Candidate Name: Md Nazmus Shakib Candidate CPR No: 251182-4071.

Option 1 Written Exam - home assignment

Regular exam in IB55 (15-23 November 2011)

IB55 - fall semester 2011

International Business Environment Can Seng Ooi, Associate Professor
Exam date: Submission date: 15/11- 2011 at 12:00 23/11- 2011 at 12:00 CBS, the IBS secretariat
Gabriella Stephanie Munch Dpt. of International Economics and Management (INT.) Copenhagen Business School Porcelnshaven 24, INT. 1st floor, IBS Office 1.72a DK - 2000 Frederiksberg Tel. +45. 3815 2517
22 November 2011 GSM Gabriella St. Munch Program Administrator M. Sc. International Business Studies Dir. +45 3815 2517 gsm.int@cbs.dk

Location for submission:

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

Table of Contents Introduction Scope determination Multilateralism and APEC APEC and China: few facts Compare and Contrast: China, USA and other major participants Crisis and beyond: A trilogy on APEC A testimony of Multilateralism in the time of crisis (Case study:APEC,China and USA) Concluding Remarks References 10-13 14 15 3 3 4 4-5 5-6 10

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

Introduction We live in a world where we are virtually connected with the people around the globe. Globalization whether it has been helpful or not, will remain a historical debate for haves and have nots group; yet no one group can thoroughly deny the fact of interconnectivity. From the nip of the pen factory in Vietnam to the giant base of windmill in Amsterdam- all has been an integral part of Global Trade regime, where country itself plays as a striker, medals the greatest game to win and if not wining try to averse the loss. Global game of trade though most of time played under the virtual boundaries of the state participation and state cohesion either in bipartite or in multipartite format, yet we still watch this trade as much contentious and volatile as trade war1 is in place. In the crisis, boundaries become more visible and own interest persuasion dominates the podium of trade; fogs trade liberty as unbelievable and to all extent ineffective as ever. Scope of the Assignment Multilateral agreements in International trade as a whole is a big ticket item and in a short stint of time looking at these agreements in a birds eye view may lead to observational fallacy. Making things more effective and thus to conclude a logical reasoning-we have narrowed the whole recipes into some pies; where we would basically look into the matters as follows: APEC and its journey multilateral agreement and its journey for the last 10 years in the international trade arena. Deep diving into APEC and a close eye on China and USA in APEC matters; alongside the bilateral agreements between them. In the time of crisis, what this multilateral agreement reveal and does it stand out as the solution in the trade arena. And finally, criss-crossing the earlier puzzles we will comment on multilateral agreements based on the facts derived from APEC. Putting all our effort to look into the basket of APEC is simply because APEC constitutes of 21 countries representing both developed and developing countries. And most importantly, almost 44% 2 of global trade occurs in this Asia Pacific rim with China, USA and Japan.

1 2

Signified and coined by Jagdish Bhagwati in Jagdish Bhagwatis blog 2010.(why free trade matters) WTO Trade Statistics Report2011.

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

Multilateralism and APEC3: It has been a pivotal issue for the countries of how much is it connected with the other parties beyond the sovereign boundaries. Opening up the market has been the name of the existence for different countries and it is possible only through both bilateral and multilateral

agreements arranged in certain trade blocs or region. It has been noted from the last year trade statistics report- out of 5 regional Trade agreements

only 3 remains pretty active. They are active in a sense that they are ready or have already to give the market access through FTA. APEC since its inception has always called for economic integration. More integration means of trade liberalization, creating employment and energizing growth. And to do that accessing the market is the key arena. From Canberra 1989 to Yokohama 2010, APEC has established a quality linkage in the trade sectors among all of its trade members. Economic cooperationism 4 has been the cornerstone for the last three meets at APEC but this time after BOGOR5 implementation in 13 associates, APEC came up with more integration possibilities with ASEAN+3, ASEAN+6 and TPP6 channels to diverse its trade relations and sustain dynamic gains7 in the trade world. APEC and CHINA China has been the fastest growing economies around the world for the last 5 years; a great boom in the export sectors fathoms their national strength in the channel of international trade regime. It has huge trade surplus which can balance off the shock of recession but a paradox has been existing in the pipeline of it as well; nearly 60% of its GDP is dependent to export sectors thus
3

