ITC Executive Director speech at the High Level Dialogue on ASEAN Italy Economic Relations

6 June 2019
ITC News
Speech delivered by ITC Executive Director Arancha González at the High Level Dialogue on ASEAN Italy Economic Relations
Hanoi, Vietnam

The outlook for global trade remains uncertain. Looking back a decade, the financial and economic crisis of 2008-2009 disrupted world trade flows because growth and demand collapsed in major economies. But governments kept markets broadly open, and trade was a contributor to growth during the slow if steady recovery. Companies continued to be able to invest in Factory Asia, confident that goods and services produced within ASEAN countries would have ready access to markets along the rest of their value chains.

Yet, today, opportunities for trade-led growth are once again in jeopardy. Protectionist rhetoric has been followed by unilateral action. Tariffs on a steadily larger share of traded merchandise are not just diminishing trade flows and disrupting financial markets, they are giving investors reason to hesitate about when and where to invest. Discouraging investment in turn lowers future prospects for growth and trade.

In February, world trade volumes decreased by 1.7% month-on-month (according to the CPB/Dutch Bureau of Economic Analysis). The OECD projects that global growth will slow to 3.2% this year, down from 3.5% in 2018.

What does this mean for trade in the ASEAN region and beyond?

Uncertainty in global trading conditions poses a threat to ASEAN countries’ abilities to continue to reap the benefits of open markets. With the exception of Vietnam, which has registered strong export growth in recent years, trade in ASEAN countries has mirrored the slow growth seen elsewhere in the world. Nevertheless, value chain investment in ASEAN remains an important driver of job creation with Southeast Asia and in the rest of the world.

ASEAN’s largest trading partners are China and the United States. ASEAN exports to China hit a record of $223 billion last year, an increase of 19% from 2017. Countries in the region rightly fear they may be caught in the crossfire of trade tensions between the country’s two largest export markets. ASEAN is doubly exposed to the ongoing trade tensions: first to any slowdown in the large Chinese consumer market, and then to disruptions in international supply chains that run through China.

Thailand’s Minister of commerce recently noted that Thailand could lose between $5.6 billion to $6.7 billion in exports this year as a result of higher US tariffs on Chinese goods, with shipments of electronics and automobiles expected to decline sharply. Similar dynamics could affect other ASEAN economies. UNCTAD estimates that exports of East Asian regional value chains could be reduced by as much as $160 billion in light of the trade tensions.

For the ASEAN region, the stakes are not just about the threat to existing trade relationships, but in terms of trade opportunities foregone. At ITC, as part of our work to help countries target their trade promotion efforts more effectively, we have developed analytical tools to identify high-potential exports and quantify export opportunities. Our estimates suggest that the ASEAN region has $705 billion of unused export potential globally over the coming years. Of this room for export growth, nearly one-third, over $209 billion, is in the United States and China.

But how ASEAN should respond? In response to all of the uncertainty, ASEAN countries need to take strategic action to confront these risks.

First, by enhancing efforts to strengthen regional integration
Second, by targeting new markets for export diversification.
Third, by building more resilient societies at home, by which I mean economic inclusion and environmental sustainability.
And fourth, by supporting a stronger multilateral trading system

ASEAN has worked to strengthen regional integration. This has yielded dividends in terms of intra-regional trade. Total exports within ASEAN – that is, from one ASEAN member to another – exceed the bloc’s exports to the US or China alone. Nevertheless, only about one-fourth of ASEAN countries’ exports are destined to stay within the region – compared with nearly 65% in the European Union. There is considerable room for trade growth within ASEAN: ITC estimates put unused intra-regional export potential in the neighbourhood of $128 billion.

ASEAN regional trade integration has been effective at removing tariffs. However, non-tariff measures continue to constrain intra-regional trade and prevent businesses from taking advantage of export potential in sectors such as electronics and farm products.

In a business survey ITC conducted across ASEAN, over half of companies reported facing difficulties with burdensome non-tariff measures. Many of the biggest obstacles occur in traders’ home countries, and arise from trade-related procedural requirements related to time delays, the solicitation of information payments, or unusually high fees and charges. Importantly, these challenges are felt most acutely by micro, small, and medium-sized enterprises, or MSMEs, a point I will come back to later. Streamlining trade procedures in the ASEAN region would help spur trade within the region while enhancing businesses’ competitiveness on the global stage.

