economy's trade with Asia relative to the proportion of its all trade with the rest of the world.

Table 2.1 shows the regional trade dependence indices for major Asian economies for 2004 and 2007 and, the time period from 2011 to 2016. Amid the persistent global economic slowdown (a possible cause for Black Swan events as seen in 2016, e.g. Brexit and Presidency election in the US), almost all the major economies (except Korea, India, Singapore, Malaysia, and the US) had decreased their trade dependence on Asia. In particular, China’s dependence on Asia contracted to 44.52 percent (well below the 50 percent watershed since 2013). China’s Hong kong dropped by nearly 3 points to 71.75 percent and China’s Macao dropped sharply from 94.83 percent in 2015 to 53.58 percent in 2016. Japan saw roughly three percentage points decrease to 53.82 percent while Korea continued to be less than 60 percent (ending up with 59.88 percent).

The US dependence on Asia managed to increase to 39.36 percent while EU’s share of trade with Asia declined to 16.83 percent in 2016 after the

peak in 2015. Finally, Asia's self-dependence saw a large setback over three years with the dependence index falling from 55.65 percent in 2014 to 50.74 percent in 2016 (see Figure 2.1). While it is not clear about the exact cause of the fall, to expand the region’s internal demand through further reforms may effectively stop the decline. Among all the factors for the Asia’s decline in trade integration, a possible candidate is the slow-down in the global value chain which was responsible for the sluggish trade growth after the global financial crisis. In particular, the innovations such as precise machines, 3-D printers and robots by the firms in the developed countries to compete with low-cost in the developing countries and overcome possible risks of long- distance supply chains resulted in shorter value chains, which, as a consequence, led to the reduction in the quantity of intermediate goods trade.

At the regional level, the counter-integration rivalries in Asia from both political and economic fields also affected the trade integration. At the global economic level, the anti-globalization sentiment that had led the US to withdraw from TPP and Britain from EU and, the slow and lack of significant progress in RCEP negotiations would all have negative impact on Asia’s ongoing integration process. If all these factors continue, Asia’s economic integration would come to a halt.


18

Table 2.1 Trade Dependence Index, Selected Asian Economies (percent) 2004 2007 2011 2012 2013 2014 2015 2016

China, People’s Republic of 55.16 50.06 47.72 51.14 46.77 46.50 46.24 44.52China’s Hong Kong 78.95 76.46 71.47 79.52 68.08 72.28 74.41 71.75Japan 54.40 53.69 58.08 61.29 57.03 57.06 54.19 53.82Korea, Republic of 56.57 56.07 57.92 65.95 62.63 60.74 59.50 59.88China’s Macao 48.01 52.46 48.33 60.05 - 56.18 94.83 53.58South Asia1 40.25 48.28 51.71 56.15 55.87 55.76 54.32 54.70India 37.33 48.75 51.28 55.91 54.50 54.23 52.72 53.51Sri Lanka 50.93 49.30 55.53 62.86 60.17 60.89 60.90 59.13ASEAN2 64.75 60.24 61.43 70.93 66.70 66.06 65.66 67.09Singapore 67.25 55.54 53.12 70.55 65.27 65.16 65.50 65.60Malaysia 63.28 62.56 65.42 71.71 67.72 66.44 66.95 67.14Thailand 65.56 65.30 67.83 69.69 66.86 66.67 66.22 65.84The Philippines 63.37 63.44 66.86 72.02 - - - 68.76Indonesia 60.39 61.92 65.28 74.10 71.30 70.51 68.75 68.16Vietnam 63.82 58.44 - 66.95 62.06 61.11 60.98 -New Zealand* 37.89 40.91 45.26 50.97 51.22 50.76 48.74 49.47Australia* 50.75 51.85 59.14 67.85 62.65 67.55 66.32 65.35US* 36.86 35.80 36.51 38.97 37.65 37.29 38.90 39.36EU (27)* 13.33 14.05 16.28 16.20 16.08 16.41 16.93 16.83Asia 55.83 53.07 54.07 59.49 53.01 55.65 51.48 50.74

Note: - means data not available.

The Economies with * indicating a different formula for computation (i.e., trade volume with Asia/trade volume with rest of world).

Since these economies are outside Asia, the indices are not entirely comparable with their counterparts.

Source: WITS, World Bank.

Figure 2.1 Asia’s Trade Dependence Index on Asian Economies, 2004-2016

———————————————————————— 1 South Asia includes India, Bangladesh, Sri Lanka, Pakistan, Nepal, Bhutan and the Maldives, among others. Due to space limit, two

countries are listed, namely India, and Sri Lanka. 2 The 10 ASEAN member countries include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand

and Vietnam. Only a few countries are shown due to space constraints.


19

2.2 Trade Interdependence among Key Members: Past and Present

This section is an update of the status of trade interdependence among major Asian economies. The economies are indentified by the closeness of their trade with each other. The measurement for the degree of interdependence is the same as in the

previous reports. The computed index lies between zero and one, with higher value representing a higher degree of trade interdependence.1 —————————————————————— 1 In one extreme case, if the index for one economy on another

one (or a region) is equal to zero, the economy is not trading with the latter economy. If the index is equal to one, then the former economy trades with the latter economy, not with all other economies.

Table 2.2 Trade Dependence Index, Selected Asian Economies, 2016 (percent)

OnOf ASEAN

China, People’s

Republic ofIndia Japan

Korea, Republic

of Asia

TPP Including

the US

TPP Excluding

the US

ASEAN 25.0 15.8 2.8 9.1 4.3 67.1 36.1 25.6

China, People’s Republic of

12.3 - 1.9 7.5 6.9 44.5 35.5 21.3

India 10.5 11.2 - 2.2 2.5 53.5 22.7 12.6

Japan 15.0 21.6 1.0 - 5.7 53.8 30.3 14.3

Korea, Republic of 13.2 23.4 1.8 8.0 - 59.9 35.2 23.0

TPP Including the US 10.0 16.7 1.7 4.7 4.1 43.1 42.3 25.9

TPP Excluding the US 12.5 16.7 1.6 4.0 4.7 45.9 44.5 15.7

Source: WITS, World Bank.

Table 2.2 shows the interdependence of

selected Asian economies in trade in 2016. For instance, almost all the selected economies exhibit significantly high dependence on China, typically with the all dependence index exceeding 10 percent. In particular, the degree of dependence of Korea and Japan on the Chinese markets is high with the index recorded at 23.4 percent and 21.6 percent, respectively, in 2016. As documented in our previous reports, many Asian economies had the highest dependence on China in their trade in Asia, even taking into account ASEAN as a whole. However, India had been an exception in terms of the trade dependence as it tended to trade more extensively with ASEAN than with China. The pattern of trade changed and its dependence index vis-à-vis China increased to 11.2 percent in 2016 as compared to 10.5 percent dependence on ASEAN in 2016.

In contrast, China’s trade tended to depend less on other Asian economies, because China’s trade is more diversified across the world. In fact, over half of China's trade (55.5 percent) was conducted with non-Asian economies. India, another big economy in

the region, also has a diversified pattern of trade. Notably, India’s dependence on the TPP (including the US, the same below) members was 22.7 percent in 2016, the lowest level of dependence vis-à-vis other Asian economies in Table 2.2.

Figure 2.2 also gives the trade dependence among the selected Asian economies and TPP members. The following observations may be drawn. Firstly, interdependence in trade among the TPP members was declining steadily from 53.4 percent in 2000 to 43.0 percent in 2016, evidencing that TPP might be an organization arbitrarily formed and driven primarily by political motives. Even worse, the US withdrawal from TPP has made the TPP even economically irrelevant. In sharp contrast to this decline, the dependence of TPP on China had increased rapidly, from 5.9 percent in 2000 to 16.6 percent in 2016. Secondly, ASEAN and China had followed a steady trend to strengthen the interdependence between them. Finally, all the economies in Figure 2.2 including TPP had increased their dependence on China reflecting the growing importance of the Chinese market for a sustained development in Asia.


20


21

Figure 2.2 Trade Interdependence Index for Selected Economies


22

2.3 Trade Flows among Selected Asian Economies

Table 2.3 presents the trade flows matrix for major Asian economies in 2016. Along the row-wise, it gives the value of exports from one economy to its trading partner (in USD billion), e.g. Australia exports to Australia, China, Indonesia, India, Japan among others; while column-wise indicates how much one economy imports from its trading partner, such as Australia imports from Australia, China, Indonesia, India, Japan among others. Take the value 60.00 in the first row and second column for instance, it means that Australia’s exports to China were USD60.00 billion in 2016.

There are huge differences between selected Asian economies in terms of trade relation with their counterparts, from India (the least) to Australia (the most). It is observed that, there are two trading hubs within Asia, which are China and

Japan, as they took large shares of trade vis-à-vis counterparts.

Clearly, China dominates the pattern of trade flows with the most of the selected economies. Exports to a particular economy in excess of USD100 billion include: China’s exports to Japan amounting to USD129.27 billion; Japan’s exports to China recording at USD113.83 billion and, Korea’s exports to China reaching USD124.43 billion in 2016. In general, China was the largest market for the exports of most economies except for the Philippines that exported more intensively to Japan. As an exporter, China’s competitive advantage is more pronounced if measured by the relative size of its exports against imports. China’s exports to most of these selected economies far exceeded its imports from them except for Korea and New Zealand. Behind this close ties with the Asian economies is China’s position as the single most important production hub in Factory Asia as discussed in other sections of this Report.

Table 2.3 Trade Flows among Asian Economies, 2016 (USD billion)

To

From Australia

China, People’s Republic

of

Indonesia India JapanKorea,

Republic of

Malaysia New

ZealandThe

Philippines Thailand Vietnam

Australia - 60.00 3.98 7.92 26.34 12.77 3.50 6.46 1.43 2.64 2.79


37.28 - 32.12 58.40 129.27 93.71 37.66 4.76 29.84 37.18 61.09

Indonesia 3.20 16.79 - 10.09 16.10 7.01 7.11 0.37 5.27 5.39 3.05

India 2.95 8.92 3.13 - 3.83 3.47 4.19 0.31 1.47 2.96 5.96

Japan 14.10 113.83 11.33 8.19 - 46.24 12.14 2.19 10.35 27.40 13.00

Korea, Republic of

7.50 124.43 6.61 11.60 24.35 - 7.53 1.31 7.28 6.48 32.63

Malaysia 6.45 23.75 6.67 7.71 15.25 5.50 - 7.32 3.29 10.63 5.73

New Zealand 5.23 6.57 0.60 0.44 2.06 1.04 0.54 - 0.44 0.57 0.35

The Philippines

0.49 6.19 0.59 0.32 11.67 2.10 1.19 0.05 - 2.13 0.75

Thailand 10.23 23.57 8.02 5.12 20.42 4.01 9.54 1.14 6.35 - 9.34

Vietnam - - - - - - - - - -

Source: WITS database, World Bank.


23

2.4 Direction and Dependence of Intermediate Goods Trade in Asia

To understand better the pattern and the evolution of Asia’s global value chain (GVC), Table 2.4 shows the directions of the intra-regional trade in intermediate inputs by the major Asian economies that are deeply involved in the global value chain network. The table suggests that among the Asian economies, most of Japan’s intermediate goods trade took place with China. In 2016, Japan exported USD73.7 billion of intermediate inputs to China and imported USD53.1 billion in contrast to its imports of USD30.8 billion from the US. Amid the uncertainty in the bilateral diplomatic relations between the two countries, Japan’s exports of intermediate inputs to China increased by 2.5 percent over the previous year in 2015 while the imports from China decreased by 7 percent. Korea exported USD88.6 billion of intermediate inputs to China compared to USD98 billion in 2015, down by 9.7 percent and sourced USD54 billion from China in 2016, decreased by 5.6 percent.

China’s largest export market of intermediate inputs is the US and EU (27) outside Asia if China’s Hong Kong is excluded. China exported USD114.9 billion to the US and USD111.4 billion to EU (27). However, China’s sourcing from these two giant economies is more limited, particularly with respect to the US. China imported USD52.3 billion from the US and USD92.4 billion from EU (27) of intermediate inputs in 2016.

China’s Hong Kong’s role is special in China’s participation of the global value chain. Being the largest supplier and the buyer of the intermediate inputs for the Chinese mainland, China’s Hong Kong sourced USD131 billion of intermediate goods from the Chinese mainland and exported USD242 billion into the Chinese mainland.

By ranking, China’s Hong Kong is China’s largest export market of intermediate inputs in Asia, Korea is the second and Japan is the third, followed sequentially by Vietnam, India, Thailand, Malaysia, Indonesia, Singapore and the Philippines. On the import side for China, China’s Hong Kong is the largest sourcing place of intermediate inputs of the Chinese mainland, Korea is the second, and Japan is the third, followed sequentially by Australia, Singapore, Malaysia,

Thailand, Indonesia and Vietnam, etc. While India is relatively a large economy in the region, it has acted mainly as a destination of China’s intermediate goods exports rather than a major sourcing place. In 2016, China imported only USD7.1 billion of intermediate goods from India, down from USD8.2 billion in 2015. China’s trade pattern of intermediate goods with Vietnam is similar to that with India, with Vietnam acting mainly as the destination of the Chinese exports. China exported USD39.8 billion of intermediate inputs to Vietnam and imported USD12.7 billion in 2016. While China’s exports of intermediate inputs fell by 4.8 percent, from USD41.8 billion to USD39.8 billion, the sourcing from Vietnam increased by about 31 percent.

Top destinations for Korea’s intermediate goods exports include, sequentially, China, the US, China’s Hong Kong, Vietnam, EU (27), Japan and India while its top sourcing places are China, Japan, the US, EU (27), Australia and Singapore, etc. Japan exported most of its intermediate goods to China, followed sequentially by the US, EU (27), Korea, Thailand and China’s Hong Kong and its top suppliers of intermediate inputs include China, EU (27), the US, Australia, Korea, Malaysia and Thailand.

To further show the dependency pattern of Asia’s global value chain trade, the export dependence index of each economy in Table 2.5 was calculated. The index measures the amount of an economy’s intermediate goods exports to another in proportion to its total exports to the world based on the data in 2016. The table shows the results of the calculation. Identical to the analysis based on Table 2.5, China has the highest dependence on China’s Hong Kong in its exports of intermediate inputs, with dependence index at 0.15. China also has relatively high dependence on the US, EU (27), Korea and Japan with the dependence level indexed at 0.13, 0.13, 0.6 and 0.6, respectively. In general, China’s importance to other Asian economies in the global value chain lies on its imports of intermediate inputs rather than exports. As Table 2.5 shows that China’s dependence on other Asian economies in the export of intermediate goods is significantly lower than that of other Asian economies on China. It implies that the Asian economies mainly act as suppliers of intermediate inputs for the Chinese market. However, this normal pattern would be violated when it comes down to the pattern of China’s trade with the US and EU (27). In this case, China’s role is mainly to act as a supplier


24

of intermediate inputs rather than an importer as the indices of dependence on the US and EU (27) are

significantly higher than those of the US and EU (27) on China.

Table 2.4 Intra-regional Exports of Intermediate Goods, Selected Asian Economies, 2016 (USD billion)

ToFrom

JPN CHN KOR AUS NZL IND HK SGP MYS IDN THA PHL VNM USEU

(27)

JPN – 73.7 30.9 2.8 0.4 5.5 16.6 9.5 8.3 8.3 20.6 5.5 9.0 54.5 35.6

CHN 53.1 – 54.0 13.3 1.8 36.4 131.1 18.2 19.2 18.3 20.9 14.8 39.8 114.9 111.4

KOR 15.7 88.6 – 1.9 0.3 8.9 25.6 5.3 4.2 4.5 5.0 4.6 25.4 28.8 23.9

AUS 16.1 50.3 9.6 – 2.5 6.5 5.5 2.2 2.3 2.0 2.3 1.1 1.9 3.4 10.3

NZL 0.9 2.6 0.5 2.1 – 0.3 0.1 0.2 0.2 0.3 0.3 0.2 0.2 1.2 0.9

IND 2.0 7.1 2.5 0.9 0.1 – 9.7 2.2 1.9 1.8 2.1 0.7 1.7 19.0 22.4

HK 6.7 242.0 5.0 1.0 0.1 10.7 – 5.5 1.9 2.2 7.8 2.0 5.3 12.5 18.9

SGP 7.9 31.1 9.3 3.0 0.5 6.1 31.7 – 18.3 12.1 8.1 3.5 5.6 14.2 18.8

MYS 11.7 19.4 4.6 3.6 0.5 6.4 7.0 17.2 – 3.9 6.9 2.3 3.0 10.5 12.2

IDN 12.9 14.8 5.8 2.2 0.3 9.7 1.0 7.9 5.5 – 4.1 3.1 2.0 5.9 7.8

THA 10.0 17.1 2.7 2.6 0.3 3.8 6.5 3.8 6.0 5.4 – 2.8 4.9 8.9 8.2

PHL 9.2 3.7 1.4 0.3 0.0 0.2 5.4 3.3 0.9 0.4 1.8 – 0.6 4.4 4.3

VNM 6.6 12.7 5.7 0.7 0.1 1.8 4.4 1.1 2.1 1.9 1.8 1.0 – 6.1 6.1

US 30.8 52.3 22.0 8.2 0.9 15.4 15.1 12.0 8.1 3.0 6.9 5.6 6.8 – 118.2

EU (27) 23.8 92.4 20.5 11.4 1.8 27.5 14.5 16.8 8.2 5.1 8.2 3.1 4.6 172.6 1,432

Note: Trade in intermediate goods is estimated based on the UN Broad Economic Categories (BEC) classification. Intermediate goods

include industrial food and beverage(BEC 111 and BEC 121), industrial supplies (BEC 21 and22), fuels and lubricants (BEC 31 and

322), and parts and accessories of capital goods and transport equipment(BEC 42 and 53).

Source: Based on the United Nations, ComTrade Database.

Table 2.5 Dependency Index for Exports of Intermediate Goods, Selected Asian Economies, 2016

On Of

JPN CHN KOR AUS NZL IND HK SGP MYS IDN THA PHL VNM US EU (27)

JPN – 0.22 0.09 0.01 0.00 0.02 0.05 0.03 0.02 0.02 0.06 0.02 0.03 0.16 0.11

CHN 0.06 – 0.06 0.01 0.00 0.04 0.15 0.02 0.02 0.02 0.02 0.02 0.04 0.13 0.13

KOR 0.05 0.30 – 0.01 0.00 0.03 0.09 0.02 0.01 0.02 0.02 0.02 0.09 0.10 0.08

AUS 0.11 0.34 0.06 – 0.02 0.04 0.04 0.01 0.02 0.01 0.02 0.01 0.01 0.02 0.07

NZL 0.08 0.22 0.05 0.18 – 0.03 0.01 0.02 0.02 0.03 0.02 0.02 0.01 0.10 0.08

IND 0.02 0.06 0.02 0.01 0.00 – 0.08 0.02 0.02 0.01 0.02 0.01 0.01 0.15 0.18

HK 0.02 0.69 0.01 0.00 0.00 0.03 – 0.02 0.01 0.01 0.02 0.01 0.02 0.04 0.05


25

(continued)

On Of

JPN CHN KOR AUS NZL IND HK SGP MYS IDN THA PHL VNM USEU

(27)

SGP 0.04 0.16 0.05 0.02 0.00 0.03 0.16 – 0.09 0.06 0.04 0.02 0.03 0.07 0.10

MYS 0.09 0.15 0.04 0.03 0.00 0.05 0.05 0.14 – 0.03 0.05 0.02 0.02 0.08 0.10

IDN 0.13 0.15 0.06 0.02 0.00 0.10 0.01 0.08 0.06 – 0.04 0.03 0.02 0.06 0.08

THA 0.09 0.16 0.03 0.02 0.00 0.04 0.06 0.04 0.06 0.05 – 0.03 0.05 0.08 0.08

PHL 0.23 0.09 0.03 0.01 0.00 0.01 0.14 0.08 0.02 0.01 0.05 – 0.01 0.11 0.11

VNM 0.11 0.21 0.09 0.01 0.00 0.03 0.07 0.02 0.03 0.03 0.03 0.02 – 0.10 0.10

US 0.04 0.07 0.03 0.01 0.00 0.02 0.02 0.02 0.01 0.00 0.01 0.01 0.01 – 0.16

EU (27) 0.01 0.04 0.01 0.00 0.00 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.07 0.61

Note: The index was computed as one economy’s exports of intermediate goods to another in proportion to this economy’s intermediate

goods exports to the world. The value of the index, thus calculated, lies between zero and one.

