Impact of the Global Financial and Economic Crisis on east Asian Trade

3.1 Impact of the Global Crisis

The global crisis affects East Asia less with regards to its financial systems and more with its economic growth through export and investment channels. Table 1 [ PDF 23.9KB | 1 page ] shows that economic growth for most East Asian economies slowed considerably in 2008 and 2009. Singapore appears to be worst off, with gross domestic product (GDP) growth plunging from 7.8% in 2007 to only 1.1% in 2008. Economic growth in 2009 is forecast to be substantially worse than in 2008, pulled down by decreases in the export of manufactures and the subsequent knock-on effects on income and investment. For 2010, ADB (2009) forecasts recovery, as signs of recovering economies started to appear in the second half of 2009 in response to stimulus packages and some recovery in global trade.

The global crisis has been mainly transmitted to East Asia through the trade channel. The drop in developing East Asia's export growth has been huge as import demand from the Group of Three (G3) countries (the US, EU, and Japan) contracted sharply. Table 1 shows the sharp decline in export growth rate in 2007 for Malaysia, Philippines, and Singapore, turning into expected negative growth rates in 2009 for all East Asian economies. Table 2 [ PDF 33.7KB | 1 page ] shows negative export growth appearing in the third quarter of 2008 for most economies. For Singapore, non-oil domestic exports declined from the second quarter onwards. Another indicator of the shrinkage in trade is the falling Baltic Dry Index (an index of the cost of chartering bulk cargo ships) that reflected the sudden and sharp contraction in global demand for bulk raw materials following the decline in industrial production. The fall in incomes in G3 also reduced demand for consumer electronic products, automobiles, and all other durable goods that feature prominently in East Asian exports. The plunge in export demand has been aggravated by the disappearance of trade finance through letters of credit as the global financial crisis deepened. The shrinking demand for East Asia's exports have led to factory closures and rising job losses, negative consumer sentiment discouraging household spending, and negative business sentiment discouraging investment. Falling commodity prices, having peaked in mid-2008, have contributed to the woes of commodity exporting countries in Southeast Asia.

3.2 Rising Threat of Protectionism

Asian Development Outlook 2009 (ADB 2009) cautions that the growing specter of protectionism will complicate the development of Asia's efforts to achieve a more balanced trade structure, which ultimately depends on a robust domestic economy and a healthy appetite for imported capital and consumer goods. It notes that most of the world's major economies have already put various forms of protectionism into effect. This includes the substantial amount of aid given to automobile manufacturers around the world, which totals about US$48 billion. In East Asia, Indonesia has restricted the import of certain goods to just a few ports and airports and India has increased tax rebates for exporters.

G20 leaders made a “no protectionism” pledge at their November 2008 Summit. A September 2009 report from Global Trade Alert (Evenett 2009), however, revealed that at least 121 protectionist measures have been implemented by G20 governments since November 2008 and another 134 measures are pending. The report noted that in each quarter of 2009, about 70 harmful measures were implemented and fewer than 5% of the product categories escaped being affected by some protectionist measure. In the goods sectors, the bulk of protectionist measures affect agriculture and lower-productivity manufacturing. The report noted that the “overwhelming picture is one of planned and implemented state initiatives that reduce foreign commercial opportunities and reverse the 25-year trend towards open borders…these findings imply that any notion that protectionism is abating should be set to one side” (Evenett 2009: 3). The report urges G20 leaders to take steps to halt the protectionist dynamics.

3.3 East Asia's Export Structure and Direction

Trade statistics show that East Asia is becoming increasingly integrated through merchandise trade. As noted by Athukorala and Kohpaiboon (2009), the share of intra-regional trade (import and export) in total non-oil trade ranged between 48% and 52% (with a slight uptrend in recent years), a share that is higher than the North American Free Trade Agreement (NAFTA) and is approaching that of the EU15.² However:

