Trade in Asia: The Greenback still rules
The importance of Donald Trump’s economic management to Asia’s health has only been reinforced by the Asian Development’s Bank’s launch of a new index designed to track the region’s growing economic integration.
The Asia-Pacific Regional Cooperation and Integration Index shows, at face value, significant progress in regional integration, with Asia more integrated than Africa and Latin America but less than Europe. Asia’s intraregional trade share (measured by value) rose to 57.3% in 2016, a record high and up from an average of 55.9% from 2010 to 2015. And foreign direct investment (FDI) by Asian investors into Asia rose last year despite a decline in global FDI into the region. This meant intraregional FDI increased as a share of total FDI to the region from 48% in 2015 to 55% in 2016.
Twenty years after the Asian Financial Crisis, the ADB rightly argues that this sort of internal trade and investment growth should provide an extra measure of resilience against global trade and policy uncertainties.
But dig a bit deeper. This integration still depends on demand from the US and Europe. While top line intra-regional trade is at 57.3%, a decomposition of Asia’s value-added exports shows that its own final demand accounts for only 36.8% of these exports and 26.9% is accounted for by Europe and the US. 'Once the cascading effect of "intermediate goods exports" are accounted for, the region’s dependence on external demand grows - particularly with the US,' the ADB concedes.
So while security issues might top the agenda for Trump’s visit to the region next week, there will be quieter judgements being made about how Trump is managing what is still the world’s largest economy in market terms.
Nevertheless, despite the continuing influence of US final demand and the faltering progress of institutionalisation such as the ASEAN Economic Community (AEC) and the Regional Comprehensive Economic Partnership (RCEP), the new Index provides some interesting insights into the integration process. Southeast Asia emerged as the most integrated part of Asia, with five of the ten most regionally integrated countries coming from ASEAN.
This underlines the point Australia will be making at the Sydney ASEAN leaders summit next March: an important integration process is under way right on the doorstep even if much of the news flow is about non-tariff barriers and fragile democracies.
Trade deals: Economists vs negotiators
Two tribes have long fought for the high ground since Australia embarked on serious trade liberalisation more three decades ago: the negotiators and the economists.
The negotiators have certainly had a good last decade after Australia threw its weight behind bilateral trade deals after it became clear its traditional preference for clean multilateral negotiation was fading with the Doha round. Australian negotiators have worked hard to extract comprehensive agreements from the bilateral 'noodle bowl' with harmonious rules that can possibly be expanded to new entrants in future.
But politicians want 'announceables', as is demonstrated by the way the trade deals with China, Japan and South Korea are now claimed as the proudest achievements of the incumbent government even though they were never mentioned when it was seeking office in 2013. So this week’s commitment by the Labor Opposition to conduct an independent review of trade deals before they are signed and then again after ten years in force represents the revenge of the economists.
While negotiators and their ministerial masters have been surfing the bilateral wave, a tribe of economists in agencies such as the Productivity Commission (PC) have been gnawing way at the fundamentals of these agreements and questioning their real economic benefit.
As then PC chairman Peter Harris said bluntly in 2015 amid the north Asia deal flurry: 'It does a nation no good in the long run to add to the cost of doing business and employing Australians by making imported goods and services more expensive then they need to be; nor to congratulate ourselves for obtaining slightly more export access to another market in return for that.'
Labor hasn’t bought the whole economists’ package but it has set the scene for a more complex trade negotiation environment just when the global landscape for further liberalisation is uncertain. And the fact the new policy was launched at an Australian Chamber of Commerce and Industry event in Sydney only highlights how business has had one foot each in the negotiator and economist camps.
The facts on Investor-State dispute settlement
Settlement of investor disputes has become one of the more incendiary elements of the global economic liberalisation agenda in recent years, with unlikely coalitions of free marketeers and left-wing activists lining up against mainstream trade negotiators.
Now the new Labour government in New Zealand seems to be backtracking on the Investor State Dispute Settlement (ISDS) clauses in the moribund Trans-Pacific Partnership (TPP) deal, potentially threatening Japanese-led plans to keep the TPP (minus the US) afloat at next week’s Asia Pacific Economic Cooperation (APEC) group summit in Vietnam.
This is more likely to be posturing, given the Kiwis claim the TPP as their own. But while it is unlikely to be read by Labour’s anti-TPP coalition partners, the APEC Policy Support Unit (PSU) has produced the first analysis of how existing investor-state dispute settlement (ISDS) clauses are working in Asia Pacific trade deals. It shows that, in the past 30 years, ISDS cases in the Asia Pacific which were ruled in favour of investors against states involved investor claims of US$117 billion. But ISDS panels only awarded US$50.4 billion or 43% of what was claimed.
That’s a big number that may well be seen at a TPP protest rally soon. But the PSU study makes the point that 45% of APEC ISDS cases were resolved in favour of the State, 25% in favour of the investor and 17% were settled. That was slightly more favourable to States in APEC than the global average.
The study actually describes the US$50 billion awarded against APEC governments as 'a reasonable cause for concern' because it is much higher than the US$13.4 billion awarded against non-APEC governments in that time. But it seems the APEC ISDS figures have been massively distorted by a US$40 billion (unnamed) settlement and if this is removed the APEC payouts are 'as a whole not too onerous.'
Photo by Flickr user Nicolas Lannuzel.