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“Trade Policy Trends: Serving the Business Interests”

Speech by
Haruhiko Kuroda
President
Asian Development Bank

At the Asia-Europe Business Forum

Helsinki, Finland
10 September 2006

I.  Introduction

Mr. Christoffer Taxell, Chairman of AEBF-10; Mr. Rufus Yerxa, Deputy Director General of the World Trade Organization; ladies and gentlemen:

It is a great honor to join you for this important discussion. Let me begin by recognizing the deep commitment and outstanding efforts of the WTO to achieve a compromise on the Doha development agenda. Since the Doha negotiations were suspended on July 24th, a lively debate has taken place on whether a deal is better than no deal. In my view, however, there can be little doubt that successful conclusion to Doha would improve economic prosperity around the world. I will return to this issue in a moment, but first I would like to say a few words about Asian regionalism in the global context.

II.  Thinking Globally, Acting Regionally

Globalization, of course, has been the driving force behind market-driven economic integration in the last century. Asian economies, with their outward-looking development strategies, have reaped tremendous benefits in the form of trade expansion, economic growth and poverty reduction. Asia now accounts for nearly 30% of world GDP – double the figure for 1960. And, it encompasses four of the world’s ten largest economies (Japan, PRC, India and Korea). The rapid rise of Asia as a pivotal region during this era of globalization is a remarkable achievement by any standard.

One of the ways that developing Asian economies have responded to globalization is by strengthening efforts toward regional cooperation and economic integration, to better share opportunities and manage the risks of increased interdependence. Indeed, many Asian leaders these days are promoting the notion of a larger Asian economic community. And, the evidence shows that such a community is already emerging.

One of the best indicators of this trend is the growth of intra-regional trade. While still at a modest level in Central Asia and South Asia, intra-regional trade in East Asia rose from 43% of total trade in the early 1990s to 55% in 2005. This is higher than the 46% figure for NAFTA and only modestly lower than the 62% figure for the 15 European Union countries.

Intraregional investment is also substantial. Since 1980, FDI inflows into East Asia (including Japan) have more than quadrupled, reaching 21% as a share of world FDI inflows in 2004. Over the same period, the share of East Asian FDI outflows increased from 5% to 14% of the world total. Intraregional FDI flows accounted for much of this increase.

These integration processes have been largely market-driven through the establishment of global and regional supply chains and production networks. However, in recent years, Asian governments have begun to make real efforts to work together towards deeper economic integration.

For example, through the Association of Southeast Asian Nations (or ASEAN) and ASEAN-related activities, such as ASEAN+3, and of course the Asia-Europe Meeting (ASEM), Asian policymakers are engaging in policy dialogue, coordination, and cooperation to further liberalize trade and investment, strengthen monetary and financial integration, improve cross-border infrastructure and reduce transport costs, and respond more effectively to cross-border health, environmental and security threats. Similar discussions are beginning in other subregions, such as South Asia (through the South Asian Association for Regional Cooperation) and Central Asia (through the Central Asia Regional Economic Cooperation program).

These efforts at regional cooperation and regional community building are not easy, especially given the region’s socioeconomic and political diversity. But it is noteworthy that Asian policymakers are now engaged in frank, open, honest discussions on many complex issues. They want to find solutions that will strengthen efforts at institutionalizing a regional economic community and address their growing collective global responsibilities.

This does not mean, however, that Asian regionalism should come at the expense of its engagement with the global economy. Quite the opposite. Asia’s postwar economic success has been due in part to its participation in the global economy. Drawing on this lesson, the objective must be not to create a “fortress Asia”, but a highly integrated Asia that is open to the rest of the world as well. ADB is a strong supporter and promoter of “open regionalism” whereby Asia increasingly acts regionally while continuing to think globally.

III.  Global Trade Talks: Imperative and Outlook

This, then, is why the current multilateral trade negotiations are so important. In my view, “multilateralism vs. regionalism” is not an “either-or,” but a “both.” If managed effectively, they can be mutually reinforcing and bring substantial benefits to participating economies.

While an ambitious Doha trade deal with a comprehensive agricultural agenda would be most beneficial for developing countries, even a limited Doha agreement would be better than no deal at all. For instance, under a somewhat modest Doha scenario¹ we estimate that the world income would rise by around $70 billion in 2025 (equivalent to about 0.1% to 0.2% of world GDP). Whilst these figures may seem relatively small, such a deal would encourage globalization and avoid protectionism. Moreover, a Doha deal would open markets further, hasten domestic restructuring, accelerate inward investment, create new jobs and lay the foundation for future economic growth. Owing to its high trade openness, strong human capital and modern infrastructure, Asian developing countries would gain disproportionately but other developing regions would also witness gains.

