Rising role of China in the transmission of cross border ... · • NIE-4 – Hong Kong,Singapore,...

Rising role of China in the transmission of cross border trade shocks to small open East

Asian economies

Asia Institute of Tasmania

Presenter: Mala RaghavanTasmanian School of Business and Economics

University of Tasmania

(some points extracted from - International Trade and the Transmission of Shocks: The case of ASEAN-4 and NIE-4 Economies by Dungey, M., Khan, F., & Raghavan, M. (2018))

Trade Shocks, China and Asian Economies

• Introduction• Background• Objective

• Changing Trade Patterns• Export Shares

• Shock Transmission Mechanism• Third Market Effects

• Modelling Framework • Focus on time varying trade matrix

• Empirical Analysis • Impulse responses and output multipliers

• Discussion and Conclusion

Trade Shocks, China and Asian Economies Outline

Outline

Trade Shocks, China and Asian Economies BackgroundASEAN-5

IntroductionGlobal Economic Growth Rate

Between 2010 to 2018

• The US grew on average by 2.3%

• The EU by 1.7%

• Latin America by 1.8%

• East Asia by 6%

• Southeast Asia by 5.4%

• South Asia by 6.9%

• A substantial increase in the regional share of Asia on the worldGDP (calculated using IMF Data, 2019).

• This demonstrates, the world's economic centre of gravity isshifting east.

Trade Shocks, China and Asian Economies BackgroundASEAN-5

IntroductionASEAN-4 and NIE-4• East and Southeast Asia – currently a dynamic region in global

trade and is increasingly a major driver of global economicgrowth.

• This study focuses on two sets of countries:

• ASEAN-4 – Indonesia, Malaysia, Philippines and Thailand

• NIE-4 – Hong Kong, Singapore, South Korea and Taiwan

and their trade ties with Group of 4 (US, EU, Japan and China)

Why??? Due to their

• impressive economic growth rate, following the 1998 EastAsian Crisis.

• resistance during the 2008 global financial crisis.

• high trade openness and rising trade ties with China.

Trade Shocks, China and Asian Economies BackgroundASEAN-5

IntroductionASEAN-4 and NIE-4 Economic Growth RateAverage growth rate from 2010 to 2018

ASEAN-4 Growth % NIE-4 Growth % Group-4 Growth %Indonesia 5.5 Hong Kong 3.3 US 2.3Malaysia 5.4 Singapore 5.0 EU 1.7Philippines 6.3 South Korea 3.3 Japan 1.3Thailand 3.7 Taiwan 3.3 China 7.6

• Southeast Asia region have an impressive growth trajectory.

Trade intensity = imports plus exports as a percentage of GDP

Trade Shocks, China and Asian Economies Trade IntensityASEAN-5

IntroductionASEAN-4 and NIE-4 Trade Intensity

ASEAN-4 Trade Intensity

(%)

NIE-4 Trade Intensity

(%)

Group-4 Trade Intensity

(%)Indonesia 32.1 Hong Kong 333.6 US 20.4Malaysia 130.4 Singapore 216.4 EU 63.0Philippines 54.4 South Korea 68.7 Japan 28.1Thailand 89.9 Taiwan China 33.6

• High trade intensity• high trade openness• high integration into global production chains • can be heavily influenced by developments in global activities• vulnerable to external trade or economic shocks

Trade Shocks, China and Asian Economies Export SharesASEAN-5

IntroductionASEAN-4 and NIE- 4 Trading Partners

ASEAN-4 China Japan EU USIndonesia 11.0% 13.4% 9.6% 9.5%Malaysia 12.8% 10.5% 9.5% 8.6%Philippines 11.9% 21.3% 11.3% 14.3%Thailand 11.4% 9.6% 10.0% 10.6%

NIE-4 China Japan EU USHong Kong 54.2% 3.7% 9.4% 9.4%Singapore 12.6% 4.3% 8.1% 6.0%S. Korea 25.9% 5.7% 9.0% 12.1%Taiwan 30.7% 6.2% 9.9% 10.0%

Export shares of ASEAN-4 and NIE-4 to their G4 trading partners for 2015

ASEAN NIE

11.1% 19.8%11.2% 25.2%7.2% 25.1%

12.1% 13.8%

ASEAN NIE

3.3% 5.4%26.3% 19.2%6.4% 11.5%7.5% 21.4%

Trade Shocks, China and Asian Economies Trade PatternsASEAN-5

IntroductionChanging Trade Patterns of ASEAN-4 and NIE-4 from 1978 to 2015

Trade Shocks, China and Asian Economies Trade PatternsASEAN-5

IntroductionChanging Trade Patterns of Group-4 from 1978 to 2015

Trade Shocks, China and Asian Economies BackgroundASEAN-5

IntroductionIn summary…

• Growing economic integration and increased economicopenness

• created interdependencies among the Asian economies.

