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	Table of Contents
p. 70 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Introduction The drivers of trade and integration in Asia The rise of bilateralism Trade scenarios: Potential benefits and risks An agenda for trade and integration in Asia Conclusions Endnotes and references Statistical appendix

Asian Development Outlook 2006 : III. Routes for Asia's Trade

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Introduction

Rising prosperity in the global economy has been closely associated with vibrant growth of international trade (Maddison 1995). History attests that when nations erect high walls against international trade and turn their economies inward, stagnation and decline typically follow.

Over the past 30 years, international trade has also been closely associated with rising incomes and falling poverty in Asia. Throughout most of this period of rapid Asian economic growth, growth of exports and imports has outpaced growth of income. Although debate remains about the exact nature of the links between trade and growth, rapid expansion of trade, particularly merchandise trade in manufactures, has usually occurred in tandem with large investments in capital, technological upgrading, and the acquisition of new skills and knowledge—all of which have boosted productivity.

Fast expansion of trade has brought wider benefits. In particular, the social impacts of trade-led growth have generally had positive effects on employment, labor-force participation rates of women, and jobs for new entrants to the labor force. Expansion of international commerce has also been an important channel through which competition and choice have been enhanced. Although differences of opinion exist about the appropriate pace and scope of trade liberalization, the experiences of East Asia, and Southeast Asia, and then the People's Republic of China (PRC) have had a powerful effect in persuading others of the potential benefits of reducing protection and better gearing their economies to trade. India, for example, has now embarked on a liberalization effort aimed at reducing its high tariffs to East Asian levels and is also allowing up to 100% foreign equity in industrial enterprises.

In this part of the Asian Development Outlook 2006, future opportunities for Asia's trade are explored.¹ These opportunities will be shaped by a variety of factors. At a global level, prospects for the world economy and the outcome of the Doha Round (Part I of Asian Development Outlook 2006) will obviously be important as, of course, would any future initiatives for multilateral liberalization. At a regional level, programs and agreements intended to forge closer cooperation and deepen integration could prove influential. Motivated by a variety of interests, a number of countries within the region are now also pursuing bilateral trade (and investment) agreements, often with partners outside the region. A looming challenge will be to minimize inconsistencies and frictions among multilateral, regional, and bilateral agreements.

Outside the arena of formal trade agreements are other important factors driving trade expansion. For example, increasing trade integration within East and Southeast Asia has been closely associated with changes in industrial organization and the spread of international production sharing, or the fragmentation of vertically integrated supply chains. The attractiveness of East and Southeast Asia as production and investment platforms has been enhanced by a variety of measures that reduce the frictions and costs of trade, such as investments in port and other infrastructure, the establishment of special zones and bonded industrial warehouses, and duty drawback schemes. These arrangements have allowed investors to take advantage of economies of scope and specialization and have resulted in a burgeoning cross-border trade in manufactured parts and components and in assembly of final goods.

In the next section, The drivers of trade and integration in Asia, the growth of Asia's trade is chronicled. The roles of policy, technology, and markets in influencing growth of trade and patterns of regional integration are examined. A key conclusion is that technological change, markets, and the private sector, particularly multinational firms, have been crucial in deepening integration. To date, regional trade agreements have had only a limited impact on integration; the most significant liberalization efforts have been unilateral.

The rise of bilateralism, the subsequent section, considers relevant institutional factors. An enumeration and classification of free trade agreements (FTAs) involving one or more developing member country of the Asian Development Bank (ADB) suggests not only that bilateralism is on a strong upswing but that it crisscrosses regions. Asia's "noodle bowl" is not only expanding, but is becoming increasingly enmeshed with elaborate agreements in other parts of the world. This section points to the risks that a proliferation in bilateralism entails in terms of trade diversion. There is also a risk that bilateralism could polarize opportunities, favoring large trading "hubs" at the expense of more isolated trading "spokes."²

Trade scenarios: Potential benefits and risks examines the welfare implications of multilateral, regional, and bilateral trade liberalization scenarios using an Asian-focused computable general equilibrium model of the global economy (GEMAT). Full global liberalization of merchandise trade provides an ideal against which the impacts of partial liberalization in a hypothetical Asian Free Trade Area—with most-favored-nation (MFN) tariffs—and Asian "bilateral hub and spoke" systems are compared. Given the limitations of computable general equilibrium models and the likelihood that they underestimate benefits from trade liberalization, the relative rather than absolute magnitude of the welfare impacts are of most interest.

Recognizing that global free trade is a long-term ambition, the penultimate section, An agenda for trade and integration in Asia, asks what developing Asia can do to position itself to maximize the future benefits of trade. Steps to mitigate the potential damage arising from the noodle bowl problem and hub-and-spoke trading configurations are set out. These may require extending technical assistance and cooperation to poor countries where capacities and institutions are weak. Beyond ensuring that bilateral agreements are designed to mitigate trade diversion problems, it is argued that bilateralism may provide a springboard for "deeper integration," either through measures that go beyond World Trade Organization (WTO) agreements, or through reductions in behind-the-border frictions. To the extent that bilateral agreements can do this, the gains from bilateralism may offset any losses entailed by discrimination. For example, bilateral agreements that help reduce trade transaction costs or liberalize cross-border investment present the opportunity for sizable income gains.

The Conclusions section summarizes the key messages. The now familiar—but crucial—point is restated that further progress on multilateral liberalization will limit the potential harmful effects of bilateral agreements by reducing the scope for discrimination through narrowing margins of preference.

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