21 Pacific Rim countries and was established in 1989, china joined in 1991, constitutes 50% of world GDP, 40% of world population, 44% of world trade. Combination of both developed and developing states. 4 Co operationism coined by Hikari ishido in looking back and beyond of APEC. 5 BOGOR: Goals set for the trade partners in APEC summit 2006. 6 Connectivity through Trans pacific partnership. 7 Coined by Schumpeter.(1926)

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

making it more vulnerable in the time of economic crisis in the world. A major parameter of growth has also been in China that about 30-40 % population coming out of poverty level and joining the force of middle class, making it the biggest size of the market for merchandised items from all around the world.

Source: WTO stat on China October 2011

The biggest market in size and the largest exporter, China, has not actually capitalized its fire in a sense of Multilateralism of APEC so far as most of its huge exports count on bilateral trade balances. It has been revealed that 18% of its export in USA8. Digging this into a bit more we have a comparison as:

Source: statAPEC

From the table it is crystal clear that China enjoys a handsome trade balance which actually accelerates the wheel of its growth engine, hence it has also been a paradox to China that is has lower market access score than the overall APEC countries score level.

Compare and Contrast: China, USA and other major participants Since the beginning, USA has been the dominant player in the APEC format. On the contrary to China, USA is trading with trade deficit. But the fact which really encounters our mind is the overall score for accessing the market looks a bit higher for China and even compared to APEC score overall.
8

WTO trade statistics on China Oct 2011. Exports in EU: 19% and in USA: 18%.

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

As a result, the narration gets a bit interesting that overall negative growth of GDP in APEC is quite aligned to USAs negative GDP trend9 whereas China still is very much in comfortable position with the boost of growth in GDP. Stepping into a conclusion that China is leveraging higher growth from APEC or not - therefore a big question comes in the corner. To look at it we tried to look into the overall bilateral trade figures with the major participants in APEC with China. In this statistics what we have got is very identical, since with all the major players China in has APEC, the

functional trade basis. Just comparing with USA from 2007-09, more exports puts trade balance higher than all participants, somehow a bit puzzling. As we all know that trade is not a zero sum game 10. In each case, China has gained a lot from this agreement framework. Now it is again a question that for bilateral or multilateral agreements has China gained that handsome momentum in trade. And if it has gained from APEC agreements we need to look at the magnanimity of it. It has always been a question that whether it is only China that cashes the growth or the whole APEC got the fruit of it. Since this is one that multilateral agreements which puts Spaghetti Bowl11 to transform and take a shape of Lasagna. Plotting the figures against the world data and other regional and multilateral agreements, we can then have the actual data of how much China has been benefited to this sort of trade arrangement. Again we see a magic of this agreement as nearly 70% of the trade exists within the trade zone that APEC has been created for. It is estimated that if trade fosters like this in this region, it

Stats APEC: USA GDP growth: -2.4(2009); whereas China :6.7(2009) Nash Equilibrium, Theory of Games and Economic Behavior, Princeton University press, 1953. 11 Jagdish Bhagwati, U.S. Trade Policy: The Infatuation with Free Trade Agreements.1995
10

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

would tend to reach a growth momentum of both exports of 6.2% and imports of 5.3% respectively in 2012.