• Intra-regional trade embodies double counting: Calculated trade shares misinform regarding the relative importance of intra-regional trade as a source of East Asia's growth. In view of widespread production fragmentation, the trade data contains serious double counting, as goods in process cross multiple international borders before being embodied in the final product. Even in the absence of product fragmentation, double-counting of intra-regional trade arises because of the entrepot role of Singapore (in Southeast Asia) and Hong Kong, China (in the PRC).
• Asymmetry of intra-regional trade: There is significant asymmetry in East Asia's regional import and export trade patterns. Growth in the intra-regional trade ratio has come largely from intra-regional imports rather than from intra-regional exports. From 1995 to 2007, the intra-regional share of imports increased from 56% to 63%, while the intra-regional share of exports decreased from about 46% to 36%, indicating that East Asia's dependence on markets in the rest of the world has increased.
• Variations among sectors: Electronics is probably the sector most dependent on G3 markets, and the products of this industry have high income elasticity. Hence, the economic slowdown in G3 countries is likely to have a relatively larger effect on the electronics industry and on the economies where the sector is relatively important such as Korea, Malaysia, Philippines, and Singapore. For exports of labor intensive products such as textiles and clothing, developing Asia has become even more dependent on the North American and European markets, which accounts for 42% of the region's textile and clothing exports in 2006; this is up from 35% in 1994–1995. The PRC was the main source of this increase in market share; in Southeast Asia more than 70% of total textile and clothing products were exported to NAFTA and EU15 in 2005–2006, up from 65% in 1994–1995.
• Trade in parts and components: ADB (2009) notes that the share of parts and components in developing Asia's total manufacturing trade has increased continuously since the early 1990s (on the export side, the share increased from 16% in 1992 to 25% in 2006). Trade in these goods is concentrated in information and communication technology products and electrical machinery. In the Philippines, the share of parts and components in total manufacturing exports doubled from 1992 to almost 70% in 2006; in the PRC it rose from 4% in 1992 to 19% in 2006. Parts and components account for a growing share of developing Asia's total imports as well, rising from 22% in 1992 to 36% in 2006. In the PRC, parts and components account for a much larger share of imports than exports; in other Asian countries the opposite holds true. Since the mid-1990s, the PRC has become the centre of final assembly for electronics and electrical goods as well as for other global industries based on parts and components imported from other countries in the region. The share of parts and components in the PRC's total manufacturing imports from East Asia rose from 18.5% in 1994–1995 to over 44% in 2006–2007. Hence, the PRC is playing an increasingly important role in final product assembly using parts and components procured from other countries in the region.

Table 3 [ PDF 43.8KB | 2 page ] shows the direction of East Asia's exports. It shows a declining dependence on the European and US markets. In 2007 total export shares to Europe and the US ranged from a high of 62.5% for Cambodia, 32.8% for the Philippines, 31.0% for the PRC, 30.0% for Viet Nam, and 29.9% for India; to less than 10% for Brunei Darussalam, Lao People's Democratic Republic (Lao PDR), and Myanmar. In contrast, the shares to Asia (PRC + Developing Asia + Japan) show a rising trend between 2000 and 2007 except for Cambodia and Viet Nam. In 2007, Asia's share ranged from over 80% for Myanmar; over 70% for Brunei Darussalam; over 60% for Indonesia; Philippines; Singapore; Lao PDR; and Hong Kong, China; to over 50% for Malaysia and Thailand.

In recent years many East Asian economies have leveraged on the PRC's rapid economic growth by supplying raw materials, parts, and components (intermediate goods). The global crisis has highlighted that, notwithstanding the growing economic importance of the PRC, East Asia is still heavily dependent on markets in Europe and North America.