Source: Based on the United Nations, Com Trade Database.

2.5 Basic Facts about Trade in Value Added in Asia

This section will update our knowledge of trade in value added versus gross trade, and distribution of value added in a product by source of origin. In particular, the degree of integration among the Asian economies is measured by the amount of value added by another economy to this economy’s product. If an economy’s product contains more value added by another economy, it can be generally concluded that the degree of integration in production between the two economies is high.1 In contrast, if the economy’s product contains mostly domestic value added and the value added by another economy is low, the degree of integration in production between the two economies is low.

First, look at the value added pattern in gross exports. 14 Asian economies covered by the OECD inter-country input-output (ICIO) tables were included in the analysis. Several observations may

———————————————————————— 1 The database employed in this Report is different from that of

the previous Report. In particular, the OECD ICIO tables are used to calculate the value added for its better representation of the Asian economies.

be drawn from the results, as shown in Figure 2.3. At aggregate level, the average share of domestic value added (DVA) in manufacturing exports for the 14 Asian economies was following a declining trend from 1995 to 2014 while the trend was reverted temporarily at the trough of the global financial crisis between 2008 and 2009.2 Overall, it indicates that over the past twenty years, Asia had been deepening its integration into the world economy despite the interruption of the global financial crisis. But the pace of integration measured by the foreign contributions to domestic exports seemed slowed down after the average DVA reached its peak in 2003.

By disaggregating DVA into contributions by manufacturing sectors and by services sectors, a clear distinction is found in the pattern of DVA.3 The DVA attributed to service sectors showed a moderate upward trend after the financial crisis. On the other hand, DVA accrued in manufacturing sectors did not show much difference from the general pattern, as shown by the averages for the 14 economies.

———————————————————————— 2 As in common practice, the sector mining, and sector supply of

water, electricity, and gas are not included in the calculations for manufacturing exports.

3 The sector Construction is not included in the calculation of DVA attributed in services sectors.


26

Figure 2.3 Average Share of Domestic Value Added in Exports Selected Asian Economies, 1995-2014

Note: DVA = domestic value added (of the mean of the 14 Asian regions); DVA manufacturing = domestic value added in manufacturing sectors; DVA services = domestic value added in services sectors; Foreign VA = foreign value added (other regions other than the 14 Asian economies); Asia’s DVA = the average of foreign VA within Asia for each of the 14 economies; Other DVA = the difference between Foreign VA and Asia’s DVA; Double counting = pure double counting terms in gross exports.

Source: Authors’ calculation using OECD ICIO dataset.

Figure 2.4 Shares of Domestic Value Added in Exports, Selected Asian Economies, 1995-2014


27

The following describes the DVA for each region, the manufacturing DVA content, and the services DVA content (see Figure 2.3 for general pattern). Two groups of economies were given respectively in Figure 2.4 and Figure 2.5.

Divide the 14 economies into two groups. The first group includes China, Indonesia, India, Malaysia and the Philippines as shown in Figure 2.4. The second group includes Japan, Korea, China’s Taiwan, China’s Hong Kong, Singapore, Thailand, Vietnam, Cambodia and Brunei as shown in Figure 2.5. The 5 economies in the first group all experienced a

U-shaped development in the DVA of their exports. However, 4 economies including China, Indonesia, Malaysia and the Philippines reversed the downward trend in the share of DVA in exports well before the financial crisis. This change in the DVA pattern may suggest that these 4 economies heavily depended on foreign inputs or foreign value added in the mid 1990s. However, the pattern started to change in the early 2000s. They began to use less and less foreign inputs in their exports, suggesting that their ability to substitute for foreign inputs started to increase.

Figure 2.5 Shares of Domestic Value Added in Exports,

Selected Asian Economies, 1995-2014 In contrast to the U-shaped pattern of DVA in

exports for the 5 economies in Figure 2.4, the other 9 selected economies saw a long-term declining trend in the shares of DVA in their exports (see Figure 2.5). Particularly, Japan, Korea, China’s Taiwan, and China’s Hong Kong, showed clear downward trend. These 4 economies are advanced and mostly small open economies and they tended to unbundle the production process in a more revolutionary way.

The above analysis has looked at the DVA in the economy’s total exports. Now, look at the changes in the DVA in manufacturing exports alone for the 14 Asian economies. China and Malaysia exhibited a downward trend in the share of DVA in the exports

through the period from 1995 to 2014 (see Figure 2.6) while the Philippines first followed a declining trend and then a strong reversal in the early 2000s. Other economies shown in Figure 2.7 all exhibited a downward trend in the shares of DVA in manufacturing exports. Japan, Indonesia and Brunei saw more significant unbundling with the shares of DVA in manufacturing exports. Indonesia’s DVA share in manufacturing exports decreased from over 50 percent to less than 50 percent in 1998, while Brunei fell in the same manner in 2000. Japan followed the same pattern of fall in 2008. However, Japan saw a rebound later and fell again to less than 50 percent in 2014.


28

Figure 2.6 Shares of Manufacturing DVA Content in Manufacturing Exports, Selected Asian Economies, 1995-2014

Figure 2.7 Shares of Manufacturing DVA Content in Manufacturing Exports, Selected Asian Economies, 1995-2014


29

Finally, look at the evolution of service contents as shares in manufacturing exports. Brunei, China and the Philippines had significantly increased the service contributions to their manufacturing exports (see Figures 2.8). While Brunei had increased service content in its exports, there must be quite substantial share of outsourcing (substitution away from domestic input by imports), as in aggregate, Brunei’s total DVA in manufaturing exports were decreasing. Figure 2.9 shows domestic service contributions to the manufacturing exports for the remaining 8 economies. These economies generally experienced steady or

even lowering shares of service DVA. The experience of the Philippines is rather unique as its shares of manufacturing DVA increased after 2005 and that of service DVA increased after 2006, resulting an increase in the total DVA in manufacturing exports.

Taking together of Figure 2.6, 2.7, 2.8 and 2.9, it is found that the DVA of manufacturing exports were decreasing especially for Korea, China’s Taiwan and the Philippines. Notably, Japan’s share of manufacturing DVA content in manufacturing exports kept declining, while that of service DVA content did not change much.

Figure 2.8 Shares of Service DVA Content in Manufacturing Exports, Selected Asian Economies, 1995-2014


30

Figure 2.9 Shares of Service DVA Content in Manufacturing Exports, Selected Asian Economies, 1995-2014

Chapter 3 Interdependence of Asian Economies in Factory Asia

31


3.1 Pattern of Interdependence Remained Stable

This section constitutes an update of our monitoring of the changes in the pattern of interdependence in Factory Asia, measured by the share of trade in parts and components (P&C) among the Asian economies—the so-called “Factory Asia phenomenon”. 1

First, look at the changes in Factory Asia’s self dependence in comparison with that of Factory Europe and Factory North America. Overall, Asia’s self dependence in P&C trade slightly decreased as the dependency index decreased from 0.61 in 2015 to 0.58 in 2016 (see Table 3.1 and Table 3.2). From 2015 to 2016, Factory Europe’s self-dependence index had stagnated at 0.59 while that of Factory North America remained unchanged at 0.42. Viewed over a longer-term horizon, the self-dependencies of the three global factories including Factory Asia, Factory Europe and Factory North America had remained

more or less stable from 2011 to 2016. Next, look at individual economies. Table 3.1

and Table 3.2 suggest that China’s Hong Kong, Korea, Singapore and Vietnam had slightly reduced their dependence on China between 2015 and 2016 while Indonesia, the Philippines and Thailand saw a minor increase in the dependence on China. The dependence on China by Japan, Malaysia and India had remained unchanged during the period from 2015 to 2016. Overall, Asia’s dependence on China had decreased by 3 percent from 0.23 in 2015 to 0.20 in 2016. It is not clear that such a decline in the dependence on China in intermediate goods trade represents a temporary fluctuation or a long-term trend. At present, China’s position as the hub of Factory Asia remained unchanged. ——————————————————————— 1 Data used for calculation in this chapter come from Standard

International Trade Classification (SITC Rev3), where 22 most actively traded parts and components were selected from SITC 6, SITC 7 and SITC 8 components, see Table 3.6 and Table 3.11.

Table 3.1 Index of Interdependence in Factory Asia, 2016

On

Of CHN HK IDN IND JPN KOR MYS PHL SGP THA VNM ASIA

EU (27) NAFTA

CHN – 0.12 0.01 0.02 0.08 0.10 0.04 0.02 0.02 0.02 0.02 0.45 0.12 0.14

HK 0.54 – 0.00 0.04 0.04 0.05 0.03 0.01 0.02 0.02 0.02 0.76 0.05 0.06

IDN 0.24 0.02 – 0.02 0.14 0.06 0.04 0.01 0.07 0.06 0.04 0.72 0.07 0.06

IND 0.18 0.10 0.01 – 0.03 0.04 0.01 0.00 0.02 0.02 0.01 0.41 0.18 0.16


32

(continued)

On

Of CHN HK IDN IND JPN KOR MYS PHL SGP THA VNM ASIA EU

(27)NAFTA

JPN 0.29 0.03 0.02 0.01 – 0.07 0.02 0.02 0.02 0.06 0.03 0.58 0.09 0.20

KOR 0.31 0.07 0.01 0.02 0.08 – 0.02 0.01 0.02 0.01 0.25 0.63 0.27 0.15

MYS 0.19 0.06 0.02 0.01 0.07 0.03 – 0.01 0.14 0.06 0.03 0.62 0.11 0.15

PHL 0.15 0.11 0.01 0.00 0.16 0.06 0.03 – 0.10 0.05 0.02 0.68 0.08 0.13

SGP 0.16 0.12 0.04 0.02 0.06 0.08 0.11 0.03 – 0.03 0.02 0.65 0.09 0.11

THA 0.20 0.05 0.03 0.02 0.17 0.03 0.06 0.03 0.03 – 0.03 0.66 0.09 0.10

VNM 0.25 0.03 0.01 0.01 0.09 0.17 0.02 0.01 0.01 0.03 – 0.63 0.12 0.11

ASIA 0.20 0.07 0.01 0.02 0.07 0.07 0.03 0.02 0.02 0.03 0.03 0.58 0.10 0.13

EU (27) 0.08 0.01 0.00 0.01 0.01 0.01 0.01 0.00 0.01 0.00 0.01 0.16 0.59 0.08

NAFTA 0.17 0.01 0.00 0.02 0.05 0.03 0.03 0.01 0.01 0.01 0.01 0.36 0.12 0.42

Source: Based on UN ComTrade database.

Table 3.2 Index of Interdependence in Factory Asia, 2015

On


EU (27)

NAFTA TPP

CHN – 0.13 0.01 0.02 0.07 0.11 0.04 0.01 0.02 0.02 0.03 0.52 0.12 0.14 0.31

HK 0.56 – 0.00 0.03 0.04 0.03 0.02 0.01 0.05 0.02 0.02 0.78 0.05 0.06 0.19

IDN 0.20 0.02 – 0.02 0.15 0.07 0.04 0.01 0.09 0.06 0.04 0.69 0.08 0.06 0.41

IND 0.18 0.09 0.01 – 0.03 0.04 0.01 0.00 0.01 0.02 0.01 0.41 0.19 0.15 0.23

JPN 0.29 0.03 0.02 0.01 – 0.07 0.02 0.02 0.02 0.06 0.03 0.59 0.09 0.19 0.27

KOR 0.33 0.06 0.01 0.02 0.08 – 0.02 0.02 0.03 0.01 0.17 0.63 0.26 0.14 0.33

MYS 0.19 0.06 0.02 0.01 0.07 0.04 – 0.01 0.14 0.06 0.03 0.63 0.11 0.14 0.40

PHL 0.13 0.10 0.01 0.00 0.16 0.05 0.03 – 0.10 0.05 0.01 0.64 0.10 0.15 0.45

SGP 0.17 0.11 0.04 0.01 0.05 0.08 0.11 0.02 – 0.03 0.02 0.65 0.08 0.11 0.30

THA 0.19 0.05 0.03 0.02 0.18 0.04 0.06 0.02 0.03 – 0.03 0.66 0.09 0.10 0.41

VNM 0.26 0.03 0.02 0.02 0.09 0.15 0.02 0.01 0.02 0.03 – 0.63 0.12 0.09 0.23

ASIA 0.23 0.08 0.01 0.02 0.06 0.07 0.03 0.02 0.03 0.02 0.03 0.61 0.10 0.12 0.29

EU (27) 0.08 0.01 0.00 0.01 0.01 0.01 0.01 0.00 0.01 0.00 0.01 0.15 0.63 0.08 0.12

NAFTA 0.18 0.01 0.00 0.02 0.05 0.04 0.02 0.01 0.01 0.01 0.01 0.35 0.12 0.42 0.52

TPP 0.20 0.03 0.01 0.02 0.05 0.05 0.03 0.01 0.02 0.02 0.02 0.44 0.11 0.31 0.43



33

Finally, look at the long-term trend of the dependence on Factory Asia by the Asian economies. From 2001 to 2016, most of the economies had steadily increased their dependence on Factory Asia in the share of trade in parts and components, though with some minor fluctua- tions (see Table 3.3). The changes in Indonesia and India were most dramatic. In 2001, Indonesia’s dependence on Factory Asia was 0.57 and rose to

0.72 by 2016. India started at a low level in the early 2000s, but the degree of dependence on Factory Asia had steadily increased. By 2016, the index of dependence reached 0.41. However, Vietnam’s dependence on Factory Asia in P&C trade peaked before the breakout of the global financial crisis and then followed a downward trend. After 2014, the dependence index became stabilized around 0.63.

Table 3.3 Index of Dependence on Factory Asia, Major Asian Economies, 2001-2016

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CHN 0.51 0.52 0.51 0.49 0.48 0.47 0.46 0.45 0.46 0.46 0.45 0.46 0.46 0.45 0.52 0.45

HK 0.67 0.70 0.73 0.73 0.74 0.74 0.75 0.75 0.76 0.77 0.76 0.77 0.77 0.77 0.78 0.76

IDN 0.57 0.58 0.60 0.60 0.62 0.58 0.59 0.68 0.67 0.69 0.69 0.69 0.68 0.70 0.69 0.72

IND 0.26 0.25 0.29 0.28 0.32 0.32 0.34 0.35 0.38 0.35 0.35 0.35 0.36 0.37 0.41 0.41

JPN 0.45 0.48 0.51 0.52 0.52 0.52 0.53 0.54 0.57 0.58 0.58 0.60 0.60 0.60 0.59 0.58

KOR 0.49 0.52 0.55 0.53 0.54 0.55 0.55 0.56 0.57 0.58 0.58 0.60 0.61 0.61 0.63 0.63

MYS 0.55 0.57 0.57 0.57 0.58 0.57 0.59 0.58 0.63 0.63 0.63 0.65 0.64 0.62 0.63 0.62

PHL 0.50 0.51 0.55 0.57 0.58 0.57 0.58 0.60 0.58 0.49 0.32 0.64 0.65 0.64 0.64 0.68

SGP 0.59 0.61 0.64 0.63 0.63 0.63 0.65 0.65 0.67 0.66 0.65 0.64 0.63 0.63 0.65 0.65

THA 0.57 0.60 0.64 0.64 0.66 0.66 0.66 0.66 0.66 0.67 0.67 0.67 0.66 0.66 0.66 0.66

VNM 0.65 0.63 0.65 0.67 0.69 0.73 0.73 0.72 0.69 0.71 0.71 0.66 0.66 0.64 0.63 0.63


3.2 Product Dependence and Competitive Advantage in the Global Value Chain

Top 22 actively traded components and parts in Asia were identified and the share of trade by each economy was calculated. The results could be used to reveal the pattern of division of labor in producing different products in the global value chain. For example, if an economy has a high share of trade in an intermediate input, it implies that the regional global value chain has a high dependence on this economy in producing this product. The results are also useful to provide some information about competitive advantage of an economy in producing the product as a high proportion of trade in the intermediate product, which may suggest that the economy may possess competitive advantage in producing this product, intermediate or mostly final

goods. Table 3.4 and Table 3.5 are the results of the calculation for 2016 and 2015.

As described in the previous reports, India is competitive in producing SITC 667 products (pearls, precious and semi-precious stones) as it has the highest share of trade in those intermediate inputs among the Asian economies. The product dependence index in Table 3.4 and Table 3.5 indicates that India was still the leading trader in Asia in SITC 667 products and its competitive advantage strengthened as the index of dependence increased slightly from 0.16 in 2015 to 0.17 in 2016.

Singapore is still the lead trader in SITC 7239 (civil engineering and construction contracting business machinery and equipment), SITC 714 (turbo jet engine or turbine propeller engines) and SITC 7929 (aircraft), but its competitive advantage in SITC 7239 weakened as the product dependence index fell from 0.10 in 2015 to 0.08 in 2016. Mainly due to


34

the relocation of manufacturing capacities to other Asian economies over the past several decades. Japan’s scope of dominance in Asia’s trade in P&C is quite limited. Table 3.4 shows that Asia has the highest dependence on Japan in only one product, category SITC 713 (piston internal combustion engine and parts). Relative to 2015, Japan’s competitive advantage in the product remains more or less unchanged.

China, as the hub of Factory Asia, may be further exemplified by its dominance in the trading of a wide range of intermediate goods. Among the top 22 actively traded parts and components, China had the highest share of trade in 17 of them, covering the products such as textiles (SITC 65), rubber tires (625), unclassified steel, aluminum and base metal products (SITC 691, 699), pipe valves (SITC 747), office machines (SITC 759), telecommunications equipment (SITC 764), electronic components (SITC 776), switch

devices (SITC 772), etc (see Table 3.4). However, China saw some structural changes from 2015 to 2016 because some of the top 22 products such as SITC 65, SITC 667, SITC 691, SITC 699, SITC 759, SITC 764, SITC 772, SITC 776 and SITC 8211 had reduced the dependence on China while the rest of others increased the dependence.1 In particular, the dependence of trading in SITC 776 (electronic components) on China fell from 0.29 in 2015 to 0.27 in 2016.

Like China, Korea had also increased the dependence on most of the top 22 parts and components from 2015 to 2016. However, Japan continued to see reductions in the share of P&C trade in Asia (see Table 3.4 and Table 3.5).

——————————————————————— 1 See Table 3.6 for more complete descriptions of the SITC coded

products.