• changed the structure of the global trade over time.

• These changes are bound to alter the channels through whichthe trade related shocks are transmitted and their effects onthese small Asian economies.

Trade Shocks, China and Asian Economies ObjectivesASEAN-5

IntroductionThe focus of this study…

• Assess the changing nature of trade links and its influence ontransmitting trade shocks to the ASEAN-4 and NIE-4 economiesover time.

• The specific focus is on the change in trade link through exportdemand from the G4 economies

• Demand component of the trade shock, commonly know asexternal shock.

• Evaluate the role of China in the transmission of cross bordertrade shocks to these small Asian economies.

Trade Shocks, China and Asian Economies Transmission MechanismASEAN-5

IntroductionShock Transmission Mechanism

Demand component of trade shocks

Trade Linkages

Competition or Income effect

Trade intensity effect

Third market effect

Trade Shocks, China and Asian Economies Transmission MechanismASEAN-5

IntroductionThird Market Effect

Malaysia

US China

Trade

Direct effect Direct effect

Indirect effect

Trade Shocks, China and Asian Economies ModelASEAN-5

IntroductionModelling framework

• Develop a modelling framework and identification mechanismthat enable us to

• Measure the direct and indirect transmission channels ofhow output shocks originating from the G4 economiespropagate into ASEAN-4 and NIE-4.

• Evaluate the relative importance of changing traderelationships versus changing shocks in propagating shocksbetween global markets.

• The SVAR approach of Abeysinghe and Forbes (2005) byconstructing a trade matrix (W)

Trade Shocks, China and Asian Economies ModelASEAN-5

IntroductionData and Sources

• Variables: Output (real GDP) and Trade linkages (Export Shares)

• Countries: 12 Countries• ASEAN-4 (Philippines, Indonesia, Malaysia, and Thailand), • NIE-3 (Hong Kong, Korea, Singapore, Taiwan),• Group-4 (China, Japan, United States and Europe Union)

• Sources of data• International Financial Statistics, DataStream, OECD

Economic Indicators, Eurostat• Direction of Trade Statistics, IMF Data.

• Period of study: Q1-1978 to Q4-2015

Trade Shocks, China and Asian Economies GraphsASEAN-5

IntroductionThe responses of GDP growth ASEAN-4 to a one unit shock in the samples economies

• Same weighted shocks with changing trade links - different samples

Trade Shocks, China and Asian Economies Graphs ASEAN-5

IntroductionThe responses of GDP growth ASEAN-4 to a one unit shock in the samples economies

• Different weighted shocks with changing trade links - same sample period

Trade Shocks, China and Asian Economies Graphs ASEAN-5

IntroductionThe responses of GDP growth NIE-4 to a one unit shock in the samples economies

• Same weighted shocks with changing trade links - different samples

Trade Shocks, China and Asian Economies Graphs ASEAN-5

IntroductionThe responses of GDP growth ASEAN-4 to a one unit shock in the samples economies

• Different weighted shocks with changing trade links - same sample period

Trade Shocks, China and Asian Economies MultiplierASEAN-5

IntroductionAccumulated Impact of Four Growth Drivers on ASEAN-4

China Japan EU US

ASEAN-4 1998 2015 1998 2015 1998 2015 1998 2015

Indonesia 0.20 0.51 0.40 0.25 0.55 0.43 0.80 0.62

Malaysia 0.28 0.61 0.46 0.30 0.70 0.50 0.94 0.77

Philippines 0.14 0.34 0.25 0.18 0.44 0.32 0.60 0.46

Thailand 0.22 0.53 0.36 0.28 0.58 0.39 0.83 0.64

Average 0.21 0.50 0.37 0.25 0.57 0.41 0.79 0.62

• The cumulative average impact of China’s shock on ASEAN-4 has increased to 0.50 from 0.21 (2.3 times), confirming the emergence of China as a major force in global trade.

