ECONOMIC BRIEF No. 1 IS THE UNITED STATES MISSING THE BOAT I N ASEAN? A Comparison of U.S. and Japanese Trade and Investment Experiences

rirc PRIVATE INVESTMENT AND TRADE OPPORTUNITIES ECONOMIC BRIEF No. 1 IS THE UNITED STATES MISSING THE BOAT I N ASEAN? A Comparison of U.S. and Japanese Trade and Investment Experiences East-West Center

The PITU Economic I3nrf Series The Private Investment and Trade Opportunities (PITO) project seeks to expand and enhance business ties between the U.S. and ASEAN private sectors. P110 is funded by a grant from the United btafes Agency for International Development (AID) with contributions from the U.S. and ASEAN public and private sectors. The P1T0 Ecorrornic Brief series, which is published under this project, is designed to address and analyze timely and important policy issues in the ASEAN region that are of interest to the private sectors in the United States and ASEAN. It is also intended to familiarize the U.S. private sector with the ASEAN region, identify growth sectors, and anticipate economic trends. The P170 Econenrrc Brief series is edited and published by the Institute for Economic Development and Policy of the East-West Center, which coordinates the Trade Policy and Problem Resolution component of P1T0. To obtain a copy of a P170 Economic Brief, please write to: Editor Institute for Economic Development and Policy East-West Center 1777 East-West Road Ilonoiulu, HI 96848 United States of America

r'i'rc PRIVATE INVESTMENT AND TRADE OPPORTUNITIES ECONOMIC BRIEF NO. 1 I S THE UNITED STATES MISSING THE BOAT IN ASEAN? A Comparison of U.S. and Japanese Trade and Investment Experiences East-West Center Institute for Economic Development and Policy

I Beijing r NKOREA S. KOREA JAPAN Tokyo CHINA s' L! Y HONG cr' 1!"' r"; KC)N[; I AIWAN BURMAr i LAC3S ^ t v C? VIETNAM THAILAND I r PHILIPPINES Bangkok \t --:", Manila KAti1PUCHEA C Pacific Ocean BRUNEI Bandar Seri Begawan MALAYSIA Ku ala Lumpur / /r' SINGAPORE 0 equaiar I NDONESIA d a a I]jakarla 6r Lad; ^ Q a O AUSTRALIA

IS THE UNITED STATES MISSING THE BOAT IN ASEAN? A Comparison of U.S. and Japanese Trade and Investment Experiences TRADE, INVESTMENT, AND ECONOMIC GROWTH Several members of the Association of Southeast Asian countries (ASEAN)' have been among the fastest growing countries in the world (Table 1). Both Thailand and Singapore have been growing at or close to double-digit rates for the past few years. Malaysia has been growing at almost 9 percent. Indonesia and even the Philippines (except for 1990) have been growing at about 6 percent per annum, which is higher than the world average of 3-4 percent and the average of other developing regions. The export-led growth of the region, with its associated outward- and private sector-oriented policies, has resulted in a boom in both exports and imports in these fast-growing countries (Table 2). While world trade grew at about 10 percent in the last few years, exports have grown by 20-30 percent in Malaysia, Thailand and Singapore. The other ASEAN countries have had more moderate but nevertheless strong export performances, well in excess of world trade growth. Even in Indonesia, which has been traditionally dependent on oil exports, the rapid growth of 'Although ASEAN consists of six member countries Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand Brunei is not included in the discussion because of its unique characteristics and lack of data.