• ADB (2007) estimated that 61% of Asia's total exports were eventually consumed in the G3 economies (Europe, Japan, and the US), while only 6.4% went to meet final demand in the PRC.
• The Hong Kong Monetary Authority (2007) estimated that a 10% decline in US imports could lead to a 2.9% decline in total exports of four newly industrialized economies (Hong Kong, China: Taipei,China: Korea: and Singapore) and a 3.0% decline in the total exports of ASEAN, reflecting the vulnerability of emerging Asia to fluctuations in US demand.
• The European Central Bank (2009) found that final demand in the PRC only accounted for 7.2% of value added in Korea; Singapore; Taipei,China; and ASEAN4 (Indonesia, Malaysia, Philippines, and Thailand).
• The Singapore Ministry of Trade and Industry (2009) found that a significant portion of East Asia's exports to the PRC is used as intermediate inputs to be assembled into final goods in the PRC and subsequently shipped to the G3. Hence, the indirect export exposure to G3 via the PRC was significant for most economies. The total direct and indirect export exposure to G3 is over 40% for Hong Kong, China; Korea; Philippines; Malaysia; Thailand; and Indonesia. Singapore appears to have a lower exposure (although the large volume of entrepot export trade through Singapore probably distorts this figure), especially given that a significant part of such trade is in oil and electronic component products, which are used in outward processing activities in other parts of Asia. When only Singapore's non-oil domestic exports are considered, Singapore's total direct and indirect export exposure to G3 is comparable to other East Asian economies. Thus, the PRC is not a key source of final demand for the exports of many East Asian economies and the region is still very much dependent on demand from G3 countries.
• ADB (2009) used a computer general equilibrium (CGE) model to estimate how the recession in Organisation for Economic Co-operation and Development member countries and the attendant drop in consumption and imports will affect developing Asia's trade and growth. The impact was simulated by comparing projected growth in 2009 and 2010 with what growth would have been without the financial crisis. By the end of 2010, most Asian economies will experience real GDPs of 6.0–10.2% less due to the financial crisis, with the PRC having the largest absolute loss.

3.4 Need for Rebalancing Growth

Export-led growth has delivered enormous benefits to East Asia and will continue to do so. However, the current global crisis underlines the risks of excessive dependence on external demand and the unsustainable nature of overproduction in developing Asia that is sustained by overconsumption in the US.

• There is a need for East Asia, particularly the PRC, to put more emphasis on domestic demand, take steps to re-orient trade in final goods within the region, and strongly resist protectionist measures in the region. The PRC's export dependence is unusually high for a large continental economy.
• Rebalancing growth could give a large boost to intra-regional trade. A more robust domestic demand for final goods within regional countries will allow for more substantive intra-regional trade of differentiated products.
• The imbalance between what the region produces and what it consumes will not be resolved quickly as there are many structural reasons for the imbalances, including lack of social insurance, underdevelopment and incomplete financial markets, and limited competition among service products. A key development that bodes well for rebalancing is the emergence of a large and rapidly growing urban middle class.
• Rebalancing growth is fundamentally in East Asia's self interest—increased domestic consumption will raise consumer welfare and increased investments will improve productivity. Bolstering domestic demand in response to weakened external demand requires a combination of policy measures. The optimal mix differs by country, but effective rebalancing requires both policies that reinforce domestic demand and policies that revitalize the domestic economy.
• Strengthening domestic consumption requires policies that transfer more corporate savings to households and reduce the precautionary motive for savings among households.
• The fact that private domestic demand cannot be mechanically increased in the short-term implies that the government must take the lead in rebalancing demand through an activist fiscal policy stimulus package. A more active fiscal policy is needed to mitigate weak external demand in the short-term and to lay the foundation for a more robust domestic demand in the medium–long term.
• Governments should give priority to enhancing the investment climate.
• Supply side policies that promote small and medium enterprises and service industries will bolster production from firms that cater to domestic demand.
• Policies pertaining to financial development and adjustment of the exchange rate can promote a better balance between domestic supply and demand.

3.5 Need to Strengthen Regional Cooperation

• A larger regional market is conducive to economies of scale and specialization, and thus, to intra-industry trade in differentiated products.
• Greater regional cooperation and FTAs can also promote a more balanced trade structure. Intra-Asian trade is still largely based on intermediate rather than final goods, and trade in final goods remains heavily dependent on demand from Europe and the US. Removing trade barriers and trade facilitation among countries in East Asia would help stimulate intra-regional trade in final goods as well as re-direct export demand from Europe and the US towards the region itself.
• Strengthened regional cooperation can provide developing Asia with additional resilience against large external shocks.
• Intra-regional exchange rate policy dialogue or coordination could also promote intra-regional trade and investment by maintaining stability among regional currencies.

Download this Paper [ PDF 443.9KB| 49 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.