Rationale
In recent years, the global economy has experienced significant fluctuations, largely influenced by U.S policies under President Donald Trump, including the withdrawal from the Trans-Pacific Partnership (TPP) Additionally, the United Kingdom's exit from the European Union has further impacted international economic dynamics.
EU (Brexit) and the Industrial Revolution 4.0 has strongly developed, …All of these events have impacted a lot to the world’ economy as long as its international trade
Asia, a major global economy, has experienced a remarkable growth rate of 4.5% annually over the past two decades, according to the International Monetary Fund (IMF) However, recent trends indicate a slowdown in both economic and international trade growth within the region Since 2011, the Asian Development Bank (ADB) reported a decline in export and import growth, with annual values dropping by 4% between 2012 and 2016 Despite the slowdown, international trade remains crucial, enhancing global output, providing firms access to larger markets, facilitating capital flows, and integrating businesses into international production networks and supply chains.
Understanding the current trends in international trade, particularly the slowdown in Asia, is essential for developing effective strategies This necessitates identifying the underlying causes of these trends Hence, my thesis titled “The Slowdown in Asia’s International Trade and Its Causes” was conducted to explore this critical issue.
Literature review
Current status of international trade slowdown
Gita Gopinath (2019) highlights a recent trend of economic slowdown globally, attributed to significant declines in manufacturing activity and international trade Her research offers forecasts and recommendations aimed at enhancing the world's growth rate in 2020.
Cristina, Aaditya, and Michele (2015) highlighted that post-global crisis, trade growth has remained sluggish, particularly in advanced economies like the Eurozone, while emerging markets and developing economies have experienced moderate growth The authors attribute this stagnation to several factors, including shifts in income convergence rates among countries, alterations in global trade composition, modifications in trade regimes, and an increase in protectionist measures, as well as changes in vertical specialization patterns.
Lewis and Monarch (2016) identify several factors contributing to the slowdown in international trade, including a deceleration in trade openness, a reduction in supply chain fragmentation, structural shifts in Chinese trade, and cyclical influences like the decline in trade-oriented components of aggregate demand.
According to Petersen (2016), five key factors contribute to the economic slowdown: a decline in goods demand in Europe and China, the rising significance of the services sector, increasing wages in newly industrialized nations, a trend towards greater protectionism, and the rapid advancement of digitalization.
According to Christophe Bellmann, Trineesh Biswas, and Marie Chamay (2010), the global economic and financial crisis significantly impacted world trade, leading to a notable slowdown in trade activities among major countries, including China, India, and Brazil.
These researches only point out the trade slowdown in the world and some countries but do not mention Asia
Impacts of trade slowdown to economies
In 2019, Valentina Romei emphasized a significant trade slowdown in Europe, mirroring global trends Major EU economies experienced declines in exports and imports, with France seeing reductions of 3.6% and 1.7%, respectively, while Germany faced drops of 0.4% in exports and 1.8% in imports Additionally, Italy reported a continuous decline in trade for the sixth consecutive quarter.
Exports fell by 1.2% and imports declined by 1%, highlighting the adverse impact of trade slowdown on global economies, particularly among G20 nations However, the study lacked an analysis of the underlying causes of the decline in world trade and did not provide detailed insights into regions beyond Europe, with a notable absence of information regarding Asia.
In their 2016 study, Sumedh Deorukhkar and Le Xia assess how China's economic transition affects emerging Asian economies, particularly in light of China's growth slowdown, Yuan depreciation, and financial market instability Their findings indicate that Taiwan and Korea are the most susceptible to declines in Chinese imports, while the Philippines, Indonesia, and India experience minimal impact The research emphasizes the trade slowdown in China and its adverse effects on neighboring countries.
It does not point out trade slowdown picture in Asia as well as the causes and impacts of this trend
Jan Hanousek and Evžen Kočenda (2013) examine the impact of various traditional and emerging determinants on trade between European countries from 1992 to 2008 Their analysis includes factors related to geography, culture, institutions, infrastructure, and trade direction.
Steve Suranovic (2010), Point out six main factors that affect international trade The first factor is inflation, national income, government policies, subsidies for exporters, restrictions on imports and exchange rates
The cause of the slowdown in international trade
In his 2016 review, Fabian Mendez Ramos analyzes recent trends in global trade, identifying both transitory and structural factors contributing to the current slowdown He also explores policies that will influence the future trajectory of trade, particularly in light of emerging global dynamics.
