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REGIONAL WORKSHOP ONUsing Evidence-based Trade Policy for Achieving the Sustainable Development Goals in LDCS and

LLDCS

Session 1: Trade and Investment and Sustainable Development Goals: Trends for the Asia-Pacific Region

Mia MikicDirector

Trade, Investment and Innovation Divisionmikic@un.org

-30

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10

20

30

40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ye

ar-

on

-ye

ar

pe

rce

nta

ge

ch

an

ge

Imports

Developed Asia-Pacifc Developing Asia-Pacific

Developing Asia-Pacific excluding China Total Asia-Pacific

-30

-20

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0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ye

ar-

on

-ye

ar

pe

rce

nta

ge

ch

an

ge

Exports

Developed Asia-Pacifc Developing Asia-Pacific

Developing Asia-Pacific excluding China Total Asia-Pacific

Merchandise trade in Asia and the Pacific

• Trade returned to its double-digit growth:

11.5% and 15% for exports and imports in

2017

• Manufactured goods remain dominant,

while the ones related to the global value

chain (GVC) were relatively resilient.

Source: APTIR 2018 Chapter 1, ESCAP (unreleased)

Merchandise trade is heavily concentrated within four East and North-East Asian economies (about 63%).

...

Hong Kong, China

8.1%

Philippines

1.0%

BD

0.6%

KH

0.3%

MM LK

UZ

China

33.5%

Japan

10.3%

Korea, Republic of

8.5%

Singapore

5.5%

Russian Federation

5.3%

India

4.4%

Viet Nam

3.7%

Thailand

3.5%

Australia

3.4%

Malaysia

3.2%

Indonesia

2.5%

Turkey

2.3%

IR

1.0%

KZ

0.7%

NZ

0.6%

PK

0.3%

AZ

PG

Asia-Pacific

Source: APTIR 2018 Chapter 1, ESCAP (unreleased)

Intraregional merchandise exports (share, by sub-region)

Subregion Year

Destination of exports

ENEA excl.

ChinaChina ENEA SEA SSWA NCA

Pacific

Asia-Pacifi

c

Rest of the world

East and North-East Asia (ENEA)

2017 17.4 14.1 31.6 12.9 5.2 2.1 2.6 54.4 45.6

2016 18.2 14.1 32.3 12.4 5.0 1.9 2.3 53.9 46.1

South-East Asia (SEA)

2017 18.8 14.9 33.7 22.8 5.5 0.6 3.4 65.9 34.1

2016 19.2 12.5 31.7 24.0 5.3 0.5 3.6 65.1 34.9South and

South-West Asia (SSWA)

2017 6.8 6.2 12.9 7.0 10.0 2.3 1.1 33.2 66.8

2016 5.2 4.0 9.2 5.6 8.4 2.2 1.0 26.4 73.6

North and Central Asia

(NCA)

2017 6.1 12.1 18.1 1.9 7.7 7.7 0.0 35.5 64.5

2016 6.2 11.3 17.6 1.7 8.2 7.8 0.1 35.3 64.7

Pacific2017 18.8 28.2 46.9 9.2 5.2 0.1 6.9 68.3 31.7

2016 21.4 30.0 51.4 9.9 4.5 0.2 7.9 74.0 26.0

Intra-Asian trade

intensity is higher for

South-East Asia and

the Pacific than for

other subregions.

North and Central Asia

and South and South-

West Asia still trade

more with the ROW

than with other Asia-

Pacific economies. Source: APTIR 2018 Chapter 1, ESCAP (unreleased)

For many Asia-Pacific economies trade in services constitutes a dominant part of their total trade.

Asia-Pacific’s share of world trade in commercial services has been growing (from 24.9% to 30.3% between 2005 and 2016).

Commercial services trade is important and growing

Trade in Commercial Services in Asia-Pacific 2017

ESCAP calculations based on the WTO trade database.

Restrictions on trade in commercial services:A rise in “Behind the border” measures of services sector

However…

FDI inflowFDI outflow

Decreased inflows due to

• timid growth and low commodity prices

• structural reforms towards higher value-added

industries in leading economies in the region.