Table 3.4 Dependence of Trade in Top 22 Parts and Components by SITC Codes, 2016

On


EU (27) NAFTA

625 0.10 0.00 0.01 0.01 0.04 0.03 0.01 0.00 0.00 0.03 0.01 0.25 0.39 0.19

641 0.06 0.00 0.02 0.02 0.02 0.02 0.01 0.00 0.01 0.01 0.01 0.18 0.50 0.16

65 0.24 0.03 0.02 0.04 0.03 0.03 0.01 0.00 0.00 0.01 0.04 0.45 0.26 0.11

667 0.05 0.15 0.00 0.17 0.01 0.00 0.00 0.00 0.01 0.01 0.00 0.40 0.14 0.18

67 0.11 0.00 0.01 0.02 0.05 0.05 0.01 0.01 0.01 0.02 0.02 0.32 0.38 0.11

691 0.13 0.01 0.01 0.01 0.03 0.05 0.01 0.00 0.01 0.01 0.01 0.30 0.39 0.11

699 0.12 0.01 0.01 0.02 0.02 0.03 0.01 0.00 0.01 0.03 0.01 0.26 0.43 0.18

713 0.06 0.00 0.01 0.01 0.06 0.02 0.00 0.00 0.01 0.02 0.00 0.21 0.45 0.25

714 0.04 0.04 0.00 0.01 0.05 0.01 0.00 0.00 0.06 0.01 0.00 0.22 0.45 0.21

7239 0.08 0.01 0.02 0.02 0.04 0.03 0.02 0.00 0.08 0.01 0.00 0.31 0.33 0.18

747 0.13 0.00 0.01 0.02 0.04 0.03 0.01 0.00 0.02 0.01 0.01 0.27 0.38 0.22

748 0.11 0.00 0.01 0.02 0.07 0.02 0.01 0.00 0.01 0.01 0.01 0.26 0.42 0.22

759 0.17 0.15 0.00 0.01 0.05 0.03 0.03 0.02 0.05 0.02 0.01 0.53 0.25 0.19

764 0.23 0.14 0.01 0.01 0.03 0.04 0.01 0.00 0.02 0.01 0.04 0.54 0.20 0.18

772 0.16 0.08 0.01 0.01 0.05 0.04 0.02 0.01 0.02 0.02 0.02 0.43 0.32 0.17

773 0.12 0.03 0.01 0.01 0.04 0.03 0.01 0.01 0.01 0.01 0.02 0.30 0.34 0.23

776 0.27 0.19 0.00 0.00 0.04 0.07 0.05 0.02 0.11 0.02 0.02 0.80 0.09 0.09


35

(continued)

On


EU (27) NAFTA

7788 0.15 0.06 0.01 0.01 0.05 0.11 0.01 0.01 0.02 0.02 0.02 0.45 0.31 0.16

784 0.07 0.00 0.01 0.01 0.05 0.04 0.00 0.00 0.01 0.02 0.00 0.22 0.45 0.26

7929 0.02 0.01 0.00 0.02 0.04 0.02 0.02 0.01 0.06 0.00 0.00 0.21 0.48 0.17

813 0.33 0.02 0.00 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.40 0.31 0.19

8211 0.16 0.00 0.00 0.00 0.02 0.01 0.01 0.00 0.00 0.01 0.01 0.23 0.40 0.29


Table 3.5 Dependence of Trade in Top 22 Parts and Components by SITC Codes, 2015

On


EU (27) NAFTA TPP

625 0.10 0.00 0.01 0.01 0.04 0.03 0.01 0.00 0.00 0.03 0.01 0.25 0.38 0.19 0.28

641 0.05 0.00 0.02 0.01 0.02 0.02 0.01 0.00 0.01 0.01 0.01 0.17 0.50 0.18 0.25

65 0.25 0.03 0.02 0.04 0.03 0.03 0.01 0.00 0.00 0.01 0.04 0.46 0.25 0.11 0.19

667 0.06 0.15 0.00 0.16 0.01 0.00 0.00 0.00 0.01 0.02 0.00 0.40 0.15 0.19 0.21

67 0.11 0.00 0.02 0.03 0.05 0.05 0.01 0.00 0.01 0.02 0.02 0.32 0.36 0.11 0.21

691 0.15 0.01 0.01 0.01 0.03 0.05 0.01 0.00 0.01 0.02 0.01 0.32 0.37 0.10 0.20

699 0.13 0.01 0.01 0.02 0.02 0.03 0.01 0.00 0.01 0.03 0.01 0.27 0.41 0.18 0.25

713 0.06 0.00 0.01 0.01 0.06 0.03 0.00 0.00 0.01 0.02 0.00 0.20 0.46 0.24 0.33

714 0.04 0.04 0.00 0.01 0.04 0.01 0.00 0.00 0.05 0.01 0.00 0.20 0.45 0.22 0.33

7239 0.08 0.01 0.02 0.02 0.03 0.03 0.02 0.00 0.10 0.00 0.00 0.31 0.29 0.20 0.39

747 0.13 0.00 0.01 0.01 0.04 0.03 0.01 0.00 0.02 0.01 0.01 0.26 0.36 0.22 0.30

748 0.11 0.00 0.01 0.02 0.06 0.02 0.01 0.00 0.01 0.01 0.00 0.26 0.41 0.21 0.31

759 0.18 0.16 0.00 0.01 0.05 0.03 0.02 0.01 0.05 0.02 0.01 0.53 0.24 0.17 0.31

764 0.24 0.14 0.01 0.01 0.03 0.04 0.01 0.00 0.02 0.01 0.04 0.55 0.19 0.17 0.28

772 0.17 0.09 0.01 0.01 0.05 0.04 0.02 0.00 0.02 0.02 0.01 0.44 0.31 0.16 0.27

773 0.12 0.03 0.01 0.01 0.04 0.03 0.01 0.01 0.01 0.01 0.02 0.30 0.33 0.21 0.30

776 0.29 0.17 0.00 0.00 0.05 0.07 0.05 0.03 0.11 0.02 0.02 0.81 0.08 0.09 0.31

7788 0.15 0.05 0.01 0.01 0.05 0.10 0.02 0.01 0.02 0.02 0.01 0.45 0.31 0.15 0.26

784 0.07 0.00 0.01 0.01 0.05 0.04 0.00 0.00 0.01 0.02 0.00 0.21 0.44 0.26 0.33

7929 0.02 0.01 0.00 0.02 0.04 0.01 0.01 0.01 0.06 0.00 0.00 0.19 0.49 0.18 0.31

813 0.37 0.02 0.00 0.01 0.01 0.01 0.00 0.00 0.01 0.00 0.00 0.44 0.29 0.17 0.21

8211 0.18 0.00 0.01 0.00 0.02 0.01 0.01 0.00 0.00 0.01 0.01 0.25 0.38 0.28 0.34

Source: Based on UN Com Trade database.


36

3.3 Pattern of Competitive Advantages among Global Factories

This section attempts to identify the competitive advantages that each of the three global factories has in different products. Quantity of each product exported by a region would be used as the criteria of judgment. If a product is exported extensively by a region relative to other regions, it can be said that this region has a competitive advantage in producing this product.

As shown in Table 3.6 to Table 3.11, Factory Asia had obvious competitive advantage in textiles (SITC 65), jewelry (SITC 667), steel materials (SITC 67), office machines (SITC 759), telecommunications equipment (SITC 764), electronic components (SITC 776), switch devices (SITC 772) and battery (SITC 77812) as it had exported these products more extensively than Factory Europe and Factory North America in 2016

In a similar logic, the competitive advantage of Factory Europe mainly focused on automobiles,

engine, transmission device and electrical equipment. Specifically, the products in which Factory Europe has a competitive advantage covering vehicles (SITC 784), paper and paperboard (SITC 641), the piston internal combustion engine (SITC 713), turbojet engine (SITC 714), engineering machinery (SITC 7239), internal combustion engine and special vehicle electrical equipment (SITC 7783), pipe valves (SITC 747), transmission device (SITC 748), unclassified steel, aluminum and base metal products (SITC 691, 699), the special distribution equipment (SITC 773), vehicle electrical equipment (SITC 18) and aircraft (SITC 7929).

Compared to Factory Asia and Factory Europe, Factory North America has competitive advantage in much smaller range of products such as machines and mechanical appliances of headings (SITC7285), turbojet engine (SITC 714) and aircraft (SITC 7929). This conclusion can also be verified by the lower degree of dependence in the P&C trade in Table 3.4 and Table 3.5.

Table 3.6 Major P&C Exports by Asian Economies, 2016 (USD billion)

SITC SITC Code Product of Parts and Components Exports

SECTION 6. MANUFACTURED GOODS CLASSIFIED CHIEFLY BY MATERIAL

625 Rubber tires, interchangeable tire treads, tire flaps and inner tubes for wheels of all kinds

30.2

641 Paper and paperboard 18.8

65 Textile yarn, fabrics, made-up articles, n.e.s., and related products 161.3

667 Pearls and precious or semiprecious stones, unworked or worked 52.8

67 Iron and steel 121.9

691 Structures and parts of structures, n.e.s., of iron, steel 22.1

699 Product of parts and components 44.7

SECTION 7. MACHINERY AND TRANSPORT EQUIPMENT

713 Internal combustion piston engines, and parts thereof, n.e.s. 37.2

714 Engines and motors, non-electric 20.0

747 Taps, cocks, valves and similar appliances for pipes, boiler shells, tanks

24.1

748 Transmission shafts (including camshafts and crankshafts) and cranks

15.9

759 Parts and accessories of office machines, automatic 93.5

764 Telecommunication equipment and parts 429.1

772 Electrical apparatus for switching 108.5

773 Equipment for distributing electricity, n.e.s. 41.0


37

(continued)



776 Thermionic, cold cathode or photo-cathode valves and tubes 442.8

77812 Electric accumulators (storage batteries) 22.4

7788 Electrical machinery and equipment, n.e.s. 22.4

784 Parts and accessories of the motor vehicles 101.9

7929 Aircraft parts 19.7

SECTION 8. MISCELLANEOUS MANUFACTURED ARTICLES

813 Lighting fixtures and fittings, n.e.s. 34.0

8211 Seats 26.9

Note: Asian economies include: China, Japan, Korea, China’s Hong Kong, India, Indonesia, Malaysia, Singapore, Thailand, the Philippines,

Vietnam.

Source: Based on UN ComTrade data, http://comtrade.un.org/db/.

Table 3.7 Major P&C Exports by Asian Economies, 2015 (USD billion)




31.6


65 Textile yarn, fabrics, made-up articles, n.e.s., and related products 168.6

667 Pearls and precious or semiprecious stones, unworked or worked 49.4






7239 Parts, n.e.s., of the machinery of civil engineering and contractors 17.2


24.8


16.0






77812 Electric accumulators (storage batteries) 21.3

7788 Electrical machinery and equipment, n.e.s. 23.2




38

(continued)



813 Lighting fixtures and fittings, N.E.S. 39.8

8211 Seats 28.3

Note: Asian economies include: China, Japan, Korea, China’s Hong Kong, India, Indonesia, Malaysia, Singapore, Thailand, the Philippines,

Vietnam.


Table 3.8 Major P&C Exports by EU (27), 2016 (USD billion)




26.3


65 Textile yarn, fabrics, made-up articles, n.e.s., and related products

61.7

667 Pearls and precious or semiprecious stones, unworked or worked

21.3







7285 Parts, n.e.s., of the machines and mechanical appliances of headings

14.7


34.1


24.8






7783 Electrical equipment, n.e.s., for internal combustion engines and vehicles; parts thereof.

17.9




39

(continued)



8211 Seats 23.4

8931 Articles for the conveyance or packing of goods, of plastics 18.7


Table 3.9 Major P&C Exports by EU (27), 2015 (USD billion)




28.8



63.7


19.5







7239 Parts, n.e.s., of the machinery of civil engineering and contractors

14.7

747 Taps, cocks, valves and similar appliances for pipes, boiler shells, tanks 35.4


25.6







19.1




8211 Seats 26.1




40

Table 3.10 Major P&C Exports by North America, 2016 (USD billion)




7.3



17.4


22.8


699 Manufactures of base metal, n.e.s. 21.0





6.0


8.2


14.5


8.4







9.2




8211 Seats 12.8


Source: Based on UN ComTrade database, http://comtrade.un.org/db/.


41

Table 3.11 Major P&C Exports by North America, 2015 (USD billion)




8.1



18.3


22.3


699 Manufactures of base metal, n.e.s. 21.7





9.3


8.2


16.2


9.3







8.6




8211 Seats 12.5


Source: Based on UN ComTrade database, http://comtrade.un.org/db/.


42

Chapter 4 FDI Interdependence in Asia

43


4.1 FDI Self-dependence in Asia

The FDI interdependence index measures the degree of one economy’s FDI inflows and/or outflows that depends on another economy. The dependence index for the inflows is calculated as the proportion of an economy’s FDI inflows from another economy in its total inflows from the world while the outflows dependence index is calculated as the proportion of this economy’s FDI outflows to a particular economy in its total outward direct investment in the world. In a similar way, the Asia’s FDI self-dependence index measures the amount of intra-Asia FDI flows (inflows plus outflows) in proportion to Asia’s total global direct investment flows.

Table 4.1 shows the pattern of FDI interdependence for selected Asian economies in 2016. The Chinese mainland and China’s Hong Kong are the most important FDI partners. The index shows that more than 60 percent of the Chinese mainland’s foreign direct investment depends on China’s Hong Kong either as a source or a destination. China’s Hong Kong also has the highest dependence on the Chinese mainland in the flows of foreign direct investment, with the dependence level at 35.77 percent. In 2016, India also registered a high FDI dependence on China with 32.65 percent of its foreign direct investment activities taking place with China. Korea and Indonesia are most dependent on ASEAN, especially for FDI inflows (see Table 4.2 and 4.3) while Japan and Singapore have a higher dependence on non-Asia FDI, especially on EU.

Japan’s FDI dependence on EU was 42.9 percent and Singapore was 25.2 percent.

China has the highest dependence on Asia, indexed at 71.12 percent, followed by Korea with dependence level at 71.09 percent and Indonesia at 62.56 percent. However, Australia registered a negative value of FDI dependence on Asia mainly because of its large-scale disinvestment from Asia, amounting to USD -28.45 billion in 2015 which overwhelmed the FDI inflows of USD15.81 billion from Asia. Japan’s FDI dependence on Asia was surprisingly low at present and the dependence index was only 9.66 percent in 2016. However, despite the decline in the dependence, in stock terms, Asia still accounted for over 31.1 percent of Japan’s foreign direct investment flows (outflows plus inflows) until 2016 1 and Japan was the leading source of Asia’s FDI.

For the dependence on each individual economy, the Asian economies, as selected in Table 4.1, had the highest dependence on China with the index at 16.63 percent in 2016, followed sequentially by China’s Hong Kong at 13.87 percent and ASEAN at 11.66 percent. Asia’s self-dependence in FDI, as shown in Table 4.1, was as high as 50.72 percent, indicating the FDI and global value chains are interlinked which have acted as an accelerator to deepen the integration among ASEAN, China and India, and held these economies ever closely together.2

———————————————————————— 1 Data source: https://www.jetro.go.jp/en/reports/statistics/. 2 UNCTAD, World Investment Report 2017, p55.


44

Table 4.1 FDI Interdependence Index (inflows plus outflows), Selected Asian Economies, 2016 (percent)

onof

CHN JPN KOR HK IND AUS IDN SGP ASEAN ASIA EU US ROW

CHN 0 1.07 1.83 60.75 0.04 1.38 0.47 2.86 5.22 71.12 5.83 6.01 17.04

JPN 4.16 0 0.80 1.62 1.80 2.47 1.44 -7.78 -1.17 9.66 42.90 28.34 19.09

KORa 20.65 -5.03 0 16.78 5.83 -1.25 0.79 11.28 22.96 71.09 1.58 11.41 15.92

HK 35.77 1.82 2.32 0 0.48 -0.32 0.18 -0.79 5.88 46.86 1.90 3.51 47.73

INDb 32.65 18.55 2.29 2.06 0 -4.84 0.11 -2.29 1.18 35.80 26.35 6.52 31.33

AUSc 5.99 -26.13 0.92 0.11 -0.13 0 0.23 -4.93 -5.26 -17.40 12.69 56.25 48.46

IDNd 7.87 15.39 3.03 6.38 0.16 0.50 0 26.88 28.47 62.56 0.60 3.39 33.44

SGPe 7.54 3.79 3.39 0.26 4.41 -2.26 0.66 0 4.39 25.06 25.20 29.85 19.89

ASIA 16.63 4.20 2.07 13.87 2.25 2.49 2.32 3.82 11.66 50.72 13.88 9.30 26.10

Notes: Interdependence Index for FDI of X on Y (FDIIXY) = FDIXY/FDIWX, FDIXY = FDI inflow from Y to X and outflow from X to Y,

FDIWX = total global FDI inflow and outflow of economy X.

The negative value means the negative value of FDI inflow to or outflow from economy Y is larger than the positive value of the

other one (outflow or inflow), i.e., there is disinvestment between the economy X and Y. a, b, d FDI data of Korea, India, and Indonesia are calculated on IMF CDIS FDI stock data, which is the FDI stock of 2016 minus the

FDI stock of 2015. c FDI data of Australia in 2015 (because of outflow from Australia to the world is negative value and the FDI index cannot be

calculated) come from the FDI stock of 2015 minus the FDI stock of 2014 from Australian Bureau of Statistics. e FDI data of Singapore in 2015 come from the FDI stock of 2015 minus the FDI stock of 2014 from Singapore Department of

Statistics.

Source: Based on IMF Coordinated Direct Investment Survey (CDIS) database, UNCTAD FDI/TNC database, OECD Stat and the data from

the Statistical Bureaus of individual economies.

4.2 Inward FDI Interdependence

The interdependence index for inward FDI measures the degree of one economy depends on another in FDI inflows and is calculated as the share of one economy’s FDI inflows from another economy in the total FDI inflows from the world.

Table 4.2 shows the interdependence indices of inward FDI for selected economies in 2016. China’s Hong Kong remained as the largest source of FDI inflows into the Chinese mainland. Notably, the Chinese mainland replaced British Virgin Islands for the first time to become the largest source of FDI inflows into China’s Hong Kong, with the dependence index rising from 14.9 percent in 2015 to 28.18 percent in 2016. India also saw a sharp rise in its inward FDI dependence on China as indicated by the jump in the index from 1.15 percent in 2015 to 34 percent in 2016. Korea is more dependent on FDI

inflows from ASEAN with an index of 35.2 percent and then on China with an index of 15.94 percent in 2016, while Indonesia depended more on ASEAN for 31.87 percent of its inward FDI and then on Japan for 18.65 percent of the FDI inflows.

ASEAN depended on itself for 24.82 percent of the inward FDI compared to 18.4 percent, an increase of more than 6 percentage points. In fact, ASEAN’s self-dependence had followed an upward trend after 2003 except for a slip in 2013.1 For the members of the Regional Comprehensive Economic Partnership (RCEP, including ASEAN, China, Japan, Korea, India, Australia and New Zealand), the intra-RCEP inward FDI dependence reached 31.59 percent, a level that very close to Asia’s dependence on RCEP which was 32.55 percent in 2016 (see Table 4.2).

———————————————————————— 1 UNCTAD, Global Investment Trends Monitor, No. 27, Special

edition, 16 November 2017.


45

Table 4.2 Inward FDI Interdependence Index, Selected Asian Economies, 2016 (percent)

onof

CHN JPN KOR HK IND AUS IDN SGP ASEAN RCEP ASIA EU US ROW

CHN 0 2.46 3.77 64.65 0.35 0.21 0.05 4.80 5.18 11.69 78.44 6.98 1.89 12.69

JPN -0.36 0 1.61 36.65 0.00 2.14 0.05 8.73 10.64 14.05 23.57 49.90 16.51 10.02

KORa 15.94-22.1

80 20.23 4.80 -3.49 0.00 40.08 35.20 30.72 51.72 32.28

-22.08

38.08

HK 28.18 1.58 2.52 0 0.603 0.598 .. -1.99 0.64 34.18 34.49 1.43 5.22 58.85

INDb 34.00 19.28 2.51 0.37 0 -0.03 0.01 3.16 6.90 55.77 44.66 20.39 9.11 25.84

AUSc 9.08 8.09 0.68 -0.08 -0.02 0 0.66 3.27 3.19 23.59 25.28 17.44 26.24 31.04

IDNd 9.20 18.65 3.68 7.76 0.19 0.60 0 31.69 31.87 64.25 72.87 0.73 4.01 22.38

SGPe 3.08 3.37 2.32 -1.28 -1.20 0.20 1.12 0 2.38 10.12 8.87 33.90 35.78 21.45

ASEAN 9.49 14.43 6.07 9.90 1.20 3.76 1.11 15.78 24.82 60.27 72.22 40.95 13.07-26.2

4

RCEP 7.95 7.81 3.43 25.50 0.40 1.90 0.43 8.01 11.12 31.59 58.70 23.68 10.76 6.86

ASIA 12.00 6.19 3.25 17.94 0.82 1.61 0.30 5.33 8.27 32.55 52.50 18.94 11.16 17.40

Notes: Interdependence Index for FDI Inflows of X on Y (IFDIIXY) = IFDIXY/IFDIWX, IFDIXY = FDI inflow from economy Y to X, IFDIWX

= total global FDI inflow to economy X.

.. = Not available.

The negative value means the negative value of FDI inflow from economy Y to X, i.e., net outflow from economy X to Y. a,b,d FDI data of Korea, India, and Indonesia are calculated on IMF CDIS FDI stock data, which is the inward FDI stock of 2016

minus the inward FDI stock of 2015. c FDI data of Australia in 2016 come from the inward FDI stock of 2015 minus the inward FDI stock of 2014 from Australian Bureau

of Statistics. e FDI data of Singapore in 2015 come from the inward FDI stock of 2015 minus the inward FDI stock of 2014 from Singapore

Department of Statistics. Source: Based on IMF Coordinated Direct Investment Survey (CDIS) database, UNCTAD FDI/TNC database, OECDStat and the data from

the Statistical Bureaus of individual country or region.