10 protectionism and the relevance of multilateral and bilateral trade agreements In general the research does not indicate the causes of trade slowdown
Logan Lewis and Ryan Monarch (2015) examine the significant slowdown in global trade in recent years, evaluating its causes and the extent to which it stems from cyclical weaknesses in global growth versus long-term structural shifts in the economy Understanding these causes is crucial, as they determine whether the trade slowdown warrants further concern beyond general anxieties about future global economic growth While the research highlights the slowdown and its implications, it notably lacks an analysis of the trade slowdown specifically in Asia.
Previous research has primarily focused on global trade dynamics, often neglecting a detailed examination of Asia's international trade growth As a result, there remains a lack of clarity regarding the factors contributing to the perceived "slowdown" in Asia's trade This study aims to fill that gap by analyzing Asian trade in depth and identifying the underlying causes of the trade slowdown in this region.
Research objective
General objective: Identify and recognize the changing trends in international trade in Asia as well as find out the causes of the slowdown in Asia’s trade
- Find out how the slowdown in trade is happening in Asia
- Find out the changing trend in Asia's Trade by commodity group
- Find out the changing trend in Asia's Trade by partner
- Find out the causes of the slowdown in Asia’s Trade
- Make policy implications in this context to identify and mitigate the negative impact of this phenomenon
Subject of the study and Scope
Subject of the study: Asia's international trade and factors affecting Asia's international trade
+ Time scope: The Asian economies within 2008- 2019 to see the specific change in periods before Financial Crisis and after Financial Crisis
The 2008 economic crisis significantly impacted the global economy and international trade, marking a pivotal moment in both Asian and worldwide economic development This research specifically examines the period from 2008 to 2019 to understand these effects.
+ Space scope: The Asia,Trade between Asia countries and partners outside Asia + Content scope: Trade perspectives in goods and services of Asia’ international trade
Methodology
The research aims to analyze the slowdown in Asia's trade by gathering data from reputable sources, including the Asian Development Bank (ADB), International Monetary Fund (IMF), World Bank (WB), and Trademap.org Through statistical analysis, calculations, and descriptive analysis, the study will highlight the current status of trade in Asia and identify the underlying causes of its decline.
Research structure
The research consists of three chapters:
Chapter 1: Theoretical basic on International Trade
Chapter 2: The slowdown in Asia’s International Trade
Chapter 3: The causes of slowdown in Asia’s international trade and implications
THEORETICAL BASIC ON INTERNATIONAL TRADE
Definition of International Trade
Krugman, Obstfeld, Melitz (2012) argued that international trade focuses primarily on the real transactions in the international economy, that involve a physical movement of goods or a tangible commitment of economic resources
International trade is defined as the exchange of goods and services across international borders, fostering increased competition and competitive pricing in the market This heightened competition leads to more affordable products for consumers Additionally, international trade influences the global economy through the dynamics of supply and demand, making goods and services accessible that may not otherwise be available to consumers worldwide.
Briefly, international trade is the purchase and exchange of goods and services across national borders.
International Trade Theory
International trade theory analyzes the basis and the gains from trade (Salvator,
This article focuses on several key international trade theories, including mercantilism, absolute advantage, comparative advantage, opportunity cost, and the Heckscher-Ohlin theory, to provide a comprehensive understanding of global trade dynamics.
The Mercantilists’ Views on Trade (TK XV- XVIII)
Mercantilists believed that a nation could achieve wealth and power by exporting more than it imported, leading to a surplus that would attract precious metals like gold and silver The accumulation of these metals was seen as a measure of national strength, prompting governments to actively promote exports while limiting imports, especially of luxury goods However, this approach created a zero-sum game, as not all nations could maintain an export surplus simultaneously, meaning one nation's gain would come at the expense of another.
13 mercantilists thus preached economic nationalism, believing as they did that national interests were basically in conflict
The Absolute Advantage: Adam Smith
In the late 18th and early 19th centuries, economists Adam Smith and David Ricardo laid the groundwork for international trade while advocating for free trade, countering the prevailing mercantilist doctrine (Thomas A Pugel, 2004) In his seminal work, "Wealth of Nations," Smith likened nations to households, arguing that just as households specialize in producing certain goods and purchase others with their earnings, nations should adopt a similar approach to enhance economic efficiency and prosperity.
Adam Smith's theory of trade between nations highlights the concept of absolute advantage, where one country is more efficient in producing a specific commodity while being less efficient in another By specializing in the production of goods where they hold an absolute advantage and trading with each other, both nations can optimize resource use, leading to increased output of both commodities This specialization and subsequent trade result in gains that can be shared between the two nations, enhancing overall economic efficiency.
