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Asian Development Outlook 2006 : III. Routes for Asia's Trade
ConclusionsTrade has been an important ingredient in the mosaic of factors that has contributed to rapid economic catch-up in parts of developing Asia. Although it would be naïve to suggest that trade liberalization alone can ignite and sustain growth, 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, and perhaps accelerated growth. The direction of causation between growth and trade is difficult to disentangle, but one possible reason for the link is that trade openness stimulates investment by expanding markets abroad and reducing the cost of imported machinery. Another is that trade liberalization may help stimulate or lock in other beneficial institutional and policy changes. Significant trade protection, in contrast, has never been associated with sustained fast economic growth. So far, the closer trade integration that has taken shape in East and Southeast Asia over the past two decades has been propelled largely by market forces, rather than by PTAs. The private sector in developing Asia has benefited from access to developed-country markets sponsored under successive rounds of multilateral liberalization, and countries have done much to help themselves by reducing tariffs, frequently on a unilateral basis. However, a rising tide of bilateralism is sweeping across the global trading system and Asia is being carried along by it (discussed in The rise of bilateralism, above). Estimates confirm both the potential costs of bilateralism in terms of trade diversion and the promise of initiatives that could go beyond WTO agreements to deepen integration. The simulation results summarized in this part of the Asian Development Outlook 2006 (and echoed in many other studies) underscore the principle that the more open and nondiscriminatory the trade agreement, the better it is. It is also demonstrated that agreements that attempt "deep integration"—by reducing trade costs through behind-the-border reforms—could be potentially much more beneficial than traditional PTAs. The movement toward regional and bilateral agreements is a reality and is motivated by noneconomic, as well as commercial, considerations. Asia's agreements tend to be very young, but during the time that they are implemented they will start making their mark on regional and global trade and investment flows. Therefore, it is essential that the dynamics of bilateralism are guided in such a way that they support, rather than contradict, the openness that to date has been a hallmark of Asia's trade expansion and integration. Many of the PTAs that Asian countries are entering into extend beyond the region. This underscores the importance to Asia of non-Asian markets. The political economy of bilateralism is complex. Baldwin (2002), for example, sees an opportunity to leverage bilateralism to work for, and not against, multilateralism. His point is that special and differential treatment of low-income countries within the context of multilateral liberalization efforts has inadvertently fortified protectionist pressures. Bilateral agreements with developed countries that already have negligible protection, such as Japan, would under GATT Article XXIV require the virtual elimination of tariffs and indirectly pit protectionist interests in developing countries against international competition. As a consequence, protectionist influences would likely shrink, and the influence of exporters and those favoring liberalization expand. Such a shift, Baldwin argues, would help change attitudes to multilateral negotiations, as well as their mood.15 Others have contributed to the "building blocks versus stumbling blocks" debate (e.g., Frankel 1998). They emphasize that bilateral FTAs are more likely to cause damage if they fail to address behind-the-border barriers and focus narrowly on preferential reduction of tariffs. Bilateralism also runs the risk of establishing hub-and-spoke systems that marginalize small trading spokes and concentrate gains in the larger hub countries, unless governments make conscious efforts to link the spokes. Associations of bilateral agreements can help in this linking, but this would present considerable harmonization problems. In principle, if such associations become sufficiently large, include countries with complementary factors, and extend preferences on an MFN basis to outsiders, they would help increase opportunities for gains. The "building/stumbling blocks" literature tends to focus merely on what might emerge endogenously out of bilateral and regional trade agreements. But it would be useful if a format could be established whereby these accords would have to be building blocks. Currently, the Doha Development Agenda is exploring means to ensure that bilateral and regional trade agreements will be consistent with WTO principles, i.e., to give more "teeth" to its Article XXIV, but only modest policies are being considered, such as improving transparency. Much more is needed. Possible "guidelines" to good practice in bilateral and regional trade agreements are set out in An agenda for trade and integration in Asia, above. Adoption and effective implementation of these 10 basic principles (Box 3.8 above) would help minimize the potential damage from bilateral agreements and, at the same time, allow for trade creation, investment creation, and efficient behind-the-border reforms. While this sort of approach would be best adopted at the multilateral/WTO level, it will be difficult to do so without strong political support. Asia could play a significant leadership role by adopting these principles and by incorporating them in its bilateral and regional trade agreements. Leading by example would not only have significant economic benefits but would also strengthen the profile of Asia in the global trading system. The least-developed countries in Asia have, perhaps, the most at stake in this process. As they move forward with economic reform and commercial policy liberalization, it is of the essence that international markets remain open to them. If market access is effectively closed off by a web of preferences favoring others, it will be extremely difficult for them to succeed in their reform process. It is also important that the poorest countries are helped in developing the technical and physical capacity to take advantage of global markets. Many low-income countries remain at a competitive disadvantage in getting their goods to market (Box 3.9 above). Assistance for trade facilitation and the easing of behind-the-border trade barriers will likely prove critical to their success. Ultimately, Asia's growth and prosperity will be a function of the health of the global trading system, of which the region is an important part. Asia has a significant interest in a strong, healthy, ambitious multilateral agenda. After all, Asia's trade interests overwhelmingly lie in having unfettered access to the largest markets of the US and EU. Intraregional trade integration through production sharing actually reinforces Asia's interests in keeping open access to industrial-country markets. This is because these markets are the ultimate destination of most exports of final goods assembled from parts and components traded in Asia. Thus, WTO and the Doha Development Agenda are critical. A substantive, comprehensive result in the Doha talks would mitigate any potential negative effects of preferential trade agreements. It would also emphasize that the multilateral system, generally governed by WTO, forms the core of the system. Asia has much riding on this result, and needs to take an active leadership role in the Doha talks.
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