So future looks smiley for Zia Bao, as they are already making statements on nonprotectionism12 in APEC. And more tensions waiting for Obama and other premiers. So far we have seen both rosy and contentious picture on APEC but yet to come across the major issues of market accessibility of the participants in APEC. There has always been a facilitation principle for APEC countries

through which trade and intra trade related aspects were taken care of. Of them Trade Facilitation Action plan is one of the key and fundamental issues. This action plan refers to reduce 5% transaction cost among all the trade partners in APEC between 2007 and 201013. We can observe that an overall transaction cost reduced by 5% and saving 6% time, which have saved an amount of 967 Million US$. Multilateral agreement thus can benefit the trade parties among themselves like APEC. If we compare to other multilateral agreements and other major international trade partners we can have the real insight that APEC has not only reduced the transaction cost, by this measure, fosters trade growth for 5% in year-on- year comparison. Again it is pretty much predictable that trades in these areas are very much contentious to customs exercise, tariffs and paper related stuffs. Since each country here wants to have a
12 13

How important is APEC to China?: Yang, Yongzheng; Huang, Yiping. Australian Economic Papers, Sep99, Vol. 38 Issue 3, p32 TFAP II (assessment on APEC).

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

comparative advantage in the end, it has become more common phenomena that policy comes in place and thus restricts the trade flow.

But within the framework of TFAP II all the countries in APEC have consented on low paper issues and reducing tariff and non-tariff barriers within the intra APEC. Meanwhile the figures above actually have put more muscle to the puzzle of multilateralism. As we can observe here that both China and Japan still posing a great tariff even if for the MF nations. And an interesting part reveals here that USA, who has always kept low tariff on agricultural products; but in recent years a sharp jump from 2.5% to 12%; joined tha clan of China and Japan. It simply does mean neither bilateralism nor multilateralism, it simply means of more protectionism. In terms of efficiency drive stated in TFAPII, the data shows here seems very promising. Cost

reduction in APEC compared to any other agreement frame work makes it more competitive than other multilateral agreements, meaning easier access, low cost solution and trade growth. Therefore it has been clearly understood that after BOGOR goals implemented in the zone of APEC, there has been fresh wave of FTAs and regional integration. For any agreement, it is must that it contains the macroeconomic mathematics of game theory. More trade not necessarily means more growth; it has to be pro macro growth oriented. Indication in macroeconomic

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

indices would give us detail score card for APEC countries, whether it stands out the other countries or other multilateral agreements. Against the APEC line as we can see that developed countries better GDP /capita, China has been by far the least which actually unravels the huge population size and the

income distribution level. If we consider the trend we would see that China has been enjoying double digit growth in the selected 2005-08 years. If we look at the GDP growth rate it would give us an idea how china has been streamlining its growth channels through trade in APEC region. More importantly, growth rate is APEC shows greater sign than other group of countries like EU, NAFTA and OECD; thats only because of smashing growth rate of over 6% year-on-year in both China and Russia. And for that matter if we look into the details of macroeconomic issues further we will see a positive to

connotations

compared

other multilateral agreements. For example: 80%14 tarde are happening in between these countries, it is pretty obvious that what Chinas figure is showing is a big gain and remarkable in

14

WTO trade statistics 2011.

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

10

international trade utilizing APEC. Therefore it is again worth mentioning that developing countries like Chile and Korea has also been cashing a lot for their own countries being in APEC. But compared to China it looks very meager; as we have seen earlier that China has been maintaining comparatively high tariff or even unnoticed15 tariff imposed to its imports. Is it all because of saving the domestic industry and making it more competititve16 in the trade zone. Hence it takes a new dilemma in the APEC states. For the last decade China has been enjoying huge trdae surplus, but still its currency has been determied at a rate which keeps it compettitve. For example with USA, depriciation in Yuan against US$, can only worsen the game for USA. In the end, APEC trade tend to fall down by 5-7%, this is so mammoth that whole trade flow of world would tend to squize down to 3%; nail biting in the sense that world has miniature (11.5%) GDP growth in the last 3 years. A real story to worry for. Crisis and beyond It has always been a roratory factor that economy in the world has gone from bust to boom and then facing great recovery, falling into the trap of recession; a vicisuos circle has always been there. But the fact to be in question that policy and all other economic agreements be it bilateral or multilateral, can save it from happening this. It has also surfaced the question of fair game in international trade. And when crisis is in hand, things shape in protectionist movement from country to country, it may vary, but unfortunately it has been the truth. From the great depression of 1932, does, did or even now will the nations in international trdae learn any lessons other than protectionism.From Keyenes to Krugman, we see a commmon thought that trade should not be hampered due to protectionism, well of course every country must have their own choice of making competititive its doemstic players in the market, yet again the point is it has to be just and has to be a fair game17 for all. It will always benefit those countries having the factor endowments18 with them and thus enjoyed the comparative advantage in the international trade. In the time of crisis, we see that states then have the prejudice of being remained competititve ratfying the agreement policies than others and thus kept its currency depricitaed. And the noise errupts to shake the balance of international trade game. As a result not only the giants but also the minnows, in terms of economy, faces the doomsday.
15 16