In addition to enhancing regional integration, ASEAN countries can also increase their efforts to take advantage of opportunities in other promising markets. Currently, more than one-third of ASEAN’s exports - and nearly half of Vietnam’s exports - are concentrated in only three markets. Given the trade tensions among its top partners, ASEAN could usefully focus on expanding sales to the EU. Per ITC calculations, ASEAN’s export potential to the EU is $223 billion, of which 52% remains untapped.

The EU market offers over $64 billion in room for exports to grow in sectors such as electronics, apparel, machinery and footwear. Vietnam has room for an additional $2.8 billion in export sales to Italy alone, for products including coffee, footwear and seafood.

Realizing this unused potential in the EU will require further efforts at meeting sanitary and phytosanitary and technical requirements, conformity assessment measures and rules of origin.

To be resilient in the face of uncertain and changing circumstances, ASEAN nations need to make the best use of all of their available resources. This means ensuring inclusive participation in their economies – and ensuring that those economies are environmentally sustainable.

Micro, small, and medium-sized enterprises play a critical role in making economies more inclusive. Because they account for the vast majority of jobs, the productivity and competitiveness of MSMEs shapes wages and working conditions for large sections of society. Businesses that successfully trade tend to become more productive; this is why connecting MSMEs to international value chain matters so much for inclusive growth.

ITC is actively engaged in fostering the competitiveness of MSMEs in the ASEAN region. I have already mentioned business surveys on non-tariff measures. These surveys have helped identify strategic priorities for regulatory reform in Cambodia, Indonesia, the Philippines and Thailand.

Our SME Competitiveness Surveys in Cambodia are highlighting key bottlenecks facing exporters. In Lao PDR and Myanmar, ITC is collaborating to help local MSMEs and other stakeholders gain more from ASEAN integration through trade policy reform and capacity building for trade facilitation.

ITC’s Global Trade Helpdesk, a joint initiative with the WTO and UNCTAD, is a free, online one-stop-shop for information about tariff and non-tariff measures. We are working with ASEAN countries, such as the Philippines, to simplify market research and ensure seamless access to key market information for MSMEs in the region.

Successfully integrating regional SMEs into intra-regional and EU-destined value chains will require significant investments in hard and soft infrastructure. Soft infrastructure, by which I refer to the trade-related policy and institutional ecosystem in which businesses operate, is crucial for enhancing MSME competitiveness. Upgrading laboratories and testing facilities would help regional exporters meet and prove compliance with international standards.

Ensuring sufficient access to capital is another fundamental concern. According to an ITC survey involving thousands of companies across dozens of markets, 40% of formal MSMEs cite access to finance as one of the most significant constraints on their growth. Connecting MSMEs with productive, long-term investment is imperative for ensuring their competitiveness and creating opportunities for growth. When we think about financing for meeting the Sustainable Development Goals, we should also be thinking about financing for MSMEs.

It is difficult to see how societies can achieve inclusive growth without dynamic MSME sectors. But it is impossible for them to do so without including women as active, equal participants in the economy. ASEAN recognises the importance of enhancing private sector involvement, especially of women entrepreneurs, as demonstrated by the strong ASEAN Women Entrepreneurs’ Network.

In Indonesia and Malaysia, ITC’s SheTrades initiative is working with local businesses, governments and other stakeholders to link women entrepreneurs to markets. Prioritizing trade promotion in sectors likely to create more opportunities for women is one way ASEAN leaders can leverage trade for women’s economic empowerment.

Empowering women and small businesses brings us towards greater equality. Environmental damage, on the other hand, hits the poorest people and communities hardest. Creating environmentally sustainable opportunities for men, women and youth, is a key priority for creating an equitable future in the ASEAN community. In November 2018, ASEAN heads of state adopted a Declaration on Promoting Green Jobs for Equity and Inclusive Growth of ASEAN Community. It sets out an agenda for creating sustainable opportunities in key sectors including renewable energy sector, agriculture, construction, manufacturing, and transport, among others. ITC is setting up Green Hubs in Vietnam and Lao PDR to support MSMEs to implement green business practices. These hubs will partner with local institutions to offer integrated solutions for access to green finance and improved sustainability.

In conclusion, the current economic context of protectionism and uncertainty about market access presents serious risks for ASEAN. Yet there is much ASEAN governments can do to foster resilience. On the global stage, they can act for multilateral cooperation on trade. ASEAN countries could be a powerful drive for a stronger multilateral trading system, one that preserves the progress achieved so far while working to adapt it to the new realities, including the digital economy. The choice today is not between the US or China. The choice is between order or chaos.

ITC looks forward to continuing to support your efforts to create economic opportunities for the ASEAN community and for all.