Shiro Armstrong

Measuring Trade and Trade Potential: A Survey

This paper provides a survey and a brief critical review of the literature on the widely used gravity models of trade, as a prelude to the justification of its use with the stochastic frontier methodology. The important papers on the theoretical foundations of the gravity model are reviewed and related to papers applied to explain determinants of trade flows. Then some shortcomings of the gravity model are discussed. The paper introduces the stochastic frontier gravity model as a way of estimating trade resistances and overcoming some of the shortcomings of conventional gravity models in their use for that purpose.

International and regional cooperation: Asia's role and responsibilities

Asia has emerged from the global financial crisis as an important stabilizing force and engine of global economic growth. The establishment of the G20 gives Asian economies the global forum that they have needed to both represent their interests in global governance and to deliver on responsibilities concomitant with their growing weight in the global economy. The region has a host of cooperation arrangements in APEC, ASEAN+3 and EAS, all with ASEAN as the fulcrum. They are huge assets but they need to be re-positioned to relate effectively to the G20 process and other global arrangements. They also need to comprehend the politics of the changing structure of regional power. This paper discusses the challenges that Asia faces in aligning regional and global objectives in financial, trade and other areas of cooperation, such as on climate change and on foreign investment. It argues that Asia is now a critical player in the global system and has a central contribution to make in strengthening global governance and international policy outcomes. Currently, there is a disconnect between the regional cooperation and the global agenda. The paper sets out ways to address this problem through filling gaps in regional cooperation and linking the agenda for regional cooperation more effectively to Asias new role globally. That is essential to sustain Asias superior growth performance, correct imbalances and support the global economic system.

Asian Trade Structures and Trade Potential: An Initial Analysis of South and East Asian Trade

A frontier of potential trade is constructed for trade flows from a world trade matrix of trade determinants to compare East Asian trade performance with that of South Asia. The results suggest that East Asian trade, led by ASEAN, is outperforming the world while South Asia lags behind significantly. Within East Asia, the transformation of Chianis trade performance is remarkable with its accession to the WTO. Australia is efficiently integrated with East Asia and performing close to its trade frontier. There is scope to lift intraregional trade among the East Asian economies but South Asia has even more unrealised potential, including within its own region.

Assessing the Scale and Potential of Chinese Investment Overseas: An Econometric Approach

The recent rise in Chinese outward direct investment (ODI) has significant global implications and impacts on host country policy. The present paper attempts to provide a theoretical basis and to define a robust econometric approach to assess the performance and potential of Chinese ODI. In this paper, foreign direct investment (FDI) performance is estimated using a frontier FDI model to measure how foreign investors, especially China, and the recipients of this direct investment perform relative to a benchmark of potential FDI. The results show that Chinese ODI achieves less of its potential compared with other investors. However, its ODI to Australia has performed much better than investment to other destinations. The results suggest that Chinese policy-makers should look at the pattern of Chinas ODI and, in light of superior performance in destinations like Australia, adjust policy strategies and institutional arrangements to enhance performance and reduce barriers to Chinese ODI.

The Influence of Economics and Politics on the Structure of World Trade and Investment Flows

The Asia Pacific region, and especially East Asia, has experienced rapid economic integration without the hard politics of legally binding economic and political treaties, unlike Europe where integration has been institutionled. The soft politics and marketled integration in East Asia set against a background of political tensions and rivalries in key relationships in the region. The paper measures trade and investment performance in the world economy. This allows comparison of bilateral and regional trade and investment flows. A measure of the effect of political distance on both trade and investment flows is also defined. The growth of ChinaJapan trade and investment, despite political distance between the two countries is discussed to highlight and elaborate on key findings. The analysis leads to five conclusions. Multilateral institutions are important in reducing economic and political distance between trading partners. While political relations do affect economic relations, their effect is not important across the vast majority of trading relationships. The important effects of political relations on economic relations come in todays world via international investment rather than through international trade. East Asian economies are leading trade and economic integration, measured in terms of their trade and investment performance and their impact on global trade and investment frontiers. Finally, of all the major regional groupings, APEC and ASEAN stand out as arrangements in which there has been no trade diversion, unlike the other formal regional groupings such as NAFTA and the EU in which trade diversion is measurable. The paper finds an APEC effect, explains how economics can dominate politics in international economic relations and recommends priority to strengthening regional and international investment regimes to help ameliorate the likely effects of politics on economic integration in the future.