APEC outlook and beyond 2011. Porter, M. 1990. The competitive advantage of nations, Harvard Business Review, 68 (2): 73-93 17 Joseph E Stiglitz; Joanne J. Myers 2006. Fair trade for all: How trade can promote development 18 B. Ohlin, E Heckscher, Interregional and international Trade (Cambridge: Harvard University Press, 1933.)

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

11

A testimony of Multilateralism in the time of crisis (Case study:APEC,China and USA) Fundamentally we will look into the last decade (2000-2010); taking a snap shots of macro and international trade factors of APEC overall and specifically in the case of China and USA. As we all know that although export rose 30 times in the late 70s and it has taken a sharp nose dive as well in the late 80s. If we follow trend in the last decade, we will observe negative growth in GDP and exports, commenting a more lengthy recession. Crisis is seen there twice in this decade and as a result world trade has been in the negative trend. Comparing this into the decade of trade matter in the APEC zone, we will have an idea of how much multilateral trade arrangements have been affected or not; or would there be a new dimensions of trade been surfaced. Looking into the trade of China in this period with USA, APEC and the rest of the world- can it give us a picture that we are searching for.
Source: WTO trade statistics report 2011

It actually depicts that during the crisis time China neither had the de growth in GDP nor had any impact on trade since China had been able to find out more other markets19 that it could play with its low labor cost edge factors, meaning that its exports rose to 11% outside and 12% dip in export from APEC has been offset by that. But one must note that over the last 3 years China has been facing huge troubles within APEC (losing export of 10%) since it has the largest trade surpluses, and very likely China has been hit worst due to protectionism measures in APEC,

19

Robert C. Feenstra 2003. Advanced international trade theory and evidence

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

12

mainly driven by USA. China remains the most frequent target of crisis-era protectionism and vice versa, but other nations are hit often. According to a statistics in GTA, USA has implied protectionism in the form of beggar-thy-neighbor policies as in import ban, competitive devaluation and bail out plans etc. And thus China has also remained rigid to all its trade members regarding importing to China. As per GTA20 report, trade discriminatory measures had been taken earlier and it is still being valid there, which account an estimated 7-9% annual decline in overall trade in the worldwide and especially in APEC. As a matter of fact since the inception of APEC, global domino 21 effect starts rolling in, against of the powerhouse and new world order in the trade regime has been in effect in the late 2000s, assuming China leading the game. A very recent example from Obama administrations appeal in the APEC summit for green goods liberalization, as expected Singapore and China resisting it highly. And keeping China apart, USA tries to build a TPP (Trans Pacific Partnership) for liberalizing trade and reducing non-tariff barriers. On the other hand China is looking forward to CAFTA, free trade agreement with ASEAN bloc. All the factors are now being very open that in the time of crisis neither China nor USA has been keen and firm to continue the legacy of APEC as in multilateralism, well of course, remaining competitive than others Chinese govt.22 also feel that time has come when trade should be more open in this hard time. Unlike 2001, China has been approaching to a paradise lost 23 position, China being very much sure that it cannot be able to prolong the growth engine of trade lonely but along with others. Therefore, a long history of trade disputes between China and USA pushes the game of influence in the world order of trade; escalation to these would impact only trade, and can just win bilateral discomfort. To make it understandable and more vivid lets put the following connotations and see how the answer comes to us in response: A: Since 50% GDP of World currently constitutes from APEC and China single handedly propels the growth engine with more than 60% of its exports while others
20 21

