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.

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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

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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!

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