AMRO Director Dr Junhong Chang delivers the keynote speech at the AMRO-BSP Joint Seminar.

Keynote Speech by Dr Junhong Chang, AMRO Director

AMRO-BSP Joint Seminar

“Asia’s Emergence in the New World Order: Growth, Integration, and Resilience”

3 May 2018, Manila, Philippines

(As prepared for delivery)

Dear Governor Espenilla, distinguished panelists and colleagues,

1. Good morning.  It is my great honor to address this distinguished gathering here today.  I would like to start by expressing my appreciation to the Bangko Sentral ng Pilipinas, for co-hosting this seminar together with AMRO, and for the excellent arrangements here today.

Asia’s Emergence Through Growth and Integration

2. Despite the improving global economic outlook in 2018, the ASEAN+3 region faces external risks such as trade protectionism, and also longer-term challenges posed by changes in trade and production networks, and technology in a rapidly changing world.  The theme today of “growth, integration and resilience” aptly describes what has underpinned Asia’s emergence in the past decades. Integration into the global economy has underpinned our region’s growth and development. Economies adopted a “manufacturing for exports” strategy to jumpstart their development, earning foreign exchange through exports to import capital goods, and in the process built productive capacity and created jobs.

3. This story is of course well known to you, but at a time when integration into the world is under threat from trade protectionism, it is worth reminding ourselves of the importance and benefits of free trade in our economic development.  And at a time when openness to trade is sometimes seen as vulnerability to external shocks, we need to remind ourselves that trade had lifted growth and helped the region to recover quickly from past crises. The rebound in our region’s exports after the Asian Financial Crisis led our economic recovery, and was supported by external demand from a robust U.S. economy and the emergence of China as the center of the region’s production networks from the early 2000s.

4. It would indeed be a setback if the world were to take a step back in terms of trade integration due to unilateral trade protectionist actions.  In AMRO’s flagship report this year, launched this morning before the seminar, we identified trade protectionism as one of the key risks to the region’s growth outlook.  Our simulation of a hypothetical scenario of a limited trade war between the U.S. and China shows that both countries could lose 0.2 percentage points of growth within the first year, and an additional 0.2 percentage point for the U.S. by the third year, given the U.S.’s relatively greater openness to global trade.

5. Not only will a U.S.-China trade war be a lose-lose situation for the two countries, but there will also be collateral damage to the whole of Asia due to the strong production networks between China and the countries in the region, many of which also have close trade ties with the U.S. The negative impact to advanced economies in the region such as Japan, Korea, and Singapore ranges from 0.2 to 0.8 percentage point of growth. Among the emerging countries, the impact is smaller but still significant, ranging from 0 to 0.5 percentage point. In short, a US-China trade war is in fact a US-Asia trade war, with significant fallout on the rest of the world.  On this cautionary note, let us hope that this scenario remains hypothetical.

6. Besides this near term risk of trade protectionism, there is much else to occupy the policymakers’ minds as they consider what could bring their economies to the next level of development, while maintaining financial stability. I have mentioned the “manufacturing for exports” strategy that led our region’s growth, and continue to be important for developing economies in the region such as Vietnam and Cambodia as they integrate themselves into global value chains. As these global value chains mature, however, some of the trade in intermediate goods in our region would be replaced by domestic production. In China, for instance, the share of domestic inputs in its export products have risen over the years to over 40 percent. Therefore, while integration into global value chains is still a viable driver of growth through exports and manufacturing, it is worth thinking ahead to economic diversification and creating multiple drivers of growth.

7. When considering these issues, technology and its impact must surely be at the top or near the top of policymakers’ minds.  Technology is a double-edged sword. On the one hand, technology and automation means that manufacturing for exports will no longer generate jobs as in the past.  Within our region, the extensive automation in the car industry is one example. On the other hand, technology has also facilitated the emergence of the services sector as a potential engine of growth and development.

8. Here in the Philippines, the success of the business process outsourcing or BPO industry illustrates the immense potential for services, facilitated by technology, to be a driver of growth and employment. I understand that the BPO sector employs more than 1 million workers, with wages 3 to 5 times that of the national average.  This would not be possible without technological advances that transformed these services by making it tradable across borders.  Here and elsewhere in the region, there is also tremendous potential in services industries such as tourism, as a driver of growth and employment.  I look forward to the insights from our distinguished panelists on what has worked well for their economies in the face of challenges from global forces such as technology.  We hope the discussion today will help ASEAN+3 economies better understand these emerging challenges and benefit more fully from new opportunities in the new world order.

Resilience Through Integration

9. I have touched on the theme of growth and development – the near term threat of trade protectionism, the challenges and also opportunities posed by developments in global value chains and technology, and the promise of the services sector as an engine of growth.  Let me end on the theme of building resilience, which is closely linked to AMRO’s mandate to support the regional financial safety net of CMIM.

10. What would be an appropriate response to these challenges and opportunities?  For an individual economy in ASEAN+3, the key recommendation is to build resilience through multiple engines of growth, including through the growing services sector.  For our region, the key recommendation is to strengthen intra-regional connectivity and integration to meet growing intra-regional final demand.  While the region remains open to global trade and investment, leveraging on intra-regional demand would improve the resilience of the region as a whole against external shocks such as protectionism.  The ample resources and diversity in development within the ASEAN+3 region is a source of strength.

11. Our region has also come together to channel our efforts and resources into safeguarding regional financial stability, which is the foundation upon which we can pursue further growth and integration.  The Chiang Mai Initiative Multilateralisation or CMIM stands at the center of our regional financial safety net.  In the last few years, the operational readiness of the CMIM has been greatly enhanced by conducting test runs, including with the IMF, and updating our operational guidelines.  The first CMIM Periodic Review is about to be concluded and will stand as another milestone in strengthening our regional safety net and in regional financial cooperation.

12. At last year’s Host Country Seminar in Yokohama, I assured the audience that as the product of regional financial cooperation, AMRO will continue to be one of the “anchors” to advocate for greater regional cooperation and integration.  I would like to end with this same message, and to reaffirm our commitment to safeguarding regional financial stability, in line with today’s theme of “growth, integration and resilience”.  With this, I look forward to learn from our distinguished panelists, and I wish you all a stimulating and insightful discussion.

Thank you very much.