Rationale
In recent years, the global economy has experienced significant fluctuations, particularly influenced by U.S President Donald Trump's decision to withdraw from the Trans-Pacific Partnership (TPP) and implement various policies that affect numerous countries Additionally, the United Kingdom's exit from the European Union has further contributed to economic uncertainty worldwide.
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 significant global economy, has experienced a remarkable average 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) has reported a decline in export and import growth, with annual values dropping by 4% between 2012 and 2016 Despite these challenges, international trade continues to offer numerous benefits, including increased global output, expanded market opportunities for firms, access to capital flows and technology, and integration into international production networks and supply chains.
To understand the current trends in international trade, it is essential to identify and analyze their underlying causes This necessity prompted my thesis, titled “The Slowdown in Asia’s International Trade and Its Causes.”
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 global trade Her research provides forecasts and recommendations aimed at enhancing the world’s growth rate in 2020.
Cristina, Aaditya, and Michele (2015) highlight that trade growth has remained sluggish following the recovery from the global crisis, with advanced economies, particularly in the Eurozone, experiencing weak growth, while emerging markets and developing economies show only moderate improvements The study identifies several factors contributing to this trend, including shifts in income convergence rates among countries, alterations in global trade composition, evolving trade regimes marked by increased protectionism, and changes in vertical specialization patterns.
Lewis and Monarch (2016) identify several key factors contributing to the slowdown in international trade, including a decline in trade openness, reduced supply chain fragmentation, structural shifts in Chinese trade, and cyclical influences like weakened trade-oriented components of aggregate demand.
According to Petersen (2016), the slowdown can be attributed to five key factors: a decline in demand for goods in Europe and China, the rising significance of services, increasing wages in newly industrializing countries, a surge in protectionist measures, 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 noticeable 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 affecting Europe and the global economy, noting declines in exports and imports across major EU economies France experienced a drop of 3.6% in exports and 1.7% in imports, while Germany saw decreases of 0.4% in exports and 1.8% in imports Additionally, Italy faced a continuous decline in trade for the sixth consecutive quarter.
Recent research indicates that exports fell by 1.2% and imports decreased by 1%, highlighting the adverse impact of trade slowdown on global economies, particularly among G20 nations However, the study lacks an analysis of the underlying causes of this decline in world trade and does not provide detailed insights into regions outside of Europe, especially Asia.
In their 2016 study, Sumedh Deorukhkar and Le Xia assess the effects of China's economic transition on emerging Asian economies, particularly in light of ongoing challenges such as China's growth slowdown, Yuan depreciation, and financial market volatility 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 underscores the trade slowdown in China and its adverse effects on certain 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 both traditional and new determinants on trade between European countries from 1992 to 2008, focusing on 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
Fabian Mendez Ramos (2016) analyzes recent trends in global trade, identifying key factors that influence trade dynamics by differentiating between temporary and long-term components of the slowdown He also discusses the policies that will influence the future trajectory of trade, highlighting the emergence of new economic patterns.
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, investigating its causes and determining whether it stems from recent cyclical weaknesses in global growth or from deeper, long-term structural changes in the world economy Understanding these causes is crucial, as they influence whether the trade slowdown warrants additional concerns beyond the general outlook for global economic growth While their research highlights the decline in world trade and its contributing factors, it notably lacks an analysis of the trade slowdown specifically in Asia.
Previous research has primarily focused on global trade, often neglecting a detailed analysis of Asia's international trade growth As a result, readers may struggle to grasp the concept of the "slowdown" in Asia's trade Therefore, this research aims to provide an in-depth examination of Asian trade, exploring 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 trade, marking a crucial turning point in the development of international trade, particularly in Asia Consequently, this research examines the period from 2008 to 2019 to understand these effects better.
+ 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
This research will gather data from key sources, including the Asian Development Bank (ADB), International Monetary Fund (IMF), World Bank (WB), and Trademap.org It will utilize statistical methods, calculations, and descriptive analysis to assess the current status and identify the causes behind the slowdown in trade across Asia.