Major Asian economies, except China’s Hong

Kong and Singapore, as shown in Table 4.3, demonstrate a high degree of dependence on Asian for inward FDI. To understand the pattern of this dependence, the index of self-dependence for Asia’s inward FDI is constructed and calculated as the amount of one economy’s FDI inflows from Asia proportional to its total inflows from the world. Among the economies in Table 4.3, China is most dependent on Asia for the inward FDI. In 2015, about 82.80 percent of China’s inward FDI came from Asia and the figure slightly reduced to 78.44 percent in 2016. India made rapid gains in attracting Asian investment, with the level of dependence rising from less than 20 percent in 2008 to a new record of 44.66 percent in 2016.

Indonesia’s dependence on Asian peaked at 88.58 percent in 2012 and then declined afterwards. Japan, China’s Hong Kong and Singapore saw an unstable pattern in its dependence on Asian investment. ASEAN’s dependence on Asia reached a record of 72.22 percent in 2016. RCEP had a record high level dependence of 61.08 percent on the Asian investment in 2015 and of 58.70 percent in 2016.

Intra-Asia inward FDI dependence index increased sharply from 43.86 percent in 2015 to 52.50 percent in 2016, a new record of more than 50 percent. Large proportion of intra-Asia FDI is on greenfield, focusing in manufacturing activities, 1

———————————————————————— 1 Asian Development Bank, Asian Economic Integration Report

2017, p 32.


46

which may explain the phenomenon of production fragmentation and industrial reconfiguration in

developing Asia.

Table 4.3 Asia’s Inward FDI Self-dependence Index,

Selected Asian Economies, 2012-2016 (percent)

Economies 2008 2012 2013 2014 2015 2016

China, People’s Republic of 61.50 77.60 80.51 82.75 82.80 78.44

Japan 14.91 165.94 53.95 65.65 .. 23.57

Korea, Republic of 34.90 53.96 51.60 35.70 .. 51.72

China’s Hong Kong 43.56 47.31 14.86 42.58 18.20 34.49

India 18.11 21.55 27.74 33.84 44.14 44.66

Australia 22.77 31.65 30.64 20.30 20.30 25.28

Indonesia 61.31 88.58 .. 76.88 51.41 72.87

Singapore 21.12 25.36 24.47 38.50 85.80 8.87

ASEAN .. 51.33 49.41 44.61 55.76 72.22

RCEP .. 56.62 56.32 54.04 61.08 58.70

ASIA 38.28 47.28 41.86 38.01 43.86 52.50

Notes:..= Not available.

Source: Based on IMF Coordinated Direct Investment Survey (CDIS) database, UNCTAD FDI/TNC database, OECDStat and the data from

the Statistical Bureaus of the individual country or region.

4.3 Outward FDI Interdependence

The interdependence index of outward FDI reveals an economy’s importance as the host of another economy’s outward FDI. The index is calculated as the proportion of one economy’s outward FDI to a particular destination in its total direct investment to the world.

Table 4.4 shows the outward FDI dependence indices of selected Asian economies. In contrast to the pattern of Asia’s inward FDI, the outward FDI seemed to be more dispersed in terms of destinations. The relation between the Chinese mainland and China’s Hong Kong was an exception. The Chinese mainland and China’s Hong Kong were the top destinations for each other’s outward FDI. In general, Chinese mainland was the favorite destination for the outward direct investment for the Asian economies as shown by the dependence index of 18.98 percent. The importance of Asia for outward FDI was followed by ASEAN with the dependence index at 13.46 percent and China’s Hong Kong at 7.74 percent. Singapore and Korea also had high

dependence on Asia for their outward FDI, with the level of dependence at 86.12 percent and 76.99 percent respectively, while Japan and India preferred to choose EU as the destination of their outward direct investment.

The Chinese mainland, Korea, China’s Hong Kong and Singapore locate more than two thirds of their outward FDI in Asia. Because of the disinvestment by Australia and India in Asia, their outward FDI dependence on Asia was negative in 2016. For Australia, the value of its disinvestment in Asia was nearly 3 times more than the total outward FDI from Australia to the world. The withdrawal of direct investment from Asia by Australia brought down Asia’s outward FDI dependence index to a low level of 42.32 percent, nearly 10 percentage points below the intra-Asia inward FDI dependence index as shown in Table 4.2.

Developing Asia has been and will continue to be active investor and major driver of economic development in Asia as well as in the world. The recent growth in outward investment from developing


47

Table 4.4 Interdependence Index for Outward FDI, Selected Asian Economies, 2016 (percent)

On

Of CHN JPN KOR HK IND AUS IDN SGP ASEAN ASIA EU US ROW

CHN 0 0.18 0.59 58.24 0.05 2.13 0.74 1.62 5.24 66.41 5.10 8.66 19.84

JPN 5.09 0 0.64 1.15 2.18 2.54 1.72 -11.18 -3.60 6.80 41.46 30.78 20.96

KORa 22.08 0.19 0 15.73 6.15 -0.57 1.02 2.51 19.24 76.99 -7.77 21.60 9.18

HK 50.69 2.29 1.94 0 0.25 -2.14 0.53 1.58 16.17 71.18 2.81 0.15 25.85

INDb 2.50 2.38 -2.76 39.64 0 -111.85 2.34 -123.44 -126.06 -161.18 159.01 -51.19 153.37

AUSc -13.18 -238.92 2.45 1.27 -0.80 0 -2.44 -55.94 -57.75 -282.81 -16.81 242.85 156.77

IDNd 1.72 0.30 .. .. 0.05 .. 0 4.60 12.74 14.76 0.00 0.53 84.71

SGPe 24.35 5.38 7.46 6.07 25.55 -11.55 -1.09 0.00 11.95 86.12 -7.63 7.48 14.03

ASIA 18.98 1.58 0.57 7.74 3.39 3.04 4.05 1.74 13.46 42.32 6.73 6.08 44.87

Notes: Inter-dependence Index for outward FDI of X on Y (OFDIIXY) = OFDIXY/OFDIWX, OFDIXY = FDI outflow from economy Y to X,

OFDIWX = total global FDI outflow from economy X.

.. = Not available.

The negative percentage means the negative value of FDI outflow from economy X to Y, i.e., net inflow from economy Y to X.

Because of data availability, the data of China, Japan and China’s Hong Kong are data of 2015, the data of Korea, Singapore and

Australia are data of 2014, and the data of India and Indonesia (negative value of FDI outflows in 2013 and 2014) are data of 2012. abd FDI data of Korea, India, and Indonesia are calculated on IMF CDIS FDI stock data, which is the outward FDI stock of 2016

minus the outward FDI stock of 2015. c FDI data of Australia in 2015 (because of outflow from Australia to the world is negative value and the OFDI index cannot be

calculated) come from the outward FDI stock of 2015 minus the outward FDI stock of 2014 from Australian Bureau of Statistics. e FDI data of Singapore in 2015 come from the outward FDI stock of 2015 minus the outward FDI stock of 2014 from Singapore

Department of Statistics.

Source: Based on IMF Coordinated Direct Investment Survey (CDIS) database, UNCTAD FDI/TNC database, OECDStat and the data from

the Statistical Bureaus of the individual country or region.

Asian investors may imply the growing internationalization efforts by Asia’s multinationals. They are strengthening their global presence especially within the region,

taking advantage of local opportunities1, regardless of external economic environment.

———————————————————————— 1 Asian Development Bank, Asian Economic Integration Report

2017, p 32.


48

Chapter 5 Integration in Asia’s Service Sector

49


5.1 Features of Services Content in Asia Trade

International trade negotiations have focused on four modes of trade in services (e.g. cross-border delivery, consumption abroad, commercial presence and presence of natural persons) defined by the GATS at the Uruguay Round negotiations around the late 1980s. After three decades of explosive growth of international trade and in particular, the continuous decline cost of ICT technologies, the global trade pattern shifted away from final goods towards intermediates. This development has brought about challenges to conventional statistics regarding the four modes of trade in services. Specifically, international production fragmentation has deepened worldwide, featured with finer split-up of production phases and thus significant trade in intermediates. Clearly, the four modes of trade in services as given in GATS were out of reach for this new development, as many if not most trade in services are contained in goods traded. This section will update our knowledge about Asia’s indirect trade in services.

The analysis employed a database developed by OECD, which is different from the one used in the previous Report because it has the advantage of providing a better representation of the Asian economies. The purpose of this section is to demonstrate the progress of Asia’s integration in services trade by providing information about direct and indirect trading in services among the member economies. The indirect trade in services covers those contained in one economy’s manufacturing

and non-manufacturing exports and imports. Figure 5.1 presents the total of direct and

indirect services as in value added terms in the exports of 14 Asian economies for the years from 1995 to 2014. Several observations may be drawn from Figure 5.1 through Figure 5.3. First, most Asian economies experienced rapid increase in the services value added in their exports after 2000 (see Figure 5.1). Notably China saw an exceptional high growth of the services value added in the exports, with the total services value added exports reaching USD797 billion in 2014. Japan was the second largest exporter of services value added in the region, with USD440 billion of service exports, followed by India and Korea, exporting USD277 billion and USD224 billion of value added services, respectively.

In addition to China, other developing Asian economies such as Vietnam, India, Indonesia and the Philippines also saw fairly high growth rates from 2000 to 2014 while the three more advanced economies such as Japan, Korea and China’s Taiwan were experiencing relatively moderate rates of growth.

Second, indirect service exports played a more than commonly expected role in service exports (see Figure 5.2). For most of the economies (11 out of 14), the proportion of indirect service exports was over 50 percent, with Korea as the highest at 68.5 percent. Even for the last-runner Cambodia, the share of indirect service exports could reach 31 percent of the total value.


50

Figure 5.1 Total Services Value Added Export (direct and indirect) for Selected Asian Economies, 1995-2014


Figure 5.2 Indirect Services Value Added Exports for Selected Asian Economies, 1995-2014



51

Third, services are important for manufacturing exports.1 The majority of the selected economies had indirect services value added embodied in manufacturing exports over 60 percent while the share for Brunei, Cambodia, and China’s Hong Kong

remained low (see Figure 5.3 and Table 5.1b).

——————————————————————— 1 Manufacturing does not include mining, construction and

water, gas, electricity industries.

Figure 5.3 Services Value Added in Manufacturing Exports for Selected Asian Economies, 1995-2014

Source: Authors’ calculation using OECD ICIO dataset. China’s total service value added exports

overtook Japan in 2009. However, if direct service exports were not counted, the year of catch-up was 2010, one year later. But if the services value added embodied in manufacturing exports were taken into account, the catch-up year was 2011.

Table 5.1a and Table 5.1b present a complete picture of trade in services for the selected Asian economies. Only 2000 and 2014 were chosen for the study. Several main features may be observed. First, trade in services became more important for the more recent period (2000-2014) than the period of 1995-2000 and four regions including China, India,

Vietnam, and Cambodia had exhibited outstanding performance.

Second, the indirect services embodied in manufacturing exports constituted a lion’s share of total services trade through the whole period. For total services exports, only three economies had indirect exports of services less than 50 percent in 2014. India’s share of indirect services exports was 47.5 percent, while the share for Vietnam and Cambodia was 49.8 percent and 30.6 percent respectively (see Table 5.1b). Of the indirect services exports, services embodied in the goods were the most important. Of course, there are a few exceptions


52


53


54

especially for non-manufacturing Asian economies in this case. For example, China’s Hong Kong’s share of indirect services in manufacturing exports was only 32.1 percent and the share for Brunei was even lower at 26 percent. Further to this understanding, it is found that most of the indirect services were added to local manufacturing exports, with China’s Hong Kong, Cambodia and Brunei as exceptions.

Third, most of the Asian economies (except China, Malaysia and Vietnam) had significantly increased the share of the indirect services exports via regional manufacturing trade. 1 In contrast to the relative decline in the share of indirect services exports through local manufacturing, it may be an indication that these economies were on the way to integrate services sectors into the regional value chains.

Finally, Japan was the largest exporter of indirect services via Asian manufacturing trade, with a total of USD26.02 billion, followed by Korea with USD6.7 billion, China’s Taiwan of USD6.63 billion and China’s Hong Kong of USD3.7 billion in the year of 2000. China ranked only the 7th on this list with an amount of USD2.34 billion. By 2014, however, China, with an annual average growth rate of 22 percent after 2000, moved up to the second place next to Japan, exporting USD38 billion of indirect services via regional manufacturing trade, compared with USD53.7 billion for Japan.

What’s more impressive is that China’s gains in indirect services value added to the ROW manufacturing exports as the amount rose from USD3.8 billion, ranked the 4th in 2000 to USD56.5 billion, on the top of the list in 2014. China’s position and role in Asia’s services exports are mainly manifested by its absolute size and growth rates. In fact, relative to most of other Asian economies, China’s impact in services exports is all-encompassing. The absolute size and growth rates have affected not only domestic manufacturing exports but also the manufacturing exports of Asia as well as the ROW.

5.2 Asia Integration

Despite the challenges, global tourism continued to

———————————————————————— 1 Indirect VA exports refers to the service DVA realized through

the other 13 economies manufacturing exports for a given Asian region; and Indirect VA through ROW gives the DVA generated by manufacturing exports outside the 14 Asian regions. Clearly, foreign VA equals to the sum of Asian DVA and ROW DVA.

rise for the seventh consecutive years in 2016 following the 2009 global economic crisis. International tourist arrivals (overnight visitors) in 2016 increased by 3.9 percent to a total of 1.235 billion worldwide. Asia and the Pacific region led the growth of global tourist industry and the number of cross-border tourist arrivals reached 308.4 million, up by 9 percent in 2016. Africa followed closely Asia and the Pacific region to obtain a 8.1 percent growth. All the four subregions in Asia and the Pacific region had impressive performance. Oceania had the strongest growth to reach 9.4 percent, followed by North-East Asia and South-East Asia, both growing at 8.6 percent, South Asia at 7.8 percent.

Global international tourism receipts grew by 2.6 percent to reach USD1.22 trillion worldwide in 2016. The tourism receipts of Asia and the Pacific in 2016 grew by 4.8 percent to USD366.7 billion. The growth of international tourism receipts in the four subregions of Asia and the Pacific region has increased in line with the increase in the number of international tourist arrivals.

The following is an update of the indicators measuring the interdependence of the Asian tourist trade. The ten economies, as presented in the previous issues of this Report, are selected to demonstrate the interdependency of the Asian tourism trade. Figure 5.4 shows the proportion of international tourists coming from other Asian economies. The index is constructed by calculating the ratio of international tourist arrivals from other Asian economies to the total international arrivals from the world. It is used to show the share of Asian international tourists that choose to travel in other Asian economies as the outbound travel destination.

After Malaysia’s dependence on Asia in its sources of arrivals peaked at 90 percent in 2015, the index had surpassed China’s Hong Kong and rose to a record level of 92.61 percent in 2016, indicating that Malaysia is becoming a more attractive destination for the Asian tourists. While there are minor changes in the ranking of the dependence as compared to the previous year, the main characteristic of “Asians travelling in Asia” still remain (see Table 5.2). Between 2015 and 2016 except for China, Malaysia and Korea, the dependence index on Asia tourism for China’s


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Hong Kong, China’s Taiwan, Japan, Singapore and Indonesia had all declined.

Another dependency feature is that some major Asian economies tend to have high dependence on the neighboring economies as the sources of their tourist arrivals. For example, China’s Hong Kong’s

dependence on the Chinese mainland was 75.51 percent. Malaysia’s dependence on Singapore was about 50 percent and Korea’s dependence on China was 46.79 percent, all exceeding forty percent (see Table 5.3).

Figure 5.4 Dependence Index of Asian Tourism for Selected Economies, 2016 Note: Data for international tourist arrivals of the US had undergone some technical adjustments in 2014 and 2015. Therefore, data for 2016

is not comparable to that of the previous years. China’s international arrivals data includes tourists arrivals from the neighboring

border areas.

Source: Main data from UNWTO Tourism Highlight 2017 Edition at www.unwto.org, supplemented by data from the economies’ Tourism

and Statistical offices.

Table 5.2 Dependence Index on Asian Tourism of Selected Economies, 2015-2016 (percent)

Rank Economies 2015 2016

1 China, People’s Republic of 93 95.32

2 China’s Hong Kong 92.28 90.78

3 Malaysia 90.82 92.61

4 China’s Taiwan 90.71 90.03

5 Japan 85.55 82.81

6 Korea, Republic of 82.89 84.06

7 Singapore 76.71 73.15

8 Indonesia 79.14 77.34




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Table 5.3 2016 Interdependence Indices Between Different Asian Economies (percent)

on

of CHN MYS HK SGP KOR JPN IDN TWN US AUS

CHN (VF) 0.00 0.84 58.74 0.67 3.45 1.87 0.46 4.15 1.63 0.49

MYS (TF) 7.94 0 0 49.6 1.66 1.55 11.64 1.12 0.81 1.41

HK (TF) 75.51 0.95 0 1.14 2.46 1.93 0.82 3.55 2.14 1.02

SGP (VF) 17.46 7.02 3.28 0 3.46 4.78 17.65 2.4 3.15 6.26

KOR (VF) 46.79 1.81 3.77 1.28 0 13.33 1.71 4.83 5.02 0.88

JPN (VF) 26.51 1.64 7.65 1.51 21.18 0 1.13 17.34 5.17 1.85

IDN (TF) 13.51 13.38 0.88 13.16 3.36 4.73 0 2.2 2.75 11.31

TWN (VF) 32.85 4.44 15.11 3.81 8.27 17.73 1.77 0 4.9 0.77

US (TF) 7.91 0.00 0.00 0.00 5.25 9.52 0.00 1.23 0.00 3.58

AUS （TF） 14.73 4.56 3.02 4.88 3.41 4.97 2.19 2.01 8.96 0.00

Note: “\” =figure or data not (yet) available; TF: international tourist arrivals at frontiers (excluding same-day visitors); VF: international

visitor arrivals at frontiers (tourists and same-day visitors). The international tourist arrivals data for China includes international

arrivals from the border areas to China.


and Statistical offices. In comparison, the main sources of international

tourist arrivals for Singapore, Japan and Indonesia are relatively diversified. China’s position as the major supplier of the region’s tourists has been prominent. The number of Chinese outbound tourists reached 122 million in 2016 and had remained as the world’s largest provider of cross-border tourists for four consecutive years after 2013. Therefore, China’s importance for the Asian tourism industry is obvious as the dependence of major Asian economies on Chinese tourists averaged about 32 percent according to Table 5.3.

Figure 5.5 shows that except China’s Hong Kong and China’s Taiwan, other seven economies had increased their dependence on China as sources of cross-border tourists between 2015 and 2016. In particular, the dependence of the US on China increased by more than 100 percent, with the dependence index up to 7.91 percent. Such explosive growth has been marked by a series of efforts made by both China and the US, such as China-US Tourism Year 2016, granting ten-year multiple–entry visas by both governments and opening new direct routes between China and the

US. Similarly, other Asian economies have taken

measures to attract more international tourists. Malaysia adopted visa free policy and electronic visa system for important tourist markets. In addition, it has made efforts to improve infrastructure and increase air capacity. Singapore, by fully exploiting their comparative advantage in tourism, has launched a series of micro movies and tourists marketing movies. Indonesia has also released visa policy, opened more direct flights from important tourist sourcing cities. These measures have played an effective role in attracting international tourists, particularly from China.

Due to the unfavorable factors in the early 2016, including the deterioration of bilateral relations and security accidents，the number of tourists from the Chinese mainland to China’s Hong Kong and China’s Taiwan dropped significantly. However, the short- haul markets saw encouraging gains in China’s Hong Kong, partly due to the recent simplification of entry-exit visa by the Hong Kong authorities and the promotion of short-haul markets. To mark the 20th anniversary of Hong Kong’s return to China in 2017,


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the Hong Kong government and the Tourism Development Bureau held a number of large-scale events, which is believed to have contributed to

attracting an increasing number of high value-added overnight international tourists.

Figure 5.5 Dependence Index of Tourism Exports on China for Each Economy, 2015-2016




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Chapter 6 Financial Integration

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6.1 Portfolio Investment in Asia: Fragile Recovery amid Continuing Uncertainty

This section demonstrates the latest features of Asia’s portfolio investment flows1. Unlike FDI, portfolio investment covers capital flows through financial market.

