Inclusive Global Value Chains

George Manzano and Kristine Joy Martin

        Inclusiveness is a big word in the development community. Given the increasing ubiquity of global value chains (GVCs), policy attention has turned towards making these more 'inclusive.' APEC, for one, is promoting inclusiveness of GVCs through international cooperation.

        APEC is interested in GVC because it is perceived to be a game changer, i.e. a new paradigm that will increasingly define the patterns of international trade. Indeed, GVC has shaped the current global business environment in more ways than one. It has shifted the focus of the unit of trade from trade in goods to trade in tasks. Secondly, GVC encourages firms and countries to specialize in specific tasks and business functions based on their comparative advantages in order to ratchet up efficiency in production. GVCs provide potential mechanisms for all countries - whether these countries are large or small, developed or developing - to improve their income, employment, and productivity.

        The emergence of GVCs thus raises many important trade policy questions, which can be discussed and for which a consensus for collective policy action can be drawn out in APEC.

Why does APEC have to raise inclusiveness in GVCs as a policy objective?

        APEC raises the issue of inclusiveness for a number of reasons. Firstly, inclusiveness is at the very heart of development, i.e. what development is for, if not for people. Secondly, because participation in GVCs does not automatically lead to inclusive outcomes, there is a groundswell for a policy stance. In addition, as GVCs, by nature, reaches beyond borders, there are avenues for cooperation. APEC is thus, an appropriate forum to discuss and initiate policy responses, either at the collective level or at the level of individual APEC members, to promote inclusiveness in GVCs.

Inclusiveness at the extensive margin

        Inclusiveness can be understood in various ways. One way is to consider inclusiveness across countries, i.e. getting more countries to participate. Different countries, of course, have different initial capacities to participate in GVCs. Such differences may be due to different factors that are fixed, such as, country's geographic location and resource endowment. Conversely, the differences can also be due to public policy, such as, a country's human capital, physical infrastructure, and overall investment climate. Thus, to facilitate the entrance of developing countries into the GVC, proper trade and investment policies that aim to liberalize exchange of goods and services worldwide should be encouraged and implemented. We call attempts to broaden inclusiveness across countries as the extensive margin.

        Because of the nature of GVCs, where parts and components necessarily cross borders multiple times, countries with low trade barriers have better chances of participating. It also has been observed that GVCs tend to propagate in industries or product groups that have been subject to global trade liberalization. The passage of the 1997 Information Technology Agreement (ITA), which calls for the liberalization of IT products on an MFN basis by many countries, has been credited with the blossoming of GVCs in the electronics sector. To the extent that sectoral liberalization such as the ITA has promoted the participation of many countries - developed and developing alike - in the electronic GVC, it can be said that such initiatives foster inclusiveness across countries.

        Thus, inclusiveness at the international level could be fostered if APEC could take the lead in promoting more sectoral liberalization on an MFN basis. APEC has a role because the sheer size and economic weight of its members is likely to give it the critical mass which is needed to push for sectoral liberalization. In addition, APEC is a forum for cooperation, which makes it an appropriate venue to gather consensus and support for sectoral liberalization in different sectors.

        It is, however, not easy for APEC to negotiate for more sectoral liberalization because of the 'free rider' problem. Free riding entails that the countries which are not signatories to a sectoral liberalization agreement will also enjoy additional market access even without having to offer tariff concessions of their own. To lessen the possibility of free riding on the trade liberalization efforts by APEC, the challenge is to identify those areas in which the benefits of trade liberalization would redound mostly on APEC members rather than on non-members. These product groupings would be the promising candidates for sectoral trade liberalization. Wonnacott suggested a trade liberalization scheme on a selective product-by-product basis wherein countries choose the commodities for early liberalization based on a pre-defined criteria1.[1]

Inclusiveness at the intensive margin

        Inclusiveness in GVCs could also be enhanced among the elements of the value chain within a country. Inasmuch as there are lead countries at the international level, there are also lead firms that coordinate production across a series of producers, each with different tasks, along a domestic supply chain. The lead firms, which could be producers or traders, thus act as the nexus between the international and the domestic supply chain. By and large, policies aimed at promoting inclusiveness within countries deal with getting more small and medium establishment (MSMEs) and fostering more linkages especially between foreign firms with local firms. We call policy actions directed to promote inclusiveness within the country as the intensive margin.

        Making GVCs more inclusive can be achieved through many means. In this article we focus on (1) intensifying existing participation of Micro Small and Medium Enterprises (MSMEs) and (2) developing linkages of lead firms with local firms.

MSMEs

        Because GVCs are export-oriented, the firm-actors are operating under a very competitive environment. They are agile enough to modify products to suit the changing tastes and to adopt technology and production practices to remain cost effective. For these reasons, MSMEs that join GVCs are likely to enjoy positive spillovers of production technology as well as best managerial practices. However, the literature is replete with accounts of the many barriers that MSMEs face as they attempt to join, deepen and widen their GVC participation. These barriers are usually related to trade costs which could have structural or policy induced origins.

        Thus, government plays a big role in lessening trade costs for MSMEs. For example, it can provide financial aid to help companies access credit for more efficient operations. More importantly, it can also facilitate MSMEs compliance to international standards, especially since MSMEs find it difficult to adjust to global standards and regulations at public, private, and civil society levels. Note that the GVCs, standards and certifications are at the heart of a firm's ability to participate and compete.

Linkages

        The linkages of MSMEs and other local firms - especially those outside the special export processing zones (SEZs) - with lead firms or large multinational enterprises (MNEs) can also promote GVC inclusiveness. SEZs do not necessarily help in creating spill-over if the participating firms engage in processing activities with very little interaction with the local supplier firms. Thus, enclaves with little connection with the local firms are created.

        An opportunity to make GVCs more inclusive is through forging partnerships among lead firms and local firms outside SEZs. Local firms can be suppliers of manufactures while the lead firms can be the buyers. This would increase the smaller partner's market and capabilities which can eventually hook them to the GVCs [2].

        Policy should be directed at strengthening the linkages between the lead and the supplier firms in the GVC model that have the weakest link. APEC, being a body that supports economic and technical cooperation can consider initiating capacity-building programs or advocacy where linkages can be deepened in pursuit of inclusiveness, in the following areas:

1. On standards and international certification: Participation of firms in a GVC is conditional on their ability to meet the product or process standards of the lead firms. APEC can spearhead initiatives such as designing capacity building initiatives in certification compliance so as to facilitate the ability of small local firms to participate meaningfully in the production chain.
2. Entrepreneurship: In certain industries, supplier firms may have started as informal subcontract suppliers. However, transitioning towards formal status could be problematic. Given this difficulty, it is recommended that policy attention be directed towards facilitating the transition of informal establishments to the formal sector by reducing red tape and enforcing of property rights [3]. In addition, company programs where managers in lead firms could be trained and 'spun off' to head supplier firms could be explored.
3. Trade facilitation: Trade costs act as tax on supplier firms or as a fixed cost to internationalization. Trade costs need not necessarily be monetary in nature (tariff, taxes, etc). Delays can be particularly debilitating to the tight process flows of GVCs, thus any policy that improves export-import procedures at the border could encourage local firm participation. Programs to cluster service suppliers can create economies of agglomeration, lower transaction costs, and diminish the enclave behavior of lead firms.

Final Remarks

        The advent of the GVCs, on the crest of network economics, is an important development to warrant keen policy attention. APEC, for one, has taken an interest in GVCs, because fostering this mode of integration raises many policy issues that can be discussed in the context of economic cooperation. Missing out on the policy questions surrounding GVCs would make APEC less relevant. Furthermore, APEC desires to imbue regional integration with an inclusive character for developmental purposes.

        We suggest two broad areas to promote inclusiveness in APEC. The first deals with increasing the potential for GVCs. The proliferation of GVCs could only increase the possibilities for developing countries to participate. APEC, as a collectivity, could engage in initiating sectoral liberalization. The second avenue addresses fostering linkages between lead firms, which are usually foreign, with local suppliers (small businesses or otherwise) within the country. The idea is to prevent enclaves of foreign led GVCs. Though there is a host of complementary policies that could improve linkages, we highlight those that will help local supplier firms acquire the necessary standards, deepen entrepreneurship and benefit from trade facilitation measures.

