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What can CLMV gain from AEC integration?Phnom Penh, 16 September 2014
Agenda
• Regional and global trends: opportunities to enhance trade and investment in the AEC
• A Theory of Change for the AEC• Conclusions
2
Regional and global trends: opportunities to enhance trade and investment in the AEC
3
ASEAN Economic Community presents an opportunity for greater trade and investment prospects
Tariffs reduced to 0% by 2010 (except CLMV in
2015)
Mutual Recognition Agreements (MRA) in 7
professional services
Promote capital market linkages and development of
bond markets and capital accounts liberalization
standards
Promote & protect investments between ASEAN under National
Treatment
Allowing foreign shareholding of
up to 70%
AEC
1. Free flow of goods
2. Free flow of investment in
services
3. Free mobility of
skilled labor
4. Free flow of Capital
5. Free flow of investment
4
ASEAN and AEC will probably be at the center of Regional Integration Schemes
5
EAP Region Accounted for About 30-40% of Global Growth during the Crisis Years
Contribution to global GDP growth (in percentage points)
6
ASEAN share of World GDP is increasing rapidly, including in CLMV
Share of ASEAN in World GDP Share of CLMV in World GDP
0.9%
1.1%
1.3%
1.5%
1.7%
1.9%
2.1%
2.3%
2.5%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
GDP (constant 2000 US$, excluding Myanmar)
Asean/World
0.04%
0.06%
0.08%
0.10%
0.12%
0.14%
0.16%
0.18%
0.20%
GDP (constant 2000 US$, excluding Myanmar)
CLMV/World
7
East Asia’s share in global FDI doubled after the global crisis
Source: World Bank’s World Development Indicators
Net Foreign Direct Investments (FDI) inflows to EAP as a percentage of total world net FDI inflows
0%
5%
10%
15%
20%
25%
30%
35%
40%
2005 2006 2007 2008 2009 2010 2011 2012
8
High growth in emerging markets is driving South-South trade
050
100150200250300350400450500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Index (100=export value in 2001)
South-South South-North
North-South North-North
Source: ITC Trade Map
South-South trade is increasing in importance, rising incomes in the larger Southern markets and production networks.
9
Under the AEC agenda, intra-ASEAN Preferential Tariffs have been successfully reduced
Intra-ASEAN Preferential Tariffs, 1993-2012
Source: ASEC database
ASEAN-10
ASEAN-5
CLMV
0
2
4
6
8
10
12
14
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Perc
ent
Average CEPT Rates, 1993-2012
The regional market for ASEAN products is already there…no need to wait for 2015!
10
Hence, 2015 will not mark any dramatic change as far as intra-ASEAN market access is concerned…
11
…because growth in intra-ASEAN trade flows seems to be slowed down by NTM proliferation
Tariffs, Non-tariff measures (NTMs), and Migration Measures Implemented by ASEAN
Source: Global Trade Alert database. Data accessed June 2012.
BruneiDarussalam
Cambodia Indonesia Lao Malaysia Myanmar Philippines Singapore Thailand Viet Nam0
10
20
30
40
50
60pending liberalizing
pending discriminatory
green & out of force
amber & out of force
red & out of force
green & in force
amber & in force
red & in force
12
Trade costs in ASEAN are going down compared to those in its main trading partners, but more could be done…
Source: Arvis et al. (2013). Note: Brunei Darussalam is represented on the right axis, while all other countries are on the left axis.
200
220
240
260
280
300
320
70
90
110
130
150
170
190
210
1995199619971998199920002001200220032004200520062007200820092010
Cambodia Indonesia Malaysia
Philippines Singapore Thailand
Vietnam +6 Brunei Darussalam
AMSs’ trade costs with respect to the top ten importers, percent ad valorem equivalent, ASEAN and +6 countries
…to enhance connectivity and increase CLMV’s integration in regional production networks
Arvis & Ojala, 2014
14
Trade Logistics have a strong influence on trade costs and on the countries’ capacity to attract FDI
CLMV needs to look at at-the-border and beyond-the-border reforms in trade logistics and facilitation to attract FDI and spur both their intra-regional and global integration
International LPI scores as a percentage of the top performer, 2007-2012
Source: Logistics Performance Index 2007-2012.