Table 6.1 reports flows in portfolio investment in 2016 in comparison with those in 2015. After a significant loss in 2015, the world aggregate portfolio investment recovered in most regions. The total portfolio investment increased by 12.68 percent to USD52.09 trillion despite gloomy economic growth in major developed countries. However, the gap between developed countries and emerging markets widened, as investors sought to “flight to safety”. Capital inflows to Asia’s 10 biggest economies amounted to USD0.57 trillion, an increase of 12.49 percent over 2015.2 Meanwhile, flows to the US

surged by 26.91 percent and flows to the EU (15) also increased by 15.65 percent. Collectively, these two regions absorbed over USD5.63 trillion, accounting for about 96 percent of the world total portfolio investment. The rest of the world (excluding 10 Asian economies, EU (15) and the US) recorded negative capital inflows. The growing trend of capital concentration in the US and EU (15) reflected a growing concern about the economic and political risks in developing countries.

——————————————————————— 1 Portfolio investment represents investing in debt and equity

securities with less than 10 percent ownership. Data is obtained from the Coordinated Portfolio Investment Survey (CPIS) by the International Monetary Fund (IMF). CPIS contains both the source and destination of each economy’s portfolio investment.

2 10 major economies in Asia include the Chinese mainland, China’s Hong Kong, Japan, Korea, Singapore, India, Malaysia, Thailand, the Philippines and Indonesia.

Table 6.1 World Total Capital Inflows in 2016 (USD million)

Country/Region 2015 2016 Flows in 2016 Percent Change

Proportion in Total Capital

Flows


776,410 844,369 67,959 8.75 1.16

Japan 1,851,976 2,129,431 277,454 14.98 4.73

Korea, Republic of 427,533 507,128 79,596 18.62 1.36

Indonesia 135,534 171,080 35,546 26.23 0.61

Malaysia 118,083 113,602 -4,481 -3.79 -0.08

The Philippines 62,669 65,625 2,957 4.72 0.05


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(continued)

Country/Region 2015 2016 flows in 2016percent change

proportion in total capital

flows

Singapore 252,123 301,830 49,707 19.72 0.85

Thailand 83,786 103,768 19,981 23.85 0.34

10 Asian Economies 4,560,413 5,129,958 569,544 12.49 9.71

EU (15) 18,386,291 21,263,255 2,876,964 15.65 49.07

US 10,235,949 12,990,563 2,754,615 26.91 46.99

Total value 46,225,757 52,088,314 5,862,556 12.68

Figure 6.1 Annual Percentage Change of Portfolio Investment to Asia

Within Asia, the most prominent growth occurred in Japan and Korea, with an annual rate of 14.98 percent and 18.62 percent respectively (see Figure 6.1). With the inflow of USD277.45 billion, Japan ranked as the region’s top economy to attract foreign portfolio investment, followed by ASEAN with a total of USD103.72 billion inflows in 2016. China received USD67.96 billion of portfolio investment in 2016, up by 8.75 percent.

Capital outflows from major Asian economies reached the record high. With the deficits in capital flows, Asia continued to experience significant capital flights (see Table 6.2). The Asia’s 10 biggest economies invested USD689 billion in other countries, but only received USD570 billion capital inflows, resulting to a USD119 billion deficit. Japan and Singapore are the region’s traditional capital suppliers, with capital outflows constantly surpassing capital inflows. Surprisingly, China saw a 28.07 percent surge in capital outflows. In 2016, China sent USD78.83 billion

of portfolio investment to other regions but only received USD67.96 billion. As a result, the net capital inflows to China dropped by 2.19 percent. Even though China didn’t report its outward portfolio investment until 2015, it is generally considered as a net capital importer. However, with the outflows in excess of inflows in 2016, it may suggest that the investors were willing to hold dollar dominated assets in anticipation of the RMB depreciation. With the 6.8 percent depreciation of the RMB against the USD in 2016, there was growing concern that the surge in capital outflows may add additional pressure on the country’s financial stability. In recent years, the People’s Bank of China had placed high priority on reducing financial risks and listed preventing systematic financial risks as its No.1 task. In contrast to the massive capital outflows from the Asian economies, Table 6.2 shows portfolio outflows from developed economies remained weak. Capital


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outflows increased by 3.32 percent in the US and only 0.5 percent in EU (15). Total portfolio investment from the US and the EU (15) only accounted for about 7 percent of the world total portfolio

investment, while the two regions absorbed more than 90 percent of the total portfolio investment, indicating the two regions had acted as net importers of portfolio investment in the world.

Table 6.2 World Total Capital Outflows in 2016 (USD million)

Country/Region 2015 2016 Flows in 2016 Percent Change

Proportion in Total Capital Flows


280,830 359,659 78,830 28.07 1.34

Japan 3,511,692 3,877,710 366,018 10.42 6.24

Korea, Republic of 235,872 302,761 66,889 28.36 1.14

Indonesia 13,090 13,215 125 0.96 0.00

Malaysia 69,132 72,967 3,835 5.55 0.07

The Philippines 10,677 11,455 778 7.29 0.01

Singapore 961,638 1,024,662 63,024 6.55 1.08

Thailand 42,024 38,695 −3,329 −7.92 −0.06

10 Asian Economies 6,383,444 7,072,671 689,227 10.80 11.76

EU (15) 19,650,432 19,748,211 97,780 0.50 1.67

US 9,447,716 9,761,659 313,943 3.32 5.36

Total value 46,225,757 52,088,314 5,862,556 12.68

Figure 6.2 Destination of Asia Portfolio Investment

Capital outflows from Asia mainly went to the

US and the European Union countries. Collectively, these two regions absorbed more than 53 percent of Asia’s total portfolio investment (see Figure 6.2). Meanwhile, Asia received more than 58 percent of its total capital inflows from the US and the European Union countries (see Figure 6.3). Only 14.2 percent of Asia’s outward portfolio investment went to Asian economies, which accounted for only 19.6 percent of the region’s capital inflows. So as described previously in

the Report, Asia’s financial market has been heavily dependent on the Western countries.

Figure 6.3 Source of Asia Portfolio Investment

6.2 De jure and de facto Financial Openness of Asia

6.2.1 De jure Measure of Financial Openness

This section and the next section will report the latest progress of financial integration in Asian


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countries and main economic partners, including the ASEAN(10), China, Japan, the US, India and Korea from de jure and de facto perspectives. For the de jure measure, this section focuses on the relevant regulatory policies and arrangements of the capital account in the Asian economies.

In recent years, the degree of financial integration in the Asian region has been significantly improved even though the financial regulations in Asia showed a slightly tighter trend. After the outbreak of the global financial crisis in 2008, market recovery had been the dominant factor of capital regulations in the Asian economies. The entire Asian region saw a massive readjustment to the existing regulations and in-depth reforms were adopted by different governments in response to the crisis. Meanwhile, the establishment of Asian Infrastructure Investment Bank (AIIB) played an important role to promote the region’s financial cooperation as the AIIB acts as an alternative source of financing in the multi-channel financing framework of the region.

Japan, while maintaining a relatively high level of financial integration over the last decade, witnessed stricter regulations on capital accounts in 2016. On March 25, 2016, the Bank of Japan issued a new version of the Capital Flow Account (J-CFA) with wider scope of regulations, covering the capital account transactions in more sectors and more types of financial assets. In April 2016, the Japan Financial Services Agency announced a prohibitive rule on certain capital outflows, prohibiting banks and credit card companies from transferring funds to all foreign brokers outside Japan. That is, when Japanese native traders were dealing with these foreign brokers, they could not deposit money by international bank transfer or credit card.

Korea also saw reduced financial openness in past years. From 2005 to 2016, the de jure financial openness of Korea declined as the capital account controls were tightened. In recent years, due to the increased tensions in North-East Asia and the higher Fed’s interest rate, Korea’s capital outflows became active and the authorities strengthened controls, especially on short-term financial investment, derivatives investment and transfers. After January 1, 2016, Korea announced that it would formally begin to levy a transfer income tax on derivatives. On June 16, 2016, the Korean financial regulatory agency announced a new set of provisions to help Korean financial market to cushion the potential impact of a tighter US monetary policy. These new provisions required banks to ensure adequate liquidity allocation to cope with sudden capital outflows, some of which had come into effect as early as July 1, 2016. According to these new rules, effective July, the

upper limit of the foreign currency forward position as a proportion to total capital for domestic banks was raised from the current 30 percent to 40 percent. For foreign banks, this limit was raised from the current 150 percent to 200 percent.

China employed a set of stricter measures of capital account controls in 2016. Specifically, China intended to control the net outflow from the RMB funds pool more strictly, especially through giving guidance to QDIIs (qualified domestic institutional investors). A series of measures were adopted such as strengthening the supervision over commercial banks’ short-term cross-border RMB capital outflows, requiring the commercial banks to review more carefully the facticity of transit trade and reselling business and allowing the conversion of the funds in RMB NRA (Non-Resident Account) into fixed-term deposits. In contrast to more strict controls on the outflows, the controls on inflows continue to loosen. In 2016, China's State Administration of Foreign Exchange loosened the restrictions on the funds flow by the QFIIs. According to the new rules, the lock-up period was shortened from 1 year to 3 months for the QFIIs and the subscription and redemption of open-end funds held by QFIIs were allowed on the daily basis rather than weekly. At the same time, the quota for a QFII’s initial investment was increased by four times from the initial USD1 billion to USD5 billion.

In summary, for the majority of the Asian economies, the capital account controls had been tightened in 2016. Consequently, measured from the de jure perspective, the average of Asia’s financial openness fell in 2016.

6.2.2 De facto Measure of Financial Openness

The de facto measure of financial openness shows the de facto level of openness by examining a country's actual capital flows. Three measures are adopted to measure the de facto financial openness, namely IFIGDP, GEQY, EQSH (Lane and Milesi-Ferretti 2007). 1 The first measure, named as IFIGDP,

———————————————————————— 1 IFIGDP=(FA+FL)/GDP, where the FA represents the total of

foreign direct investment assets, portfolio investment assets, other investment assets, financial derivatives and foreign exchange reserves; FL represents the total of direct investment liabilities, other investment liabilities and financial derivatives liabilities. GEQY financial integration calculation method is based on portfolio investment and FDI investments in equity securities, GEQY=(PEQA+FDIA+PEQL+FDIL)/GDP, where PEQA (PEQL) says the stock in portfolio investment assets (liabilities), FDIA (FDIL) represents the stock in direct investment assets (liabilities). EQSH is estimated to examine the role of the international risk-sharing to improve the level of financial openness, EQSH=(PEQL+FDIL)/FL.


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represents the ratio of a country’s total investment assets and liabilities to GDP. The second measure represented by GEQY is the ratio of a country’s total portfolio investment and FDI to the GDP. The third is EQSH, which is the share of a country’s cross-border

flows of equity investment to its financial liability. All variables are denominated in US dollar. The results of calculation from 2001 to 2016 are presented in Figure 6.4 to 6.6.

Figure 6.4 De facto Financial Openness of Selected Countries by IFIGDP Measure Note: The Ave of ASEAN means the average de facto index of the 10 ASEAN countries, including Brunei, Myanmar, Cambodia, Indonesia, Laos

Malaysia, the Philippines, Singapore, Thailand and Vietnam.

Source:The calculation is based on IMF International Financial Statistics, CD-ROM, CEIC database and author’s own calculations.

Next, we examine the trend of the portfolio

investment and FDI investment in Asia using GEQY indicator. Figure 6.5 shows the de facto financial openness of ASEAN (10), China, the US, Japan, India and Korea from 2001 to 2016 based on the GEQY indicator. As can be seen from the figure, again, from 2015 to 2016, ASEAN (10) enjoyed a larger increase while the index of Japan declined, while exact same logic applies. In the case of China, GEQY indicator remained stable as well in 2016. However, a further investigation of the component of GEQY demonstrates that the portfolio investment increases at 7.3 percent in 2016, especially due to 7 percent increase in holding of portfolio asset in foreign countries while inward FDI investment decreases at 1 percent, while the FDI asset holding in foreign countries decreases at 5.7 percent. This might be due to the stricter capital controls policies preventing the FDI investment overseas and reinforce the asymmetric regulation regarding capital inflow and capital outflow employed by China.

We further investigate the capital structure of

external holdings in Asia using EQSH indicator. Figure 6. 6 shows the de facto financial openness of ASEAN (10), China, the US, Japan, India and Korea from 2001 to 2016 based on the EQSH indicator. As shown in the figure, except for ASEAN (10), the ratio of equity investment liabilities and direct investment liabilities to liabilities in other countries remained basically unchanged from 2015, with a slight increase for Korea, India and the US, while a slight decrease for Japan. In the case of ASEAN, the proportion of the debt financing (both portfolio liability and FDI liability) increases from 0.5 to 0.58 in 2016. In Japan, the proportion of the debt financing decreases from 0.34 to 0.31 and might be due to the deleverage efforts by the Japanese government. In the case of China, EQSH remained stable, as the proportion of debt financing is 74.2 percent in 2015 while 74.1 percent in 2016. Thus, there are no systematic changes in the capital structure of external holding in Asia in 2016 except it seems that there is a trend in ASEAN towards debt financing.


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Figure 6.5 De facto Financial Openness Based on the GEQY

Figure 6.6 De facto Financial Openness Based on the EQSH Method Table 6.3 reports the rankings of the de facto

openness of the 15 sample countries (ASEAN (10), China, the US, Japan, India and Korea) based on the IFIGDP measure from 2001 and 2016. As shown in the table, Singapore and Brunei were the top-ranking countries for most of the time periods as demonstrated by the IFIGDP index before 2012. From 2012 to 2016, the US emerged into the top 2 countries except in 2015. As can be seen from the figure, after 2012, Japan's openness was rising, but slightly decreased in 2016. On the basis of de facto financial openness, the

rankings of financial integration in countries such as Laos continued to decline during the sample period, which could mean that their GDP growth relied on a gradual decline in the portion of foreign investment. Although China ranked lower, it had steadily moved up in the ranking from 2001 to 2015. However, due to the stricter controls on capital outflow, the external holding of asset in foreign countries decreases significantly which lead to a drop of de facto financial openness measure for China in 2016.


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6.3 Index of Business Cycle Synchronization

The degree of business cycle synchronization gauges the extent that macroeconomic activities move together. It is measured as the correlations between the cyclical component of country i’s real GDP growth rate and the cyclical component of country i’s real GDP growth rate corr (ci, cj)1.

Figure 6.7 shows the business cycle synchronization index between Asia and some major economies. The correlation of business cycle in Asia and the aggregated world economy is close to 1, indicating that Asia has become more and more integrated with the world economy. Within Asia, Japan and ASEAN (5) 2 appear to have same degree of synchronization with Asia. The correlation of business cycles with Asia for India and the Middle East region have remained at a low level. For China’s correlation with the Asian business cycles, the index is 0.74, lower than that of Japan and the ASEAN (5), indicating that the Chinese economy is less affected by the common factors in Asia. However, that pattern of Asia’s business cycle synchronization is changing progressively. The degree of synchronization with Asia has increased sharply since the subprime financial crisis in 2008, particularly for China and the US. The US used to have a low correlation with Asia business cycles in the 1990s and even turned to the opposite direction during Asian financial crisis in 1998. However, the correlation of business cycles between the US and Asia peaked to 0.9 in 2008 partly because the financial crisis that originated in the US and spread all over the world had affected almost all Asia countries and significantly enhanced the co-movements of the world economy. As China’s output continues to grow, it is more likely to have greater synchronization with the aggregate Asia economy and the rest of the world.

———————————————————————— 1 Annual data for real GDP (at 2010 constant price) was obtained

from International Financial Statistics (IFS). The original time series was first filtered with the Hodrick and Prescott (HP) filter to separate the trend component from the cyclical component. A 10-year rolling correlation was then calculated based on the cyclical component.

2 The ASEAN (5) includes Indonesia, Malaysia, the Philippines, Singapore and Thailand, which are the major economic entities within ASEAN.

The East Asia region (including China, Japan, Korea, China’s Hong Kong, China’s Taiwan, China’s Macao and Mongolia) has almost the perfect correlation with the aggregate Asian economy, implying that Asia economy is largely driven by the two biggest economies in the East Asia—Japan and China. Figure 6.8 shows the average correlation of individual economy’s business cycle with the aggregate East Asia business cycle. The average correlation within East Asia region is 0.63 for the entire sample period. However, the cyclical correlation of China and Japan appears to be significantly different. While Japan has persistently high correlation of 0.9 or above, the correlation between China and the East Asia has never exceeded 0.6, which is even below the average level within the region. Clearly, the East Asia region co-moves more with Japan rather than with China. This is probably due to the fact that Japan has long been the region’s source of investment both in FDI and portfolio investment. The correlations between the East Asia region and the US almost resemble the pattern between the aggregate Asia and the US, indicating that East Asia is more dependent on the US than on the rest of Asia. India, on the other hand, has a low correlation with the East Asia region.

In contrast, ASEAN (5) (including Indonesia, Malaysia, the Philippines, Singapore and Thailand) is more synchronized than the East Asia region. All five members have considerably high correlations with the ASEAN, and such high correlations tend to persist over time. The results show that the ASEAN countries are more dependent on each other and are more likely to be affected by common factors. Japan has greater degree of business cycle synchronization with the ASEAN region, particularly after the Asian financial crisis in 1998. In the 1990s, the average correlation between Japan and the ASEAN was only 0.33 and the figure surged to 0.88 after 2000s, probably because after the Asian financial crisis, the ASEAN countries became more dependent on capital flows and trade from Japan. China has significantly enhanced its correlation with the ASEAN countries. Under the Belt and Road Initiative, the bilateral correlation between China and the ASEAN has increased from 0.47 in 2013 to 0.59 in 2017 (see Figure 6.9). However, the overall level of synchronization remains relatively low.


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Figure 6.7 Business Cycle Synchronization Index over Time Note: Business cycle synchronization index is the average 10-year rolling correlations of cyclical part of real GDP growth rate between

country i and the aggregate level in Asia components.

Source: IFS data series.

Figure 6.8 Average Bilateral Correlations with East Asia


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Figure 6.9 Average Bilateral Correlations with ASEAN

6.4 Asian Financial Market Integration: Saving and Investment Correlation Indices

Capital flow is one of the important factors in promoting economic growth. If there is perfect capital market mobility, domestic investment could be financed by foreign saving, implying a low correlation between domestic saving and investment. However, if the correlation coefficient is high and different from zero, it means that capital is immobile. Feldstein and Horioka (1980) firstly examine the relationship between domestic saving and investment rates by using cross-sectional data for the 16 OECD countries in 1960-1974 to measure the degree of international capital mobility. They find that the correlation coefficient is close to one, implying that capital is not mobile in the OECD countries. However, given the prevailing integration of financial markets, the capital markets are inclined to be integrated more deeply, contrary to Feldstein and Horioka's findings. For this reason, this situation is known as the Feldstein–Horioka puzzle (FHP). To analyze whether FHP exist in Asia, we will examine the correlation between saving and investment rates by using the data of 12 Asian countries in 1997-2017, including Japan, Korea, China, Thailand, the Philippines, Vietnam, Malaysia, Singapore, Indonesia, India, Australia and New Zealand.1

———————————————————————— 1 Data source: World Bank database.

Firstly, the descriptive analysis of the averaged gross domestic saving and investment rates in Asian is shown in Table 6.4. For the period 1997-2017, the ratio of gross domestic saving to gross domestic product averaged 0.311 for the 12 Asian countries and the standard deviation was 0.081. This saving rate varied from a high of 0.462 in Singapore to a low of 0.186 in New Zealand. The 21-year average gross investment ratio had a mean of 0.274 and a standard deviation of 0.047. It varied from a high of 0.400 in China to a low of 0.211 in the Philippines. The excess of gross domestic investment over gross domestic saving is equal to the net inflow of foreign investment. Its average absolute value was 4.9 percent of GDP with a standard deviation of 4.5 percent and 14.2 percent of gross saving with a standard deviation of 11.3 percent. It is worth noting that both China and Korea had average investment and saving rates higher than all the other Asian economies, while those of New Zealand and the Philippines were the lowest.