Table 1 Average Annual Rates of Growth of Real GDP Country/group 1960-693 1970-79 h 1980-89` 1987 1988 1 989 1 9904 World 4.9 3.8 2.9 3.6 4.4 3.0 2.0 Africa 4.7 4.2 2.3 2.0 4.5 3.2 2.7 Latin America 5.7 5.8 1.8 3.4 0.7 na na Japan 1 0.9 5.2 4.2 4.6 5.7 4.9 5.1 United States e 4.1 2.7 2.8 3.5 4.6 3.0 0.9 ASEAN Indonesia 3.6 7.8 5.7 4.8 5.7 7.3 7.0 Malaysia 6.5 8.1 5.7 5.3 8.7 8.5 9.4 Philippinesc 3.0 6.1 2.0 5.8 6.7 5.7 3.1 Singapore 8.9 9.5 7.3 9.4 11.1 9.2 8.3 Thailand 8.3 7.4 7.3 9.5 13.2 12.2 10.0 NOTES: na = Not available. a. 1960-1970 for Malaysia; and 1961-1969 for the World, Singapore, and Indonesia. b. 1971-1979 for Malaysia. c. 1980-1988 for the World and Latin America, d. Estimate. e. Real GNP. manufactured exports has pushed total export growth beyond the world average since 1988. Import growth exceeded or matched the strong export growth for most of the countries in the region. Typically, exports are consumer products and labor-intensive intermediate goods while imports are capital products and capitaland technology-intensive intermediate goods, products in which the United States and Japan are acknowledged leaders. While the U.S. market has absorbed growing shares of ASEAN exports in the 1980s, the United States barely maintained its modest (16 percent) share of ASEAN imports (Figure 1). In contrast, Japan has been quick to capture the trade opportunities, raising its share of the 2

Table 2 Average Annual Growth of Merchandise Trade' Country/group 1960-691970-791980-89 1986 1987 1988 1989 1990 Expo rts World 8.8 20.8 6.6 10.7 18.1 1 2.5 7.9 na ASEAN Indonesia -0.5 38.1 4.6-13.5 6.6 13.6 13.8 11.9 Malaysia 5.1 23.5 9.4-10.9 30.4 17.7 18.7 1 5.6 Philippines 5.8 20.4 6.2 3.5 18.4 24.5 10.3 4.8 Singapore 3.8 26.8 1 3.0-1.4 27.5 37.0 13.E 14.0 Thailand 7.4 23,8 1 5.2 23.5 32.5 35.8 26.7 1 8.0 Imports World 8.9 20.2 6.9 9.3 17.8 13.9 8.0 na ASEAN Indonesia 7.0 26.3 10.7 4.4 20.3 2.8 24.1 17.4 Malaysia 4.5 23.0 12.4-12.0 17.4 30.3 35.9 25.0 Philippines 10.1 20.2 6.9-1.2 32.4 22.1 28.1 16.3 Singapore 5.3 25,4 11.9-2.8 27.4 34.7 1 3.2 14.0 Thailand 11.5 20.2 1 5.4 0.7 40.8 56.9 23.7 23.4 NOTES: na = Not available. a. Annual growth of merchandise trade expressed in current prices. region's imports to 24 percent. As incomes in the ASEAN countries continue to grow, markets for consumer durables will blossom. Here, especially in motor vehicles and consumer electronics, Japan has a clear but not insurmountable competitive edge. A similar picture can be seen when looking at direct foreign investment (DFI) in the region. To support rapid economic growth without increasing debt burdens and to make up for the decline in ODA flows, the ASEAN countries all began to invite DFI. As a result, DFI increased sharply in 1988 and 1989, especially from Japan but increasingly from Taiwan and South Korea. U.S. DFI.to 3

Figure 1 Direction of ASEAN Trade A. Exports 35-30- 4) 25 - [n U, 20 - U 47 0-15- 10-,Japan " '^> '_ USA ASEAN.' A 1 ^ 5-70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 Year 28 B. Impo rts 26 24 Japan 22.. y CU C 20 018 CL16 USA ASEAN 14 12 10 t -- 70 71 72 73 74 75 76 77 78 79 80 61 82 83 84 85 86 87 88 89 Year Source: Intemational Menatary Fund, f}wbc,n of Trado Qtahsbcs, computer data tapes and Vaartnook 1990.