Global Trade Alert Report 2011.(9th GTA Report) A domino theory of Regionalism, Richard E Baldwin, Graduate international Studies, p 14-16 22 Reject protectionism to fight global crisis: Wen Jiabao, Chinese premier at New York times, Oct 14, 2011 23 New York times

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

13

(USA, Japan) facing the contrast, can it be the protectionism to recover this gloomy shades of trade or doing this we are actually slowing the recovery and thus reversing the growth engine. B. Not only China needs APEC24 rather it can be of two ways and measures of trade liberalization therefore can make the trade elastic in the long run. Figures sometimes shock and shaken us. Total 356 protectionism measures have been taken during 2010-11 and due to that trade have been hampered by 7% in gross in APEC. Since major players trying to save their domestic clients and thus can lead to abnormal behavior in international trade like in 30s, as a result, success journey seems bleak here in APEC now. And for the second connotation, we can see that over the last 2 years there has been trade complains to WTO regarding the bilateral trade between China and USA, out of total 17 TDS 25 in 2010, 3 of them from China and USA complaining to each other. So far this is the game and this the way players of international trade playing even though they are in complete global hairball phenomena, sometimes calling it multilateral agreement framework. Lessons therefore are yet to be learnt due to all so called savior format i.e. state aid. It is the last resort in the time of deep crisis. Beyond that all we know that there is just a black hole of world trade, liberalizing ultimately can resume the trade once again. In the case of APEC we got the notion as following: A. Showcasing China and USA we have come to point that trade has been severely curtailed from and to, therefore slow recovery26 of world trade system is evident since 50% of world GDP constitute from here. B. Bi lateral issues are now taken as choice of the game, yet the mistakes came across as once again in trade channel even though all know that it is no more for two partys game. It is as because one country wont be abundant in resources for the infinite time, therefore new market and new provision to be there, to catch the right fish from the right pond, would be the name of the game, and it is Multilateralism, however not tried and tested yet with its full throttle.

24

Do Trade Unions Deteriorate International Competitiveness? Reconciliation of the DiscrepancyBetween Theory and Practice Chi-Hsin Wu & Chia-Ying Liu, Atlantic Journal 2010. p146 25 Trade dispute settlement by WTO; in 2010 there has been 17 TDS and out of these 3 has been between China and USA referring as the disputes no. WT/DS217; WT/DS363 26 Sally, R. 2009. "Exit Goldilocks, enter crisis and new protectionist threats," Economic Affairs 29(1): 99.

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

14

C. Compensating and/or trying to save own industry; at the same time making it competitive in the global market is just the opposite. End of the day innovation take its toll, making other obsolete. At least in APEC, infancy game 27 is not encouraged from both China & USA. D. Trade competition is very welcome and probably the hygiene for having been competitive in the market and for the core consumers, but trade rivalry at this age is simply a double edged sword. Cutting others edge in ones own market is just putting ones own trade into axed in turn, causing a double dip finally. Concluding Remarks Yes or no for multilateralism, is not the answer or cant be the answer by judging the merit and sphere of International trade. Its not a simple two plus two theory. Still I would remark keeping zig-zug-saw international trade environment in mind that within the framework of multilateral agreements, countries choose more of bilateral FTAs. The big game is still untouched due to cumbersome policy level implications. Had it not been the case, global crisis can be recovered from the world much earlier. In the case of 2010, only recently APEC- the biggest trade body moving like tortoise dilemma because its not only and the only TRADE here, it is more than that. For sure winners and losers are there, for instance China would not let its huge trade (60%) off from APEC, and neither do USA want china out of the frame; somehow just not been side by side. But both the parties aware of new modus of operandi in the new horizon for trade. APECs initiatives for trade involvement with ASEAN bloc is just the beginning. Big picture says multilateralism do exist and will be the name of the game for trade liberalization in future where WTO should conduct the game with post DOHA scenario and fair trade for all treatment. Finally we can say that it is indeed contentious and cumbersome to practice the game of multilateral agreement, and in the event of crisis, it seems broken and didnt pay off; all we can say that hiding from the truth of multilateral format would be costlier even, all just needed is to change the rules of game so that trade wins not the bureaucratic policies.