Increase in outflows

• establishing the region as a main outward investor.

FDI: Liberalization continues in Asia and the Pacific

Merchandise trade in Asia-Pacific LDCs and LLDCs

Source: ESCAP calculations based on UNCTAD data; accessed Aug 7, 2018; http://unctadstat.unctad.org/

Inward FDI to Asia-Pacific LDCs and LLDCs

Source: ESCAP calculations based on UNCTADstat data Source: ESCAP calculations based on the OECD International Development Statistics online database

FDI Performance Index

• Measures a country’s relative success

in attracting global FDI

𝑆ℎ𝑎𝑟𝑒 𝑖𝑛 𝐺𝑙𝑜𝑏𝑎𝑙 𝐹𝐷𝐼 𝐼𝑛𝑓𝑙𝑜𝑤𝑠

𝑆ℎ𝑎𝑟𝑒 𝑖𝑛 𝐺𝑙𝑜𝑏𝑎𝑙 𝐺𝐷𝑃

• Robust economic growth led to their

increasing share in global GDP, but

FDI inflows did not keep up.

• Given the size and growth of their

economy, AP LDCs and LLDCs

should do better in attracting FDI and

integrating in the global economy.Source: ESCAP calculations based on UNCTADstat data

( ≈ 1.1 for the Asia-Pacific region as a whole )

Sustainable Development Goals (SDGs)

Where does Asia- Pacific stands now?

• Very limited progress (even

regression) on some goals:

inequality; peaceful society;

SDGs related to environment.

• Significant achievement gaps

between sub-regions.

• Disparities between countries

increased, highlighting needs for

targeted support

Source: Asia and the Pacific SDG Progress Report 2017, UNESCAP https://www.unescap.org/sites/default/files/publications/Asia-Pacific-SDG-Progress-Report-2017.pdf

Goal 2, 7, 8, 10, 14, 15 and 17, in particular, require further efforts

Maintain Accelerate Reverse No Data

Promoting trade and investment is NOT just an end in itself – it is a critical mean to help achieve relevant SDGs

Efficient

agricultural

trade

Greenfield

FDI

Aid for Trade Preferential

treatment to

developing

economies

Targeted

TBT

measures

Trade-related goals, targets, and indicators…will be further discussed in session 5

Sustainable Trade Index 2018(Hinrich Foundation)

The capacity of 20 economies—19 in Asia along

with the US—to participate in international trade

in a manner that supports the long-term domestic

and global goals of economic growth,

environmental protection, and strengthened

social capital.

• Bangladesh quickly become a world leader in eco-

factories (after the Rana Plaza tragedy).

• In Cambodia: Inequality worsened dramatically

over the past two years.

• Laos made progress in reducing transfer emissions.

• Myanmar sharply reduced the share of natural

resources in trade.

OVERALL SCORE

Hong Kong, China 73.7

Republic of Korea 73.3

Singapore 71.4

Japan 71.3

United States of America 68.5

Taiwan Province of China 66.6

Sri Lanka 53.3

China 53.0

Vietnam 51.7

Philippines 51.2

India 50.6

Malaysia 47.7

Thailand 47.6

Indonesia 47.4

Brunei Darussalam 45.9

Pakistan 44.8

Bangladesh 42.4

Lao People's Democratic Republic 42.4

Cambodia 42.0

Myanmar 37.9Source: Hinrich Foundation

SDG 17: Partnership for the goals

The UN Conference on Trade and

Development (UNCTAD) says achieving

SDGs will require US$5 trillion to $7

trillion in annual investment.

Enhancing support to developing countries, in

particular the least developed countries and

the small island developing States, is

fundamental to equitable progress for all.