the region has increased, but has not kept up with the pace of total DFI inflows; therefore, the U.S. share of total DFI to the region declined in several of the countries. The decline in the U.S. share of direct investment in the Philippines has been especially dramatic, falling from 70 percent in 1983 to less than 20 percent in 1989; but, the United States has been more successful in maintaining its share of DFI in Thailand. In contrast, Japan's share of investment has jumped sharply. Why has Japan been able to outcompete the United States? There are many answers to this question. Three important aspects of this problem will be discussed here: trade and investment linkages, the role of ODA, and the role of trading companies. TRADE AND INVESTMENT LINKAGES U.S. investment to Asia and the ASEAN countries increased in the 1980s, attracted by rapid growth and outward-looking policies. The United States' DFI position in ASEAN has been relatively constant, accounting for about 3 percent of U,S. investment (Figure 2). For Japan, ASEAN has long been an important investment destination. Today, DFI stock in ASEAN accounts for more than 8 percent of Japanese investment; this is down from nearly 20 percent in the early 1980s because of the sharp rise in Japanese investment to developed countries in recent years (Figure 3). Despite this decline, the DFI position of Japan continues to increase in ASEAN. This is in contrast to the U.S. DFI stock in ASEAN which has been relatively stagnant over much of the last decade and is now dwarfed by Japan (Figure 4). 5

Figure 2 U.S. Direct Foreign Investment Position Abroad, 1982-1989 400 300 EC cn C = 200 Canada D Others 1 Latin America 9 1982 1983 1984 1985 1986 1987 1988 1989 Japan Aust N.Z. ASEAN NIEs Year Sources: Urited States. DepaAment of Commerce. Various years. Survey of Current Bus'aisss, August 1987. 1968. aid 1990.

Figure 3 Japan's Direct Foreign Investment Position Abroad,1982-1989 400 300 Others 0 ff3 CI) D 200 U.S. 100 Latin America Aust., Can., N.Z. 0 1982 1983 1984 1985 1986 1987 1988 1989 Year EC ASEAN NI Es Souro s: Japan, Ex orl-1rn4)orl Ben*. 1988. Report of lhs Overzeas I r,vestrnen1 RBaexch Instlh.Re, Noven',er; Minlst y of Fgi ce_ Various yd s_ M BL 81 of Flscal and Monetary SIBtotics, No, 356 (December 1981). No. 404 Il3880mbor 1985). No. 428 (December 1987, and rrk-os.

U.S. investment in the region is important because of its potential to expand U.S. exports in goods, services, and technology. Contrary to the popular belief that foreign investment exports jobs abroad and is thus harmful to the U.S. economy, most studies have found that foreign investment has a large, positive effect on U.S. exports. 2 There is evidence that production of U.S. firms in a foreign country tends to increase U.S. exports and market shares in that country while reducing those of rival producers. Thus increases in U.S. foreign investment may have a positive impact on America's trade deficit. At the same time, the income earned from the investments has a positive effect on the current account balance. Conversely, declines in U.S. investment may have an adverse effect on U.S. exports. Of course, the same holds true for Japanese DFI, thus highlighting the significance of an increasingly larger Japanese presence in the region. Some insight into the significant effects of DFI on trade is seen in the large share of exports to affiliates in total exports. Although the data are not categorized by country, the sectoral data shows that exports to affiliates account for about a quarter of total exports (Table 3). Exports to affiliates are especially important in the transportation sector, accounting for more than 57 percent of total exports in that sector. 2 See, for example, Robert E. Lipsey and Merle Y. Weiss. 1984. Foreign Production and Exports of Individual Firms, Review of Economics and Statistics, 66(2): 304-309. 8

25,000 Figure 4 Japanese & U.S. DFI Positions in ASEAN, 1982-1989 n Japan q United States 20,000 z 15,000 0 E CD 10,000 5,000 0 1982 1983 1984 1985 1986 1987 1988 1989 Year So c- Japan, E^q ort Impoil A, s98b. Reporl of lha Ovorseas fnvostrnant g as earch Instltul. Noverr r; Mnictry of Fnanco Vartouc yearn. Mont, y BL#Obn of Fis i &,d Morrelny Statlstics. f o. 956 (DOUcr e. 1981). No. 404 (December 1885), No. 428 (f)ecenriec 1987), and rtw, os_ Unitad Stains. Npx9ne.if of Cormrnrco. Variotn yowl. Survey of Curanl Business..August 1987. 1988. and 1990.