References:

1.  Wonnacott, P. (1994) "Merchandise trade in the APEC region: Is there scope for liberalisation on an MFN basis?" The World Economy, Special Issue on Global Trade Policy: 33-51
2. Ibid.
3. Organization for Economic Cooperation and Development (OECD), World Trade Organization (WTO) and UNCTAD. "Implications of Global Value Chains for Trade, Investment, Development and Jobs." Prepared for the G-20 Leaders Summit Saint Petersburg (Russian Federation), August 6, 2013

APEC Growth Strategy and Beyond

Wayne Chen

        APEC, as a premier forum to facilitate economic growth, trade and investment in the Asia-Pacific region, has been promoting cooperation on issues beyond its traditional agenda. Through economic and technical cooperation (ECOTECH), APEC is dynamic in narrowing development gap and enhancing capacity building among its member economies across the region. In so doing, APEC has improved economic growth in terms of both quantity to quality, and this feature demonstrates that APEC, a non-binding organization, significant in leading regional integration in the globe.

        The APEC Leaders' Growth Strategy announced in 2010, by following which all the 21 member economies achieved consensus on objectives of their pursuit of economic growth, was a milestone for APEC carry on its ECOTECH activities. In 2015, APEC is drafting the second framework to continue the collective endeavor for common prosperity for another 5 years. The essay views the 1st phase APEC Growth Strategy and beyond.

Emergence of Growth Strategy

        After 2000, APEC has been extending its Trade and Investment Liberalization and Facilitation (TILF) agenda by incorporating a wide range of capacity building activities as well as issues not directly related to trade. As shown by the three pillars of APEC's agenda--Trade and Investment Liberalization; Business Facilitation, and; Economic and Technical Cooperation-- announced in 1994, APEC has been focused on capacity building and APEC was achieving growth and prosperity for a common future through narrowing development gap.

Emergence of Growth Strategy

        After 2000, APEC has been extending its Trade and Investment Liberalization and Facilitation (TILF) agenda by incorporating a wide range of capacity building activities as well as issues not directly related to trade. As shown by the three pillars of APEC's agenda--Trade and Investment Liberalization; Business Facilitation, and; Economic and Technical Cooperation-- announced in 1994, APEC has been focused on capacity building and APEC was achieving growth and prosperity for a common future through narrowing development gap.

        In this context, anthropocentric issues, such as health, welfare, inclusiveness, and social safety net, have gradually involved in the agenda. The health working group was establish in response to the increasing risk of epidemic diseases in 2007, and the Emergency Preparedness Working Group was built in 2009 after the hit of tsunami and earthquake in the South Asia, South-East Asia, and Chile.

        Climate Change, Energy Security and Forestation, and other ecology related issues were later introduced to APEC. The Sydney APEC Leaders' Declaration on Climate Change, Energy Security, and Clean Development recognized that "economic growth, energy security and climate change are fundamental and interlinked challenges for the APEC region," therefore, Leaders are "committed... to ensuring the energy needs of the economies of the region while addressing the issue of environmental quality and contributing to the reduction of greenhouse gas emissions." 2 goals were revealed in the Declaration: 1) to increase forest cover in the region by at least 20 million hectares by 2020, and; 2) to reduce energy intensity of at least 25% by 2030, with 2005 as the base year.

        Given the long history of expanding the APEC agenda, it is not surprising that the APEC Growth Strategy soon served as a comprehensive framework upon which various APEC issues were coordinated and integrated after the Strategy came in place in 2010.

        In 2009, APEC was seeking to develop a new growth paradigm for the changed post-crisis landscape considering that "growth as usual" is not realistic anymore. The Growth Strategy drafted in 2010 was comprised of 5 attributes, namely: Balanced Growth, Inclusive Growth, Sustainable Growth, Innovative Growth and Secure Growth.

        The Balanced Growth refers to growth across and within economies that will unwind imbalances and raise potential output through macroeconomic policies and structural reforms. The Inclusive Growths emphasizes that economic growth needs to take social inclusiveness into account by promoting equity, human resources, employment and welfare of vulnerable groups. The Sustainable Growth or Green Growth urges the use of natural resources and economic activities to be ecological friendly and its applications are often technology oriented in the APEC context. Innovation is crucial to the development of other growth attributes given that ICT is such powerful tools for transition to knowledge based economy. The Secure Growth accommodates issues of emergency preparedness, health, food security, anti-corruption and anti-terrorism.

       

Applications of the APEC Growth Strategy

        Since 2010, the Growth Strategy has been supervising capacity building activities across the APEC region by shaping annual priority areas. Through the lens of Growth Strategy, member economies could also be categorized by their development progress. For example, developing economies are supportive to social inclusiveness and infrastructure investment which are crucial for narrowing development gap and disparity with the society. Developed economies that are of advantage in R&D are focused more on innovative growth and sustainable growth which lead to cutting-edge technologies, IPR and energy saving devices. The USA and Russia are in particular active in this regard.

        In practice, the Growth Strategy has been utilized intensively in evaluating projects and initiatives within APEC, and therefore, the Growth Strategy was implemented from a top-down manner, from the Leaders to the Working Groups. However, on the other hand, the Strategy was not fully used in evaluating the outcome of initiatives or assessing the performance of working groups due to the lack of qualitative goals. In 2015, while APEC member economies reviewed the first Growth Strategy and working collectively on the new one, it was suggested to involve clear goal or quantitative objective as G20 does, but such comment was not much echoed particularly by developing economies.

Looking Forward       

        The 2nd phase of the Growth Strategy-- APEC Strategy for Strengthening Quality Growth--- was drafted by all member economies during the 3rd Senior Officials' Meeting in Cebu and is being submitted to Leaders for endorsement in November. in the new Strategy, 3 Key Accountability Areas (KAA), namely: Institution Building, Social Cohesion, and Environmental Impact were newly added for examining and prioritizing APEC initiatives and meanwhile the 5 growth attributes remain. It is not clear yet what changes the addition of KAAs is bringing up, APEC Leaders may not elaborate address priority works of the Growth Strategy in detail. Instead, the new Growth Strategy can be linked and interpreted in line with UN ongoing tasks, such as the Millennium Development Goals and the Sustainable Development Goals to highlight its significance accelerating regional integration and development. APEC still needs to further elaborate the Strategy to member economies, APEC fora and subfora. Similarly, the APEC working groups will need to study the comprehensive Strategy and translate it into strategic plans and work plans for implementation.

       

       
       

Internet Economy: a Revolutionary Manufacturing Paradigm

Wayne Chen

        China proposed to list the Internet Economy as a new priority in APEC under the New Economy annual priority in 2014 and was endorsed by APEC Leaders and Ministers by the end of the year. In 2015, an Ad Hoc Steering Group was established in February to carry forward the Chinese APEC Initiative of Cooperation to Promote Internet Economy. According to the conclusion of the Second APEC Senior Officials Meeting, a Chair and a Vice Chair will be selected to lead the Steering Group and its first meeting will be held before the Third APEC Senior Officials Meeting in September.

        The Steering Group will be focused on advancing the growth of the Internet Economy by strengthening cooperation on 1) regulatory environment and 2) innovation and entrepreneurship. The former includes utilizing and securing data in cross-border flows, promoting SME-friendly e-commerce policies, facilitating the cross border flow of ICT-enabled services and achieving universal access to broadband. The latter is more related to holding skill training activities, establishing enabling environment to enhance inclusive economic participation by using ICT, and promoting internet finance and internet of things.

        One major reason why China is so enthusiastic about Internet Economy was that the internet is a powerful tool to stimulate its economy for big, for long and highly likely will reinforce its leading role in the world economy. The initial public offering (IPO) of the Alibaba Group Holding, worth of US$25 billion, was not only the largest IPO ever, but revealing a new era of internet economy to the world leaders. The e-commerce is only part of the new economy but has already been a significant driver of economic activities. The market scale of e-commerce is enormous and growing significantly in recent years. In 2013, the turnover of global e-commerce grew by 17% and the market of e-commerce in China came to US$248 billion and received 11.3 billion orders. The internet substantially increases market access by linking individual consumers to retailers or even wholesalers, improves communication with providers of logistic services, financial services and customer management, as well as facilitates SMMEs to enjoy more public media exposure, all these were beyond imagination before and the future even looks more promising.