The Politics of Japan–China Trade and the Role of the World Trade System

The large and rapidly growing trade relationship between Japan and China has occurred against a backdrop of political tensions. This study measures performance of the trade relationship, benchmarking it against other trade flows worldwide, and examines the impact of the politics on bilateral trade performance. To do this, a frontier gravity model is estimated using core determinants of trade. This gives a benchmark against which to measure trade performance, explained using resistances to trade. While the economic relationship is not independent from the politics, an important conclusion is that trade has not been diminished or disturbed by politics to a significant extent. China’s commitment to the global trading system from the mid‐1980s and its accession to the WTO in 2001 has meant that tensions in the political relationship with Japan from time to time have not derailed, but rather have increasingly come to be dominated, by the economic relationship.

Japanese FDI in China: Determinants and Performance

Japanese foreign direct investment (FDI) into China is an important aspect of one of the largest bilateral economic relationships in the world. The bilateral FDI is analysed using an FDI model combined with stochastic frontier analysis to explain the determinants of FDI, measure the performance of FDI using the frontier, and to measure all unobservable or difficult to measure barriers to investment. The FDI frontier is estimated using core determinants and a second stage of the modelling allows for explaining some of the barriers that FDI face. The choice of variables for both stages is made clear using a model derived from theory and on multinational enterprise behaviour. Both stages allow for an overlap of two important yet independent streams of FDI literature. The analysis allows for the inclusion of a measure of political closeness between countries which is another innovation in the analysis of FDI flow. The influence of politics and other barriers (or resistances) on a FDI relationship can best be understood in the context of the other determinants of investment flows. Political closeness between countries is shown to affect FDI. An improvement in political relations is associated with an increase in FDI by reducing uncertainty in the investment environment. The performance of Japanese FDI into China is shown to be high relative to its potential since 1986, the year China started its negotiations to join the GATT in 1986. That year saw a policy shift in China which opened many doors for foreign firms to enter and operate in China. Japanese FDI performance in China was high from 1986 until the Asian financial crisis in 1997/98, including through Chinese domestic political turbulence in 1989. Japanese FDI faces less resistance in China than any other major investing source and since WTO entry has bounced back from the post Asian financial crisis slump to be at the level predicted by the average performance worldwide after accounting for the determinants of FDI. Chinas WTO accession in 2001 helped reduce uncertainty and gave confidence in bilateral investment, with the effect of mitigating the effects of increased uncertainty from rising bilateral political tensions after 2001.

Australian Trade Policy Strategy Contradictions

Australia’s Trade Policy Review by the WTO in 2011 was positive about Australia’s openness and its progress in removing residual barriers to trade. But it glosses over the fact that Australia’s current strategy of supporting the multilateral system while signing, negotiating and concluding preferential agreements is not consistent. The paper focuses on the question of Australia’s role in the multilateral system as it prosecutes preferential agreements, and examines ways of multilateralising some of those preferences, especially in a broader regional setting and under the WTO. One priority is to multilateralise the preferences in trade agreements – by reducing the MFN tariffs and extending the preferential access that some investment and services providers enjoy. Another priority is to get domestic regulations and reforms right so that there is no discrimination between foreign and domestic firms, let alone between foreign firms from different countries.

Interaction Between Trade, Conflict and Cooperation: The Case of Japan and China

The complex interaction between trade and politics is analysed for the Japan-China relationship using Granger causality tests. The purpose is to determine the presence and direction of causation between trade and political events, both positive and negative, and to gauge an idea of the lag length of causality. Trade is growing quickly between Japan and China despite long standing political distance between the two countries. Results show that the economic relationship underpins and constrains the political relationship between Japan and China while an increase in positive political news and a decrease in negative political news promote trade to some degree.

Taiwan's Asia Pacific economic strategies after the Economic Cooperation Framework Agreement

Taiwan has had discriminatory trade and investment policies towards China, severely limiting economic engagement across the Strait. Not having free and open trade with China, one of the largest and most important parts of the East Asian economy, has resulted in Taiwans underperforming in attracting foreign direct investment, effectively cut Taiwan off from participating fully in East Asian production networks and prevented the deepening of its specialisation in the regional and international economy. The Economic Cooperation Framework Agreement is a watershed in cross-Strait relations and gives Taiwan the opportunity to integrate more fully into the East Asian economy. There is pressure now for Taiwan to pursue preferential trade deals with other countries. This is not the best way forward; rather, Taiwan should pursue a multilateral trade strategy and focus on domestic reforms that will bring larger economic gains, economic diversification and avoid the political risks to the cross-Strait relationship associated with preferential deals.