Moreover, to measure the stability of saving and investment rates, the sample was divided into three periods: 1997-2001, 2002-2007 and 2008-2017 and the correlation between pairs of sample periods was calculated. Between 1997-2001 and 2002-2007, the saving rate correlation is 0.862. For 2002-2007 and 2008-2017, the saving rate correlation is 0.959. Finally between 1997-2007 and 2008-2017, the saving rate correlation is 0.948. Correspondingly, the correlations of the investment ratios among the sub-periods are 0.487,


69

0.864 and 0.832. So the pattern of savings rates has remained quite stable over the period, while the

investment rates show a stable pattern only after 2002.

Table 6.4 Averaged Gross Saving and Investment Rates in Asia, 1997-20171

Index

Country

SGDP

I

GDP

| S - I |GDP

| S - I |

S

Australia 0.222 0.262 0.040 0.186

China, People’s Republic of 0.455 0.400 0.055 0.080

India 0.308 0.295 0.013 0.040

Indonesia 0.316 0.284 0.032 0.031

Japan 0.274 0.246 0.028 0.103

Korea, Republic of 0.346 0.307 0.039 0.101

Malaysia 0.337 0.246 0.091 0.283

New Zealand 0.186 0.221 0.035 0.212

The Philippines 0.224 0.211 0.013 0.068

Singapore 0.462 0.279 0.183 0.417

Thailand 0.293 0.248 0.045 0.165

Vietnam 0.304 0.286 0.018 0.019

Mean 0.311 0.274 0.049 0.142

S.E. 0.081 0.047 0.045 0.113

Finally, to assess the relation between saving rates

and investment rates, the following equation with reference to Feldstein & Horioka（1980）was estimated:

,ii i

I SGDP GDP

α β ε⎛ ⎞ ⎛ ⎞= + +⎜ ⎟ ⎜ ⎟⎝ ⎠ ⎝ ⎠

The coefficient β indicates the proportion of the incremental savings that is invested domestically and is referred to as the “saving retention coefficient”. The estimation of β is negatively related to world capital mobility and a value close to one would indicate that

——————————————————————— 1 I is gross domestic investment, S is gross domestic saving. GDP

is the gross domestic product.

most of the incremental saving in each country has remained there.

Table 6.5 shows the correlation coefficients between saving rates and investment rates for the 12 Asian countries during the period from 1997 to 2017. The first row of the table shows that for the entire 21-year period, the correlation coefficient is 0.433, indicating that an averaged 43.3 percent of domestic investment had come from domestic savings in the 12 Asian countries. During the period from 2002 to 2007, the level of such correlation was as low as 35.5 percent, indicating that after the breakout of the global financial crisis in 2008, the 12 Asian economies became more self-sufficient in financing their domestic investment because the correlation


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between domestic savings and domestic investment increased to the highest level at 51.2 percent.

Table 6.5 Correlation Coefficients for the Sample in 1997-2017

Periods α β P value R2

1997-2017 0.139 (0.040)

0.433 (0.124)

0.006 0.548

1997-2001 0.135 (0.024)

0.443 (0.075)

0.000 0.778

2002-2007 0.161 (0.054)

0.355 (0.169)

0.062 0.301

2008-2017 0.116 (0.047)

0.512 (0.145)

0.005 0.555

Note: *** represents statistical significance of the coefficient at 1% and stand errors are reported in parentheses.

Source: EIU country data, January, 2018.

In general, compared with the results in

different sub-periods and the experience of other countries, the following conclusions may be drawn.

First, the financial markets of the major Asian economies are no longer isolated from the rest of the world as only an average of 43.3 percent of domestic investment had come from domestic savings. For the 21 OECD countries, between 1960-1974, around 90 percent of domestic investment had come from domestic savings (Feldstein and Horioka 1980). 1 During the period between 1980 and 2012 the correlation of the European countries were lower, at 50 percent (Johnson and Lamdin 2014). However, compared to these countries at present, the coefficient between domestic investment and domestic savings in Asia is relatively high 2 . This observation has encouraging implications as it suggests that major Asian countries depend, in a relative way, substantially on foreign outside savings to finance their investment.

Second, after the global financial crisis in 2008, the degree of financial openness may have fallen as

———————————————————————— 1 In contrast, Holmes and Otero(2014) find a much lower

coefficient of 0.156 using 25 OECD countries during 1970- 2011.

2 Based on the author’s estimation of 22 European countries during 1997-2017, the coefficient is 0.219.

the correlation between domestic savings and domestic investment rose obviously. This is consistent with the conclusion drawn from the analysis of the stock markets and inflation correlation in the next section. In general, the global financial crisis has had significant impact on the progress of the financial integration in Asia.

6.5 Stock Market Correlation Index in Asia

In this section, we report how the stock markets are correlated among the Asian economies (including the US), to show the degree of the financial integration. The sample periods were divided into three sub-periods: January 2002 to December 2006, January 2007 to December 2011, and January 2012 to December 2017 to check how the degree of correlation had evolved over time. Table 6.6 reports the adjusted correlation matrix of monthly returns among the Asian economies during 2002-2017.3

———————————————————————— 3 We refer to Forbes and Rigobon (2001) to calculate the adjusted

correlation coefficient *ρ between x and y. 2

2

*1

ρρρ ρ

=− +Δ

ρ is the correlation coefficient between x and y. Δ is the ratio of the variance of x sample to the variance of the total sample.


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First, due to the subprime crisis in the US and the debt crisis in Europe during 2007-2011, many economies had implemented expansionary fiscal and monetary policies to stimulate economic recovery, leading to increased financial integration in Asia. Compared with Table 6.6a, all the correlation coefficients in Table 6.6b became significant.

Meanwhile, after 2007, a higher correlation among the Asian economies was observed as compared to the previous periods. As an example indication of deeper financial integration in Asia during this period, the correlation coefficients between China and others increased from an average of less than 0.04 in 2002-2006 to 0.26 in 2007-2011.

Table 6.6a Stock Market Correlation Coefficients in Asia, 2002-2006

AUS HK IND IDN KOR MYS NZL JPN PHL CHN SGP US

AUS 1

HK 0.15* 1

IND 0.22* 0.16* 1

IDN 0.15* 0.15* 0.21* 1

KOR 0.25* 0.28* 0.23* 0.14* 1

MYS 0.10* 0.16* 0.08* 0.08* 0.10* 1

NZL 0.15* 0.05 0.10* 0.08* 0.05* 0.06* 1

JPN 0.17* 0.12* 0.17* 0.12* 0.19* 0.06 0.10* 1

PHL 0.10* 0.05 0.09* 0.15* 0.08* 0.05 0.12* 0.10* 1

CHN 0.02 0.08 0.02 0.02 0.04 0.13* 0.04 0.01 0.01 1

SGP 0.19* 0.19* 0.13* 0.10* 0.15* 0.18* 0.13* 0.09* 0.09* 0.01 1

US 0.21* 0.19* 0.09* 0.08* 0.20* 0.09* 0.10* 0.09* 0.06 0.01 0.20* 1

Table 6.6b Stock Market Correlation Coefficients in Asia, 2007-2011


AUS 1

HK 0.37* 1

IND 0.34* 0.44* 1

IDN 0.31* 0.35* 0.37* 1

KOR 0.29* 0.30* 0.28* 0.33* 1

MYS 0.17* 0.21* 0.20* 0.24* 0.17* 1


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(continued)


NZL 0.18* 0.13* 0.14* 0.11* 0.14* 0.13* 1

JPN 0.30* 0.27* 0.21* 0.25* 0.24* 0.21* 0.23* 1

PHL 0.22* 0.24* 0.27* 0.28* 0.20* 0.27* 0.20* 0.17* 1

CHN 0.25* 0.35* 0.28* 0.25* 0.28* 0.31* 0.26* 0.20* 0.24* 1

SGP 0.35* 0.46* 0.39* 0.37* 0.39* 0.35* 0.29* 0.33* 0.30* 0.21* 1

US 0.41* 0.25* 0.22* 0.21* 0.22* 0.18* 0.25* 0.25* 0.19* 0.12* 0.28* 1

Table 6.6c Stock Market Correlation Coefficients in Asia, 2012-2017


AUS 1

HK 0.23* 1

IND 0.11* 0.17* 1

IDN 0.12* 0.07* 0.09* 1

KOR 0.08* 0.16* 0.08* 0.07* 1

MYS 0.05* 0.05* 0.05* 0.08* 0.06* 1

NZL 0.16* 0.08* 0.08* 0.09* 0.05* 0.04* 1

JPN 0.18* 0.18* 0.16* 0.08* 0.15* 0.1* 0.11* 1

PHL 0.10* 0.11* 0.15* 0.19* 0.12* 0.09* 0.18* 0.05* 1

CHN 0.13* 0.35* 0.05* 0.07* 0.22* 0.06* 0.10* 0.19* 0.1* 1

SGP 0.16* 0.25* 0.14* 0.13* 0.17* 0.11* 0.13* 0.12* 0.15* 0.12* 1

US 0.15* 0.15* 0.13* 0.07* 0.12* 0.08* 0.12* 0.16* 0.09* 0.06* 0.19* 1

Note: We use Shanghai A-share index as a proxy of China stock market index.

* denotes significance of statistical correlation coefficient at the 5% level.

Source: China Stock Market Accounting Research (CSMAR) database; RESSET Database, January, 2018. However, the degree of financial integration in

Asia significantly declined after 2012. Compared with 2007-2011, nearly all the correlation coefficients became lower in 2012-2017 and the number of insignificant coefficients increased widely. Specifically, the US economy stood out in the current global economic downturn. After several rounds of QE and long-term zero interest rates, the US economy took the lead in the recovery with its

flexible market and innovation mechanism. Although the US core inflation rate remained below the target level, the US economic activity continued to recover, with steady growth in the labor market, forcing the Federal Reserve continue to raise interest rates. Especially in 2017, the Federal Reserve raised interest rates three times and formally announced a contraction in September. The US planed to reduce the balance sheet from USD4.5 trillion to about USD1.5


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trillion. In addition, the US tax reform at the end of 2017 were expected to bring new impact on the global economy. The drastic reduction of corporate taxes and the “one-time” profit-sharing tax cuts for multinational corporations may further promote the return of overseas manufacturing capacities and consolidate the steady recovery of the US economy. As a result, the US stock market continued to perform strongly in 2017. This could be seen from the average stock market correlation coefficient between the US and the Asia-Pacific economies, dropping from 0.26 in 2007-2011 to 0.14 in 2011-2017.

In 2017, “deleveraging” and “strengthening financial regulation” were the two key words of China's financial markets, aiming at preventing systemic risks and reshaping China’s financial system. China adopted a series of capital market reform measures amid the ups and downs in recent years. As a consequence, the degree of interdependence with other economies in the Asia-Pacific region in 2012 - 2017 significantly dropped. In the future with the progress of the Belt and Road Initiative (BRI), the correlation between China and the Asia-pacific economies are expected to improve. Similarly, the correlation between China’s Hong Kong and others was also significantly weakened. For instance, China’s Hong Kong and India's correlation coefficient decreased from 0.44 to 0.17 after 2012. One possible reason may be that China’s Hong Kong maintained the currency peg and the market value of the Chinese mainland firm accounts for more than 40% of China’s Hong Kong’s listed companies. In the meantime, the opening of the Shanghai-Hong Kong Stock Connect program in recent years had brought astronomical incremental funds to the Hong Kong stock market, helping regulators strengthen their management and bringing the market return allied with value investment. In 2017, the Hang Seng Index rose more than 30 percent and Investors started to embrace the long-awaited prosperity.

Moreover, the overall performance of commodity market showed major ups and downs after 2014. Taking the oil price as an example, it fell from the highest USD100 a barrel to the lowest USD30 a barrel in 2014, but rebounded to USD58.36 dollars in the first 10 months of 2017. The fluctuating commodity markets aggravated the volatility of financial markets in Asia. For the economies relying on the

commodities imports and exports such as Australia, India and Indonesia, their correlations with other Asian economies were significantly reduced. Compared with 2007-2011, the correlation coefficients between India and Singapore, Indonesia and Korea dropped from 0.39 to 0.14 and from 0.33 to 0.07 respectively in 2012-2017.

In the future, the degree of financial integration in Asia would face more uncertainty. On one hand, Jerome Powell, the new chairman of the Federal Reserve, would face big challenges after assuming office. Will his policies be politically driven or economically driven? The choice could have significant impact on the capital flows of the Asia-pacific region. The Asian financial markets may be affected by the future direction of Democratic People’s Republic of Korea (DPRK) nuclear issue. Currently, the situation of Korean peninsula was very tense, which may be a black swan event in the future, triggering a possible global economic turmoil and bringing more uncertainty to the economic recovery and integration in the Asia-pacific region.

6.6 Inflation Correlation Index in Asia

Table 6.7 presents correlation matrix of CPI (Consumer Price Index) in Asia (including the US) during 2002-2017. The sample periods were divided into two sub-periods: January 2002 to December 2007, January 2008 to December 2017 to check how the degree of CPI correlation had changed over time.

Since the subprime crisis and debt crisis in Europe and the US, many economies have implemented expansionary fiscal and monetary policies to stimulate economic recovery. In particular, both the US and Japan have implemented quantitative easing policies and released much liquidity, causing inflationary danger in Asia. After 2008, a more significant CPI correlation among the Asian economies was observed as compared to 2002-2007, with the percentage of significant correlation coefficients increased from less than 11 percent to around 40 percent. Moreover, quantitative easing monetary policy in the US aggravated the inflation levels in China, Singapore, Malaysia, Australia and Korea, as evidenced by a significant increase in the correlation coefficients in 2008-2017. But the inflation levels of both India and Japan were not


74

significantly correlated with that of the others after 2008. The inflation levels of Malaysia, the the Philippines, Singapore, Australia and Korea showed significant correlations with more economies,

suggesting that these economies’ inflation, to a certain degree, was also affected by loose monetary policies of other economies.

Table 6.7a Inflation Correlation in Asia and US, 2002-2007

CHN HK IDN IND JPN KOR MYS PHL SGP AUS NZL US

CHN 1

HK 0.63 1

IDN -0.68 0.1 1

IND 0.32 0.74 0.26 1

JPN 0.71 0.8 -0.23 0.51 1

KOR 0.1 -0.61 -0.69 -0.84* -0.16 1

MYS -0.06 0.73 0.74 0.58 0.38 -0.82* 1

PHL 0.13 0.58 0.4 0.03 0.38 -0.27 0.75 1

SGP 0.96* 0.67 -0.59 0.46 0.82* 0.01 0.01 0.08 1

AUS -0.68 0.03 0.86* 0.28 -0.01 -0.54 0.59 0.18 -0.49 1

NZL -0.07 0.59 0.76 0.48 0.15 -0.77 0.90* 0.71 -0.04 0.45 1

US 0.52 0.88* 0.07 0.38 0.77 -0.35 0.69 0.79 0.5 0.01 0.47 1

Table 6.7b Inflation Correlation in Asia and US, 2008-2017

CHN HK IDN IND JPN KOR MYS PHL SGP AUS NZL US

CHN 1

HK 0.74* 1

IDN 0.54 0.48 1

IND 0.17 0.12 0.18 1

JPN 0.23 0.52 0.52 -0.45 1

KOR 0.66* 0.21 0.44 0.43 -0.20 1

MYS 0.68* 0.44 0.60 -0.39 0.62 0.45 1

PHL 0.62 0.31 0.72 0.33 0.21 0.87* 0.65* 1

SGP 0.84* 0.62 0.52 0.48 0.03 0.83* 0.47 0.77* 1

AUS 0.83* 0.54 0.76* 0.37 0.24 0.83* 0.68* 0.90* 0.82* 1

NZL 0.70* 0.26 0.38 0.30 -0.19 0.93* 0.51 0.77* 0.72* 0.82* 1

US 0.91* 0.64* 0.42 0.03 0.31 0.67* 0.81* 068* 0.82* 0.78* 0.68* 1

Note: *denotes significance of statistical correlation coefficient at the 5 percent level.

Source: World Bank Statistics, January, 2018.

However, as the US economy maintained a steady recovery after 2014 and the Federal Reserve


75

started a rate-rise cycle, the US dollar continued to strengthen, causing the central banks around the world except the US to release liquidity frequently. The differentiation of monetary policies and falling commodity prices lead to new changes in Asia’s CPI. To further understand the new changes of inflation in the Asian economies, we analyze the trends of CPI in Asia and the US, which is shown in Figure 6.10.

Except India, Indonesia, Japan and the US, the CPI trends of other economies were very similar, all dropped in 2009 and 2012, but steadily recovering in 2009-2011 as a result of the quantitative easing monetary policies in the US and Japan. However, affected by the drop of commodity market and the rate-rise cycle started by Federal Reserve, the Asian economies continued to grow sluggishly and the inflation rate decreased. Similarly, affected by the falling oil prices, the CPI of the US was hovering around zero after 2015. However, the rise of energy prices in 2016 increased the level of inflation in the US. After 2017, the process of economic recovery accelerated and as a result, the US inflation rate started to rise due to Trump’s expansionary fiscal policy and the improvement of oil price. It is expected that there would be a rebound in employment and continuous economic recovery in the US. All these factors above plus the tax cuts effect may raise the US inflation in the future.

In particular, India’s inflation was the opposite of

that of others in 2008-2014 and 2016-2017, with the highest level of inflation among the Asian economies. Many factors led to India’s high inflation, such as domestic economic downturn, the deficit of India’s balance of payment and the consequent depreciation of rupee and, the political uncertainties before the 2014 election. But as India highly depends on oil imports, the falling oil prices after 2014 greatly reduced the inflation level in India. Besides, after Raghuram Rajan was appointed the governor of the Indian central bank in 2013, his policy of “controlling the inflation and stabilizing the exchange rate” also held down the Indian inflation. The inflation level of Indonesia before 2012 was always high and a big increase in inflation in 2013 made Indonesia the country with the highest CPI in Asia. Indonesia maintained high interest rate and tightening monetary policy to curb rising inflation and currency devaluation. The policy had received much success as shown in its inflation level in 2016-2017. Moreover, Japan’s CPI was always the lowest among all the economies before 2014 and did not show a sharp increase in 2011 as other economies did. This is because Japan had suffered economic downturn and persistent deflation since the asset price bubble burst in 1995. However, as Japan implemented extremely loose monetary policy to stimulate its economy in 2014, Japan’s economy began to recover and the prices rebounded from deflation levels.

Figure 6.10 Trends of CPI in Asia and US during 2008-2017 Source: World Bank Statistics, January, 2018.


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Financial Integration

77

Outlook

The Boao Forum Annual Report on the Progress of Asian Economic Integration is a score card on the progress of the integration in Asia and a description of major economic issues in the Asian region in the past, especially those events in the previous year.

Amid many challenges faced by the Asian economies, Asia’s trade growth saw some modest sign of improvement in 2016. Compared to the negative growth of 7.1 percent for exports and 8.5 percent for imports, Asia’s exports continued to fall by 3.7 percent and imports by 4.7 percent. However, this merchandise trade performance is only measured in value terms and the fall in exports and imports were mainly attributed to low commodity prices and the appreciation of the US dollar. In volume terms, Asia’s merchandise trade performed a lot better and the exports increased by 1.8 percent compared to 1.3 percent for the world in 2015. In general, Asia’s position in the world trade still remained historic high of the past ten years even measured in value terms. In 2016, Asia’s share in global exports was 34 percent, close 34.2 percent attained in 2015 while the share of merchandise imports fell slightly from 30.8 percent in 2015 to 30.26 percent. Asia’s trade seemed to recover strongly into 2017. In the first eight months of 2017, a number of Asian economies such as Australia, Indonesia, China’s Hong Kong, Malaysia, Korea and India were able to achieve double-digit export growth and the momentum for import growth was also high for most of the major Asian economies.

The global value chain (GVC) had been an important driving force for Asia’s trade growth.