        According to the World Bank, more than 60% enterprises in high income countries used internet for business operations in 2003, but in 2012 mostly enterprises used the internet in daily operations. In middle and low income countries, the figure is 35% for 2003 and 70% in 2012. Developing countries have higher growth rate, and the market prospectus is commonly bigger due to their population base.

        A wide range of innovative business models are emerging and performing creative destruction in practice, sometimes industries not merely companies were wiped out in the new chapter of internet economy. Kodak, for example marked the rise and fall of the photographic film industry. Founded in 1888, Kodak had focused on photographic film products, and had a 90% market share in 1970s in the US. Its workforce peaked at 145,300 in 1988, but reduced to 13,100 in 2012 due to the severe competition in the digital photography market. In January 2012, Kodak filed for bankruptcy protection and in December sold its imaging patent for over $500 million. On the other hand, Instagram, the photo-sharing phone app which employed 13 people, was acquired by Facebook for $1 billion. In other words, the value of individual employee created by Instagram reached $77 million, 15 times more than Apple of Google.

        Internet economy has also become a hot issue in APEC where China, Russia and the United State are competing to lead in the discourse, although China proposed the Internet Economy Initiative first back in 2014. At the 2015 APEC Second Senior Officials Meeting, the US tabled the initiative of "Enabling Inclusive Growth Through the Digital Economy", and proposed 4 deliverables for APEC 2015, namely: 1) conduct an APEC Digital Economy Agenda to be endorsed by AELM; 2) conduct a Digital Economy Action Plan for connecting MSMEs into global and regional markets; 3) conduct an independent Digital Economy assessment in 2016, and; 4) identify 'facilitating Digital Trade for Inclusive Growth' as a Next Generation Trade and Investment issue.

        Different from the Chinese Internet Economy initiative, the US Digital Economy is more related to the MSMEs and trade. The Statement to Implement APEC Policies on Trade and the Digital Economy, for example, is listed as an important APEC reference documents by the Digital Economy Initiative which urges APEC economies "take a collective leadership role in the WTO negotiations to pursue market openness in areas related to trade in the digital economy".

        I argue that US attempted to redirect discussion on Internet/Digital Economy towards the Trade and Investment Liberalization and Facilitation (TILF) pillar while China has been addressing related issues in the domain of Economic and Technical Cooperation (ECOTECH). In this context, related deliberation was linked and shadowed by the disagreement on ITA2 between big powers. Not surprisingly, hot debates occurred at SOM2 where China and Russia emphasized that "Digital Economy" has no clear definition and the objective to identify it as the next generation issue requires further discussion for consensus. After informal discussion facilitated by the host economy, China, Russia and US agreed to return the Digital Economy Initiative back to the Committee of Trade and Investment (CTI) and incorporate the actions proposed by US into mandate of the Steering Group. In return, China invited US to join the leadership of the Ad Hoc Steering Group but not yet received positive response at the place. Taiwan has been long known as a high tech island and its industrial development is greatly related to the Internet Economy. However, considering the contest between China and US, Taiwan needs to be careful and elaborate while speak up for the interests of the private sector, and meanwhile avoid involving the political disagreement between China and US.

References:

1.APEC (2015), "Draft Terms of Reference on the Ad Hoc Steering Group on the Internet Economy", 2015/S OM2/021_rev1 

2.APEC (2015), "Enabling Inclusive Growth Through the Digital Economy", 2015/ SOM2/028 

3.Associate Press (2012), ""Kodak Sells Digital Imaging Patents For $525m", http://bigstory.ap.org/article/kodak-receive-525m-patent-sale, 19 Dec 

4.Atlantic (2012), "Instagram Is Now Worth $77 Million Per Employee", http://www. theatlantic.com/business/archive/2012/04/instagram-is-now-worth-77-millionperemployee/255640/, 9 April 

5.OECD (2014), "Skills and Jobs in the Internet Economy", http://dx.doi.org/ 10.1787/5jxvbrjm9bns-en 

6.OECD (2012), "OECD Internet Economy Outlook 2012", http://www.oecd-ilibrary.org/science-and-technology/oecd-inte rnet-economy-outlook- 2012_9789264086463-en 

7.Norbhu, T. (2014), "Internet and Business Model Innovation", World Bank, October. 

8.Koske, I. et al. (2014), "The Internet Economy - Regulatory Challenges and Practices", http://dx.doi.org/10.1787/5jxszm7x2qmr-en 

9.Nam, S. (2014), "Promoting Innovative Development in the Asia-Pacific Region throughout the Internet Economy", KIEP, APEC Study Series 14-02.

The Year of Promising Economic Integration in the Asia-Pacific

Eric Chiou

        The year of 2015 is going to be indicated as a remarkable year for economic integration in the Asia-Pacific region. Not only the negotiation of Regional Comprehensive Economic Partnership (RCEP) is scheduled to be concluded by the end of this year, but also the Trans-Pacific Partnership (TPP), after a series of intensive and difficult negotiations, aims to reach a principle framework agreement in this year. In addition, an ambitious vision of the ASEAN Economic Community (AEC) is planned to be fulfilled within this year, which will make it one of major global player in the world, and become the seventh largest economy as well as the most consolidated trade bloc in Asia.
     
         Furthermore, foreseeing robust demands of infrastructure financing in developing countries in Asia, China initiated the proposal of Asian Infrastructure Investment Bank (AIIB), in order to provide sufficient financial support to bridge the gap of financial needs for infrastructure development in the region. The Bank is expected to operate by the end of this year and its establishment has been considered positive contribution to deepening regional economic integration and spurring economic momentum by strengthening physical connectivity in the Asia-Pacific region. Based on these favorable factors, the year of 2015 is likely to be a promising watershed in the history of Asia-Pacific economic integration.

        As the most vibrant and long-standing locomotive in promoting economic integration, APEC has been one of the most dynamic forums and a critical incubator for cultivating various ideas toward a common goal of facilitating free and open trade and investment in the Asia-Pacific region. Meanwhile, it has also played as the most persistent advocate and assiduous actor in carrying out numerous policy measures to enhance regional trade and investment.

        For example, APEC has adopted the global Trade Facilitation Agreement and also set a goal of increasing 10 percent from 2009 levels in regional supply chain performance by the end of this year. This initiative targets at reducing customs bottlenecks for goods at borders by enhancing custom cooperation among APEC members, which expects to improve efficiency, lower operation costs, and facilitate trade flows across APEC countries.

        To continue the efforts and progress made in 2014, one of APEC's priorities in this year is "Enhancing Regional Economic Integration." As a host member in 2015, the Philippines has laid out a plan to organize a task force and launch a two-year collective strategic study on issues related to the realization of a Free Trade Area of the Asia-Pacific (FTAAP), in order to ensure the fruitful results of the Beijing Roadmap for APEC's Contribution to the Realization of the FTAAP to be maintained and carefully implemented.

        Moreover, from a geopolitical aspect, heightened tensions over territorial disputes in recent years have gradually lessened since last fall, while the forecast of moderate economic growth for most countries in the region in 2015 has also played a positive role for allowing national leaders to keep cool head and concentrate on the issues of how to stimulate economic growth, instead of augmenting their existing political frictions. Last year, the lukewarm, but symbolic meeting between Chinese leader Xi Jinping and Japanese Prime Minister Shinzo Abe signified a historical turning point and showed deliberate efforts to turn down their rising suspicion and hostility in recent years.

        In a word, an overall geopolitical environment in 2015, so far, provides a fairly constructive and peaceful milieu in fostering economic integration. Nevertheless, despite various advantageous elements being depicted above, some critical hindrances to the final achievement of regional integration remain challenging in the coming months of this year. Here are possible challenges worthy of further discussion.

        First, despite the latest TPP negotiation just taking place in Hawaii in March, some thorny issues, such as intellectual property rights (IPR), have not been solved, which cast a shadow over the prospect of successfully concluding the TPP this year. Furthermore, with the upcoming presidential election in the United States in 2016, the chance for the Obama administration to obtain the Trade Promotion Authority (TPA) from US Congress seems gloomy.