The Comparative Advantage: David Ricardo
In 1817, David Ricardo introduced the law of comparative advantage in his work, "Principles of Political Economy and Taxation." This principle asserts that even if one nation is less efficient in producing both goods compared to another, there remains potential for mutually beneficial trade The less efficient nation should focus on producing and exporting the commodity where its relative disadvantage is smaller, while importing the commodity in which it has a greater absolute disadvantage.
The Opportunity Cost Theory: Haberler
Haberler (1936) discusses the theory of comparative advantage through the lens of opportunity cost, often referred to as the law of comparative cost This theory posits that the cost of producing a commodity is determined by the quantity of another commodity that must be sacrificed to produce one additional unit of the first Importantly, this framework does not assume that labor is the sole factor of production or that all labor is identical, nor does it suggest that a commodity's cost or price is solely based on its labor content.
Consequently, the nation with the lower opportunity cost in the production of a commodity has a comparative advantage in that commodity (and a comparative disadvantage in the second commodity)
The Heckscher-Ohlin theory of trade delves into the underlying reasons for international trade, highlighting how variations in the abundance of production factors—such as land, labor, skills, capital, and natural resources—create comparative advantages These differences in factor availability influence the production processes of various goods, ultimately shaping global trade dynamics.
The Heckscher-Ohlin theory predicts that a country exports the products that use its abundant factor intensively and imports the products using its scarce factor intensively
The Heckscher-Ohlin (H-O) model explains trade patterns by examining the differences in product prices between countries prior to trade According to H-O, comparative costs are determined by the factor proportions utilized in production For instance, if cloth costs significantly more in the United States—2 bushels per yard—compared to less than a bushel per yard elsewhere, it indicates that the U.S has a relative scarcity of the factors needed for cloth production and an abundance of those required for wheat production In this context, land is the factor used more intensively in wheat production, while labor is the key factor for cloth production.
The H-0 theory suggests that all costs can be broken down into land and labor expenses, leading to the prediction that the United States exports wheat, which is land-intensive, while importing cloth, which is labor-intensive.
Without international trade, land in the United States is expected to be cheaper and labor to have higher wage rates compared to other countries This results in lower costs for wheat farming relative to cloth production, leading to higher prices for cloth due to labor scarcity According to the Heckscher-Ohlin theory, these differences in factor endowments and intensities explain why the U.S exports wheat and imports cloth once trade begins.
International Trade Policy
Free trade enhances global output and benefits all countries, yet nearly every nation enforces some limitations on international trade These limitations, referred to as trade or commercial policies, are often justified by claims of national welfare However, they are typically promoted by specific interest groups within the country that stand to gain from such restrictions.
A tariff in international trade is a tax imposed on goods or services imported into a country, typically collected by customs officials at entry points There are three main types of tariffs: ad valorem, specific, and compound An ad valorem tariff is calculated as a percentage of the commodity's value, while a specific tariff is a fixed amount charged per physical unit of the commodity A compound tariff combines both ad valorem and specific tariffs.
When imposing tariff, consumer surplus decrease, producer surplus increase, government collect tariff revenue but overall, national welfare decrease
While tariffs have traditionally been the primary trade restriction, various other trade barriers exist, including export subsidies, voluntary export restraints, and antidumping measures As tariffs were reduced in the postwar era, the significance of nontariff trade barriers has notably risen.
An NTB reduces imports by operating through one or more of the following channels:
• Limiting the quantity of imports
• Increasing the cost of getting imports into the market
• Creating uncertainty about the conditions under which imports will be permitted
An export subsidy is a financial incentive provided by the government to businesses or individuals who export goods overseas This subsidy can be structured as a specific amount per unit exported or as a percentage of the product's value By offering such financial support, the government encourages exporters to sell goods until the domestic price surpasses the foreign price by the subsidy amount, thereby boosting international trade.
In the exporting country, consumers are hurt, producers gain, and the government loses, the net welfare loses So an export subsidy unambiguously leads to costs that exceed its benefits
An import quota is a regulatory measure that limits the quantity of a specific good that can be imported, typically enforced through licenses granted to select individuals or firms This restriction leads to an increase in the domestic price of the imported good, as the limited supply causes demand to surpass both domestic production and available imports at the initial price point Consequently, prices rise until the market reaches equilibrium Ultimately, an import quota raises domestic prices similarly to a tariff that restricts imports to the same level; however, unlike tariffs, quotas do not generate revenue for the government.
Import quotas restrict imports and allow license holders to resell goods at higher domestic prices, generating profits known as quota rents Evaluating the costs and benefits of these quotas requires understanding who receives these rents When the rights to sell in the domestic market are allocated to exporting countries' governments, the resulting transfer of rents increases the overall costs of quotas compared to equivalent tariffs.