Trade Shocks, China and Asian Economies MultiplierASEAN-5

IntroductionAccumulated Impact of Four Growth Drivers on NIE-4

China Japan EU US

NIE-4 1998 2015 1998 2015 1998 2015 1998 2015

Hong Kong 0.38 0.70 0.34 0.26 0.80 0.63 1.12 0.83

Singapore 0.32 0.66 0.44 0.32 0.85 0.56 1.17 0.85

South Korea 0.42 0.64 0.50 0.35 0.66 0.54 0.98 0.75

Taiwan 0.25 0.62 0.37 0.39 0.61 0.45 0.91 0.69

Average 0.43 0.63 0.41 0.31 0.73 0.54 1.04 0.78

• On average, in 1998 the US multiplier effects on ASEAN-4 and NIE-4 were 3.8 and 3.1 times larger relative to those of China; however, this gap has reduced to only 1.2 times in 2015.

Trade Shocks, China and Asian Economies ComparisonsASEAN-5

IntroductionRanked by export shares and multiplier effect

• Output-Multipliers with 2015Q4 W –Matrix vs Export Shares at Q4 2015

Malaysia Singapore

Export Rank Multiplier Rank Export Rank Multiplier Rank

China 0.13 US 0.30 China 0.12 US 0.33

Japan 0.11 China 0.25 EU 0.08 China 0.28

EU 0.09 EU 0.24 US 0.06 EU 0.26

US 0.08 Japan 0.18 Japan 0.04 Japan 0.19

Indonesia South Korea

Export Rank Multiplier Rank Export Rank Multiplier Rank

Japan 0.15 US 0.24 China 0.25 US 0.29

China 0.11 China 0.21 US 0.12 China 0.27

EU 0.09 EU 0.20 EU 0.09 EU 0.25

US 0.09 Japan 0.15 Japan 0.06 Japan 0.21

Trade Shocks, China and Asian Economies Comparisons

ASEAN-5Introduction

Ranked by export shares and multiplier effect

• Output-Multipliers with 2015Q4 W –Matrix vs Export Shares at Q4 2015

Malaysia Singapore

Export Rank Multiplier Rank Export Rank Multiplier Rank

Singapore 0.14 Singapore 0.20 Malaysia 0.13 Malaysia 0.29

Thailand 0.05 Hong Kong 0.17 Hong Kong 0.11 Hong Kong 0.22

Hong Kong 0.05 Thailand 0.13 Indonesia 0.09 Indonesia 0.18

Indonesia 0.04 Indonesia 0.12 Thailand 0.04 Korea 0.15

Korea 0.04 Taiwan 0.11 Korea 0.04 Thailand 0.14

Taiwan 0.03 Korea 0.10 Taiwan 0.04 Taiwan 0.14

Philippines 0.01 Philippines 0.05 Philippines 0.02 Philippines 0.10

Trade Shocks, China and Asian Economies DiscussionASEAN-5

IntroductionDiscussion

• The economic outlook for the NIE-4 and ASEAN-4 relies on the level of engagement and prospects of their major growth drivers and how they affect one another.

• US• The results demonstrate the dominance of the US in

disseminating shocks across the Asian region, although its impacts are declining over time.

• EU• has been successful in economic interaction with individual

countries in Asian region but• it has been unsuccessful in pursuing regional level

agreements.

Trade Shocks, China and Asian Economies DiscussionASEAN-5

IntroductionDiscussion

• Japan• associations with ASEAN-4 and NIE-4 as an investor and

trading partner has been pragmatic.• economic growth stalled since early 1990s.

• China• has displaced the EU and Japan as the most dominant

connections, although the US remains the most important.• trade-biased growth presents both challenges and

opportunities for economies with complex trade links.• viewed to have a detrimental influence on trade and

manufacturing base due to crowding out.• provided a buffer for Asian economies from other

international influences.

Trade Shocks, China and Asian Economies DiscussionASEAN-5

IntroductionUS-China Trade War

• US-China trade war is the ‘biggest threat’ to Asian economies as growth forecasts slashed (ADB 2019)

• If China and US growth slows• the health of global manufacturing will suffer• the world trade volume growth will suffer• the trade volatility increases, creating uncertainties• the interdependence and integration would undermine

investment growth in these small Asian economies.

Thank You

Trade Shocks, China and Asian Economies DiscussionASEAN-5

Introduction