        If the United States could not attain the TPA to complete the final stage of negotiation, the TPP may eventually turn out to be a failed attempt. At this juncture, Abe's visit to Washington in late April becomes crucial. If two leaders from Japan and the US can effectively narrow their differences and reach consensus in the meeting, this breakthrough may generate sufficient political momentum to compel US Congress to grant the TPA to the Obama administration. Then, the TPP will be more likely to be concluded within this year, given that two largest TPP members are able to settle their differences.

        Second, compared with intensive negotiations among TPP members, the progress and pace of RCEP seem relatively limited and slow. Although these indications do not necessarily suggest that the RCEP may become an illusion in the end, this tepid development certainly invokes some concerns over its quality and future implementation, even if RCEP members eventually reach a deal this year.

        It is estimated that the RCEP accounts for 28 percent of world economy and its implementation will produce income gains of $240-644 billion to the world economy in a decade. However, these inspiring figures are likely to be illusionary, if the final agreement of RCEP fails to live up to its original objectives of being a high quality regional free trade bloc.

       A similar predicament can be applied to the AEC, since it is exactly a product and also a victim of so-called "ASEAN Way." The characteristics of ASEAN Way have highlighted consensus-building, flexibility, mutual respect for differences, etc. The outcome and effectiveness of AEC will be dubious, if it fully abides by and operates in accordance with the ASEAN Way. Hence, what matters is not whether the AEC can be established or not, but to what extent the contents of the AEC can be faithfully implemented by ASEAN members.

        Despite some possible weaknesses, the formation of AEC will certainly generate a big boost to regional economic integration in the Asia-Pacific. At least, it will consolidate its pivotal role as a center of regional integration and spur the interests of its trading partners to further strengthen economic ties with the AEC. This outcome is likely to induce a virtuous circle of competition and accelerate the completion of other regional trade deals.

        In short, the year of 2015 will be a critical juncture for the Asia-Pacific economic integration as a whole. If the above trade initiatives are fully realized as promised, this year will be a historical turning point in the history of Asia-Pacific integration. Then, the question of how to efficiently converge those diverse regional integration initiatives will be a crucial task in the next stage, in which APEC will continue to take a leading role in facilitating discussion and guide a better way to the future.

Explore Reasons of Falling Oil Prices and Analyze the Relevant Impacts

Darson Chiu

        The prices of crude oil have been dropping significantly, which obvious caught great attention around the world. The reasons behind could be complicated, whereas the potential impacts might be complex as well.

        In terms of West Texas Intermediate (WTI), the oil price per barrel was US$ 106.07 on average in June 2014. However, it was priced at US$ 49.56 approximately in February 2015 indicating a 53% of price plummet during 8 months. Such oil price tumble is definitely not unprecedented. An obvious example not too long ago when the WTI dropped from US$ 133.93 in June 2008 all the way down to US$ 39.16 on average per barrel in February 2009, the ratio of crude plunge was a high as 70%. The previous major oil price fall was simply caused by the most recent global financial crisis, and nobody has been trying to debate that. After all, the underlying principle was self-explanatory. On the contrary, the ongoing pricing dip was triggered by multiple reasons, and the world is still paying great attention to its development. In economics theory, the price is decided by demand and supply. To apprehend the trend of crude prices, we thus need to analyze the propositions of both demand and supply sides. Furthermore, as all commodities are priced at the US dollar meaning the fluctuation of greenback also has its significant role in determining the prices of crude oil.

      Of course, weaker world demand is one of the main reasons contributing to the tremendous fall of crude oil prices. By reviewing economic performances of global major economies from the first quarter of 2014 up to dates, we can conclude that the US has been the only economy enjoying a solid recovery despite of an enduring west coast strike paralyzing 29 ports. Back to the story of weaker demand, mainland China has to be put under the spotlight. China's economic growth target for 2014 was set in March last year as 7.5%; it turned out that the actual growth rate was 0.1 percentage point short to meet the mark. In addition to the failure of fulfilling its annual goal, a 7.4% GDP growth rate signaled a new low for the second largest economy in the world for since 24 years ago. Structural reform conducted by Beijing is hurting China's internal demand growth, whereas its external growth has no choice but relying on input substitution policy.

        Besides China's role, the supporting roles of weaker demand should be casted by Europe and Japan. Both Europe and Japan have long lasting debt issues to deal with; imposing expansionary fiscal stimulus package is out of their options. Both of them are still fighting deflation with extremely slack monetary measures. The Bank of Japan (BOJ) introduced its Quantitative and Qualitative Monetary Easing (QQE) in April 2013 and aimed at overcoming years of deflation and anchoring 2% inflation in just about two years from then. The European Central Bank (ECB) kicked off its European style quantitative easing (OE) in March 2015 by purchasing 60 billion euros of debt per month. The ongoing QQE by BOJ and fresh QE by ECB have stoutly suggested that growths in these two areas remained tepid, and monetary operations were the obliged means due to fiscal crash. Ironically, the collapse of crude oil prices has further clouted their efforts to cope with deflation.

        In addition to the episodes of weak demand, over-supply also played a critical role as the main culprit in driving down the crude oil prices. The introduction of shale oil fracking technology widely recognized as an oil production revolution certainly helped shift out the supply curve. Such technological advance has dramatically increased the supply of oil coming from the US. Nevertheless, the global oil prices are not simply decided by supply and demand equations, and the oil market is not in the slightest perfect competition. First, the oil prices are actually determined in the market of oil futures mostly by speculators and to some extent by hedgers. Second, the global oil market is oligopoly, a well known example of econ 101 textbook. Furthermore, this oligopolistic market is dominated by countries with large share of oil reserves but productions. With around 80% of world crude oil reserves, nations of the Organization of the Petroleum Exporting Countries (OPEC) have the say about the quantity to produce and the significant influence on global crude oil prices.

      Saudi Arabia, the leader of OPEC, laid down its subterfuge to drive out competitors by not reducing oil production and thus keeping oil prices low. Phase one would be to push away Russia, 14% share of world oil production. With the continuous economic sanctions by the West on Russia for its invasion in Crimea, plummeting oil prices are further hurting the Russian economy. Phase two would be the plot to shut down shale oil producers in the US. Most of the shale oil producers in the US are small and medium sized companies, and the cost of production on average stands at US$ 50-75 per barrel. As for OPEC members especially Saudi Arabia, their crude oil production is a typical scale economy mode; therefore the production cost per barrel can be as low as US$ 20. With the cost advantage, OPEC has been striving for taking back market dominance from the US Shale oil producers. With collapsing crude prices, the U.S. shale oil industry responded by slowing its blazing growth and holding back expansion plans.

        In addition to the weaker global demand and ample oil supply, stronger US dollar is also pressing down crude prices. The US Federal Reserve launched three rounds of quantitative easing measures since 2008. The US QE generated a huge amount of hot money flowing to emerging economies as well as markets of commodity. The last round of QE ended in October 2014, and the hot money began to retreat and flew back to the States. Besides the moratorium of QE, a potential hike in interest rate to further tighten the monetary policy has been rumored since the second half of 2014. The Federal Funds rate has been set at a range of 0-0.25% since December 16, 2018. A future rate hike will certain strengthen the greenback. As crude prices are denominated by the US dollar, a stronger dollar makes crude cheaper for sure.

        Crude price collapse takes serious toll on oil producers; nonetheless, it is categorically advantageous for Taiwan's economy. Regardless of the fact that the production and trading of certain petrochemical industries were negatively impacted by the low oil prices, the cost-down effect has helped promote overall industrial production and consumption in Taiwan to a certain extent. What ought to be placed a great emphasis on would be the trend of future crude prices. According to the forecast conducted by US Energy Information Administration in March 2015, crude prices will gradually go back up to US$ 60-70 per barrel. That means the Taiwan's economy may be losing the luxury of cost down effect. Nevertheless, that could also imply a rebound in demand above and beyond the stories of supply side and dollar trend. That might not inevitably be a bad news in spite of everything.

(Dr. Darson Chiu is the Director General of CTPECC and Deputy Director of Macroeconomic Forecasting Center, Taiwan Institute of Economic Research.)