Table 3 Intrafirm Exports in the United States' Sector 1977 1982 1985 1988 All Sectors 32,397 46,559 57,567 78,336 (27.2) (22.5) (27.8) (25.4) Manufactures 22,148 30,350 40,513 53,529 (27.7) (21.7) (27.9) (24.9) Textiles and Apparel na na 105 188 (na) (na) (3.4) (3.6) Chemicals 2,939 3,619 3,976 5,906 (27.2) (18.2) (18.3) (18.3) Metals 770 824 845 1,177 (15.0) (10.0) (13.4) (11.7) Machinery and 5,349 9,146 11,472 14,721 electronics (16.4) (15.3) (18.9) (16.6) Tranport Equip. 119,005 207,158 206,925 308,014 (55.4) (42.8) (58.7) (54.9) NOTES: a. Intrafirm exports in US$ millions and as a percentage of total exports (in parentheses). Data refer to nonbank parents of nonbank affiliates; for 1982-1985, a large number of smaller firms included in the 1977 survey are excluded. 10

At the same time, DFI, although small in terms of total investment of the individual countries, has been important in facilitating exports that have fueled the rapid growth of the region. For example, in selected industries, U.S. affiliates export a large share of their output (Table 4). Exports of these firms accounted for a significant share of the exports of the countries in several important industries, especially electrical and electronic equipment. The large impact of DFI is not just in terms of the infusion of capital, but also the technology transfer, management skills, and marketing networks that it provides. Parent-company imports from U.S. affiliates also contribute to increasing the competitiveness of U.S. goods. THE ROLE OF JAPANESE ODA In contrast to other donors that have been reducing aid flows to the region, Japan has increased its commitment to ASEAN (Table 5). Average ODA flows doubled in the mid-1980s to $1.4 billion annually as compared to the $350 million from the United States to ASEAN. Moreover, increases were seen in Japanese ODA to every ASEAN country, while U.S. ODA is heavily concentrated in the Philippines. Importantly, Japan has modified its emphasis on the nature of ODA projects. From large, infrastructural building projects, Japanese ODA is now becoming more focused on smaller, private sector oriented projects. In the past, Japanese ODA was criticized as being a tool to promote Japanese exports; now, Japanese ODA has shifted to promoting Japanese investment. 11

Table 4 Export-to-Sales Ratios for U.S. Affiliates' in Selected Industries Host Region/ Economy Year All Industries Petroleumb ManufactutIng Textiles Chemicals Metals Machinery Electronics Transport Equip. Trade1' World 1977 38.2 49.5 30.6 34.9 25.1 26,8 36.6 33.7 38.8 34.6 1982 34.5 35.4 33.9 42.9 31.7 25.7 40.6 40.7 43.3 41.7 1987 33.9 27.8 38.6 na 32.1 31.0 45.0 49.2 48.2 34.5 1988 34.6 32.6 38.5 38.5 33.3 31.8 45.3 48.7 47.3 32.9 ASEAN Indonesia 1977 80.9 na 40,8 na oa 0,0 no na ne 0.0 1982 66.1 73.2 no na na no 0.0 68.8 no na 1987 81.3 87.6 3,1 na 2.1 0.0 0.0 0.0 0.0 4.0 1986 78.4 86.3 no na 1,7 0.0 na 6.7 0.0 1.7 Malaysia 1977 44.3 19.0 76.2 na 12-1 0.0 no no no na 1982 47.4 29.3 81.5 na 14.8 no IS 96.1 no 3.3 1987 59.8 no 85.9 no 11.8 0.0 no 96.7 0.0 4.5 1988 59.5 no no na 10.5 no ne 97.2 0.0 na Philippines 1977 17.2 0.0 25.7 na 6.5 na ne 36.8 na na 1982 15.7 na 26.5 no 5.0 no no 72.5 na na 1987 24.8 na 39.0 no 3.2 0.0 na 55.8 0.0 15.7 1988 24.6 no 37.7 no 3.0 0.0 no 91.8 0.0 13.1 Singapore 1977 67,3 30,4 93.2 no no no no 97.0 no no 1982 820 82.9 91.8 no 72.4 80.0 65.4 85.8 98,1 82.0 1987 81.7 na 89.3 no 84.4 70.0 90,8 90.1 no 65.4 1988 78,1 na no na 75.6 76.9 95.6 no 98.7 65.4 Thailand 1977 11.4 no no no 9.4 no no no no no 1982 175 no na na na no no 68,2 no 14,8 1987 21.2 4,9 64.2 na 2.2 0.0 no no 0,0 no 1988 22.7 no 59,7 no 2.0 na no no 00 no NOTES; no = Not available, not disclosed, or zero total gates. a. Data refer to majority-owned nonbenk affllfates of nonbank parents. b. Wholesale trade only in 1962 and 1985; retail trade Included in 1977.

