A buffer against protectionism - Stephen P. Groff | Asian Development Bank

A buffer against protectionism - Stephen P. Groff

Op-Ed / Opinion | 3 April 2017

Asia and the Pacific’s stellar growth over the last few decades didn’t happen by accident. It was a long, difficult process, driven largely by exports but anchored in deliberate and thoroughgoing efforts to promote economic cooperation and integration. The region’s share of global gross domestic product (GDP) is estimated at more than 40% in purchasing power parity terms, up by 11 percentage points since the turn of the century. Closer economic, trade and transport links have guided its prosperity, even during times of uncertainty.

We are now in such a time. The risks to the region’s growth prospects are genuine. Even before the United States withdrew from the Trans-Pacific Partnership (TPP) in January, rising protectionism had become a roadblock to international trade. The number of anti- dumping cases against Asian exporters increased by more than 50% to 279 between 2011 and 2015. In 2015, Asia’s trade growth by volume declined to 2.3%—below the 2.7% average for all regions—as the global economy struggled to recover from a prolonged downturn.

Rising protectionism will further reduce trade volumes if countries erect trade barriers either in retaliation or because they think this will safeguard jobs at home. If allowed to become Asia’s “new normal,” protectionism could cost the region much of its hard- won growth and prosperity, and possibly upset its political equilibrium. It could be particularly disruptive in Southeast Asia, where the Association of Southeast Asian Nations (ASEAN) has presided over a period of buoyant economic growth and political stability – largely thanks to increasingly open borders.

What steps can we take to ensure that renewed protectionist sentiment doesn’t take root in Asia? Regional economic integration is a good place to start. It can be an effective buffer against the temptation to seek refuge in inward-looking policies to counter globalization – a largely uncontrolled process that provides some people with many gains, others less, and can leave still others worse off.

Despite its benefits, it is important to acknowledge that globalization has also been accompanied by rising inequality. Studies show that Asia’s income gap is expanding, with 14 of the region’s economies now having a Gini coefficient of 0.40 or greater, considered the threshold for high inequality. Such increases in inequality can provoke a rethink in policy, as we are witnessing currently in the US. With the advent of global value chains, many multinational corporations have benefited from outsourcing low- skilled jobs and operations overseas, while gaining access to new consumers and markets. It should be recognized, however, that many labor-intensive jobs were lost due to automation and technological change. The growth of the non-labor-intensive financial sector has also played a role.

Still, globalization has allowed some countries, such as the People’s Republic of China (PRC), to gain from trade and achieve development goals. GDP growth in the PRC averaged 9.7% per annum between 1980 and 2014, delivering a significant improvement in human wellbeing and quality of life as well as poverty reduction. Indeed, poverty has fallen across Asia as borders have opened. In 1981 there were almost 1.6 billion about 330 million.

The trick is to capture globalization’s benefits while minimizing its risks. Well-designed initiatives to pro- mote regional cooperation and integration can do this. The ASEAN Economic Community (AEC) and the Regional Comprehensive Economic Partnership (RCEP) currently being negotiated between ASEAN and six of the bloc’s main trade partners, are designed to increase integration while trying to address development gaps and other disparities across member countries.

Like the moribund TPP, both the AEC and the RCEP pay special attention to those left behind by globalization, and commit to inclusive economic growth through their poorest member economies. This way, they can try and keep a lid on the unequal gains from increasing integration, and the social and political tensions that it can generate.

The principle of S&D treatment acknowledges that future RCEP members are at different stages of development, and includes specific actions to address their special needs. RCEP promises more favorable terms for the less developed economies by allowing them more gradual tariff liberalization and longer transition times.

RCEP would also provide poorer countries with incentives to overcome the potential social costs from structural transformation, such as low-wage traps that prevent domestic industries from climbing the value chain. With S&D treatment, Asian economic integration should be more inclusive than unfettered market-driven globalization.

The case for further integration is bolstered by the experience of the Mekong countries, where the Greater Mekong Subregion framework has improved connections between its six member countries. Lower transport, trade and investment costs have helped to spur high rates of economic growth, with life-changing consequences. Poverty has fallen sharply throughout the region. For instance, in Viet Nam around 50 million people were lifted out of poverty between 1993 and 2012.

At the micro level, regional integration has created livelihoods across the Mekong subregion in substantive ways. Poor farmers have gained access to markets and thereby higher incomes due to the construction of farm-to-market roads in places such as Cambodia’s Tonle Sap basin.

Despite these success stories, we can’t rule out the possibility that some Asian economies may nevertheless decide to raise tariffs and erect non-tariff barriers, especially if the US follows through on threats to impose its own tariffs. If Asian countries were to respond in kind, a domino effect of protectionist policies in the region could undermine growth.

The impact of this is likely much more risky than the downsides of globalization. As global growth and trade sags, Asia’s governments must carefully weigh potential short-term benefits of erecting trade barriers against the long-term gains of continued openness.

Regional economic integration cannot stop individual countries from adopting protectionist policies to shield them against the perceived perils of globalization. In fact, the flexibility that characterizes ASEAN cooperation gives member states a pretext for non-compliance. But by doubling down on integration and cooperation, rather than moving away from it, countries can mitigate the risks to economic growth posed by growing protectionism.

Rather than reinvent the wheel by forging new models for integration and cooperation, we need to refine and improve the mechanisms we already have. Initiatives like the AEC and the RCEP are a good start, but need more teeth. As the AEC finds it feet, ASEAN member states might consider developing stronger mechanisms to ensure compliance with AEC regional integration norms.

Also, regional integration frameworks must aim to produce tangible results, apart from low-hanging fruit measures such as lifting tariffs. Removing more stubborn non-tariff barriers, for example, could galvanize support for open trade and help curb any momentum toward protectionism.

The demise of the TPP leaves the proposed RCEP as the only region-wide trade agreement in a part of the world where bilateral free trade agreements proliferate. History has shown that bilateral agreements are more vulnerable to protectionist shifts and political head- winds. Accelerating progress on regional integration is therefore vital to prodding Asian economies down a cooperative rather than protectionist pathway.

The more integrated a region is, the less likely it will embrace protectionism in uncertain times. Regional integration and cooperation are not panaceas. But they offer an insurance policy against protectionism, backed up a strong track record of success.