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, as defined by BusinessDictionary, refers to the exchange of goods and services across international borders This trade fosters increased competition and competitive pricing, leading to more affordable products for consumers Additionally, it influences the global economy through the principles of supply and demand, making a wider range of goods and services accessible 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.
The Mercantilists’ Views on Trade (TK XV- XVIII)
Mercantilists believed that a nation's wealth and power stemmed from exporting more than it imported, leading to a surplus that would attract precious metals like gold and silver The accumulation of these metals signified greater national wealth and strength, prompting governments to promote exports while limiting imports, especially of luxury goods However, since not all nations could achieve an export surplus simultaneously and the supply of gold and silver was limited, one nation's gain would inevitably come at the expense of another, creating a zero-sum game.
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, advocating for free trade in response to the dominant mercantilist doctrine of their time (Thomas A Pugel, 2004) In his seminal work, "The Wealth of Nations," Adam Smith illustrated the benefits of free trade by likening nations to households, suggesting that just as households specialize in producing certain goods and trade for others, nations should adopt a similar approach to maximize economic efficiency and prosperity.
Adam Smith's theory of absolute advantage posits that trade between two nations occurs when one nation is more efficient in producing a particular commodity while being less efficient in another By specializing in the production of the commodity where they have an absolute advantage and trading with each other, both nations can optimize resource utilization and increase the output of both commodities This rise in production exemplifies the benefits of specialization and highlights the potential gains from trade between the two nations.
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, there remains an opportunity for mutually beneficial trade The nation should focus on producing and exporting the good for which it has the smallest absolute disadvantage while importing the good for which its disadvantage is greater.
The Opportunity Cost Theory: Haberler
Haberler (1936) elucidates 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 allocate sufficient resources for one additional unit of the first commodity Importantly, the theory does not assume that labor is the sole factor of production, nor does it suggest that the cost or price of a commodity is solely derived from 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 fundamental reasons behind international trade, highlighting the significance of varying abundances of production factors such as land, labor, skills, capital, and natural resources These disparities in factor availability create comparative advantages, as different products utilize these factors in distinct ways, influencing 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) theory of trade patterns addresses the reasons behind price differences for products between countries prior to engaging in trade According to Heckscher and Ohlin, comparative costs are determined by the factor proportions utilized in production For instance, if the price of cloth is 2 bushels per yard in the United States, while it is less than a bushel per yard in other countries, this discrepancy suggests that the U.S has a relative scarcity of the factors used intensively in cloth production and a relative abundance of those used in wheat production In this context, land is the factor more intensively employed 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 components, leading to the prediction that the United States will export wheat, a land-intensive product, while importing cloth, which is labor-intensive.
Without international trade, land in the United States is expected to be less expensive than in other countries, while labor wages are likely to be higher This lower cost of land benefits wheat farming more than cloth production, leading to relatively higher prices for cloth due to labor scarcity According to the Heckscher-Ohlin theory, these variations in product prices arise from differences in relative factor endowments and intensities As a result, when trade begins, the United States is predicted to export wheat and import cloth.
International Trade Policy
Free trade enhances global output and benefits all countries, yet nearly every nation enforces some limitations on international trade These limitations, known 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 is a tax imposed on the importation of goods or services 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 per physical unit of the product A compound tariff combines both ad valorem and specific tariffs, integrating aspects of both calculation methods.
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 firms or individuals exporting goods overseas, which can be structured as a specific amount per unit or a percentage of the export value This subsidy encourages exporters to sell their products abroad until the domestic price surpasses the foreign price by the subsidy amount, thereby influencing trade dynamics.
