It is a big challenge to keep the international financial and trading systems working as the world changes rapidly -- they are two of the basic frameworks of the global economy. The financial system has been shaken by a series of crises in the past decades, while China's initiatives, including the establishment of the Asian Infrastructure Investment Bank, are seen as a challenge to the old U.S.-dominated system.
In the field of trade, free trade agreements and other regional economic cooperation efforts have increased after the stalling of multinational trade negotiations at the World Trade Organization since the 1990s. Now, the world faces a threat of rising protectionism following the U.K.'s decision to leave the European Union, or Brexit, and the election of Donald Trump as U.S. president last year.
It is clear that the systems are in the process of transformation. What is not clear is in which directions they will move. A rare area of consensus among experts is that Asian countries, especially China, will play important future roles.
About 20 top-level scholars and experts from eight countries in the Asia-Pacific region discussed these issues at a conference held in Tokyo this month. The meeting, sponsored by the Japan Center for Economic Research, one of the country's leading think tanks, is held biannually to publish the "Asian Economic Policy Review" academic journal. The topic this time was "Changing Global Financial and Trading Systems and Asia."
Establishment of AIIB symbolized the rise of China in the global financial system.
© Reuters
Takatoshi Ito of Columbia University presented an overview of the changes to the international financial architecture. Having experienced the Asian currency crisis in 1997-98 and the global financial crisis in 2008-09, Asian countries have moved to build their own defenses against such crises, such as the Chiang Mai Initiative, a multilateral currency swap arrangement, he argued. The sense of distrust among Asian countries towards the International Monetary Fund, which stands at the center of the global financial system dominated by the U.S. and Europe, lies behind such efforts. "The U.S. and Europe lost its status as a role model" after the global financial crisis and a series of crises affecting the euro, he added.
Ito examined China's recent moves in this field, including the internationalization of the yuan, establishment of the AIIB, the One Belt One Road initiative, and the launch of the Silk Road fund. For the future, "the main scenario is China's rise to [become] the third pole, after the U.S. and eurozone, and the RMB [yuan] will be used in a bloc in Southeast Asia and Eurasia," he said.
One question from the participants was whether the future structure of the global financial system would be hierarchical, with the IMF and the World Bank at the top, or multipolar.
David Dollar, senior fellow of the Brookings Institution, talked about the past, present and future of China's development finance. China is already a major funder of infrastructure projects in the developing countries. It lends $60 billion annually through the China Development Bank and the Export-Import Bank of China. The recipient countries are not only in Asia and Africa, but also in Latin America. With regard to the quality of the lending, China's lending is "indifferent to risk" and "the allocation is uncorrelated with indices of political stability and rule of law," Dollar said.
China initiated the establishment of the AIIB in 2015. Dollar saw China's "frustration with lack of reform in the World Bank and IMF" behind the country's decision to take this step. The AIIB is also a way to use the country's excessive savings through a multilateral format, he said.
A big question is whether the AIIB as well as other initiatives by China are a challenge to the existing global economic order. Dollar said that "Chinese actions seem more a revision of the global system than a challenge to it." Some participants agreed with his view, while others did not. Dollar also pointed out that very little data was available on Chinese development finance, and urged China to release more.
Protectionist moves
Former Indonesian trade minister Mari Pangestu, who teaches at the University of Indonesia, argued that although growth of trade in East Asia and the world slowed down after the global financial crisis, the trends started even before the protectionist moves in 2016.
Her team found "slow growth of productivity and innovation, and the maturity of the global value chain" behind the deceleration of trade in the last two decades. Uncertainty over trade policies increased after Brexit and the election of Trump "can have an effect on trade flows," she said. She stressed that "East Asia should play a role in safeguarding the WTO rules-based trading system," and urged countries in the region to press ahead with reforms, including unilateral measures.
Concerns over protectionism were shared in the discussions, while new issues such as rising e-commerce were also highlighted as important factors for the future.
Marcus Noland of the Petersen Institute for International Economics analyzed U.S. international economic policies under the Trump administration. The U.S. has gained benefits from international trade, but has also experienced negative effects, such as increased inequality. The appropriate response in this situation "is not to adopt trade protection, but rather implement a package of improved adjustment measures and long-term policies to enhance U.S. competitiveness," he argued.
It was clear that President Trump pursued bilateral rather than multilateral trade negotiations. Noland stressed that "the pursuit of bilateral deals is likely to be difficult," and "a re-examination, revision, and expansion of a regional agreement along the lines of [the Trans-Pacific Partnership] is more likely to generate substantial and sustained benefits to the U.S. economy." The administration looked to be moving in the the opposite direction. In the worst case, its actions "could spark trade wars to the detriment of all," he warned.
The question of what policies Trump really wanted to implement remained unanswered. Some participants agreed that the renegotiation of the North American Free Trade Agreement would be a test case to predict the administration's future direction.
Sahoko Kaji of Keio University discussed the European situation and its impact on Asia. She suggested that the process of European integration "had some unintended consequences which became renewed sources of instability." Those consequences included the division between pro-integrationists and anti-integrationists, and doubts on the benefits of the free movement. Brexit had increased instability. She examined the EU's efforts to rebuild its integration strategy with new projects.
On the economic impact, Kaji argued that "if the Franco-German initiative fails to change the minds of the anti-integration and anti-free-movement camps and the EU turns protectionist, China and [Association of Southeast Asian Nations'] goods export will get a direct hit." On regional integration, the EU was seen as a model, but "given the challenges the EU is facing, it would be helpful if Asia could show a new and different form of workable integration," she said.
Participants shared the view that the developments in ASEAN were also important for future changes to the global financial and trading systems. The ASEAN Economic Community, the current situation of economic integration and other issues were discussed under the chair of Colin McKenzie of Keio University.
The proposed working papers are found at: https://www.jcer.or.jp/academic_journal/aepr/index.html
The final version of the journal will be published in July 2018.
