The economies of Southeast Asia are particularly exposed to such reconfigurations as they have high participation in global value chains, but are located mostly downstream in those value chains, and thereby face higher risks of being left out. •  At the same time, greater importance attached to ESG considerations have led to new standards and expectations--new global rules of the game--about how countries can participate in international trade. •  For small open economies, the challenge is to find their place in the rapidly evolving international trade landscape. How should they position themselves between the major trading powers? To what extent can regional trading blocs help to increase their voice in the international arena? Where are the best opportunities to plug themselves into a new configuration of global supply chains? •  Small open economies can best navigate and benefit from the shifting trade landscape by keeping their outward orientation, strengthening domestic institutions, and undertaking structural reforms that enhance flexibility. This would allow them to harness technology to upgrade their production capabilities and adapt to new trade patterns, including integration into evolving global supply chains. Services trade, especially in intermediate services such as telecommunication services and IT management, offer large growth potential. As world trade bounces back following the pandemic, opportunities for exports of services are likely to exceed those in goods. Active engagement in bilateral and regional free-trade arrangements will also help to diversify the trade base. •  Our economies must also quickly adapt to the new global rules of the game.
And if strong worldwide demand and impaired global supply chains raise the price of a good we buy on global markets, as we’ve seen over the past year, there’s no avoiding the consequences of that for real incomes either. One way or the other, either via lower nominal pay or higher prices, real incomes will be lower than they otherwise would have been. Indeed, because suppressing nominal wages itself involves a real cost – unemployment would need to rise – real incomes would be that much lower in the first case than in the second (i.e. in the simulation depicted in Charts 5a and 5b than they actually have been this year). What policy can do – assuming these shocks are foreseeable, or persist for long enough – is to make a choice between these outcomes. Again supposing all this had been predictable in advance, in the spring of 2020, the policy maker in this simulations might have chosen not to tighten policy quite so aggressively, and to tolerate a degree of above-target inflation at the end of this year, in order to avoid such a steep rise in unemployment. But this obviously involves a trade-off. In the face of big increases in import prices of this sort, either you stick rigidly to the primary inflation objective, and suffer the greater hit to real incomes and domestic output; or you accommodate somewhat higher inflation and pay some attention to the secondary goal of stabilising the domestic economy.