27

Markets, Structures and foreign trade: Imperfect competition and international economy, P Krugman, MIT press, 1985.

CPR No: 2511824071

APEC, China and New world Trade order: Unfolding the truth!

15

Reference(s): Book reference: 1. Joseph E Stiglitz; Joanne J. Myers 2006. Fair trade for all: How trade can promote development. 2. Cavusgil, S.T; G. Knight and J.R. Riesenberger. 2008. International Business: The New Realities, Pearson International edition. New Jersey: Pearson. 3. Charles W Hill, 2005. International Business, Competing in Global Market Place; 5th edition, McGraw Hills. Article reference: 1. Rethinking regionalism: Europe and East Asia in comparative historical perspective ;Mark Beeson 2. How important is APEC to China?: Yang, Yongzheng; Huang, Yiping. Australian Economic Papers, Sep99, Vol. 38 Issue 3, p328 3. APEC: Looking back and forward;.Ishido, Hikari. Regional Outlook, 2011/2012 Southeast, p101-105. 4. Toward Fruitful Achievements of APEC Japan 2010. By: Nishimaya, Hidehiko. Economy, Culture & History Japan Spotlight, Sep/Oct2010, Vol. 29 Issue 5, p6-9 5. Do Trade Unions DeteriorateInternationalCompetitiveness?Atlantic Economic Journal; Jun2010, Vol. 38 Issue 2, p145-155 6. Computational Analysis of APEC Trade Liberalization. Kiyota, Kozo; Stern, Robert M.. Working Papers - University of Michigan Department of Economics, 2008, p1-20 7. Trade agreements; Impacts on the US economy; Congressional research service; James K Jackson; Feb 2011.p1, 3, 10. 8. APEC AT 20: Retrospect and Prospect. Milo, Melanie S. Regional Outlook, 2009/2010 Southeast, p68-78, 11p 9. Market integration and extreme co-movements in APEC emerging equity markets. Xiao-Ming Li; Rose, Lawrence C Applied Financial Economics, Jan2008, Vol. 18 Issue 2, p99-113 10. Facing Protectionism Generated by Trade Disputes: China's Post-WTO Blues; Wing Thye Woo & Xiao Geng, June 2007, Washington, p4-6. 11. The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20; edited by Richard Baldwin and Simon Evenett, center for economic policy Research 2009. 12. A True Development Round? A Review of Joseph E. Stiglitz and Andrew Charltons Fair Trade for All:How Trade Can Promote Development; Robert J Lawrence, jouran of Economic literature, vol. XLV Dec. 2009 13. Protectionist Responses to the Crisis: Damage Observed in Product-Level Trade; Christian Henn and Brad McDonald; IMFWP/11/139 Reports: 1. APECs Achievements in Trade Facilitation 2007-2010 - Final Assessment of TFAPII 2. TFAP II Key Performance Indicators. 3. APEC Outcomes and Outlook 2010/2011. 4. APEC at a Glance, 2011. 5. WTO World trade statistics 2009, 2010. 6. WTO Annual report 2001, 2010, 2011 7. Global Competitiveness report 2009-10, 2010-11. 8. Global Trade Alert Report Nov 2011. 9. UNCTAD Annual report 2001, 2009, 2010. 10. China Business Forecast Report, Oct2011, Issue 4, p7-12. Others: 1. Multilateral vs. bilateral trade agreements; UPIAsia.com 17th Nov, 2011 2. Regional agreements: the pepper in the multilateral curry Lamy; WTO News, 17th Jan 2007. 3. Obama pushes Pacific trade agenda at Apec; 4. Blog writing of Jagdish Bhagwati; why Free trade matters; 5. Interview of Joseph Stieglitz on Globalization.(2008) 6. www.ft.com 7. www.economist.com 8. www.eikipedia.org. 9. www.apec.org/statsAPEC 10. www.globaltradealert.org.