Speech at Launch of the Asia-Pacific Trade and Investment Report (APTIR) 2017

Delivered at Launch of the Asia-Pacific Trade and Investment Report (APTIR) 2017 in Bangkok, Thailand

Distinguished Delegates,
Ladies and Gentlemen,

2017 Asia-Pacific Trade and Investment Report offers optimism as global and regional demand are recovering. Turnaround is evident as Asia Pacific’s exports are set to grow by 4.5 per cent and imports by 8 per cent in volume terms in 2017 after declining in 2015 and 2016. Trade growth picked up in the fourth quarter of 2016, and continued to grow in the first half of 2017. This momentum should continue for the rest of the year. Developing Asia’s exports (at 4.8 per cent) are expected to grow at a faster pace than developed Asia (3.3 per cent). Overall, despite its ups and downs, the Asia-Pacific region continues to be the world’s largest trading region (with about 40% of global trade).

Trade prospects are promising as activity in global value chains gained momentum in countries such as the Republic of Korea and the Philippines; and the prices of industrial commodities and fuel rose - benefiting commodity producers and exporters.

Uncertainties, however, remain for 2018. Structural constraints impacting trade performance since the global financial crisis persist, and import demand in developed economies and in China has not fully recovered. Import demand in China - especially for intermediate inputs - is likely to moderate in the wake of its structural rebalancing. Together, these factors have dampened intraregional demand which may not be sufficient to bring trade growth back to pre-crisis levels. The protectionist rhetoric in some developed economies brings additional risks and creates a disincentive for investment.

These dynamics may persist which would weigh on global and regional trade recovery in coming years. We forecast the export volume of the Asia-Pacific region in 2018 will grow more modestly than in 2017 at 3.5%, while the import volume will increase by less than 3%. Export and import prices, especially commodity prices, are not likely to increase. In fact, they may trend downward due to the potential slowdown of investment and consumption precipitated by rising uncertainties. The sluggish prices will cause trade value growth in 2018 to be much slower than in 2017.

Trade in commercial services has recovered but continues to be led by only a handful of countries. An interesting trend emerging in Asia Pacific is the diversification in new types of service and the increasing share of trade in finance and insurance services, telecommunications, computer and information services. The proliferation of internet access means some goods previously traded as merchandise goods, such as books and music, are now increasingly traded as services. We expect the growth in trade in services to continue, especially since barriers to trade in this area have fallen over the past 3 years.

After a decline in 2016, foreign direct investment (FDI) inflows increased, backed by a significant increase in greenfield inflows to the region. FDI investments have been directed towards services and technology-advanced sectors, supported by sophisticated and more capital-intensive production networks, both in major economies such as China and smaller economies such as Viet Nam. Growing diversification in energy sector to renewable and alternative sources has also attracted FDI inflows.

Outward investments from the region grew relative to decline in global outflows. In 2016, outflows from Asia accounted for over one third of global FDI outflows with China’s foreign investment abroad jumping by 44 per cent – resulting in China’s outflows exceeding its FDI inflows. Economic restructuring in China is providing new opportunities for China’s direct investments in smaller South and South-East Asian economies. Chinese MNEs are now targeting a wide range of strategic industrial sectors. Looking ahead, a combination of service sector liberalization and efforts to improve business environments in recipient countries bode well for FDI growth.
Analyzing trade and investment trends now, offers an opportunity to rethink trade and investment policies for sustainable development. The positive links between trade and economic growth - and to a lesser extent between FDI and economic growth - are well established. But the social and environmental impacts of trade and investment liberalization are less obvious. In addition, there is growing public recognition that liberalization creates both winners and losers even when economies grow in aggregate.

In that context, the Report presents a simple framework to guide and encourage trade and investment into sustainable development. It advocates a combination of changes in domestic policies such as environmental and social and labor policies and targeted tariff cuts and non-tariff measures to support sustainable investments, incentivizing voluntary sustainability standards and prioritizing FDI in SDG-related sectors such as health, education and renewable energy. Key enablers of sustainable trade and investments can also be education policies, tax policies and competition policies.

Two additional key enablers in achieving more sustainable trade and FDI, that our Report recommends are trade facilitation and good governance. Without cutting red tape and reducing trade transaction costs, attracting FDI and enabling participation of more firms and people in international trade will not be possible. And without good governance – including effective public institutions and the rule of law - policies will not be enforced, no matter how well-crafted and sustainable they may be.

The Report’s analysis confirms a strong and positive link between FDI and both trade and growth. For instance, without FDI flows, the size of regional economy would be at least 7% smaller. Impact across region however would vary as the contribution of FDI would depend on how sustainable development is anchored in FDI and supported by enabling domestic policies and how businesses and investors embed sustainability in their operations and management. To illustrate this, the Report offers an impact analysis under different trade scenario incorporating complementary policies such as effective tariff and investment liberalization with due consideration to three dimensions of sustainable development to examine their implications on CO2 emissions, inequality and undernourishment. This analysis shows that an integrated sustainable development approach that factors in environmental and social consideration in course of trade and investment liberalization will boost trade by over $175 billion with enhanced development outcomes. Moreover, lowering trade and investment barriers as well as cutting trade costs and streamlining trade related procedures regionally in an integrated manner increases the competitiveness of regional firms in the global market by enabling them to effectively participate in global value chains.

To conclude, our analytical work offers a strong case for expanding multilateral and regional cooperation to promote trade and investment liberalization but doing so with due regard to ensuring policies and investments to minimize the attendant social and environmental risks. It further indicates that protectionism or resorting to global tariffs would generate economic losses close to $110 billion a year for the region and aggravate economic and social distress. Going forward, trade and investment facilitation and liberalization should be accompanied by policies that foster inclusive and competitive trade, taking advantage of regional connectivity and addressing undesirable social and environmental side effects.