However, there were signs that the GVCs were undergoing structural changes even before the breakout of the global financial crisis in 2008, which, to a large extent, were responsible for the slowdown of the global trade growth (Constantinescu etc. 2015). The slowdown in global value chain trade persisted into 2016 at both global and regional levels. Between 2015 and 2016, the world’s intermediate goods trade continued to fall by 4.8 percent. However, when compared to the sharp decline of 14 percent in 2015, the fall in 2016 was modest. In 2015, Asia’s intermediate goods trade dropped sharply by 15.2 percent in 2015. However, the situation improved in 2016 and the decline was mild at only 0.6 percent. Amid the shrinking of the global value chain, Vietnam was outstanding among the Asian economies that had been able to maintain a positive and a rather high rate of growth in its intermediate goods trade. In 2016, Vietnam’s trade in intermediate goods increased by 7.8 percent as compared to 8.4 percent in 2015. In general, the major Asian economies saw stagnation in their dependence on Factory Asia, measured by the share of its trade in parts and components among themselves as against the world. The dependency index moved up from 0.59 in 2014 to 0.61 in 2015 and then dropped to 0.58 in 2016. Despite these facts, however, it is still early to make any final judgment about the long-term direction of the global value chain in Asia as well as in the world.

From 2015 to 2016, Asia’s self dependence in trade continued to drop, with the dependency index declined from 51.48 percent in 2015 to 50.74 percent


78

in 2016. With the complicated uncertainties in the region and the world, almost all the major Asian economies except Korea, India, Singapore, Malaysia, and the US had reduced the trade dependence on Asia. In particular, China’s dependence on Asia contracted to 44.52 percent, far below the historic high of 50 percent attained 2013. Japan saw roughly three percentage points decrease to 53.82 percent while Korea’s trade dependence on Asia fell from its record high level of 65.95 percent attained in 2012 to 59.88 percent in 2016.

Asia’s financial markets looked unstable. There was a tendency of “flight to safety” in 2016 due to uncertainty of Asia’s future growth and higher economic and political risks. The 10 largest Asian economies saw USD 689 billion outflows, but only received USD570 billion capital inflows, resulting to a USD119 billion deficit. Traditionally, China was believed to be an importer of foreign portfolio investment. But the situation was different in 2016. During the year, about USD78.83 billion of portfolio investment flew out of the country in contrast to USD67.96 billion inflows. This dramatic change may suggest that the investors were willing to hold dollar dominated assets in anticipation of the RMB depreciation. With 6.8 percent depreciation of the RMB against the US dollars in 2016, there was growing concern that the surge in capital outflows may intensify and consequently, add more pressure on the country’s financial stability. In contrast to the surge of 26.91 percent for the US and 15.65 percent for EU, capital inflows into major Asian economies increased only by 12.49 percent. Collectively, the US and EU markets absorbed USD5.63 trillion, accounting for 96 percent of the world total portfolio investment.

Our indicators show that Asia’s financial integration continued to be at stagnation. Between 2002 and 2007, before the global financial crisis, the correlation between domestic savings and domestic investment was 0.355, meaning that about 36 percent of the major Asian economies’ domestic investment had come from home savings. But after the financial crisis, from 2008 to 2017, the ratio increased to 51 percent. The increase in the ratio of domestic financing suggests that the Asian economies became less open in their financial system and relied more on domestic sources of

financing. The fallback of Asia’s financial integration is also observed from the changes in stock market correlations across major Asian economies. For example, the stock markets correlations among major Asian economies after the global financial crisis became lower and the number of insignificant coefficients increased widely. Concerned about the financial market instabilities, a number of Asian economies such as China, Japan and Korea adopted measures to tighten the controls on capital account transactions, leading to a fall in the average of Asia’s de jure financial openness in 2016. China’s approach to tighter capital account controls was of an “Easy in and Strict out” style. The main targets of the controls on outflows were to prevent the massive capital outflows from domestic economy. In the first half of 2016, the Chinese monetary authorities adopted a series of outflow control measures such as giving guidance to QDIIs, strengthening the supervision over commercial banks’ short-term cross-border capital outflows and more stringent facticity review for transit trade and reselling business etc. At the same time, measures were also taken to loosen the controls on capital inflows, including reduced restrictions on the funds inflow by the QFIIs such as shorter lock-up time, more flexible approach to subscription and redemption of open-end funds held by QFIIs and increased quota for a QFII’s initial investment.

Relative to the year of 2016, Asia did not and will not move out of the shadows of violent external environments and internal uncertainties both in 2017 and in the near future of 2018. While the Beggar-Thy-Neighbor approach was officially discredited, the common sense of community is still far away. There are no strong measures designed and/or implemented to tackle the existing problems. Challenges inherited from the previous year still exist today such as noted in the last year’s report, the deceleration of global value chains, the vacancy left by the US exit from TPP, the narrowness of the internal demand, uncompetitive service sectors and lack of collective efforts to reform the financial system. To add to this list of challenges in the new year is the rising belief that protectionist measures could solve the problems at home and in the world and the possible breakout of trade wars.

Appendix Important Events of the Asian Economic Integration

79


TIME EVENT

1 2017/1/11 The 11th round of negotiation of China-Japan-Korea was held in Beijing. During this round of negotiation, they would exchange views on important issues such as trade in goods, service trade and investment.

2 2017/1/11-12The 50th Asia-Pacific Trade Agreement Standing Committee Meeting was held in Bangkok, Thailand. Attending were delegations from its six members — China, Bangladesh, India, Laos, Korea, Sri Lanka as well as Mongolia, the member-to-be of the agreement.

3 2017/1/11-13

The 2nd round of China-EEU Economic Trade Cooperation Negotiation was held in Beijing. The two sides had in-depth negotiation on issues concerning customs procedure, trade facilitation, technical barriers to trade, sanitary and phytosanitary measures, trade remedy, competition, intellectual property, government procurement, legal and institutional stipulations and departmental cooperation. Positive progress has been made.

4 2017/1/12

Chinese Ministry Commerce and Ministry of Finance of Burma co-chaired the 4th China-Burma Joint Commission on economy, trade and technology. They carried out in-depth talks on implementing consensus reached by leaders of both sides, strengthening the docking of development strategies and pragmatic cooperation in border trade, infrastructure construction, energy, cross-border economic cooperation zones, finance, agriculture and husbandry, substitute planting, assistance in Burma and regional economic integration. Extensive consensus was reached.

5 2017/1/13

The 4th Ministerial Council of Asia-Pacific Countries Trade Agreement was held in Bangkok, Thailand. Members of the Agreement such as China, India, Korea, Sri Lanka, Bangladesh and Laos and Mongolia who is prepared to join the Agreement sent high-level delegations to attend the meeting. At this conference, representatives of six members of the Agreement jointly signed the final document of the 4th round of tariff concession negotiation The Second Amendment of Asia-Pacific Countries Trade Agreement, and agreed to work hard to officially put it into effect on July 1, 2017. The conference issued the Ministers Declaration, announcing to launch the practical negotiations in fields such as trade facilitation, investment and service trade under the Agreement and to strive to launch the 5th round of tariff concession negotiation within this year. The conference also decided to establish the business association of the Agreement and promote to further improve the liberalization and facilitation level of trade investment in the region.

6 2017/1/16 Chinese Ministry of Commerce signed the MOU of Strengthening International Development, Cooperation and Communication between the Ministry of Commerce of PRC and Federal Department of Foreign Affairs with the Swiss Ministry of Foreign Affairs.


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(continued)

TIME EVENT

7 2017/1/16-19

The 5th round of China-Sri Lanka FTA negotiation was held in Colombo, the capital city of Sri Lanka. The two sides exchanged views on issues concerning trade in goods, trade in service, investment, economic and technical cooperation, rule of origin, customs procedures and trade facilitation, technical barriers to trade (TBT), sanitary and phytosanitary measures (SPS) and trade remedy. Positive progress has been made.

8 2017/2/20-24

The 1st meeting of Feasible Study and Exploratory Discussion on China-Canada FTA was held in Beijing. The two sides analyzed the potential of bilateral trade and economic cooperation in joint feasible study, held in-depth talks on issues of each other’s concern and expectation for the FTA in the future, and provided reference basis for both governments to decide whether to launch the FTA negotiations in the future.

9 2017/2/21 The 1st Conference of China-Australia FTA Joint Committee was held in Beijing. Both sides fully exchanged views on the implementation situation of China-Australia FTA and defined the next working arrangement.

10 2017/2/21-3/3

The 17th round of RCEP negotiations was held in Kobe, Japan. More than 700 representatives from 10 ASEAN countries, China, Japan, Korea, Australia, New Zealand, India and the Secretariat of ASEAN attended the meeting. The working group meetings included goods, services, investment, intellectual property, e-commerce, as well as laws and mechanism, were also held at the same time.

11 2017/3/7 The 28th meeting of The Philippines-China Joint Commission on Economic and Trade Cooperation was held in Manila, The Philippines.

12 2017/3/7-8 China and Eurasian Economic Union Trade and Economic Cooperation Agreement Work Conference Negotiation was held in Beijing. The two sides carried out talks on chapters about intellectual property, law and mechanism items.

13 2017/3/7-9

The 5th round of China-Maldives FTA negotiations was held in Male, Maldives. The two sides held in-depth talks on some leftover issues concerning trade in goods and relevant rules, trade in service, investment, economic and technological cooperation and legal issues on former basis. Major progress has been made and it has laid a solid basis for the completion of FTA as soon as possible.

14 2017/3/20-21

The 1st meeting of Trade and Economic Liaison Group for BRICS Chinese Year (the 14th meeting in total) was held in Beijing. Attending were delegates from Brazil, Russia, India, China and South Africa, the WTO, the UNCTAD, the UNIDO and the International Trade Center, and the BRICS Business Council. The meeting touched on issues concerning trade facilitation, investment facilitation, trade in service, e-commerce, IPR protection, economic and technological cooperation and support for the multilateral trading system, and positive progress has been made.

15 2017/3/24

Chinese Ministry of Commerce and Australian Ministry of Trade, Tourism and Investment signed the Memorandum of Understanding on Strengthening Development Cooperation in Canberra and the Declaration of Intent of the Government of Australia and the Government of the People’s Republic of China on the Deliberation of Related Contents of China-Australia FTA, announcing officially that the two countries will start the deliberation on the Service Chapter, the Investment Chapter of China-Australia FTA and the Memorandum of Understanding on Investment Facilitation Arrangement in 2017.

16 2017/3/27

Chinese Ministry of Commerce and the Ministry of Foreign Affairs and Trade of New Zealand jointly signed the Arrangement on Strengthening E-Commerce Cooperation Exchanges and the Arrangement on Strengthening International Development and Cooperation Exchanges.

17 2017/4/10-13The 12th round of negotiation of China-Japan-Korea Free Trade Zone was held in Tokyo, Japan. The three parties exchanged in-depth views on important issues such as how to push forward trade in goods, trade in services and investment.


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(continued)

TIME EVENT

18 2017/4/19-21

The 3rd round of negotiation of China-Eurasian Economic Union Trade and Economic Cooperation Agreement was held in Moscow. Both sides conducted profound negotiations on 9 topics such as trade facilitation and customs procedure, technical barriers to trade and sanitary and phytosanitary measures, trade remedy, competition, intellectual property, e-commerce, law and mechanism clause and government procurement and department cooperation, further exchanged information, reached consensuses on some clauses and obtained phased objectives.

19 2017/4/24-28

The 2nd meeting of Joint Feasible Study on China-Canada FTA and Exploratory Discussion was held in Ottawa. The two sides analyzed the potential for bilateral trade and economic cooperation in joint feasible study, exchanged their own concerned opinions and their expectations for the FTA through exploratory discussions, which was to provide basis for the two governments to decide whether to launch the FTA negotiations or not.

20 2017/4/25-27

The 1st round of China-New Zealand FTA Upgrading Negotiations was held in Beijing. The two sides held fruitful negotiations on issues concerning technical barriers to trade, customs procedures and trade facilitation, rules of origin, trade in service, competition policies, e-commerce, agricultural cooperation, environment and government procurement.

21 2017/5/2-12 The 18th round of RCEP negotiations was held in Manila, The Philippines.

22 2017/5/3

The Asian Development Bank and the ASEAN+3 Macroeconomic Research Office (AMRO) today signed a Memorandum of Understanding in Yokohama, Japan to strengthen cooperation between the two institutions in support of members in the ASEAN, China, Korea, and Japan.

23 2017/5/11

Chinese Ministry of Commerce and the Ministry of Industry and Trade of Vietnam signed the MOU on E-commerce Cooperation. According to this MOU, both sides will carry out cooperation in the fields such as enterprises communication, featured products trade, promoting dialogue between public and private, experience sharing and policy communication, improve trade facilitation level of the two countries by e-commerce and further promote constant and sustainable development of bilateral trade.

24 2017/5/12

Chinese Ministry of Commerce and the National Investment Commission of the Republic of Uzbekistan signed documents such as the Cooperation Agreement on Building Small and Medium-sized Hydropower Stations in Uzbekistan, the MOU of Strengthening Infrastructure Construction and Cooperation between the Ministry of Commerce of the People’s Republic of China and the National Investment Commission of the Republic of Uzbekistan and the MOU of Promoting Small and Medium-sized Enterprises Cooperation between the Ministry of Commerce of the People’s Republic of China and the National Investment Commission of the Republic of Uzbekistan.

25 2017/5/12 Chinese Ministry of Commerce and Mongolian Ministry of Foreign Affairs signed the MOU on Strengthening Trade, Investment and Economic Cooperation in Beijing.

26 2017/5/12

Chinese Ministry of Commerce and Mongolian Ministry of Foreign Affairs jointly signed the Memorandum of Understanding on Launching Joint Feasibility Research on China-Mongolia FTA, announcing to launch the joint feasibility research on FTA, officially starting the construction of bilateral FTA. The two parties agreed to establish the working group, to formulate the rules and plans of the research. The working group will conduct research focusing on the fields of mutual interests, and put forward policy suggestions according to the achievements of the research.

27 2017/5/12

Chinese Ministry of Commerce and the Ministry of Industry and Trade of Czech Republic signed the MOU on Small and Medium-sized Enterprises’ Cooperation. According to the MOU, both sides will improve the cooperation level of small and medium-sized enterprises of the two countries in the fields such as industry, trade and economy, science and technology and investment, based on the principle of equality and mutual benefit.


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28 2017/5/13 China and Georgia jointly signed the Free Trade Agreement.

29 2017/5/13 Chinese Ministry of Commerce and Malaysian Ministry of Transportation signed the Memorandum of Understanding on Cooperation of Transportation Infrastructure.

30 2017/5/13

Chinese Ministry of Commerce and Hungarian Ministry of Foreign Affairs and Trade signed the MOU on Cooperation of Small and Medium-Sized Enterprises. According to the MOU, the two parties will follow the principle of equality and mutual benefit, promote the cooperation and development of small and medium-sized enterprises in industry, economy and trade, science and technology, investment and the other fields.

31 2017/5/14

The Thematic Session on Trade Connectivity of the Belt and Road Forum for International Cooperation was held in China National Convention Center. The Cooperation Initiative on Promoting Trade Connectivity of “Belt and Road” was issued, which is one of the important achievements of the Belt and Road Forum for International Cooperation.

32 2107/5/15 The 13th round of China-EU Investment Agreement Negotiation was held in Beijing.

33 2017/5/16 Chinese Ministry of Commerce and Ministry of Commerce of Myanmar officially signed the MOU of Building China-Myanmar Border Economic Cooperation Zone in Beijing.

34 2017/5/16 Chinese Ministry of Commerce and Serbia’s Ministry of Construction, Transportation and Infrastructure signed the Affix III of Economic and Technological Cooperation in Infrastructure Field.

35 2017/5/16 Chinese Ministry of Commerce and Cambodian Ministry of Public Works and Transport signed the Memorandum of Understanding on Strengthening Infrastructure Cooperation.

36 2017/5/16 Chinese Ministry of Commerce and Sri Lanka’s Ministry of Development Strategy and International Trade jointly signed Framework Agreement on Promoting Investment and Economic Cooperation.

37 2017/5/19 The 3rd APEC Public-Private Dialogue on Asia-Pacific Model E-Port Network was held in Hanoi, Vietnam. Attending were delegates from APEC economies, APMEN (Asia-Pacific Model E-Port Network), international organizations and business circles.

38 2017/5/20-21The 23rd APEC Trade Ministers’ Meeting was held in Hanoi, Vietnam. China submitted to the meeting the APEC’s “Post 2020” Non-documents Vision of Trade and Investment Cooperation, receiving strong response from all participants.

39 2017/5/21-22The RCEP Ministerial Conference was held in Hanoi, Vietnam. Trade ministers from ASEAN countries, China, Australia, India, Japan, Korea and New Zealand attended the conference.

40 2017/5/23-25The 2nd meeting of the BRICS Contact Group on Economic and Trade Issues 2017 (the 15th group meeting) was held in Beijing. The meeting reached extensive consensus on the overall achievement direction of BRICS trade and economic cooperation and made positive progress.

41 2017/6/9

On the sidelines of the 3rd China-CEEC Investment and Trade Expo, the 2nd China-CEEC Forum on Cooperation Development, jointly held by the Ministry of Commerce and the Provincial People’s Government of Zhejiang kicked off in Ningbo. As an important part of the Expo, the forum aimed to “deepen 16+1 trade and economic cooperation and advance the achievements of Belt and Road initiative construction”.

42 2017/6/14

Chinese Ministry of Commerce and Italian Ministry of Economic Development co-chaired the 12th meeting of China-Italy Joint Commission for Economic and Trade Cooperation in Rome. The two sides exchanged views on issues concerning implementing the leaders’ consensus, strengthening trade and economic cooperation under the framework of Belt and Road Initiative, playing the role of China-Italy Joint Commission for Economic and Trade Cooperation and China-Italy Entrepreneurs Committee, strengthening cooperation in new areas like sea transport, aviation and agricultural areas, promoting investment facilitation, strengthening IPR protection, and deepening China-Europe trade and economic relations. Extensive consensus has been made.


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43 2017/6/27 The 18th Vice Ministerial Regular Meeting between the Chinese Ministry of Commerce and the Japanese Ministry of Economy, Trade and Industry was held in Tokyo, Japan.

44 2017/7/4

Chinese Ministry of Commerce and the Ministry of Economic Development of Russian Federation signed the Joint Declaration of Feasible Study on Eurasian Economic Partnership Agreement, deciding to carry out the feasible study work on Eurasian Economic Partnership agreement. The signing of the Declaration shows the steadfast determination of China and Russia to deepen their mutual beneficial cooperation and promote trade liberalization and regional economic integration. It also shows the common willingness for a comprehensive and high-level trade and investment liberalization arrangement which opens to other economics in the future. It will inject new strength for the comprehensive strategic partnership of the two countries.

45 2017/7/4-6

The 2nd round of the upgrading negotiation of China-New Zealand Free Trade Agreement was held in Beijing. Both sides conducted negotiations on topics such as technical trade barrier, customs procedure and trade facilitation, rule of origin, service trade, investment, competition policy, e-commerce, agricultural cooperation, environment, and government procurement.

46 2017/7/11 The 14th round of China-EU Investment Treaty negotiation was held in Brussels. It lasted for four days and the two sides negotiated on texts and strive for more possible progress.

47 2017/7/11-13

The 2nd round of negotiation of China-Israel Free Trade Area was held in Beijing. Both sides conducted negotiations on issues such as trade in goods, trade in service, movement of natural persons, trade remedy, economic and technical cooperation, e-commerce, dispute resolution and other legal problems with positive progress.

48 2017/7/12-14

The 2nd round of upgrading negotiation of China-Chile Free Trade Agreement was held in Beijing. Both sides conducted negotiations on issues such as trade in goods, service trade, economic and technical cooperation, rule of origin, customs procedure, trade facilitation, competition policy, environment, e-commerce and government procurement with positive progress.

49 2017/7/17-28The 19th round of RCEP negotiations was held in Hyderabad, India. All parties continued to carry out profound negotiation in fields such as goods, service, investment and regulations.

50 2017/7/25 Chinese Ministry of Commerce and the ASEAN Connectivity Committee jointly presided over and held the 3rd Meeting of China-ASEAN Connectivity Committee in Djakarta, Indonesia.

51 2017/7/26

The first meeting of the joint working group of cross-border economic cooperation of Lantsang-Mekong cooperation was held in Kunming. Six working groups of China, Cambodia, Laos, Burma, Thailand and Vietnam participated in this meeting. This meeting embodied the official establishment and practical operation of the joint working group mechanism of the cross-border economic cooperation under the cooperative framework of Lantsang and Mekong.

52 2017/7/31-8/4

The Joint Feasibility Study on China-Canada Free Trade Agreement and the 3rd meeting of Exploratory Discussion was held in Beijing. After 5-day intensive negotiation, both sides exchanged views on the joint feasibility study report and each other’s expectation on the future free trade agreement, reaching extensive consensuses and laying a favorable foundation for completing joint feasibility study and exploratory discussion as soon as possible.