A voluntary export restraint (VER), also known as a voluntary restraint agreement (VRA), is a trade quota imposed by the exporting country rather than the importer A notable example of this is Japan's limitation on auto exports to the United States after 1981 VERs are typically more expensive for the importing country compared to tariffs that restrict the same amount of imports, as the revenue that would have been generated from tariffs instead becomes profits for foreign exporters, resulting in a net loss for the importing nation.
A local content requirement mandates that a certain percentage of a final product must be produced domestically, offering protection to local parts producers similar to import quotas However, for firms required to source locally, the impact differs; these regulations do not impose strict import limits but allow for increased imports as long as domestic purchases rise correspondingly Consequently, the effective cost of inputs for these firms becomes an average of both imported and domestically produced goods Notably, local content requirements do not generate government revenue or quota rents, highlighting a key distinction in their economic implications.
18 imports and domestic goods in effect gets averaged in the final price and is passed on to consumers.
Factors affecting international trade
Steve Suranovic (2010) identifies six key factors influencing international trade, with inflation being the first When a country's inflation rate rises compared to its trading partners, it typically leads to increased imports as consumers and businesses seek more affordable goods abroad, while exports to other nations tend to decrease.
An increase in a country's national income, surpassing that of other nations, typically leads to a decline in its trade balance, assuming other factors remain constant As real income rises, consumption of goods also increases, which likely results in a heightened demand for foreign products.
Government policies significantly influence a country's foreign trade by affecting exporter subsidies, imposing import restrictions, and determining the enforcement of piracy laws.
Subsidies for exporters play a crucial role in enhancing the competitiveness of domestic firms by allowing them to produce goods at lower costs than their global rivals As a result, these subsidies lead to increased demand for the products generated by these firms in the international market.
Restrictions on imports, such as tariffs imposed by a country's government, lead to increased prices for foreign goods for consumers In the U.S., average tariffs are lower compared to those in other countries, although certain industries, like American apparel and farm products, receive higher levels of protection through these tariffs.
19 historically received more protection against foreign competition through high tariffs on related imports
Governments can limit imports not only through tariffs but also by implementing quotas, which set a maximum limit on the amount of goods that can be imported Quotas have been widely used for various products entering the United States and other nations.
Exchange rates play a crucial role in determining the value of one country's currency against another, enabling the exchange necessary for international transactions.
In addition to the six internal factors, the global economy significantly influences international trade A robust growth in the global economy typically leads to increased demand for goods, thereby enhancing both imports and exports Conversely, a slowdown in the global economy results in decreased demand, which negatively affects export levels Similar effects, albeit on a smaller scale, can occur with changes in the economic growth of major trading nations like the United States, China, the European Union, and Japan.
THE SLOWDOWN IN ASIA’S INTERNATIONAL TRADE 20 2.1 An overview of the Asian economy
The overall slowdown in Asia’s international trade value and growth
Asian merchandise imports account for about 36% of the world's imports of goods (Table 2.1) Import value value has decreased significantly from 2008 ($ 5145 billion) to
2009 ($ 3997 billion) From 2010 to 2014, Import value increased slightly little by little from 5214 billion to $ 7111 billion However, in the next period, it tend to fall sharply form
$ 7111 billion in 2014 to $ 5895 billion in 2016 and $ 6719 in 2017 In 2018, the import value increased slightly to $ 7520 billion, but it has fell down again in 2019 to $ 5321 billion
Asian merchandise exports constitute approximately 40% of global goods exports Notably, the export value saw a significant decline from $5,667 billion in 2008 to $4,350 billion in 2009 However, from 2010 to 2014, there was a gradual increase in Asia's export value each year.
$ 5657 billion in 2010 to & 7673 billion in 2014, but we can see a decrease from 2014 to
2017, from $ 7673 billion to $ 7221 billion Althought threre is a slight rise in 2018, it appears to fall deeply again in 2019 from $ 7983 billion to $ 5801 billion
Table 2.1: Exporting and importing for the goods in Asian economies (US Dollar)
Table 2.2: Exporting and importing for the services in Asian economies (US Dollar)
The value of Asian service imports increased sharply from 2008 ($1,126,771,528 ) to 2014 ($ 1,760,375,109), but tends to slowdown over the period from 2014 ($ 1,760,375,109 billion) to 2018 ($ 1,935,704,993 ) (Table 2.2)
The same as import value, the value of Asian service exports increased sharply from 2008 ($ 946,459,022 ) to 2014 ($1,437,174,560), but tends to slowdown over the period from
In 2018, Asia's merchandise trade volume experienced a deceleration, growing by only 4.0% following a robust 7.3% recovery in 2017 This slowdown was influenced by ongoing trade tensions between the United States and the People's Republic of China, as well as a general decline in global economic growth, which caused trade growth to fall below the region's 4.6% output growth Additionally, global trade volume growth decreased from 4.6% in 2017 to 3.0% in 2018.