0 20 40 60 80 100 120
Cambodia
Indonesia
Lao PDR
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
2012
2010
2007
Rapid growth of intra-regional FDI and Improvement in Trade Logistics.
There is evidence that regional integration, especially in SE Asia helped to reduce trade costs and improve logistics.
These initiatives have been accompanied by an almost tripling of intra-regional FDI flows
15
Trade and FDI are strongly linked in the era of “Trade in Tasks”: technology and innovation
are the key channels leading to sustained growth
Efficient trade logistics are key, but the challenge for developing countries is not just to integrate with the global economy, but to do so in a way that allows them to learn, absorb new technological capabilities, and upgrade their productive structures.
16
In the AEC environment, CLMV should improve conditions to attract investment in high added-value industries linked
to Regional Value Chains
• Transaction costs arising from moving intermediate goods across locations are an important determinant in investment decisions.
• CLMV can absorb a share of the estimated 100 million Chinese manufacturing jobs, most of which are in labor intensive industries, which are being relocated.
• CLMV can develop manufacturing exports, and attract investment and technology from more advanced low and middle income countries (LMICs).
17
The Services Gap: services value added (% GDP) is low in most ASEAN countries (beside Singapore and the Philippines)
Services trade contribution to GDP in ASEAN is 43%, against 62% in the World and 57% in East Asia Pacific region.
18
Global/regional value chains in services: new opportunities because of technological progress
• The internationalization of services though trade and investment is rapidly expanding international exchange and competition into formerly domestic activities.
• Many service activities which would have been non-tradable a few years ago can now be traded, often within seconds (back office and accounting services, financial services, logistics and operational support, medical diagnosis, design and layout services, and customer support).
• Modern services regulations and a conducive environment are keys to attract investors and innovation.
19
A Theory of Change for the AEC
20
The role that trade and investment can play in the AEC
if the AEC completes it integration…
…then extreme poverty can be eliminated and prosperity enhanced…
…because enhanced trade and investment can create
more and better jobs
The trade facilitation’s contribution
if National Single Windows are effectively implemented
in CLMV…
…then trade will increase its contribution to GDP
substantially...
…because lower admin costs and shorter clearance time decrease trade costs by 0.6-
1.3% of cargo value
The NTMs streamlining’s contribution
if NTMs are collected, published and streamlined…
…then trade costs will be reduced substantially and
the population welfare will increase…
…because NTMs are equivalent to an ad valorem
tariff of about 10-50%
The trade logistics’ contribution
if trade logistics are reduced by half…
…trade would increase by 15% and production by 5%...
…because supply chain bottlenecks are the primary
cause of friction in trade (trade costs)
The trade in services’ contribution
if the Services Trade Restrictiveness Index decreases from 44 to 29 (global average)…
…then services trade will increase its contribution to GDP (from 43 to 62%), boosting also developments in manufacturing
…because an efficient services sector increases
competitiveness and productivity in manufacturing
The investment policy contribution
If FDI is used as bridge b/w domestic industry and the global economy, in support
of integration into global value chains …
… then FDI will enable spillover of knowledge and new technologies, as well as innovation in the sense of development of
new sector or products …
… because (i) Increasing flows of FDI can create new and better jobs, and (ii) Greater
economic activity, competition, and FDI linkages and spillovers with the local
economy can lead to better standards of living.
Five priority areas
ATIGA, AFAS, WTO TFA
gap assessments
Trade Facilitation
Work Program
NTMs Work Program
Trade Logistics
Work Program Services
Work Program
Investment Policy Work
Program
Conclusions
28
Key Takeaways:
1. The immediate future offers many opportunities, but CLMV have to deepen reforms to attract more investment and link up to global and regional value chains
2. ASEAN can be an anchor for the reforms needed to increase CLMV’s competitiveness
3. Competitiveness can be increased by streamlining NTMs, improving trade facilitation, enhancing trade logistics, boosting services liberalization, and improving the investment policy framework
4. Improved business environment will increase competitiveness, attracting new investors and encouraging more domestic companies to participate in export
5. Creating conditions for increased participation in regional supply chains should be the mantra for CLMV policy makers!
29
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