RMB Internationalization and its Influences on Taiwan

Darson Chiu

       Tremendous attention has been paid to the fact that the Chinese Yuan (RMB) is the fastest growing currency in terms of for trade settlement. However, the RMB is still very unlikely to replace or challenge USD in this incumbent century. According to a recent report by the Bank for International Settlement (BIS), the USD is 40 times more used than RMB is for business transactions in the world. In that case, why has RMB internationalization become an issue since the recent two decades ago? Why such an issue is always extended to the RMB challenging USD scenario?

       As said by the SWIFT, an international provider of financial messaging agency, the RMB has become the world's 7th most used currency for payments in 2014. Those six other more used currencies would be US dollar (USD), euro, UK sterling, Japanese yen, Canadian dollar, and Australian dollar in rank. There's no surprise that the USD is still the most used currency with its distinguished status and unique advantage. As the biggest economy and largest market for end products in the world, the USD monopoly is expected to go on for years to come.


       In spite of that, the world is not happy with the US irresponsible fashion of leadership. The series of US quantitative easing measures launched during the ''made in US'' crisis and planned to end in October 2014 have long been criticized and described as beggar-thy-neighbor policies. On top of that, Darson Chiu such policies have been adopted by the US Federal Reserves to cope with negative impacts and consequences of the global financial crisis triggered by the US subprime housing bubble burst. Disappointed at the US economic performance, the world intentionally put China on the spot.


       China has been on the rise as a new economic giant in terms of aggregate GDP. It is therefore sensible that people have high hope for China's role on the stage of global economy and thus believe it is time for the RMB to be an international currency. However, currency liberalization is the sufficient condition for currency internationalization. As China is still having exceptionally rigid control over its capital account, RMB internationalization is a goal hard to fulfill in the near future.


       The well known Triffin dilemma concept argued that a nation whose currency being the international currency must be able to supply the currency to meet the global demand. That implies that such a country has to run a current account deficit. The US and its USD would be the case in point. China on the other hand has long been enjoying its trade surplus especially over developed economies like the US and Europe. Many must have some serious doubt that China is even willing to give up its surplus and internationalize RMB.


       Furthermore, using a currency is without a doubt a hard habit to break. As global trade has long been denominated by the USD, it will take a major and unanimous structural change for other currencies to replace RMB. In theory, an international currency must meet three criteria when it is used across borders: a) a medium of exchange, b) a unit of account, and c) a store of value. In other words, an international currency must be a currency for settlement, invoice and reserve all at once. Nevertheless, the RMB has been slowly but surely meeting those criteria, despite the fact many global traders are still used to USD.


       In addition, the mainland Chinese companies have been trading with neighboring economies, mostly Asian countries in RMB. Several central banks in the world including the Central Bank of Taiwan (CBC) have added RMB to their foreign exchange reserves portfolio and might gradually increase the RMB ratio in reserves with its propensity to appreciate in the future. In addition, world major central banks such as the Bank of England (BOE) and European Central Bank (ECB) signed bilateral currency swap agreements with the People's Bank of China (PBOC). So far, PBOC has signed swap agreements with around 40 central banks that could obviously enhance the global acceptance of RMB.


       The RMB internationalization is certainly not a goal to be fulfilled overnight, but it seems to be an inevitable trend at its own slow but sure pace. China has been Taiwan's number one exports destination accounts for 40% of Taiwan's total exports. Since2013, China has also become Taiwan's biggest imports origin accounting for 16-17% of Taiwan's annual imports. The CBC has expressed interest in signing a cross-strait currency swap agreement with PBOC. The Taiwanese government has also indirectly approached Beijing to expand the quotas for RMB Qualified Foreign Institutional Investors (RQFII) hoping to expand offshore RMB business. Some even suggested that Taiwan ought to cooperate with the Shanghai Free Trade Zone and acquire financial benefits as soon as possible.


       There are indeed certain advantages for Taiwanese businesses with respect to the RMB internationalization. The transactional costs should be further reduced as cross-strait trade could be settled in RMB. And there will be more opportunities for Taiwanese to work with Chinese businesses. On top of that, there is also a chance for Taiwan to develop into an offshore RMB financial center. However, Taiwan must be aware of the potential challenge and risk.


       China has tried to localize its supply value chains even before the global financial crisis. As a result, the status of cross-strait trade relations has turned from complementation to competition. The increasing rate of Taiwan's exports to China stood at 115% in 2002 and 118% in 2003 respectively. The rate dropped to 59% in 2004 and further declined to 20% in 2005. The period before financial crisis would be the first phase of China's supply chains localization. In the post crisis era, to deal with shrinking demands of world markets, China launched its second phase of localization policies. Said policies cause serious impacts on Taiwan's exports, as Taiwan's economy has been relying on exporting intermediate goods to China.


       Once China further makes progress towards its currency internationalization, their industries will become even more competitive. Chinese businesses can then save transactional costs by lowering foreignexchange risks, provide better offers and discounts when competing with Taiwanese businesses, and acquiring advanced technology with lesser costs etc. In the long run, the challenge for Taiwan will get tougher when dealing with RMB internationalization. It is therefore critical for Taiwan to seriously and carefully position itself for potential impacts in addition to merely gawking at benefits of future RMB status. How to effectively convert challenges into opportunities would be the key for Taiwan to prevail.

U.S. Domestic Opposition to the Trans-Pacific Partnership

Estelle Ou

       Since 2012, President Barack Obama has called for the renewal of Trade Promotion Authority (TPA) from Congress in order to support U.S. negotiators in FTAs (including Trans-Pacific Partnership, TPP). The TPA, or Fast-Track Authority (FTA), is a key element of defining U.S. congressional authority and providing credibility of legislative implementation of negotiated free trade agreements. With Presidential TPA, TPP provisions will pass through the U.S. Congress without being subject to filibuster in the Senate or further Congressional amendments (United..., 2014). In other words, the TPP provisions will not be hindered in procedural delays or blocked by U.S. lawmakers after negotiations have been completed with other member nations. However, as of now, the President has not been able to acquire TPA from the 113th Congress, which consists of a Republican-Led House of Representatives and a Democratic-Led Senate. Many members of the Democratic Party are concerned with the opinions of lower- and middleclass income individuals, for they consist of the majority voting bloc for the Democratic Party, hence the reluctance of the Democratic-led Senate to approve TPA. Consequently, countries such as Japan have used the absence of TPA as an excuse to prolong TPP negotiations, causing uncertainty in further development


       This paper identifies the main sources of concern and skepticism from lower- and middle- income class individuals about the non-transparency of TPP negotiations, limited participation of U.S. states' representatives, and potential distraction from mainstream issues through the lens of American values such as faith in democratic participation, federalism, and prioritization of domestic issues.

Non-Transparent Negotiations

       Although TPP negotiations are no more non-transparent than any other FTA negotiations, the scope of the TPP, involving 12 other countries across the Pacific Rim, has caused more anxiety among uninformed public than previous FTAs. Democratic values, particularly in the United States, amplify the negativity that is associated with ambitious trade deals negotiated without public input. Therefore, there may be inevitable assumptions that the Obama administration's call for TPA, instead of regular legislative procedures, may be related to fear of extreme public opposition and pressure to amend the agreement once proposed provisions are revealed. As the American people already have limited influence on trade policies, the granting of TPA would further undermine the ability for citizens to monitor negotiations, hindering the treasured practice of democracy. Thus, as elections approach, Congressmen cannot afford to ignore the interests of their constituencies.

Limited Participation from Individual States

       Official participation from individual states has been limited in TPP 19 negotiations. The limitation might cause dilemma for state governments to legitimize the negotiated outcome, as TPP provisions may conflict with the existing state legislations governing local businesses. There have been leaked TPP texts in which analysts claim that U.S. states and the federal government would be obliged to bring existing and future policies into compliance with expansive norms set forth in 26 proposed TPP chapters (Wallach 2012). Particularly, if any state currently has laws that are inconsistent with TPP provisions, foreign corporations may have the right to file lawsuits against the state government for violating the agreement. Furthermore insufficient states' participation in TPP negotiation, on the other hand, might suggest less responsibility for states to implement provisions that benefit the welfare of state residents, challenging the purpose of a state government that is more sensitive to the well-being of its residents. Therefore, granting TPA without defining states' participation might undermine the principle of U.S. federalism and result in backlash from conservative citizens and consumer advocacy groups.