In 2018, global economic growth was slightly below 3.1%, with several Asian economies experiencing a decline in export growth This slowdown was attributed to weaker external demand from developed nations and the potential adverse impacts of ongoing trade tensions.
In 2018, the export volume growth in commodity-exporting countries decreased to 3.5%, down from 6.8% in 2017, while import volume growth also declined to 4.7% from 8.1% Despite this slowdown, strong domestic demand, particularly from net-importing countries, continued to support imports, although growth was somewhat limited by rising commodity prices The People's Republic of China (PRC) remained the primary driver of trade expansion in Asia, contributing 41.3% to trade growth, with Japan, the Republic of Korea, Viet Nam, and Taipei, China also playing significant roles in export growth Conversely, Hong Kong, China; Viet Nam; Indonesia; and Singapore were the leading contributors to import growth.
Firgue 2.1: Merchandise Trade and GDP growth in Asia and World
Source: ADB caculations using data from International Monetary Fund (2016)
Since 2011, the growth of both exports and imports in Asia has decelerated, following a rebound in 2010 post-global financial crisis This slowdown in global growth has been more pronounced in developing economies compared to developed ones.
In 2015, Developing Asia experienced a significant slowdown in export growth, declining to 3.0% from 6.4% in 2013 and 4.6% in 2014, while developed economies saw a gradual recovery, with their export growth reaching 3.0% in 2015, up from 1.7% in 2013 and 2.5% in 2014 Additionally, import growth in Developing Asia fell behind that of developed economies, recording only 1.7% in 2015 compared to 4.5% in developed nations This sluggish import growth may have contributed to the overall economic dynamics in the region.
25 economies with current account deficits shore up current account balances, it also reflected the domestic demand weakness across developing Asia
Firgue 2.2: Export and Import volume growth in Asia
Source: ADB caculations using data from International Monetary Fund (2016)
Regarding world merchandise trade, in the period 2010-2016, the average export growth rate is 0.6%, the average import growth rate is 0.7% (Table 2.3) This represents a stagnation in global merchandise trade
In 2014, the global merchandise export growth rate was 0.3%, which significantly declined to -13.5% in 2015 and further decreased to -3.3% in 2016 Similarly, Asian merchandise trade experienced a downturn, with export growth at 2.6% in 2014, followed by declines of -7.9% in 2015 and -3.7% in 2016.
In 2014, the global merchandise import growth rate was 0.6%, but it significantly declined to -7.9% in 2015 and further dropped to -3.7% in 2016 Similarly, Asian merchandise imports experienced a downturn, with growth rates of -12.5% in 2015 and -3.2% in 2016.
Table 2.3: Merchandise trade by world and region
Export Import Export Import Export Import Export Import
Regarding world commercial service trade, in the period 2010-2016, the average export growth rate is 6.3%, the average import growth rate is 7.3% (Table 2.4) This represents more flourishing than trade in merchandise
In 2014, the global commercial service export growth rate reached 6.3%, but it declined to -5.5% in 2015 and slightly rebounded to 0.1% in 2016 Similarly, Asia's commercial service trade experienced a downturn, with export growth at 6.9% in 2014, followed by a drop to -3.2% in 2015 and a modest increase to 0.9% in 2016.
In 2014, the global commercial service import growth rate was 7.3%, but it experienced a significant decline to -5.9% in 2015, followed by a modest recovery to 0.5% in 2016 Similarly, Asian commercial service imports saw a downturn, with growth rates of -3% in 2015 and a slight increase of 2.6% in 2016.
Table 2.4: Commercial services by world and region
Export Import Export Import Export Import Export Import
Trade among Asian countries has declined, primarily driven by a reduction in goods trade This slowdown in Asian trade growth continues to lag behind the overall growth of world trade and the GDP growth in the region.
International trade by commodity group and partners
The comodity group is divided into three groups: consumption goods, intermediate goods and capital goods
In 2015, the trade of intermediate goods, which constitutes 58% of Asia's total trade, contracted by 13.2%, significantly impacting the region's overall trade performance Consumption goods, making up 20% of total trade, also experienced a decline in growth, though less severe at 1.9% Capital goods accounted for approximately 12% of trade and saw a decrease of 3.6% The decline in intermediate goods trade growth may suggest stagnation or weakening of global and regional value chains (ADB, 2016).
