March, 2015

Wook Chae

Regional Economic Competition in East Asia

I I Prospects for Regional Economic Order in East AsiaProspects for Regional Economic Order in East Asia

II II Peaceful and Prosperous Regional Economic Or-derPeaceful and Prosperous Regional Economic Or-der

III III Other Forms of Regional Economic Competi-tionOther Forms of Regional Economic Competi-tion

Table of ContentsTable of Contents

I. Prospects for Regional Economic Order in East AsiaI. Prospects for Regional Economic Order in East Asia

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Leadership for the RCEP is less visible, compared to the TPP

RCEP is pressured by TPP to aim at a high standard FTA to a certain degree

Similar organization between RCEP and TPP

Complex challenges to both RCEP and TPP

Each influences the other in progress, members, provisions, etc.

Impact of TPP on RCEP is much greater than RCEP’s effect on TPP

TPP in its final stages vs. RCEP in its earlier stage

Both support the emerging international production network (IPN)

Facilitate trade among members of the supply chain

Reduce the “noodle bowl” effect of sub-regional FTAs

Contribute to creating a wider regional economic integration (FTAAP)

I-aI-a Competition between RCEP and TPP

I-bI-b Prospects for FTAAP

I. Prospects for Regional Economic Order in East AsiaI. Prospects for Regional Economic Order in East Asia

A merger between RCEP and TPP is unlikely to happen in the short or mid-term

Big gap in quality between the two

Early signs of ambition for convergence are not promising

Stronger desires to protect special and sensitive products for RCEP

The development of the FTAAP is expected to take many years

Need studies, evaluations and negotiations among members

Absence of political will and anti-free trade politics

At the 2014 APEC Summit, APEC leaders agreed to launch "a collective strategic study" on the FTAAP

Regarded as an attempt to distract from TPP being pushed by the U.S.

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II-aII-a Roles of individual members

ASEAN: facilitate economic integration through AEC and ASEAN+1 FTAs

ASEAN’s economic role is reinforced by political considerations;

strategic location astride East Asia’s critical trade routes

neutral position in the traditional tensions of Northeast Asian countries

intermediary role between China/US and China/India

China, Japan and Korea: pursue a high level of liberalization for CJK FTA

High standards as a platform for RCEP

China needs to pursue comprehensive economic reforms

US: successfully conclude the TPP negotiation and proceed the legislative process (Trade Promotion Authority; TPA)

II. Peaceful and Prosperous Regional Economic OrderII. Peaceful and Prosperous Regional Economic Order

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II-aII-a Roles of individual members

All members: stimulate production network in the region

Deeper trade agreements

Simplified approach to ROO

harmonized ROOs

co-equality of rules

accumulation of value contents

Ensure that the agreements are never out of date (a living agreement)

II. Peaceful and Prosperous Regional Economic OrderII. Peaceful and Prosperous Regional Economic Order

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III-aIII-a The Asian Infrastructure Investment Bank (AIIB)

Could be a rival or/and a complement to ADB and the Washington institutions

A countermeasure to the western-dominated development banks(World Bank, IMF,

ADB)

A complementary source for infrastructural funds in Asia

Expected to contribute to the regional economic integration in the Asia-Pacific

Need to adopt international best practices

Clarify in details how the AIIB would;

implement practices of governance, environmental and social safeguards, procurement, etc.

work with or add values to multilateral development institutions (ADB and WB)

Address concerns for China’s infrastructure lending history and practice in Africa

III. Other Forms of Regional Economic CompetitionIII. Other Forms of Regional Economic Competition

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III-aIII-a The Asian Infrastructure Investment Bank (AIIB)

Korea may join China's move only if certain issues are clarified

Korea is still in a dilemma on what sort of strategic choices to make

Need discussions with China on the governance structure

China’s growing economic stature should be reflected in the governance structure of global institutions

Reforms of global institutions are needed

III. Other Forms of Regional Economic CompetitionIII. Other Forms of Regional Economic Competition

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III-bIII-b Internationalization of the RMB

By the end of 2014, RMB ranked 5th as the most traded currency

According to SWIFT's report, at 2.2% of SWIFT payment behind JPY (2.7%), GBP

(7.9%), EUR (28.3%) and USD (44.6%)

The average monthly RMB trade settlement up from CN ￥ 320 billion in 2013 to

￥ 480bn in 2014

The Renminbi Qualified Foreign Institutional Investor (RQFII) quotas extended to five

other countries

UK (15 Oct 2013), Singapore (22 Oct 2013), France (20 June 2014), Korea (18 July 2014),

Germany (18 July 2014), and Canada (8 Nov 2014), each with the quotas of ￥ 80bn except

for Canada and Singapore ( ￥ 50bn)

Previously, only Hong Kong was allowed, with a ￥ 270bn quotaThe path of RMB internationalization can be divided into three phases

Trade finance

Investment

Reserve currency (in the longer term)

III. Other Forms of Regional Economic CompetitionIII. Other Forms of Regional Economic Competition

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III-bIII-b Internationalization of the RMB

The road to the RMB Internationalization is far from complete

Size of the home economy relative to others (justified)

Economic stability in the form of low inflation, small budget deficits and stable growth

(justified)

Strong official and institutional support (justified)

Deep, open and well-regulated capital markets (in a deliberately slow progress)

opening up of China’s onshore capital market

greater access for foreign investors to local capital markets

deeper global RMB liquidity and wider cross-border flow channels

III. Other Forms of Regional Economic CompetitionIII. Other Forms of Regional Economic Competition

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III-cIII-c Financial Cooperation in East Asia

Monetary integration in East Asia

Should not become a goal anytime soon

whether it should become so at a later stage is also open for discussion

Managed floating regime guided by currency baskets can be one option

Costs and benefits of international financial integration to be reconsidered

International financial integration does not automatically lead to an efficient allocation

of capital

Greater degree of regional financial integration increases contagion risk

In financially integrated areas, close cooperation among national regulators is needed

ensure that not only national regulators but also appropriate supranational regulatory struc-

tures are put in place

III. Other Forms of Regional Economic CompetitionIII. Other Forms of Regional Economic Competition

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III-cIII-c Financial Cooperation in East Asia

Prevention and resolution mechanisms are needed against crisis

Beef up the CMIM to make it functional

increase the fund size further and reduce the IMF-linked portion of 70%

for Korea, only $11.52 billion available with the IMF-delinked portion

currency swap with the US Fed of $30.0billion in 2008

Surveillance and monitoring of regional financial markets to be strengthened

Strengthen the newly created AMRO

currently staffed with a director, few economists, and supporting staffs

larger resources are needed to carry out meaningful macroeconomic and financial market

surveillance

III. Other Forms of Regional Economic CompetitionIII. Other Forms of Regional Economic Competition

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III-cIII-c Financial Cooperation in East Asia

Banks to be recapitalized swiftly after crisis

Financial authorities must respond swiftly and decisively to banking crises with rapid

recapitalization of banks

adequate legal and institutional framework needed for the resolution procedures

III. Other Forms of Regional Economic CompetitionIII. Other Forms of Regional Economic Competition

Thank you