Mabini Dialogue Focuses on Changing Patterns of Trade and Global Value Chains in Asia

Dr. Ganeshan Wignaraja delivers his lecture during the Mabini Dialogue on 22 February 2017.
Dr. Ganeshan Wignaraja delivers his lecture during the Mabini Dialogue on 22 February 2017.

Dr. Ganeshan Wignaraja, advisor at the Office of the Chief Economist of the Asian Development Bank, gave a lecture on “Changing Patterns of Trade and Global Value Chains in Post-crisis Asia” at the Foreign Service Institute’s Carlos P. Romulo Library on 22 February 2017.

Trade-led growth was the life blood of Asia’s development prosperity, but this story is changing, according to Dr. Wignaraja.  Asia is experiencing a slowdown in global trade growth in general and in relation to gross domestic product (GDP). The rate of trade growth, particularly exports, has slowed considerably compared to the past. It is happening in Asia as well as in other regions as this trend is linked to falling demand in industrialized countries, slowdown of growth in China, and trade protectionism, among others. However, Dr. Wignaraja believes that it is not the end of trade-led growth. Trade still has an important role to play in Asia, but trade will grow in a slower pace than before.

In the past, exports were a major component of growth. Trade grew twice as fast as GDP growth. After the global financial crisis, the ratio of export growth to GDP growth in real terms was reduced to half from 1.5 percent in 2001-2010 to 0.7 percent in 2011-2015. In the post-financial crisis, trade has gone down, and with it GDP growth also plunged.

The growth rate of exports in developing Asia was very high before the global financial crisis. The annual volume of growth of goods and services exports grew significantly in real terms at a rate of 11.2 percent from 2001 to 2010. When compared to the period between 2011 and 2015, the rate of growth appeared more lackluster reaching only 4.7 percent annually. This regional trend mirrored China’s export performance. From an annual average of 18.3 percent in 2001-2010, China’s export growth decreased to 6.4 percent in 2011-2015. The numbers show a dramatic change, and export growth is expected to be even slower. The projections for the next three years indicate that exports will slightly go up, which means a 3.0 percent export growth for developing Asia and 2.0 percent for China.

Comparing the periods between 2001-2010 and 2011-2015 in terms of annual export growth, a pervasive slowdown across developing Asia is apparent. China’s export growth has slowed heavily along with most of the region’s largest traders: South Korea, India, Kazakhstan, Malaysia, Pakistan, Singapore, Thailand, Taiwan, and Hong Kong. Dr. Wignaraja explained that the export slowdown can be attributed to the following factors: (1) lingering weak import demand in advanced countries; (2) China’s rebalancing by focusing more on domestic consumption and services, and less on exports and investments; (3) slowing of global value chains which affects the trade of intermediate goods in the region; (4) lower commodity prices that reduced real incomes of commodity producers causing them to import less; and (5) creeping trade protectionism such as non-tariff measures that drags the region’s exports.

Vietnam is the country to watch because it is growing very fast with an export growth rate of 15.0 percent in the current period. Studies by the International Monetary Fund (IMF) claim that Vietnam’s exports will grow by 12.0 percent in the future. For Indonesia, IMF data indicate that exports will increase to 8.2 percent in the future from the current rate of 2.1 percent. India is another country that IMF thinks will do very well.

As for the Philippines, it has performed slightly better along with Cambodia, Indonesia, Sri Lanka, and Vietnam, showing stronger export growth. For 2016, data from the IMF project that countries in the region are expected to have better export volume growth compared to 2015. The rate of export growth for the Philippines is expected to remain at 5.5 percent, which is within the regional average. The country’s value of goods and services exports has increased to 75 percent from USD50 billion to USD88 billion. Electronic products, which used to dominate Philippine exports, now contribute a third of total exports illustrating more diversification in goods. On export markets, the Philippines was more heavily tilted toward the US in the past. Today, a quarter of exports is going to China and Hong Kong, 19 percent goes to Japan, and 13.4 percent goes to the US. These figures show that the Philippines is trading more with its neighbors.

Despite the decent export performance of the Philippines, there is still so much room for growth. For one, the country’s export base of USD88 billion is small compared to that of Malaysia and Thailand. In addition, the Philippines is a minor player in global value chains, which is an important aspect of production. In Asia’s context, value chain exports of the Philippines only contribute 2.0 percent. Local small and medium enterprises (SMEs) still require integration into the value chains given the segmented nature of industries in the country. Since economies of scale are needed to participate in trade, many small businesses are excluded from the benefits of trade.

The last part of Dr. Wignaraja’s lecture dealt with exploring policy implications. He said that undue pessimism toward trade in Asia seems unwarranted since weak import demand in advanced countries will be temporary. As the US comes out of recession, it can be a major engine of growth. Moreover, China’s rebalancing opens new opportunities for other countries in the region. China is moving toward a higher value-added mode of production. This offers the Philippines a chance to participate in technologically sophisticated value chains by being a service provider. Likewise, labor-intensive manufacturing (e.g. machinery, auto parts, and food processing) that will move out of China are in search of areas to relocate; thus, the Philippines should be ready to absorb these industries. Moreover, there is a greater role for SMEs in the region’s global value chains as direct or indirect exporters. SMEs can participate as Tier 2 suppliers or suppliers to larger exporting firms. Lastly, the Philippines has to maximize the benefits of expanding services exports across the region, including digital trade, financial services, and professional services.

Therefore, Dr.  Wignaraja claims that the policy environment has to improve. The Philippines should strive to be as good as Singapore in terms of productivity, infrastructure, skills, and logistics to name a few.  To realize the opportunities, Asian countries should implement structural reforms to reduce behind the border barriers, upgrade skills, enhance SME finance and invest in sea ports, logistics, and digital infrastructure. They should also resist protectionist pressures by liberalizing goods and services trade, reducing import tariffs, and better surveillance of non-tariff measures. Ratifying the World Trade Organization’s Trade Facilitation Agreement can also aid countries in reducing trade costs. Likewise, mega free trade agreements like the Regional Comprehensive Economic Partnership (RCEP) allow countries to gain market access in goods and services and spread good regulatory practices. More importantly, governments need to address the social aspects of trade by providing adjustment assistance to losing sectors, retraining workers, and offering social safety nets to maintain public support for trade liberalization and reforms in the region.