The pressing question is: What’s next for the Doha negotiations? History suggests that previous trade rounds have faltered, only to be re-launched a few years later. I recall that the Uruguay Round took seven and a half years, almost twice the original schedule. The Uruguay Round was also suspended from 1990 until mid-1993 due to differences over agricultural subsidies. Nonetheless, in April 1994, the Uruguay Round deal was signed in Marrakesh. It is likely that the Doha round will follow a similar path. ADB will continue to support the Doha process though a mixture of advocacy, studies and training.

IV.  Dealing with the Reality of FTAs in Asia

In the wake of the suspension of Doha negotiations, many have expressed concerns about the spread of free trade agreements in the developing world – particularly in Asia. By ADB’s count, there are currently 81 regional and bilateral free trade agreements under implementation in Asia, 52 under negotiation and 50 more have been proposed.²

Viewed pragmatically, there are positive and negative aspects to the spread of FTAs in Asia. On the positive side, against a backdrop of slow progress in global trade talks, they can promote continued trade liberalization, induce structural reforms in the countries concerned and widen market access across the region. On the negative side, however, the proliferation of a large number of bilateral FTAs can lead to the well-known “noodle bowl” effect. In particular, multiple rules of origin arising from overlapping agreements among members of different FTAs can have harmful results. Complex rules increase administrative and business costs, especially for small- and medium-sized enterprises, as they have limited capacity to absorb them.

Nevertheless, FTAs are a growing reality. Accordingly, our approach is to support the Doha negotiations process under the WTO while recognizing that there is a need to consolidate and streamline regional/bilateral FTAs into an eventual East Asian FTA. To this end, ADB has just launched a major study on the economic effects of FTAs on business in Asia and Latin America, in partnership with the Inter-American Development Bank. We have three objectives: to monitor the spread of FTAs through a new FTA database, which will soon be launched on our revamped web site; to help countries build their capacities to negotiate, structure and implement appropriate trade arrangements; and to encourage various bilateral FTAs to converge toward a single Asia-wide “best-practice” FTA.

V.  Enhancing “Aid for Trade”

Market access, whether through regional or international agreements, is a necessary but not sufficient condition for successful participation of developing countries in the multilateral trading system. One of the fundamental lessons from the East Asian newly industrializing economies (NIEs) is that the creation of appropriate supply-side capacity is essential for countries – and enterprises within them – to benefit from open markets and greater trade opportunities. Indeed, East Asian NIEs have enhanced their firm-level capabilities to world standards, improved their trade and investment institutions, and significantly strengthened their negotiation skills since the 1960s.

Thus, we welcome the “Aid for Trade” initiative in order to build supply side capacity in developing Asia, particularly in the least developed countries. Well before “Aid for Trade”, ADB was active in trade-related cooperation projects in the Greater Mekong Subregion (GMS), the Central Asia Regional Cooperation Program (CAREC) and the Pacific. We have worked with member countries to build cross-border infrastructure, facilitate trade, modernize customs procedures, enhance SME trade and finance, and support trade- and investment-promoting regimes. We are currently consulting with our development partners on how ADB can contribute to the “Aid for Trade” initiative, and we particularly look forward to working with the WTO on trade policy training and related activities.

VI.  Fostering Investment-driven Trade

Finally, I would like to recognize the Asian and European business communities for their continued interest in, and commitment to, developing Asia. Much of the region’s trade activity has resulted from the growth of foreign direct investment through the emergence of global value chains. This trend has been driven by reductions in transport and logistic costs, technological progress, and trade and investment liberalization—with East Asia at the forefront. Asia’s enterprises are increasingly among the world’s most efficient. Today we see that global value chains, which were initially focused on the Asian NIEs and ASEAN, have gradually converged on the PRC due to market size, labor costs, and productivity, among others.

ADB is firmly committed to promoting a conducive investment climate across the Asian region. Many of our infrastructure projects have contributed to the expansion of investment and trade by promoting private sector activities. ADB also conducts research, provides advice on investment policy reforms, and helps governments develop the skills, abilities, resources and processes needed to succeed in the global environment.

VII.  Concluding Remarks

Let me close by thanking the Confederation of Finnish Industries EK for hosting this important conference, and the people of Helsinki for welcoming us warmly to their community. The ties between Asia and Europe are strong and growing, creating excellent prospects for a more integrated and more prosperous global economy. If all parties work hard to build on the success of recent decades, I am confident that we can achieve an even higher and sustained level of growth for Asia and the world, well into the future.