Distraction from Domestic Issues

       Although President Obama came into his second-term with an agenda of boosting the economy, which the push for free trade agreement fits right in with, several challenges have emerged and hindered him from focusing efforts on the TPP in the past two years. Recently, with policies addressing the rise of the Islamic State of Israel and Syria, and increasing fear of the Ebola virus, the Obama administration has received countless criticism, from both Congress and the public, for its incompetence in confrontingforeign issues. As a result, President Obama's foreign policy approval ratings and popularity are at a record low (Nelson 2014). Furthermore, as the 2016 Presidential election approaches and political parties seek to boost their credibility, domestic issues, such as immigration reform, health care reform, and income inequality have become priority issues among both the Democratic and Republican parties, not to mention mainstream media. Although the TPP is a potentially significant issue for the United States, however, since the beginning of TPP negotiations in 2010, U.S. news media have not covered it as frequently as other domestic issues, resulting in lack of public knowledge about its existence. Therefore, the passing of TPP will neither likely be a mainstream topic on news media for the 2016 Presidential elections, nor, for the majority of citizens and voters, a major means of evaluating the efficiency of the newly elected Congress. Thus, many Congressmen may see a push for foreign trade policy as unnecessary for President Obama's time remaining in office and even a distraction from mainstream issues.

Conclusion

       Despite the Democratic-led Senate's non-approval of TPA, the results of the 2014 November midterm elections might suggest a different approach. Results show the Republican Party winning the majority of seats in the Senate. Thus, as the Republican Party has been known to favor free trade agreements more than Democratic Party, the possibility of granting TPA might be higher. However, the aforementioned major domestic oppositions could still prevent the Obama administration from acquiring the sixty votes needed to approve the TPA in the new Senate and House as the newly elected Republican Congress has indicated that domestic issues such as health care reform, immigration reform, and energy resource investments are priority issues to tackle with. Thus, despite increased discussion on the benefits of a Republican-led Congress for TPP negotiations, actual approval remains to be observed.

Reference 

United States Senate. November 19th. 2014, http://www.senate.gov/reference/glossary_term/filibuster.htm


Wallach, Lori . ''A Stealth Attack on Democratic Governance.'' The American Prospect.
March 13th. 2012. http://prospect.org/article/stealth-attack-democratic-governance


Nelson, Colleen McCain . ''Obama Foreign Policy Approval Rating Hits Low-
Water Mark.'' The Wall Street Journal. October 15th. 2014. http://blogs.wsj.com/washwire/2014/10/15/obama-foreign-policy-approval-rating-hits-low-water-mark/?KEYWORDS=Obama+approval+rating

Realignment of Global Value Chains under TPP and RCEP

Eric Chiou

        In recent years, the significance of global values chains (GVCs) with regard to regional economic integration has drawn much attention. The rapid expansion of GVCs has broadly spread around the world and its importance has also been widely recognized. Since the initial study conducted by the collaboration work between the OECD, the WTO, and the UNCTAD, the positive effects of GVCs in terms of boosting economic growth and development, helping job creation have been highly anticipated.


        As a result, policy-makers in many economies have adopted various policies to enhance their GVC participation in hope of stimulating economic growth, fostering job creation, and facilitating industrial upgrading. They hope that through actively participating in GVCs, many promising advantages, such as accelerating the catch-up process of developing countries, facilitating convergence between different development levels of economies, and upgrading production capabilities could be fulfilled.


        Over the past decades, the Asia-Pacific region has been one of the most successful cases in harnessing GVCs. The robust economic development in the Asia-Pacific region has lied in the intertwined networks of supply chain connectivity, which allow different economies to base on each comparative advantage and partake in GVCs for mutual benefits.


        Some studies even suggest that active participations by APEC members in GVCs in the past decades have allowed most them to enjoy lasting economic growth and business resilience in the ups and downs of unpredictable global economy. As the most important regional economic forum in the Asia-Pacific region, while acknowledging the importance of GVCs, APEC has initiated several action plans to facilitate the development of GVC in this region. Specifically, APEC has launched two Trade Facilitation Action Plans (TFAPs) to lower related trade transaction costs within the region.


        While the above two plans had reached significant achievements, APEC decided to shift its focus to the broader issue of supply chain performance and launched the Supply Chain Connectivity Framework Action Plan (SCFAP). This Action Plan sets a target of a 10 percent improvement in supply chain performance in terms of time, cost and uncertainty by 2015. On the other hand, while the soundness of supply chain connectivity may affect multinational corporations' decisions on where to invest and where to locate their production bases, the arrangement of regional economic integration exerts overwhelming weight on the performances of supply chain connectivity.


        Since different designs of regional economic integration provide varied incentives for multinational corporations to reconsider their strategies of GVCs in terms of where to produce and where to sell, one can expect that the consequences of regional economic integration are likely to alter existing comparative advantages, change business calculation of multinational corporations, influence supply chain connectivity, and reshape regional production networks.


        Given that TPP and RCEP have represent the major two blueprints of regional integration in the Asia-Pacific region, it is important to explore possible impacts of TPP and RCEP on supply chain connectivity and how these influences will affect some industries. Particularly, the importance of supply chain is likely to vary by different industries, while the impacts of different regional integration on different sectors also tend to be dissimilar. Hence, the consequences of regional integration may change the existing status of comparative advantages in different sectors across economies in the region, while the changed comparative advantages among economies are likely to affect multinational corporations' calculation of GVC arrangement in the region, so as to lead to the possible shift of GVCs.


        Based on the outcomes obtained through utilizing the Global Trade Analysis Project (GTAP) analysis on three selected sectors, electronics sector, machinery sector, and automobile sector, which are heavily dependent on regional supply chain connectivity, the following findings are noteworthy.


        First, a state's increased economic welfare due to participating in regional integration and GVCs does not mean that the state's each sector will gain benefits equally. Based on the principle of international division of labor and comparative advantage, regional economic integration is likely to benefit originally competitive sectors, but to further devastate vulnerable sectors in an economy. On the other hand, while regional integration may level the playing field by eliminating tariffs, it can accelerate the speed of industrial relocation to some economies with lower labor cost or more convenient access to markets, which may further erode the existing output of industries.


        Second, different routes of regional integration initiatives will not only pose different impacts on each economy's sectors, but may also shape and alter the sectoral competitiveness of each economy. In other words, based on the assessments of its industrial interests under different regional integration initiatives, an economy may prefer one route of regional integration over the others. On the other hand, if an economy does not make a prudent assessment before participating in regional integration, it may unintentionally let its relatively competitive sectors encounter more intense competition after joining regional integration.


        Third, the findings also suggest that both trading camps, TPP and RCEP, do not have a significant gap in terms of their development of regional supply chain connectivity. Although TPP may have the upper hand now, it also means that RCEP has huge room for improvement if RCEP can be concluded as a high-quality regional integration.


        At the sectoral level, the findings do indicate that some developing economies could generate remarkable growth of output in some sectors after the implementation of either TPP or RCEP. But this is not true for some developed economies. In other words, one of consequences of the formation of TPP and RCEP is to alter industrial comparative advantages in different sector across countries in the Asia-Pacific region, while this changing configuration of comparative advantages across economies seem to be more favorable to developing economies in these selected industries in terms of their domestic industrial outputs, rather than to developed economies.


        Although these changes of domestic industrial outputs in individual economies may reveal some important signs of the possible shifts in GVCs, this indicator is hardly the only and decisive factor in suggesting the shift of GVCs, since many factors would affect multinational corporations' consideration of global strategies and production arrangements.


        Despite the limitations of sketching the picture of changing GVCs under TPP and RCEP, one of important policy implications revealed from the above analysis is that leaders of individual economies should be cautious and foresee the possible shift of regional supply chains after the formation of any regional integration initiatives. They should be prepared with prudent and welldesigned strategies to alleviate negative impacts, while maximizing positive benefits from upcoming challenges of the realignment of global value chains in the aftermath of varied versions of regional economic integration.

Policy Alternatives to Sustain Long Term Economic Growth

Darson Chiu

        It has been two years, 2012 and 2013, which Taiwan's economic growths laid beneath the averaged world growth rates. Is this turning into an accepted incident? Actually, there's a sign showing that Taiwan's economy might be able to turn the tables on the distinct disadvantage, so we probably do not need to worry about that at least for the short term. What this island actually needs would be policy alternatives to sustain its long term growth.

