Asian Integration: Risks and Opportunities for the US

Michael G. Plummer, Director, SAIS Europe, and

Eni Professor of International Economics,Johns Hopkins University

Presentation to Department of State, 23 February, 2017, Washington, DC

Introductory Comments

• This presentation is an adaptation of work that has been undertaken with Peter Petri and Fan Zhai.

• We are still working on new simulations, so I will focus on policy aspects of US (dis-)engagement with Asia but will talk a bit about some new quantitative simulations.

• I’d like to keep it short so that we have plenty of time for discussion!

• If you are interested in the details of our quantitative work, please see our webpage: asiapacifictrade.org

Why Asian Participation in Mega-regionalism in the first place?

• Outward-orientation adopted by virtually all East Asian economies

• Doha challenges, strategy and politics --> RTAs

• Spaghetti-bowl consequences --> MRTAs

• Importance of Regional Production Networks: Maturing but still key

• Traditional RTA concerns are exaggerated

– Empirical evidence suggests trade creation over trade diversion

– Despite RTA trend, global trade and FDI are expanding

• RTAs improve over time

– Effective RTAs typically grow

– Competitive liberalization drives RTAs to improve

– Diversion costs of RTAs stimulate MFN liberalization

• We define MRTAs to be RTAs that have a systemic, global impact

• These are in the A-P (TPP, RCEP, FTAAP), but also TTIP

• AEC: Most advanced in developing world but systemic impact?

Megaregionals in the Asia Pacific

PNG

Hong Kong

Russia

Taiwan

Cambodia

India

Laos

Myanmar

Australia

Brunei

Japan

Malaysia

New Zealand

Singapore

Vietnam

Canada

Chile

Mexico

Peru

United States

China

Indonesia

Korea

Philippines

Thailand

APEC (21)RCEP (16)

TPP (12)

Regional agreements (2014)

Trade Shares in GDP

Barriers in Selected APEC

How did past FTAs affect trade?

AuthorsIncrease inIntra-trade

Dataset Special features

World Bank GEP 2005 (2005)

120% 17 research studies

Meta-analysis, mostly naïvemodels

Cippolina & SalvaticiREStat (2010)

84% 1460 estimates

Meta-analysis, cross-section and individual RTA studies

Head & Mayer Handbook (2014)

43% - 80% 108 – 257 estimates

Meta-analysis, naïve and structural models

Baier et al.CESifo WP (2016)

70% 1965-2010,every 5 years

Panel, general equilibrium,endogenous, two margins

Egger et al. Am Ec J (2016)

215% - 255% CEPII 2005 General equilibrium, PPML, endogenous PTA

LimãoHandbook (2016)

82% 5-year panel 1965-2010

General equilibrium, dynamic, endogenous PTA

The ASEAN Economic Community• Long history of ASEAN economic cooperation!• The AEC attempts to improve efficiency via:

(1) Increase in the SIZE of the economic pie:• Single market and production base (free flow of goods, services, FDI,

skilled labor, and freer flow of capital; trade facilitation, etc);• Competitive Economic region (competition policy, IPR, consumer

protection, infrastructure development, e-commerce, etc.);(2) Grow the pie through integration with Global economy:• Integration into the global economy (outward orientation, ASEAN

Centrality, open regionlism). ASEAN not just about intra-regionalism!(3) Effect a better DISTRIBUTION of the pie:• Equitable Economic region (close development gaps): RPNs!

• Note that attacting foreign direct investment has always been a key goal of ASEAN integration; supporting RPNs via mega-regionalism is attractive.

• US engagement: from the ASEAN-US Initiative to the Enterprise for ASEAN Initiative (bilateral agreements under a regional umbrella).

• More recently, focus on TPP for certain member-states.• Peter and I argue in our book on ASEAN Centrality that «two speeds» should

work for ASEAN• Threat of centrifugal forces?

GVCs and Regional Cooperation

Determinants of GVCs:

Fixed effects: Size, location (inverse)

But many policy variables that can be affected by regional cooperation:

• The OECD highlights enabling factors such as low tariffs, an environment open to FDI, and good infrastructure and logistics.

• IP protection and contract enforcement matter. The value chain is managed through the extensive transfer of information and these assets must be safe.

• Predictability of policy is critical. Host economies need to assure investors of their commitment to current policy and favorable reforms.

• Meeting production standards set by chain managers is also essential. Standardization and streamlined certification processes are important

• High quality services are a major facilitator of value chains.

These all feature in “deep” integration agreements, such as AEC and TPP

How effective RCEP is will depend in part on how these areas are addressed

RCEP• ASEAN-Centric

• Much progress; 17th Round next week.

• Key leadership role of China

• Competitive AND complementary to TPP– As noted, «Two-track» integration approach

– Yokohama vision: Eye on the FTAAP

• Influence of US withdrawal from TPP on RCEP probability of success (China: end-2017)

• Will RCEP rule-related templates become world standards? Doubtful.