Table 5 Official Bilateral Flows from DAC and OPEC Countries (annual averages, US$m) Country Period Total Japan United States Other Development Assistance Countries OPEC ASEAN 1976-78 1,122 357 354 351 59 1979-82 1,516 727 160 586 42 1983-88 2,572 1,415 350 791 17 Indonesia 1976-78 674 192 208 248 26 1979-82 768 310 67 372 1 9 1983-88 1,134 612 91 424 6 Malaysia 1976-78 81 37 3 34 7 1979-82 115 70-3 38 10 1983-88 265 138 3 116 8 Philippines 1976-78 216 57 121 38 0 1979-82 260 137 61 63-0 1983-88 762 394 249 122-4 Singapore 1976-78 25 6 17 2 na 1979-82 42 6 22 14 0 1983-88 -25 9-36 1 0 Thailand 1976-78 151 71 23 31 26 1979-82 373 210 36 113 14 1983-88 412 270 7 129 6 NOTE: na = Not available. 13

Indeed, Japan has created through its ODA program a $2 billion concessional relending facility called the ASEAN-Japan Development Fund, as part of the private-sector oriented Japan- ASEAN Investment Corporation. Because this corresponds to the goals of the ASEAN countries i.e., to increase DFI there are few complaints from the recipients. The United States, on the other hand, has not been able to respond to the region's increasing prosperity and the growing desire for more private sector based inflows of capital by the ASEAN countries. THE ROLE OF JAPANESE TRADING COMPANIES AND INFORMATION BUREAUS Japanese investment has been growing rapidly in recent years as Japanese firms have begun to relocate abroad in response to the rising yen and domestic labor shortages. Because of the links between trade and investment, this has had significant impacts on Japan's trade as well. Many small- and medium-scale manufacturers of parts are beginning to follow their parent companies in investing abroad as the high yen makes it costly for firms to import from Japan. These small- and mediumscale firms are able to do this largely because of the role of the Japanese trading company in providing information and finance to Japanese firms and to the large information base that has been set up by the Japanese government, The Japan External Trade Organization (JETRO) is also an important source of information and assistance for Japanese firms. 14

There are many small- and medium-scale American firms that have products and technologies that are desired by the countries in the Asia-Pacific region. While U.S. firms aspire to expand to these markets, the institutional mechanisms to help these firms are not in place. Financing is especially a problem for small firms wishing to invest abroad. It is also harder for small firms to meet the requirements regarding DFI tax incentives, export rules, business regulations, and local content requirements because of the lack of adequate information on how to proceed. Although the Export Trading Company Act of 1982 tried to address some of these concerns, it appears to be little used. In the past, U.S. DFI was largely conducted by large multinational corporations (MNCs) in the form of wholly owned affiliates. But for the United States to significantly expand its presence today and in the future, emphasis must be placed on joint ventures between small- and medium-scale firms. PROMOTING U.S. ASEAN PRIVATE SECTOR COOPERATION: A STEP IN THE RIGHT DIRECTION The emphasis on private sector development by the countries in the region suggests even larger opportunities for U.S. trade and investment in the future. Despite these growing opportunities, it can be said that Japan has generally outcompeted the United States in the Asian developing countries in terms of both investment and trade. It would be in the best interests of all countries concerned for U.S. firms to counter this with an increased presence of its own. The United States, on the one 15

hand, would be able to participate in and gain from the growth of these dynamic countries; on the other hand, the ASEAN countries would welcome greater balance between U.S. and Japanese investors. To increase or even maintain its presence in the region, U.S. firms must be encouraged to invest in ASEAN. Greater investment will lead to increased trade and other economic links to this booming region. To compete with Japanese firms in the region, however, U.S. firms will need some assistance, especially for small- and medium-sized enterprises. In Japan, financial arrangements, information on regulations, markets, customs, etc., and marketing support are provided by trading firms. In the United States there Is no counterpart public or private agency to serve potential U.S. investors. Furthermore, the United States' development assistance to the region must be programmed with due consideration to the post-oda status of some of the countries. U.S. ODA will need to take into account the role of private investment and seek to complement it. Coordination between ODA and private investments will help to strengthen the private sector and identify areas where policy adjustments and liberalization are desirable. Is the United States missing the boat? Possibly. The opportunities for enhanced ASEAN-U,S. economic cooperation are great, but a concerted effort is needed in order for the U.S. private sector to effectively tap the growing ASEAN market. It will be necessary to provide greater information on business opportunities 16

in the region and other "public goods," PITO is an important step in this direction. 17