Firgue 2.3: Total trade by commodity groups in Asia
Source: ADB caculations using data from United Nations Commodity Trade Database
Asian commodity exports primarily include electrical machinery and equipment, sound recorders, television, mechanical appliances, nuclear reactors, boilers, and mineral oils However, there has been a noticeable decline in these exports, particularly in mineral fuels, oils, and machinery, indicating a significant downturn in these sectors.
Table 2.5: List of products exported by Asia
Electri cal machi nery and equip ment and parts thereo f; sound record ers and reprod ucers, televis ion
Machi nery, mecha nical applia nces, nuclea r reactor s, boilers
29 other than railwa y or tramw ay rolling stock, and parts and access ories thereo f
Miner al fuels, minera l oils and produc ts of their distilla tion; bitumi nous substa nces; minera l
30 atogra phic, measu ring, checki ng, precisi on, medic al or surgic al
Natura l or culture d pearls, precio us or semi- precio us stones, precio us metals
The key export sectors in trade in services include travel, transport, telecommunications, and computer and information services While trade in services in Asia experienced less decline compared to commodity trade, it remained stagnant However, sectors like telecommunications, computer, and information services have shown steady growth.
Table 2.6: List of exporters for the selected service (US Dollar thousand)
Despite the slowdown in overall trade, Asia’s intraregional trade share increased in
In 2015, intraregional trade in Asia and the Pacific rose to 57.1%, an increase from the 55.8% average recorded between 2010 and 2014 This growth contrasts with the European Union, where intraregional trade stands at 63%, and North America, which has a significantly lower rate of 25%.
Firgue 2.4 Intraregional trade shares of Asia, EU and North America
In 2015, intraregional trade value experienced a significant decline of 7.4%, following a modest growth of 1.3% in 2014 When excluding the People's Republic of China (PRC), the decline in intraregional trade growth was even more pronounced at 10% Additionally, Asia's trade with the PRC contracted by 3%, while trade with non-Asian countries saw a substantial decrease of 12%.
Firgue 2.5: Trade value growth in Asia by partner
Source: ADB calculations using data from International Monetary Fund (2016)
So, we can see Asia's trade relations is worst with non-Asia, followed within Asia (except PRC) and with PRC
CHAPTER 3: THE CAUSES OF SLOWDOWN IN ASIA’S INTERNATIONAL TRADE AND IMPLICATIONS
The causes of the slowdown
While trade liberalization is advancing centered on continued efforts to reach bilateral and regional free trade agreements (Firgue 3.1), concern is growing about rising protectionism globally and regionally
Firgue 3.1 Number of signed FTAs of Asia (cumulative since 1975)
Trade protectionism is on the rise, with governments increasingly utilizing non-tariff barriers (NTBs) as a means to restrict both imports and exports A report from the World Trade Organization (WTO) in 2016 highlighted that from October 2015 to June 2016, WTO members implemented an average of 22 new trade restrictions each month This shift from traditional tariff barriers to NTBs underscores the evolving landscape of global trade policies.
Firgue 3.2 show a fast-growing number of trade remedies amid the slowdown in international trade, this trend continued in 2015 Antidumping duties are the most prevalent trade remedies affecting Asia
Firgue 3.2: Number of trade remedy measures affecting Asia Source: ADB caculations based on data from WTO (2016) Other non tarriff barriers are sanitary and phytosanitary, technical barriers An important goal for governments is to guarantee the safety of food for consumers and prevent or limit the spread of pests, outbreak of diseases among plants and animals, and other health risks arising from residues (of pesticides or veterinary drugs), contaminants (heavy metals), toxins or disease-causing organisms in food, beverages, or feed Policies with these objectives are generally referred to as sanitary (human and animal health) and phytosanitary (plant health) measures, more commonly known as sanitary and phytosanitary (SPS) measures, which include all relevant laws, decrees, regulations, requirements and procedures
In response to increasing consumer demand for enhanced product safety and stricter environmental protection, governments have strengthened existing regulations and introduced new policies These regulations, referred to as technical barriers to trade (TBTs), specify product characteristics such as shape, size, design, and performance, or they may focus on the production processes and methods employed.
SPS (Sanitary and Phytosanitary) and TBT (Technical Barriers to Trade) measures are unexpected procedures that can negatively impact trade flows, primarily due to the high compliance costs for businesses and the perishable nature of certain exported products The prevalence of SPS and TBT measures has increased significantly.