• BUT: Strategic issues become particularly important in the wake of the US withdrawal from the TPP

TPP-11?

• Several TPP countries have suggested that the TPP should move forward without the US

• Only need to revise Chapter 30 of the agreement

• The US would be allowed to join at a later date

• I see this as a low-probability event:– The US’s being in the agreement was a key motivation

– Would countries having spent political capital on passing the TPP

already be willing to go back to parliament (e.g., Japan?)

– Other initiatives will fill the void (RCEP, Pacific Alliance, bilaterals)

Bilaterals• The new administration has voiced interest in bilateral FTAs,

rather than regional ones.• A major economic argument in favor of mega-regionalism was

to un-do the spaghetti bowl effect (and rather create lasagna).• In the Asia-Pacific region, the US already has a number

bilaterals in place with many key partners, an exception being Japan.

• A US-JPN agreement has been in discussion a good deal, but will face strong political winds. And it is not clear what the agreement would yield (e.g., would the US be able to get the same deal on autos?). JPN no doubt feels reassured in terms of the US strategic commitment.

• Still, it could have interesting aspects to it (rules, services, some agriculture...but this will be tough).

Economic Costs and Benefits of 2017+ Initiatives • In our modeling of the TPP, we find that the gains will be

large and, hence, the opportunity cost of withdrawal is high:– Welfare gains of $0.5 trillion, trade gains of $1 trillion

– Percent gains are largest for less developed members

– Modest negative effects on non-members (Europe gains)

– Generally better for income distribution (in-country)

• Still, the strategic and «soft power» costs will no doubt be higher:– Questions surrounding US commitment to the region (I would also throw in

here the AIIB miscalculation)

– Strengthens Chinese leadership in the region, for better or worse

– I don’t believe that «permanent decline» is a major risk, but that of course depends on future initiatives

Economic Costs and Benefits (2)

• We have begun to model the effects of some of the scenarios noted above (TPP-11, US-Japan FTA, RCEP)

• Globally, the TPP11 leads to gains that are only 1/5 those of the TPP12. RCEP leads to gains that are double TPP11 but only 40% TPP12.

• For the US:– For the US-Japan FTA, income and export gains are only about one-

fouth the effects of the TPP

– Capital actually gains more than unskilled labor, suggesting a possible (slight) deterioration of income distribution

– Trade diversion/preference erosion of RCEP, TPP11 would be trivial.

Conclusion

• Leaving the TPP has important opportunity costs, economic and strategic. But these costs can be mitigated by a well-developed A-P cooperation strategy. This is in the US interest.

• The US has played a prominent role in leading economic integration in the region in recent decades; the «Asian Pivot» was part of a long-term process.

• I am not optimistic about bilateral agreements; in terms of formal cooperation, it would make sense to focus on:– An expanded TPP

– The FTAAP

• I am not sure that this is the inclination of the current administration. Still, even without these formal accords, much can be done in APEC by advocating «open regional» approaches in regional or global contexts; continuing to work pro-actively with Asian; constructing new approaches to Latin American (e.g., Pacific Alliance), and so forth.

• In any event, it is important that the region understand that the US is going to continue to be a reliable partner.

www.asiapacifictrade.org

Slide 17

Appendix : The Model

The modeling approach

• Standard foundations– GTAP 9 data, LINKAGE model, 19 sectors/29 regions

• Modern trade theory– Heterogeneous firms, monopolistic competition in sectors

generates productivity increases, variety benefits

• Extensive tariff, NTB, trade agreement detail– Benefits incremental to prior agreements

– NTBs from Kee et. al (goods), CEPII (services)

– Allowance for non-actionable barriers

– ROO effects, ROO-related costs

– Trade agreement provisions are scored for effectiveness

– Actionable barriers reduced in proportion to agreement scores

– 20% of barrier reductions are non-preferential (“spillovers”)

• Side model for FDI barriers, effects

Projected declines in goods barriers

Slide 20

Tariffs Non-tariff barriers

World Bank GEP 2016

Projected declines in services barriers

Slide 21

Non-tariff barriers

World Bank GEP 2016

Winners: members$billions in 2030

Petri and Plummer PIIE 2016

Winners by percentage gainsPercent of GDP in 2030

Authors

Winners/losers: non-members$billions in 2030

Petri and Plummer PIIE 2016

Winners/losers: factors% change in 2030

Skilledwages

Unskilled wages

Capitalreturns

United States 0.6 0.4 0.4

Japan 2.6 3.6 1.8

Canada 0.6 0.4 0.7

Vietnam 11.8 13.9 9.3

Malaysia 3.0 7.7 6.1

Peru 0.7 0.7 0.7

Authors