TABLE SOURCES Table 1: Asian Development Bank. 1990. Key Indicators of Develo in Asian and Pacific Countries, July; 1991. Asian Development Outlook 1991. International Monetary Fund. 1990 and 1991. International Financial Statistics, Yearbook 1990 and April 1991; 1990. World Economic Outlook, October; World Bank. 1982. World Development Report 1982. Table 2: Asian Development Bank. 1991. Asian Development Outlook 1991. International Monetary Fund. 1987, 1990, and 1991. International Financial Statistics, Yearbooks 1987 and 1990, and April 1991. Table 3: United States, Department of Commerce, Bureau of the Census. 1990. Statistical Abstract of the United States 1990 ; Bureau of Economic Analysis. 1981. U.S. Direct Investment Abroad 1977 ; 1985. UPS. Direct Investment Abroad: 1982 Benchmark Survey Data ; Various years. U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, 1983 through 1987 Revised Estimates and Preliminary 1988 Estimates. Table 4: United States, Department of Commerce, Bureau of Economic Analysis. 1981. U.S. Direct Investment Abroad, 1977 ; 1985. U.S. Direct Investment Abroad: 1982 Benchmark Surve y Data ; 1989. U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates, Preliminary 1988 Estimates. Table 5: Organization for Economic Co-operation and Development. Various years. Geographical Distribution of Financial Flows to Developing Countries, 1976/1979 through 1985/1988 issues. 18

PITO Economic Brief Series Series Editors Dr. Michael G. Plummer Dr. Pearl Imada Managing Editor Janis Y. Tagashi 19

THE INSTITUTE FOR ECONOMIC DEVELOPMENT AND POLICY (IEDP) conducts cooperative research on issues of sustainable national economic development and international economic cooperation in the Asia-Pacific region. IEDP pursues this broad agenda through four programs: international trade and investment; regional economic cooperation; public policies and private economic initiative; and policies, politics, and economic change. The program on international trade and investment examines trade in goods and services, and the flows of private capital in the Asia-Pacific region. Special emphasis is given to understanding the causes and consequences of expansion in international trade and finance. The program on regional economic cooperation focuses on improving understanding of rising regional economic interdependence and how this interdependence can be most effectively managed. The program studies the performance and prospects of existing regional cooperation arrangements (including ASEAN, PECC, APEC, and SAARC) as well as explores the potential for new ar r angements. The program on public policies and private economic initiative focuses on the development of private economic initiative in the Asia-Pacific region. It assesses how different policy designs and implementation environments can improve the scope for private economic initiative; and how the economic, social, historical, and political characteristics of different market systems influence the scope for private initiative. The program on policies, politics, and economic change examines the political economy of structural change and policy reform in the regions economic development experience. The program analyzes the characteristics of politically and socially sustainable economic reform strategies that are consistent with broad development patterns and structural change.

THE EAST-WEST CENTER was established in Hawaii in 1960 by the United States Congress "to promote better relations and understanding between the United States and the nations of Asia and the Pacific through cooperative study, training, and research" Some 2,000 research fellows, graduate students, and professionals in business and government each year work with the Center's international staff on major Asia-Pacific issues relating to population, economic and trade policies, resources and the environment, culture and communication, and international relations. Since 1960, more than 27,000 men and women from the region have participated in the Center's cooperative programs. Officially known as the Center for Cultural and Technical Interchange Between East and West, Inc., the Center is a public, non-profit institution with an international board of governors. Principal funding comes from the United States Congress_ Support also comes from more than twenty Asian and Pacific governments, as well as from private agencies and corporations.