        One of the optimistic signs would be that the U.S. housing and job markets have been recovering in recent times owing to several rounds of quantitative easing measures. Although said measures taper off, they do help the demand back to an expansion mode. As the U.S. market is the world's largest end products destination, supply value chains in the region of Asia- Pacific have started to be actively revived again. Since 1980s, Taiwan has been playing a key role in regional supply value chains; whereas more than 75% of Taiwan's present exports are categorized as intermediate goods. Therefore, the revitalization of supply chains in the region will certain help pick up Taiwan's exports of this year.

        Taiwan's degree of reliance on exports stood at 70% for the past decade, and the degree has been increasing in recent times. That means a strong exports growth can be considered as a big push for Taiwan's economic growth. The most recent forecasts of 2014 world economic growth rateconducted by global creditable agencies such as World Bank, IMF, OECD, and Global Insight Institute etc standing at 3.0% on average. By comparison, Taiwan's GDP of this year is predicted to grow by 3.28% by the Taiwan Institute of Economic Research. It means there's a chance that Taiwan may outgrow the world economy by a slim margin when the actual numbers are out.

        A potential challenge could be addressed in the short run or foreseeable near future; however, the long term issues hindering Taiwan's growth capacity in the long run still remain. First, Taiwan's status in regional supply value chains has been challenged by the downstream economies, and the challenge mainly coming from mainland China. Second, Taiwan has been continuously losing overseas market shares due to insufficient free trade agreement (FTA) coverage.

        Due to the labor cost hike, Taiwan has been outsourcing its downstream manufacturing and packaging processes mostly to mainland China since early 90s and some to Southeast Asia even earlier. Outsourcing is necessary to better allocate human and other resources among countries that are in economic and trade relations. Both sides of Taiwan Strait had been benefitted from such a business model until global financial crisis triggering the European troubles.

        Nevertheless, the economic and trade relationship between China and Taiwan has been changing from a cooperative to more of a competing mode. Because the demand of China's biggest exports destination-Europe has been shrinking ever since the outburst of European sovereign debt crisis, China has adopted a policy of import substitution or supply chains localization in response. Instead of purchasing intermediate goods from Taiwan, mainland China has been buying some less costly parts and components from local and other suppliers or making them on their own. The purpose of said Chinese policy would be to reduce production costs, and it has been hurting Taiwan's exports seriously.

        Besides China and Taiwan, East Asian countries including Japan, South Korea, Malaysia, Singapore, and Thailand and many more are all involved in the regional supply value chains. However, the Chinese policy seems to cause more harm on Taiwan's economy than others. The reasons behind would be a) economies such as Japan and South Korea have had sufficient technological advantage to stand firm on their positions and b) other economies especially Southeast Asian countries do not depend on the Chinese market as much as Taiwanese firms do.

        Why can't Taiwanese suppliers hold their positions in supply chains and overcome downstream challenges? If the intermediate goods designed and produced by Taiwanese firms are irreplaceable and critical, China's import substitution acts will pose no threat at all. South Korea's research and development (R&D) expenditures over GDP ratio is around 4.36%, which is the highest ratio among all OECD countries. Japan's R&D over GDP ratio stands at 3.35%. By comparison, Taiwan's R&D over GDP is about 3.06%. Being less dedicated in R&D has made Taiwan more vulnerable to challenges.

        Therefore, the first structural reform that Taiwan needs to secure its long term growth would be to pursue technological improvement through R&D. As over 90% of Taiwanese companies are small and medium sized, and they probably lack of funds to conduct their own R&D. And this is where the government could and should jump in to guide them and lend a helping hand. Japanese and Korean governments' policies to enhance corporate capacity building would be a good reference for the Taiwanese government to refer to.

        The reason why the Taiwan economy has been relying on China and losing market shares at the same time would result from Taiwan's lacking sufficient FTA coverage. Many have been stressed how crucial it is for Taiwan to join the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) so as to effectively enhance Taiwan's FTA coverage. The Ma administration has also issued a special order directing all ministries and government agencies to join forces and pursue both FTA processes simultaneously. It is understandable why Taiwan is in such a rush. The FTA coverage ratios of China, Japan, and South Korea stand at 29.79%, 18.93%, and 36.81% respectively, whereas Taiwan's coverage is only 9.69%. Since Taiwan is way behind the leading group, the government has been striving to pick up the pace and try to catch up. However, a FTA strategy is needed; otherwise the joint efforts will be futile.

        The second step that Taiwan ought to take to sustain its economic growth in the long run would be to prioritize the multilateral FTAs that provide Taiwanese companies most benefits and cause fewer impacts. It is hence suggested to aim for RCEP before TPP. First, RCEP members include Taiwan's number one and number two exports destinations, mainland China and Southeast Asia. TPP on the other hand is all about the US market. Although it's the world largest end products market, Taiwan is basically a supplier of intermediate goods but end products. Second, the averaged tariffs of RCEP are 7.7%, and overall tariffs of TPP are around 4.4%. That means TPP requires more market opening and less protection, which could cause more damages on Taiwan's defenseless industries. In other words, Taiwan needs more time to prepare itself for TPP. Join RCEP first and enhancing industrial resilience while applying for TPP membership would be a more feasible approach for Taiwan to address its long-standing constraints for growth.

Implications of Taiwan to Become a Member of Trans-Pacific Partnership

Darson Chiu

            It has long been discussed and stressed how important it is for Taiwan to join the Trans-Pacific Partnership (TPP) agreement. Main arguments by Taiwanese governmental and academic circles were about how Taiwan would be seriously marginalized without a TPP membership due to the fact that Taiwan was a heavily external trade oriented economy. However, those arguments were derived from the perspective of this island but others. I doubt and wonder how these Taiwan-centered arguments can even be convincing to existing TPP members. It is noted that to become a member of TPP will take a consensus from existing members. That simply means it only takes one vote to exclude Taiwan out of the integration process. Therefore, in order to convince all members to receive Taiwan, how Taiwan's membership can bring economic benefits to the entire region would be the key.





            There are actually several major reasons why the existing members of TPP agreement should invite and welcome Taiwan to join this multilateral trading process. Taiwan's participation in the TPP can indeed add to their national interests.

            First, Taiwan's membership in TPP can help strengthen the supply value chains in the region of Asia Pacific. Taiwan has been intensely and deeply integrated in the value chains of Asia-Pacific region. The most obvious evidence would be Taiwan's exports structure. Above 70% of Taiwan's annual exports to other regional destinations would be intermediate goods. In addition, more than 50% of Taiwan's exports orders have been produced overseas, mostly in economies of Asia-Pacific region. If Taiwan is not joining the TPP, the process will very likely make the supply value chains to shift and eventually push Taiwan away. Why does it even matter to other TPP members? A new set of supply value chains generated by economic policies or treaties will not be able to create as much economic welfares for the entire region as the origin set of chains caused by the natural rules of supply and demand by economic theory. For that reason, Taiwan's status in supply value chain and its membership in TPP will benefit the region and help more optimally allocate regional resources.

            Second, TPP as the trading rules charted and set mainly by the United States of America would be used to supervise and manage US's East Asian trading partners. Before the formation of TPP, the US had been stressing the significance and consequences of Trans-Pacific imbalances (TPI). Some US trade experts believed that the reason why US had to suffer from huge trade deficits only because some East Asian counterparts that did not play fair. Issues such as protection in intellectual property rights (IPR) and vested interest of state-owned enterprises (SOE) would be the cases in point. When the US paid its attention to the so called "high quality" TPP, it is sensible that the US seized the chance and used the original P-4 agreement as a mechanism to take care the long-lasting matter. In a nutshell, the purpose of TPP is to deal with the problem of TPI. For that reason, main contributors to TPI such as China, Japan, South Korea, and Taiwan should all be included in the high quality process. Japan has already attended the negotiations of TPP. The US has also extended its welcome for South Korea to join in. China has announced in public that it will not rule out the possibility to take part in the TPP in the future. With the inclusion of Taiwan, the TPP can better be utilized to manage TPI. This is more of a US based reason. However, the US is now leading the TPP negotiations. Although a TPP membership requires a consensus, a solid support from the US will certainly make a difference.

