Regional Economic Competition in East Asia

I I Prospects for Regional Economic Order in East Asia II Peaceful and Prosperous Regional Economic Order III Other Forms of Regional Economic Competition

I. Prospects for Regional Economic Order in East Asia 3  Leadership for the RCEP is less visible, compared to the TPP  RCEP is pressured by TPP to aim at a high standard FTA to a certain degree  Similar organization between RCEP and TPP  Complex challenges to both RCEP and TPP  Each influences the other in progress, members, provisions, etc.  Impact of TPP on RCEP is much greater than RCEP’s effect on TPP TPP in its final stages vs. RCEP in its earlier stage  Both support the emerging international production network (IPN)  Facilitate trade among members of the supply chain  Reduce the “noodle bowl” effect of sub-regional FTAs  Contribute to creating a wider regional economic integration (FTAAP) I-a Competition between RCEP and TPP

I-b Prospects for FTAAP I. Prospects for Regional Economic Order in East Asia  A merger between RCEP and TPP is unlikely to happen in the short or mid-term  Big gap in quality between the two  Early signs of ambition for convergence are not promising  Stronger desires to protect special and sensitive products for RCEP  The development of the FTAAP is expected to take many years  Need studies, evaluations and negotiations among members  Absence of political will and anti-free trade politics  At the 2014 APEC Summit, APEC leaders agreed to launch "a collective strategic study" on the FTAAP  Regarded as an attempt to distract from TPP being pushed by the U.S.

5 II-a Roles of individual members  ASEAN: facilitate economic integration through AEC and ASEAN+1 FTAs  ASEAN’s economic role is reinforced by political considerations; strategic location astride East Asia’s critical trade routes neutral position in the traditional tensions of Northeast Asian countries intermediary role between China/US and China/India  China, Japan and Korea: pursue a high level of liberalization for CJK FTA  High standards as a platform for RCEP  China needs to pursue comprehensive economic reforms  US: successfully conclude the TPP negotiation and proceed the legislative process (Trade Promotion Authority; TPA) II. Peaceful and Prosperous Regional Economic Order

6 II-a Roles of individual members  All members: stimulate production network in the region  Deeper trade agreements  Simplified approach to ROO harmonized ROOs co-equality of rules accumulation of value contents  Ensure that the agreements are never out of date (a living agreement) II. Peaceful and Prosperous Regional Economic Order

7 III-a The Asian Infrastructure Investment Bank (AIIB)  Could be a rival or/and a complement to ADB and the Washington institutions  A countermeasure to the western-dominated development banks(World Bank, IMF, ADB)  A complementary source for infrastructural funds in Asia  Expected to contribute to the regional economic integration in the Asia-Pacific  Need to adopt international best practices  Clarify in details how the AIIB would; implement practices of governance, environmental and social safeguards, procurement, etc. work with or add values to multilateral development institutions (ADB and WB)  Address concerns for China’s infrastructure lending history and practice in Africa III. Other Forms of Regional Economic Competition

8 III-a The Asian Infrastructure Investment Bank (AIIB)  Korea may join China's move only if certain issues are clarified  Korea is still in a dilemma on what sort of strategic choices to make  Need discussions with China on the governance structure  China’s growing economic stature should be reflected in the governance structure of global institutions  Reforms of global institutions are needed III. Other Forms of Regional Economic Competition

9 III-b Internationalization of the RMB  By the end of 2014, RMB ranked 5th as the most traded currency  According to SWIFT's report, at 2.2% of SWIFT payment behind JPY (2.7%), GBP (7.9%), EUR (28.3%) and USD (44.6%)  The average monthly RMB trade settlement up from CN ￥ 320 billion in 2013 to ￥ 480bn in 2014  The Renminbi Qualified Foreign Institutional Investor (RQFII) quotas extended to five other countries UK (15 Oct 2013), Singapore (22 Oct 2013), France (20 June 2014), Korea (18 July 2014), Germany (18 July 2014), and Canada (8 Nov 2014), each with the quotas of ￥ 80bn except for Canada and Singapore ( ￥ 50bn) Previously, only Hong Kong was allowed, with a ￥ 270bn quota  The path of RMB internationalization can be divided into three phases  Trade finance  Investment  Reserve currency (in the longer term) III. Other Forms of Regional Economic Competition

10 III-b Internationalization of the RMB  The road to the RMB Internationalization is far from complete  Size of the home economy relative to others (justified)  Economic stability in the form of low inflation, small budget deficits and stable growth (justified)  Strong official and institutional support (justified)  Deep, open and well-regulated capital markets (in a deliberately slow progress) opening up of China’s onshore capital market greater access for foreign investors to local capital markets deeper global RMB liquidity and wider cross-border flow channels III. Other Forms of Regional Economic Competition

11 III-c Financial Cooperation in East Asia  Monetary integration in East Asia  Should not become a goal anytime soon whether it should become so at a later stage is also open for discussion  Managed floating regime guided by currency baskets can be one option  Costs and benefits of international financial integration to be reconsidered  International financial integration does not automatically lead to an efficient allocation of capital  Greater degree of regional financial integration increases contagion risk  In financially integrated areas, close cooperation among national regulators is needed ensure that not only national regulators but also appropriate supranational regulatory structures are put in place III. Other Forms of Regional Economic Competition

12 III-c Financial Cooperation in East Asia  Prevention and resolution mechanisms are needed against crisis  Beef up the CMIM to make it functional increase the fund size further and reduce the IMF-linked portion of 70% for Korea, only $11.52 billion available with the IMF-delinked portion  currency swap with the US Fed of $30.0billion in 2008  Surveillance and monitoring of regional financial markets to be strengthened  Strengthen the newly created AMRO currently staffed with a director, few economists, and supporting staffs larger resources are needed to carry out meaningful macroeconomic and financial market surveillance III. Other Forms of Regional Economic Competition

13 III-c Financial Cooperation in East Asia  Banks to be recapitalized swiftly after crisis  Financial authorities must respond swiftly and decisively to banking crises with rapid recapitalization of banks adequate legal and institutional framework needed for the resolution procedures III. Other Forms of Regional Economic Competition