Catalog

1.1.3  Routes for Asia's trade

Developing Asia's trade in goods and services has grown at an unrivalled rate. Between 1984 and 2004, the region's exports expanded almost 10-fold. Over the same period, it enjoyed rapid growth of income, and made significant gains in terms of poverty reduction and other social objectives. Of course, aggregate regional trends mask considerable geographic diversity. East Asia led the way and began experimenting with trade liberalization in the 1960s. Gradually, these experiments were broadened, and East Asia was followed by Southeast Asia and more recently by the People's Republic of China. These experiences have had a powerful demonstration effect and South Asia is now embarking on its own liberalization agenda. In Central Asia, trade has grown from a low base, after a virtual dissolving of economic structures at the breakup of the Soviet Union. In the small Pacific states, location and size have been an impediment to deeper integration.

It would be naïve to suggest that trade liberalization can of itself ignite and sustain growth, but the balance of evidence (Winters 2004) provides a strong "presumption" that trade liberalization has been an important element in a broader package of factors that has helped lift productivity and incomes in developing Asia. One reason for this is, perhaps, that trade openness stimulates investment by expanding markets abroad and by reducing the cost of imported machinery. Another is that trade liberalization may help trigger or "lock in" other beneficial institutional and policy changes. In contrast, significant trade protection has never been associated with fast economic growth for extended periods of time.

Part 3 develops the point that growing trade integration within Asia, and between Asia and the rest of the world, reflects a confluence of factors. Trade integration has been driven both by multilateral and unilateral liberalization initiatives, on the one hand, and by technological changes and market opportunities that have created new avenues for trade, on the other. Developing Asia benefited from expanded market access for manufactured goods that resulted from multilateral trade liberalization under the sponsorship of the General Agreement on Tariffs and Trade and then the World Trade Organization (WTO). But in East and Southeast Asia, unilateral efforts to liberalize trade were critical and helped pave the way for foreign direct investment looking for low-cost, export-production platforms. These trends were apparent before the establishment of preferential trade agreements, such as the Association of Southeast Asian Nations Free Trade Area. Other evidence (ADB 2002) suggests that, unlike in North America and Europe, preferential agreements in developing Asia have had little impact on trade integration.

Yet the landscape of preferential trade agreements is changing globally and in Asia. Perhaps disillusioned by the slow pace of progress on multilateral liberalization trade talks, policy makers in recent years have generated an avalanche of bilateral trade agreements that have been notified to WTO. Increasingly, these bilateral agreements will influence the volume and pattern of trade and investment flows, globally and within Asia. Such agreements liberalize trade on a reciprocal basis between two countries and their scope can go beyond WTO mandates to include investment, trade in services, and other issues, including trade facilitation. Essentially, like-minded partners can agree on anything they would like to, provided that this does not abrogate their WTO obligations. The potential that bilateral agreements have to expand into areas not yet covered in multilateral agreements holds promise for gains. But bilateral agreements are also inherently discriminatory, leaving countries that do not receive preferences at a disadvantage to those signing up to them.

Asia is well represented in the array of bilateral agreements that are now in force or are currently in negotiation. Many of these actual and potential agreements are between Asian countries and countries from other regions. Asia's "noodle bowl" is not only filling up quickly, it is spilling across regional boundaries. It seems unlikely that bilateralism is a route that will lead to a larger Asian free trade area (with or without extending benefits to third parties on a most-favored-nation basis). A more likely scenario is one in which large Asian trading "hubs" negotiate bilateral deals with smaller, isolated trading "spokes," but in which the spokes are not linked through reciprocal deals with each other.

In Part 3, a general equilibrium model of the global economy that focuses on Asia's trade (GEMAT) is used to compare and contrast the potential offered to Asia by multilateral, regional, and bilateral approaches to trade liberalization. The results are striking and illustrate the possibility of significant trade diversion under bilateralism, and a polarization of benefits favoring large trading hubs to the detriment of small Asian countries. Add to this the compliance costs entailed by the expanding noodle bowl of overlapping and inconsistent rules of origin, as well as the fact that bilateralism can deflect interest and energy from multilateral processes, then the potential for harm is clearly present.

However, the risk entailed by bilateral agreements depends on their intentions, their coverage, and their details. It also depends on the underlying political dynamics. It is conceivable that bilateral liberalization initiatives may move these dynamics in some countries toward more expansive, multilateral liberalization efforts, but this is not guaranteed. A more purposeful approach may therefore be needed to limit damage and maximize opportunities. In Part 3, ways of mitigating the potentially damaging impacts of bilateral agreements and of leveraging their potential benefits are set out. These include assuring wide coverage in terms of goods and services, adopting harmonized rules, and leaving open the possibility of extending preferences to others. Calculations presented there suggest (i) that measures reducing trade costs and helping ensure that poorer countries can get their goods to market more cheaply—through simplification of customs procedures, for example—offer considerable benefits, and (ii) that these measures are inherently nondiscriminatory. As many poor countries do not have the capacity to negotiate and design "full-blown" bilateral trade agreements, technical assistance and cooperation are likely to be needed as part of broader "aid-for-trade" approaches.

In the final analysis, significant progress on the multilateral liberalization of trade under the aegis of WTO could do much to reduce bilateralism's downside, through lowering potential margins of preference on a most-favored-nation basis.

References
Asian Development Bank. 2002. Asian Development Outlook 2002. Part 3. "Preferential Trade Agreements in Asia and the Pacific." Manila.
Winters, Alan L. 2004. "Trade Liberalisation and Economic Performance: An Overview." The Economic Journal 114(493):F4-F21. February.