Source: UNDP; sustainabledevelopment.un.org

Selected References: • Asia-Pacific Trade and Investment Report 2017: Channelling Trade and

Investment into Sustainable Development https://www.unescap.org/publications/APTIR2017

• SDG Interlinkages Analysis & Visualization https://sdginterlinkages.iges.jp/visualisationtool.html

• OECD International Development Statistics (IDS) online databases http://www.oecd.org/dac/financing-sustainable-development/development-finance-data/idsonline.htm

• UNCTADstat data http://unctadstat.unctad.org/EN/Index.html

• For Inward FDI Performance Index, see World Investment Report 2011, UNCTAD http://unctad.org/en/PublicationsLibrary/wir2011_en.pdf

• Sustainable Trade Index 2018 http://hinrichfoundation.com/trade-research/sustainable-trade-index/

REGIONAL WORKSHOP ONUsing Evidence-based Trade Policy for Achieving the Sustainable Development Goals in LDCS and

LLDCS

Session 1A. Incentives to Foreign Investors: Some insights on how to use them to promote

sustainable FDI

Mia MikicDirector

Trade, Investment and Innovation Divisionmikic@un.org

Which investor incentives does your country provide?

Preferential CIT rate/ CIT exemption Lower tax rates for specific sectors or investors are common among

developing countries and LDCs

Preferential VAT rate/ VAT exemption Value-added tax the most important indirect tax in many countries

Targeted tax holidays A temporary reduction or elimination of a tax offered to companies,

usually conditioned on requirements such as location and exporting status

Duty-free imports Relief from/reduction of import duties on goods used for production, such

as machinery and essential material

Cash grants Direct financial support in the form of cash

Property assistance Help with locating properties; property tax abatement

Investment allowances and credits The right to deduct a certain share of the investment value of a company

from its taxable income

Accelerated tax depreciation Allowing companies to deduct the costs of assets faster than their value

actually declines

Training of labour /

Guaranteed or cheaper loans /

Other tax and non-tax incentives /

Discussion:

• Which instruments are cost-

based? Profit-based?

• Why differences?

• Pros and cons?

The design of financial incentives

Preferential CIT rate / CIT exemption

Preferential VAT rate / VAT exemption

Targeted tax holidays

Duty-free imports

Cash grants

Property assistance

Investment allowances and credits

Accelerated tax depreciation

Training of labour

Guaranteed or cheaper loans

Other tax and non-tax incentives

• Favours high-profit-margin investments that

would have occurred anyways

• Favours short-term investments

• Tend to be abused through profit-shifting

• Actual fiscal cost unknown

• Typically not based on performance such as

job creation or amount invested

Serious limitations of profit-based instruments

Preferential CIT rate / CIT exemption

Preferential VAT rate / VAT exemption

Targeted tax holidays

Duty-free imports

Cash grants

Property assistance

Investment allowances and credits

Accelerated tax depreciation

Training of labor

Guaranteed or cheaper loans

Other tax and non-tax incentives

Importance of financial incentives

• Limitations of profit-based incentives

• Tax avoidance and evasion (shifting profits between companies; characterizing existing capital as new)

• Corruption / rent-seeking

• Fiscal losses resulting from the non-collection of taxes

• Administrative cost

• Market / economic distortions

• Retaliation (from competing investment destinations)

But financial incentives have unintended outcomes…

Source: https://www.oecd.org/ctp/49836864.pdf; Global Investment competitiveness report 17-18

More important factors

A. Investment climate

More important factors

B. Country characteristics

Summary

Resource- and market-seeking FDI

are less responsive to incentivesMake incentives more targeted

Issues Recommendations

Efficiency-seeking FDI requires

more favourable investment climate

Unnecessary revenue loss and abuse

of tax incentives

High administrative costs,

economic distortion, corruption

Developing countries lack high-

quality investment environment

Form mid-term strategies to improve

elements like infrastructure and improve

FDI competitiveness

Avoid using too much incentives

and protect revenue base to support

mid- and long-term strategies

Shifting from profit-based incentives

to cost-based ones, and keep

incentives temporary

Increase transparency, reduce

discretion, and consolidate the legal

basis

Selected References:

• Annual Report on Exchange Arrangements and Exchange Restrictions 2016file:///Users/willshang/Desktop/Bhutan%20TA%202018,%20presentations/FDI%20session/AREAER_2016_Overview.pdf

• The tax incentives database, ADB https://aric.adb.org/taxincentives#

• Global Investment Competitiveness Report 2017/2018 https://www.worldbank.org/en/topic/competitiveness/publication/global-investment-competitiveness-report

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