36 the number of notifications to the WTO and the number of notifying economies since 1995 for SPS and TBT measures- both trending upward
Firgue 3.3: Number of SPS Measures
Firgue 3.4: Number of TBT Measures
SPS and TBT measures are projected to adversely affect exports from developing economies, especially within Asia's intraregional trade in agricultural products Following Hufbauer, Gary, and Euijin Jung (2016), the rise of micro-protectionism post-2008-2009 crisis is attributed to political motivations aimed at securing votes through promises of job creation and protection for domestic firms Additionally, these authors note that 117 local content requirement measures have been implemented since then.
2008, affecting $928 billion of global trade in goods and services in 2010, and potentially reducing global exports by $93 billion
3.1.2 Decreasing Asia’s global value chain participation ratio
Global Value Chains (GVCs) represent a complex network of interconnected production stages for goods and services that cross international borders These chains typically integrate both imported and locally produced goods and services to create products that are subsequently exported, either as intermediates for further production or as final consumer products (ADB, 2015).
Between 2000 and 2011, the value of domestic value added (DVA) in gross world exports rose 2.6 times, followed by a 1.1 times increase from 2011 to 2015 During the same periods, foreign value added (FVA) grew by 2.8 times and 0.8 times, respectively, while returned domestic value added (RDV) increased 2.1 times and 0.9 times Additionally, purely double-counted terms (PDC) saw a significant rise of 3.2 times from 2000 to 2011 but only 0.5 times from 2011 to 2015 Although DVA continued to grow between 2011 and 2015, all other components reflecting an expanding production network through multiple border crossings experienced a decline in absolute value.
Asia plays a significant role in global trade and the enhancement of the global value chain (GVC) From 2000 to 2011, the value-added decomposition of Asia's gross exports indicates a deepening integration into the GVC, reflecting a notable shift in trade dynamics during this period.
Firgue 3.5 Components of gross exports
Source: ADB (2016) DVA= domestic value added
PDC= purely double-counted terms
RDV= returned domestic value added
Asia's participation in global value chains (GVCs) is reflected in the increasing share of value-added content in gross exports utilized for further processing within cross-border production networks The GVC participation ratio increased from 63.2% in 2000 to 65.5% in 2011, but saw a decline to 58.7% by 2015.
Between 2000 and 2015, the value of domestic value added (DVA) in gross world exports grew significantly, increasing 2.6 times from 2000 to 2011 and 1.1 times from 2011 to 2015 In contrast, foreign value added (FVA) rose by 2.8 times during the first period and 0.8 times in the latter Additionally, returned domestic value added (RDV) saw increases of 2.1 times and 0.9 times, while purely double-counted terms (PDC) experienced substantial growth of 3.2 times from 2000 to 2011, followed by a decrease of 0.5 times from 2011 to 2015.
We can indicate some country that increase DVA and decrease FVA in Asia like Korea, Malaysia, Thailand (table 3.1)
Table 3.1: Select individual Asian Economies export component (% of total exports)
2000 China Korea India Japan Indonesia Malaysia Thailand Vietnam
2015 China Korea India Japan Indonesia Malaysia Thailand Vietnam
Source: ADB caculations (2016) Thus, we can see that global value chain is a factor impacting the slowdown in Asia’s trade
Over the past fifty years, Asian economies have been significantly impacted by natural disasters, economic and financial crises, and fluctuations in oil and food prices These events have led to loss of life, social and economic disruptions, and substantial financial costs Notably, the frequency of such shocks has risen, with nine major incidents occurring in the region since 2005.
Firgue 3.6: GDP growth, shocks, and cost of natural disasters- Asia
These and other risks are reflected in indices of policy uncertainty, which have increased sharply since 2015 (firgue 3.7)
Firgue 3.7: Global policy uncertainty, January 2014 - February 2017
Negotiations between the United Kingdom and the European Union are creating uncertainty regarding future trade relations following the UK's decision to leave the EU after over 40 years of membership This uncertainty is exacerbated by a slowing Chinese economy, which has been a significant driver of growth since the 2007-2009 financial crisis, and the rise of far-right nationalism in Europe The International Monetary Fund (2016) estimates that Brexit could result in a 0.2% reduction in global GDP outlook for 2017 Additionally, Brexit may restrict Asian companies' access to UK and European markets due to changes in tariffs and regulations.
Recent political developments, exemplified by Trump's election victory, indicate a growing wave of antiglobalization and anti-establishment sentiments among voters globally Trump has outlined immediate actions to stimulate economic growth in the U.S., including withdrawing from the Trans-Pacific Partnership (TPP) and imposing significant tariffs—45% on imports from China and 35% on goods from Mexico, along with varying tariffs of 15% on other imports.