53 2017/8/1 Chinese Ministry of Commerce and Brazilian Ministry of Industry, Foreign Trade and Services signed the MOU of Cooperation of Service in Trade (Two-year Action Plan).

54 2017/8/2

Chinese Ministry of Commerce jointly presided over and held the 20th meeting of trade and economic subcommittee of China-Russia Premiers’ regular conference with the Ministry of Economic Development of Russia in Shanghai. Both sides exchanged views in key problems of bilateral trade and economic relationship with many consensuses.


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55 2017/8/15 Chinese Ministry of Commerce and the Ministry of Finance of Nepal signed the Agreement on Promoting Investment and Economic Cooperation Framework between the Governments of China and the Government of Nepal in Katmandu.

56 2017/8/21-23

The 9th round of negotiation of China-Norway Free Trade Agreement was held in Beijing. Both sides conducted negotiations on issues such as trade in goods, service trade, investment, IPR, environment, competition policies, e-commerce, government purchasing and laws.

57 2017/8/28-30

The 3rd round of the upgraded negotiation of China-Chile Free Trade Agreement was held in Chile’s capital Santiago. They deeply discussed topics concerning the trade in goods, service trade, economic and technological cooperation, rules of origin, customs procedures and trade facilitation, competitive policies, e-commerce and government procurement, and made great progress.

58 2017/8/31 Chinese Ministry of Commerce and the Ministry of Economic Development and Trade of the Republic of Tajikistan signed the Agreement on Strengthening the Infrastructure Cooperation.

59 2017/9/1

Chinese Ministry of Commerce and the Ministry of Industry, Trade and Services of the Federative Republic of Brazil signed the Memorandum of Understanding on E-commerce Cooperation. They will build e-commerce cooperation mechanism and create a mutually beneficial development environment to promote the cooperation in e-commerce such as enterprise exchanges, vocational training and best practices sharing.

60 2017/9/8-10

The ASEAN Economic Ministers’ Meeting and the Related ones were held in Manila, The Philippines. The 16th China-ASEAN (10+1) Trade and Economic Ministers’ Meeting was held in the first place, and China put forward six suggestions. At the meeting, the Joint Declaration of further Deepening the Cooperation on China-ASEAN Infrastructure Interconnectivity was passed and will be submitted to the China-ASEAN Summit to be released in November.

61 2017/9/10

Trade and Economic Ministers from 16 RCEP member countries attended the 5th Ministerial Conference of RCEP in Manila, The Philippines. The Ministers confirmed that they should complete the negotiation quickly in the spirit of cooperation according to the leaders’ requests. Therefore, the Ministers put the political commitments into action rapidly by reaffirming the Hanoi Declaration and expanded authorization when necessary. They would try their best to make RCEP achieve important results and push forward the success of the negotiation before the year-end 2017. The Ministers emphasized a modern, comprehensive, high-quality and mutually beneficial economic partnership was the goal of RCEP negotiation. The Ministers reaffirmed that the member countries should continue to respond to the offer actively and constructively and improve the bid of market access. The Ministers stressed that the trade facilitation rule should be strengthened to fulfill RCEP’s considerable potential. The Ministers thought that a successful negotiation of RCEP should strive to reach a landing zone that was acceptable and feasible to all member countries and ensure the final agreement should follow the Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership. The Ministers noticed that concluding RCEP negotiation had been regarded as an important achievement of the 50th anniversary of ASEAN, while with mountains of work to do, they called for all members to focus both efforts and resources to best progress towards significant outcomes. The Ministers welcomed the RCEP key elements for significant outcomes by the end of 2017 as agreed by the RCEP trade negotiating committee (TNC) and indicated the negotiators to try their best to achieve those important results and report the smooth process of the RCEP negotiation to the leaders in November 2017.

62 2017/9/12 The 14th China-ASEAN Expo opened in Nanning, Guangxi at Nanning International Convention and Exhibition Center.


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63 2017/9/12-13

The 4th meeting of the Joint Feasible Study on China-Canada FTA and Exploratory Discussion was held in Ottawa. Both sides exchanged views on the joint study report and the joint achievement documents of Exploratory Discussion, reaching broad consensus and making positive progress that laid good foundation for completing the Joint Feasible Study report and the Exploratory Discussion as soon as possible.

64 2017/9/14 The 8th Meeting of China-Pakistan FTA Negotiations (Phrase II) was held in Beijing. Both sides discussed topics of goods trade, service trade and negotiation implementation to further improve the liberalization level of bilateral trade.

65 2017/9/15

Chinese Ministry of Commerce and Australian Ministry for Trade, Tourism and Investment co-hosted the 15th China-Australia Joint Ministerial Economic Committee. Both sides exchanged ideas on the key issues in current trade and economic relationship and reached broad consensus. After this meeting, two sides signed the Memorandum of Understanding on E-commerce Cooperation between the Ministry of Commerce of China and the Department of Foreign Affairs and Trade of Australia and released the Joint Declaration of the 15th China-Australia Joint Ministerial Economic Committee.

66 2017/9/16 Chinese Ministry of Commerce and the Ministry of Economic Department of the Republic of Maldives signed the Memorandum of Understanding on Concluding the Free Trade Agreement Negotiations.

67 2017/9/20

Chinese Ministry of Commerce and the Ministry of Foreign Affairs of Greece co-chaired the 12th China-Greece Joint Economic and Trade Committee in Athens. They exchanged ideas on bilateral trade and economic relationship, the construction of the Belt and Road Initiative and strengthening investment, trade and economic cooperation, reaching broad consensuses.

68 2017/9/22 The 7th Asia-Europe Economic Ministers Meeting was held in Seoul, Korea. The Presidential Statement, the Ministerial Statement on Supporting Multilateral Trade System and the Seoul Proposal on the Fourth Industrial Revolution were released at the meeting.

69 2017/9/28

The 10th Session of China-Vietnam Economic and Trade Cooperation Committee was held in Hanoi, Vietnam. Leaders from both sides agreed on the direction for deepening the China-Vietnam comprehensive strategic partnership via frequent high-level reciprocal visits. In the spirit of four “good” — good neighbor, good friend, good comrade and good partner, they will earnestly implement the trade and economic consensuses reached by the leaders, actively promote the docking between the Belt and Road Initiative and “two corridors and one ring” initiative and practically enhance the major cooperation items.

70 2017/9/28-29

The 51st Asia-Pacific Trade Agreement Standing Committee Meeting was held in Colombo, Sri Lanka. Attending were delegations from its six members — China, Bangladesh, India, Laos, Korea and Sri Lanka. The members deeply discussed series of issues including the effective time of the outcomes of the 4th round of negotiation of tariff concessions, launching substantial negotiations in trade facilitation, investment and service trade, initiating the 5th round of negotiation of tariff concessions and reporting to the WTO the outcomes of the 4th round of negotiation and revising the format of the certificate of origin of customs and operational procedures. Numerous consensuses were reached in this standing committee meeting, laying solid foundations for further improving the liberalization of the Agreement and broadening cooperation scope.

71 2017/10/1 Chinese Ministry of Commerce and the Eurasian Economic Commission signed the Joint Declaration of Substantially Concluding the Negotiation of Trade and Economic Cooperation Agreement between China and the Eurasian Economic Union in Hangzhou.

72 2017/10/9 The 15th round of the EU-China Investment Agreement Negotiations was held in Beijing and it took four days. Both sides were striving to promote the negotiations to make progress.


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73 2017/10/12-12The 4th round of China-Singapore FTA Upgrading Negotiations was held in Singapore. Both sides discussed topics such as service trade, investment, rules of origin, customs procedures and trade facilitation and trade remedy.

74 2017/10/21

Finance Ministers from the APEC member economies issued a joint statement reflecting the outcomes of the APEC Finance Ministers’ Meeting in Hoi An. Their joint statement assesses the global and regional economy and describes joint actions to be implemented by APEC economies over the next year to achieve strong, sustainable, balanced and inclusive growth.

75 2017/10/24 The 4th ASEAN Defense Ministers’ Meeting-Plus (4th ADMM-Plus) was held in Clark, Pampanga, The Philippines.

76 2017/10/24-28The 20th round of RCEP negotiations was held in Inchon, Korea. All sides discussed the issues regarding goods, services, investment and rules, and developed a draft of the joint assessment report which will be handed over to the leaders.

77 2017/11/6

Chinese Ministry of Commerce and the Spanish Ministry of Economy, Industry and Competitiveness co-hosted the 27th China-Spain Joint Economic and Industrial Cooperation Committee in Madrid. Focusing on the consensuses of the two countries. Both sides exchanged views on strengthening economic and trade cooperation under the framework of the Belt and Road, expanding bilateral trade, promoting investment cooperation, exploring the third-party markets and deepening the economic and trade relationship between China and Europe, and broad consensuses have been reached.

78 2017/11/8/-9The 29th APEC Ministerial Conference was held in Da Nang, Vietnam. Topics such as regional economic integration, inclusive growth and SMEs’ innovation were discussed at the meeting.

79 2017/11/10

Chinese Ministry of Commerce and the Cambodian Ministry of Commerce signed the Memorandum of Understanding on E-commerce Cooperation in Phnom Penh. According to the Memorandum, based on the established comprehensive strategic partnership, especially under the frameworks of the Belt and Road Initiative and guided by the Cambodian government’s Rectangular Strategy, China and Cambodia will strengthen communication and cooperation in e-commerce such as policy exchanges, enterprise cooperation, capacity building, personnel training and joint study.

80 2017/11/11

Chinese Ministry of Commerce and Chilean Ministry of Foreign Affairs officially signed the document about the achievements in the China-Chile FTA Upgrading Negotiations in Da Nang, Vietnam -- the Agreement between the Government of China and the Government of the Republic of Chile on Revising China-Chile Free Trade Agreement and Supplementary Agreement on Trade in Services of the Free Trade Agreement.

81 2017/11/11 The Leaders of 21 APEC member economies issued the Da Nang Declaration following the 25th APEC Economic Leaders’ Meeting.

82 2017/11/12 The RCEP Ministerial Conference was held in Manila, The Philippines. Attending were trade and economic ministers and representatives from 16 countries including the ten member countries of ASEAN, China, Australia, India, Japan, Korea and New Zealand.

83 2017/11/12 Chinese Ministry of Commerce and the Ministry of Industry and Trade of Vietnam signed the Memorandum of Understanding on the Establishment of A Working Group for E-commerce Cooperation in Vietnam.

84 2017/11/12 ASEAN and the Secretary for Commerce and Economic Development of Hong Kong, China (HKC) signed the ASEAN-HKC Free Trade Agreement (AHKFTA) and the ASEAN-HKC Investment Agreement (AHKIA) in Manila, the Philippines.


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85 2017/11/13

A series of events took place in Manila, The Philippines including: ● The 19th ASEAN-Korea Summit ● The 20th ASEAN-Japan Summit ● The 9th ASEAN-United Nations (UN) Summit ● The 20th ASEAN-China Summit

86 2017/11/13

The 31st ASEAN Summit was held in Manila, The Philippines with the theme “Partnering for Change, Engaging the World,” which envisions an integrated, peaceful, stable and resilient ASEAN Community that actively takes a leading role as a regional and global player in advancing political-security cooperation, sustainable economic growth and socio-cultural development in South-East Asia and in the world.

87 2017/11/13

ASEAN Member States and China released Joint Statements in Manila, The Philippines on the following topics: ● Further deepening the cooperation on infrastructure connectivity ● Tourism cooperation ● Comprehensively strengthening effective anti-corruption cooperation

88 2017/11/13 ASEAN Member States and China signed Declaration for a Decade of Coastal and Marine Environmental Protection in the South China Sea (2017-2027) in Manila, the Philippines.

89 2017/11/14 The 12th East Asia Summit (EAS) was held in Manila, The Philippines. The Summit was attended by the Heads of State/Government of ASEAN Member States, Australia, China, India, Japan, New Zealand, Korea, the Russian Federation, and the US.

90 2017/11/14

The first RCEP Leaders’ Meeting was held in Manila, The Philippines. The Heads of State/ Government of RCEP Participating Countries — the ASEAN Member States and ASEAN’s free trade agreement (FTA) partners: Australia, China, India, Japan, Korea, and New Zealand attended the meeting.

91 2017/11/14 The 15th ASEAN- India Summit was held in Manila, the Philippines.

92 2017/11/17 Chinese Ministry of Commerce and Panamanian Ministry of Commerce and Industries signed the Memorandum of Understanding on the Cooperation of Trade and Economic Cooperation Zones.

93 2017/11/17

Vice-Ministerial Meeting of the 12th China-Japan Economic Partnership Negotiation was held in Beijing. This meeting aims to implement the consensuses reached by the two countries’ leaders at the meetings during the APEC Economic Leaders’ Meeting and the East Asia Summit. They exchanged ideas on the world’s and the two countries’ macroeconomic situations, the key issues of bilateral trade and economic cooperation and regional and multilateral topics.

94 2017/11/20-21

The 13th ASEM Foreign Ministers’ Meeting (ASEM FMM13) was held in Nay Pyi Taw, Myanmar. The Meeting was attended by Foreign Ministers/High-level Representatives of 51 Asian and European countries, the EU High Representative for Foreign Affairs and Security Policy and the Deputy Secretary-General for ASEAN Political-Security Community. The Meeting, convened under the over-arching theme: “Strengthening Partnership for Peace and Sustainable Development”, provided the opportunity for ASEM partners to exchange views on relevant issues of common interests and explored most effective and efficient ways to create a stronger partnership between Asia and Europe for a future of shared, inclusive and sustainable growth and prosperity.

95 2017/11/22

Chinese Ministry of Commerce, the Ministry of Foreign Affairs of Luxembourg and the Belgian Foreign Affairs co-chaired the 21st China-Luxembourg-Belgium Joint Economic and Trade Committee in Luxembourg. The parties exchanged ideas on the China-Luxembourg and China-Belgium trade and economic relations, promoting the Belt and Road construction, strengthening bilateral investment cooperation and deepening the China-Europe trade and economic cooperation. Broad consensuses have been reached.


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96 2017/11/27 Chinese Ministry of Commerce and the Ministry of Foreign Affairs and Communications of the Republic of Estonia, signed the Memorandum of Understanding on E-commerce Cooperation in Budapest, Hungary.

97 2017/11/27-30

The 3rd round of Upgrading Negotiation of China-New Zealand Free Trade Agreement was held in New Zealand. Both sides conducted negotiations on topics such as technical barriers to trade, customs’ procedures and trade facilitation, rules of origin, trade in services, investment, movement of natural persons, competition policies, e-commerce, agricultural cooperation, environment, and government procurement. The negotiation has made positive progress.

98 2017/11/28

Chinese Ministry of Commerce and Hungarian Ministry of Foreign Affairs and Trade signed the Memorandum of Understanding on E-commerce Cooperation. The Memorandum aims to build the two countries’ coordination and cooperation mechanism of e-commerce, and explore in joint researches, public and private dialogues and logistics solutions. This is to promote the practical cooperation between enterprises, improve the facilitation level of bilateral trade, and further enhance the sustainable and stable development of bilateral trade.

99 2017/11/28-30

The 3rd round of negotiation of China-Israel Free Trade Area was held in Israel. Both sides launched negotiation on trade in goods, trade in services, rules of origin and customs’ procedures, sanitary and phytosanitary, economic and technological cooperation, e-commerce and dispute settlement. Favorable progress has been made.

100 2017/11/30

Chinese Ministry of Commerce and Palestinian Ministry of National Economy signed the Memorandum of Understanding on Launching China-Palestine FTA Joint Feasible Studies in Palestine, officially starting the construction process of the bilateral free trade area. Both sides agreed to begin to study the mutually concerned areas as soon as possible and end the studies soon.

101 2017/12/4

The 3rd meeting of the Joint Committee of Economics and Trade between the Government of China and the Governament of Islamic Republic of Afghanistan was held in Beijing. Both sides mainly exchanged ideas on expanding bilateral trade, investment, infrastructure, interconnectivity, people's livelihood, personnel’s communication and cooperation. Broad consensuses have been reached.

102 2017/12/5

The 5th meeting of China-Singapore Investment Promotion Committee was held in Beijing. Both sides exchanged views on China-Singapore bilateral investment, intergovernmental cooperation projects and the new investment cooperation opportunities in the new era. Broad consensuses have been reached.

103 2017/12/7 Chinese Ministry of Commerce and Maldivian Ministry of Economic Development signed the Free Trade Agreement at the Great Hall of the People.

104 2017/12/12

During the WTO’s 11th Ministerial Conference, Chinese Ministry of Commerce and Mauritius’ ambassador extraordinary and plenipotentiary to the United Nations Office in Geneva signed the Memorandum of Understanding on Launching China-Mauritius FTA Negotiations, marking the official initiation of China-Mauritius FTA negotiations.

105 2017/12/12-15 The 16th round of the EU-China Investment Agreement Negotiations was held in Brussels.

106 2017/12/21

Chinese Ministry of Commerce and Gambia’s Ministry of Foreign Affairs, International Cooperation and Gambians Abroad officially signed the Memorandum of Understanding on Economy, Trade, Investment and Technical Cooperation in Beijing. According to the MOU, China and Gambia officially build bilateral joint committee of economics and trade mechanism.

107 2017/12/24 The 11th China-Japan Energy Conservation and Environmental Protection General Discussion Forum was held in Tokyo, Japan.


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108 2017/12/28 Chinese Ministry of Commerce and Moldova’s Ministry of Economy and Infrastructure signed the Memorandum of Understanding on Launching China-Moldova FTA Negotiations in Beijing, officially launching China-Moldova FTA Negotiations.

109 2018/1/1

The Free Trade Agreement between the Government of China and the Government of Georgia came into force and was implemented on January 1, 2018. China-Georgia FTA is the first FTA China has signed with Eurasian countries as well as the first Free Trade Agreement China has initiated and achieved since the Belt and Road Initiative was put forward.

110 2018/1/9

Chinese Ministry of Commerce and the Secretariat of China National Working Commission on Aging jointly signed the Memorandum of Understanding on Cooperation in Silver Economy with French Ministry of the Economy and Finance, the Ministry for Solidarity and Health and the Ministry for Europe and Foreign Affairs.

111 2018/1/11 China and Cambodia jointly signed 19 bilateral cooperation documents in areas such as economic and trade, technology, health care, forestry, agriculture and humanity in Phnom Penh, Cambodia.

112 2018/1/15-17

The 1st meeting of China-Panama FTA Joint Feasibility Study working group was held in Beijing. During the meeting, both sides discussed the Joint Feasibility Study’s working mechanism, the study report’s framework and main points and the schedule ahead, and reached consensuses on the documents involving the scope of responsibilities that would direct their research work. Positive progress has been made in the meeting. Chinese Ministry of Commerce and Panamanian Ministry of Commerce and Industries signed a MOU, announcing to launch China-Panama FTA Joint Feasibility Study. The holding of the first meeting of China-Panama FTA Joint Feasibility Study working group marked the official launching of the construction of China-Panama Free Trade Zones.

113 2018/2/5-9 The 21st round of RCEP negotiations was held in Yogyakarta, Indonesia.

114 2018/2/7-8

The 9th meeting of the 2nd Phrase of China-Pakistan FTA was held in Beijing. The two sides held in-depth talks on trade in goods, bilateral safeguard measures, customs cooperation and agreement text. Positive progress has been made. They agreed to finish the 2nd phrase of negotiations as soon as possible so as to benefit business of both sides quickly.


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ACKNOWLEDGEMENTS

This report was edited by Lin Guijun under the general direction of Yao Wang, Senior Director of the Boao Forum for Asia. The core team of authors comprised economists from the University of International Business and Economics, the Capital University of Business and Economics, Beijing Union University and Beijing University of Civil Engineering and Architecture (see the List of Contributors). All the authors have demonstrated great spirit of cooperation, dedication and excellent professionalism even, in the details of compilation and tabulation of statistical data and preparation of figures, throughout their writing of this report. Their work and efforts are essential for the final production of this very informative report with many details.

We wish to thank all the contributors especially for their hard work and creative efforts. The Secretariate of the Boao Forum for Asia provided financial support for preparing this report and

additional funding came from the Ministry of Education of China.


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