            

            

            

            

            

            

            

            

            

            

            

            

            

            

            

            

            Third, TPP members will gain further access to the market of Taiwan with Taiwan's participation in TPP in the future. According to the 2013 WTO Tariff Profiles database, the simple average most favored nation (MFN) applied tariffs in Taiwan stands at 6.1% in general, 16.4% for agricultural goods and 4.5% for non-agricultural products. By comparison, the simple average MFN applied tariffs of current 12 TPP members on average would be 4.4% in general, 8.4% for agricultural goods and 3.8% for non-agricultural products. Therefore, Taiwan's TPP membership will come with the function of peer pressure that can help speed up Taiwan's pace in liberalizing its market and lower the barriers for TPP members. In other words, Taiwan's TPP membership will help Taiwan to speed up its economic reform for sure. As most TPP members are Taiwan's close economic partnership, they probably are more willing to work with an open economy.

            Fourth, Taiwan's membership in TPP will certainly help other TPP members to access to the market of Mainland China. Taiwan is the Asian economy that understands the Chinese market better than any others. Taiwan shares the same language, customs, and cultures, etc with China. Taiwanese businessmen have long been investing in China and doing business with the Mainland Chinese public as well as private sectors. Although the Taiwanese market implies a rather small size one with a population of only 2,300 million, it's actually a gateway to the world potentially biggest market with 1.3 billion populations. The cross-Strait Economic Cooperation Framework Agreement (ECFA) will also help Taiwan to better serve as the role as a platform to conduct economic activities with the world's second largest economy. This reason only sustains if Taiwan becomes a TPP member and China does not or both China and Taiwan join the TPP together. We shouldn't discard the likelihood of China and Taiwan becoming TPP members at the same time. Both sides of the Taiwan Strait joined the WTO, APEC, and even PECC in chorus could be good models to duplicate

            

            

            

            

            

The Dynamics of Multilevel TPP Negotiations

Eric Chiou

          International trade negotiations have been characterized by a model of so-called "two-level game." This model highlights a challenging predicament in which a chief negotiator faces pressures from both external trading counterparts and domestic interest groups when undertaking international trade pact negotiations.

          Nevertheless, it is noteworthy that the complexity and development of Trans-Pacific Partnership (TPP) negotiations among 12 members may have gone beyond the traditional two-level game model and can be depicted as a new form of "multilevel game." The latest TPP development regarding the US-Japan trade talks provides an intriguing case to illustrate the characteristics of this newly emerging trade negotiation.

          To boost momentum to TPP trade talks and to reassure its allies in Asia, US President Barack Obama paid a week-long visit to Asia by visiting Japan, South Korea, Malaysia, and the Philippines in April. Many believe that this trip signaled US determination to implement its "pivot-to-Asia" policy with concrete action.

          In addition to strengthening strategic alliances with its existing allies, on economic front, the most important task for Obama was to increase impetus on TPP talks with Japan. Nevertheless, it seemed that Obama had failed to achieve this goal, since in the US-Japan Joint Declaration in April, it only stated that the two "have identified a path forward on important bilateral TPP issues," and that "this marks a key milestone in the TPP negotiations."

          Since the US began taking a lead in TPP talks in 2009, the complexity and intricacy of this multilateral negotiation process have been broadly recognized, given its wide range of coverage on various issues. Thus, even after more than 20 rounds of negotiations, there is no explicit sign to see the conclusion of TPP treaty.

          For the United States, TPP serves as a multi-functional tool to achieve its national interests. Strategically, it plays a crucial economic element in support of US pivot-to-Asia policy, for bolstering US economic involvement and relevance in the region. Economically, TPP is viewed as an effective policy instrument to accomplish Obama's economic objectives of creating more US jobs, boosting US exports, and eventually stimulating its economic growth.

          However, Japan's entry to TPP has dramatically increased difficulties in TPP negotiations. Furthermore, TPP negotiation has transcended the traditional sense of multilateral trade talks, since TPP allows its members to settle their differences via bilateral negotiations, while undertaking multilateral talks simultaneously. These features imply that a chief negotiator in each TPP member has to adroitly make an accurate assessment of ongoing multifaceted negotiations and aptly utilize leverage to boost bargaining power for maximizing profits while minimizing costs on both bilateral and multilateral negotiation tables.

          In other words, this chief negotiator is also forced to engage battles on both domestic and external fronts. On the one hand, the negotiators might want to transform domestic opposition against the trade deal into bargaining chips for asking few concessions from other negotiating counterparts. On the other hand, they might also want to strategically translate external pressures on opening domestic market during the negotiation process into positive momentum on undertaking critical economic reforms.

          As a result, the TPP negotiations have been undertaken through this multi-level, intertwined, and dynamic interaction. For example, on the USJapan bilateral trade talk, Washington's primary goal has been persuading Japan to open up its market for American agricultural products, while Tokyo has persisted in protecting five sensitive agriculture categories intact from foreign competition, including beef and pork, dairy products, sugar, rice, wheat and barley.

          To break up Japan's resistance, the US Trade Representative (USTR) has utilized multiple strategies. The chief of USTR, Michael Froman, argued that all TPP members expected Japan to allow market access on agricultural products, in order to move TPP negotiation forward. On domestic front, several US Congressmen across the aisle signed on a letter to USTR and the US Department of Agriculture, urging them not to make a TPP deal with Japan, if the latter refuses to eliminate tariffs and non-tariff barriers on agricultural goods.

          Moreover, Obama and US senior trade officials announced on different occasions that any breakthrough in TPP negotiations will send a positive signal to Congress on granting the Trade Promotion Authority (TRA) to the Obama administration. In other words, Washington has tried to transform its domestic discord on TPP into pressure on other TPP members, especially Japan, to obtain more concessions. Finally, Washington has attempted to take this window of opportunity through Obama's visit to finalize this trade deal with Japan by imposing political and diplomatic pressures. Nonetheless, it has failed.

          Facing mounting pressures from Washington, Japan has strived to set a bottom line for its tolerable concession by concluding the Australia-Japan Economic Partnership Agreement (EPA) in early April. Tokyo's strategy is to provide Australia, a US competitor on agricultural products, with an early and acceptable range of market access to Japan, in order to persuade Washington to consent to its terms as Australia did. By doing so, Tokyo intended to sabotage a possible coalition gathered by TPP agricultural exporting members to jointly push Japan for more comprehensive market access on a multilateral TPP negotiation table. The strategy of "divide and conquest" gives Japan with more leeway to focus on demands from the US and New Zealand, respectively, while not severely damaging the core political support of Abe's ruling party.

          As for Australia, its strategy is to get "two bites of the cherry" by negotiating with Japan through a bilateral EPA and a multilateral TPP. In other words, signing an EPA with Japan does not mean that Australia has submitted its right to request Japan for additional market access in TPP negotiation. Furthermore, it is reported that the Australia-Japan EPA also covers a most-favored nation (MFN) clause for cheese products, which would ensure Australia to obtain the same treatment, if Japan provides more access to other counterparts in the same sector in future trade treaties.

          Additionally, the formation of Australia-Japan EPA is partly derived from Canberra's political calculation. Despite Japan's rejection to expand agricultural market access in the EPA, Australia's assent to Japan's terms might be attributed to following reasons. First, the Abbott administration has been eager to make tangible achievement in distinction with the former Labor Party government. Second, the Abbott administration has publicly declared its policy objectives of concluding free trade agreements with South Korea, Japan, and China by the end of 2014. Hence, it is crucial for Australia to sign an EPA with Japan before the deadline. Finally, Australia-Japan EPA provides Australia's agricultural products with a first mover advantage in Japanese market, favoring Australia's products over others while not sabotaging its future claims for more market access from Japan.

          The above case on US-Japan agricultural goods negotiation shows the intricacy and complexity of ongoing TTP negotiations. The dynamic process of TPP talks, coupled with both bilateral and multilateral bargaining approaches, requires relevant negotiating members to devote enormous time and resources to vigilantly observe other counterparts' each step, in order to generate sagacious and foresighted decisions. Undeniably, the demanding features of TPP process have posed a critical challenge to existing TPP members and significantly raised the level of uncertainty regarding the future success of TPP.