The U.S Trade Representative is directed to take action against countries labeled as currency manipulators, particularly China, by filing trade cases related to violations of World Trade Organization (WTO) rules This protectionist approach could trigger a harmful chain reaction, negatively impacting manufacturers and consumers in both the U.S and Asia, resulting in disrupted supply chains, damaged trade relationships, and potentially igniting trade wars.
Thus, these events could increase global uncertainty and erode confidence on global institutions that also impact the slowdown in Asia’s trade
3.1.4 The change in components of trade
The world has seen strong growth in trade in services while stagnating in trade in goods (Table 3.2)
Table 3.2: Merchandise trade by world and region
2010-2016 Trade in goods Trade in services
Sebastian (2016) indicated “as the world economy becomes richer, it shifts naturally from manufacturing to services, and services are traded less, partly because of higher protectionist barriers in service industries”
Lewis and Monarch (2016) argued that an expenditure components explanation turning to the first potential mechanism for the trade slowdown in more detail, it is notable
43 that recent weakness in global demand has been concentrated in expenditure that are highly traded, such as investment goods and durables
Briefly, the change in shift from manufacturing to service, weakness in global demand are the factors impacts the slowdown in Asia’s trade in recent years
Global GDP growth has reached its peak, with a projected deceleration ahead, dropping from 4% year-on-year in Q4 2017 to 3.5% by Q4 2018 and further to 3.1% by Q4 2019, which will weaken world trade volume growth Additionally, a strong US economy is unlikely to counterbalance the challenges faced by the Asia and Emerging Markets (AEJ) region Furthermore, tightening domestic financial conditions in Asia, evidenced by rising interest rates in India, Indonesia, and the Philippines, along with increasing corporate debt financing costs in China, may soon impact other countries in the region.
Implications for Asia
The WTO projects a 2.4% growth in global trade for 2017, but significant uncertainty surrounding economic and policy developments poses risks to this forecast The unpredictable nature of the global economy and unclear government actions regarding monetary, fiscal, and trade policies heighten the likelihood of stifled trade activity.
Increased trade offers significant economic advantages, such as enhancing comparative advantage, boosting competition, promoting technological and knowledge spillovers, and allowing for the import of essential capital goods The positive impact of trade on Asian economies suggests that a slowdown in global trade, regardless of its reasons, may result in diminished dynamism and growth in the region.
So what’s an Asian economies to do?
Emerging Asia should prioritize boosting domestic demand as a key driver of growth, rather than solely focusing on enhancing external surpluses By encouraging domestic consumption and allowing for a reduction in these surpluses, the region can inject much-needed demand into the global economy while simultaneously supporting its own economic growth.
Reforms focused on lowering trade costs can enhance market access and boost global value chains By reducing tariffs and non-tariff barriers for goods and services, as well as tackling inefficiencies in transport and logistics, significant efficiency gains can be achieved.
In the 2000s, applied tariffs significantly decreased, dropping from nearly 30% to under 15% in emerging and developing countries, and from 10% to below 5% in industrial nations, highlighting the ongoing relevance of trade policies in shaping international trade costs Given the challenges posed by weak investment, it is crucial to resist protectionism and revive trade liberalization efforts to dismantle remaining barriers This approach could foster trade growth and potentially initiate a new phase of global value chain development.
Engaging more deeply in global value chains by enhancing the knowledge and technology in production and exports can position a country as an appealing destination for foreign direct investment, thereby stimulating new economic sectors Additionally, improving the efficiency of labor, product, and financial markets is essential for successfully advancing up the value chain.
The growing prominence of the service sector in Asian economies indicates its potential for further expansion and the creation of high-quality jobs Additionally, enhancing infrastructure services and developing human capital will improve adaptability to evolving labor market conditions.
Fifthly, while there are signs of anti-globalization, Asian economies should actively integrate into the world economy extensively because of the benefits it brings
The thesis examines the ongoing decline in trade within Asia, highlighting that both export and import growth rates have been decreasing since 2011, falling further behind GDP growth.
In Asian trade, intermediate goods dominate the commodity group, followed by consumption and capital goods Although trade in goods is experiencing a decline, trade in services continues to grow steadily Notably, Asia's trade relations are weakest with non-Asian countries, followed by intra-Asian trade (excluding the People's Republic of China) and then with the PRC.
The decline of Asian trade can be attributed to several key factors, including the decreasing growth rates of major Asian exporters, a rise in protectionist measures, and a reduction in Asia's participation in global value chains Additionally, political and economic instability, along with shifts in trade components, further exacerbate this downward trend.
To foster economic growth, it is essential to prioritize domestic demand, promote technological and knowledge spillovers, and implement reforms that reduce trade costs These strategies aim to counteract the decline in Asian trade while enhancing the service sector.
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