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 imposes a direct limit on 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 outstrip domestic production and imports at the initial price Consequently, prices rise until the market reaches equilibrium Ultimately, an import quota elevates 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 generate revenue through import licenses, allowing license holders to resell goods at higher domestic prices The profits from these licenses, known as quota rents, highlight the importance of assessing who benefits from them When the rights to sell in the domestic market are given to the governments of exporting countries, the resulting transfer of rents abroad significantly increases the costs associated with 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 is Japan's restriction on auto exports to the United States after 1981 Unlike tariffs, which generate revenue for the importing country, a VER results in higher costs for the importing nation as the potential revenue shifts to foreign exporters, leading to a clear economic loss for the importing country.
A local content requirement mandates that a certain percentage of a final product be produced domestically, offering protection to local parts producers similar to an import quota However, for firms required to purchase locally, the implications vary; these regulations do not impose strict import limits but instead permit increased imports as long as domestic purchases also rise Consequently, the effective input cost for these firms becomes an average of prices for both imported and domestically produced goods Importantly, local content requirements do not generate government revenue or quota rents, highlighting a key distinction in their economic impact.
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 foremost When a country's inflation rate rises compared to its trading partners, it tends to lead consumers and businesses to buy more foreign goods, as local prices increase Consequently, this situation results in a decline in the country's exports to other nations.
An increase in a country's national income, when outpacing that of other nations, typically leads to a decrease 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 determining the level of support for exporters through subsidies, imposing restrictions on imports, and enforcing regulations against piracy.
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 exports generated by these subsidized firms, ultimately benefiting the economy.
Restrictions on imports, particularly through tariffs, raise the prices of foreign goods for consumers While the average tariffs imposed by the U.S government are lower compared to other countries, certain industries, such as American apparel and farm products, enjoy 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 imposing quotas, which set a maximum limit on the quantity of goods that can be imported This practice has been widely utilized by the United States and other nations across various product categories.
Exchange rates play a crucial role in determining the value of a country's currency relative to others, enabling the exchange necessary for international transactions.
The development of the global economy significantly influences international trade, acting as a crucial external factor When the global economy experiences robust growth, the demand for goods rises, leading to an increase in imports and exports Conversely, a slowdown in the global economy results in decreased demand for goods, negatively impacting export levels Similarly, changes in the economic growth of major trade contributors, such as the United States, China, the EU, and Japan, can also affect international trade dynamics, albeit with less pronounced effects.
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 represent approximately 40% of global goods exports There was a notable decline in export value from $5,667 billion in 2008 to $4,350 billion in 2009 However, from 2010 to 2014, the export value from Asia experienced a gradual increase 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 slower growth rate of 4.0%, following a robust recovery of 7.3% in 2017 This decline was influenced by ongoing trade tensions between the United States and the People's Republic of China, as well as a deceleration in global economic growth, which caused trade growth to fall below the 4.6% output growth Additionally, the overall expansion of global trade volume 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 slowdown in export growth This decline 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 declined to 3.5%, down from 6.8% in 2017, while import volume growth was 4.7%, a decrease from 8.1% the previous year Despite a slight restraint due to rising commodity prices, strong domestic demand, particularly from net-importing countries, continued to drive imports The People's Republic of China (PRC) was the primary engine of Asia's trade expansion, 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, Asia has experienced a slowdown in both export and import growth, following a rebound in 2010 after the global financial crisis This trend of decelerating growth is more pronounced in developing economies compared to their developed counterparts.
In 2015, developing Asia experienced a significant slowdown in export growth, dropping to 3.0% from 4.6% in 2014 and 6.4% in 2013, while developed economies saw a gradual recovery, with export growth rising to 3.0% from 2.5% in 2014 and 1.7% in 2013 Additionally, import growth in developing Asia remained lower than that of developed economies, registering only 1.7% in 2015 compared to 4.5% growth in developed nations.
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%, but it declined significantly to -13.5% in 2015 and further to -3.3% in 2016 Similarly, Asian merchandise trade experienced a downturn, with export growth at 2.6% in 2014, followed by decreases 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 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 was 6.3%, but it declined to -5.5% in 2015 and slightly recovered to 0.1% in 2016 Similarly, Asian 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 growth rate for commercial service imports reached 7.3%, but this figure dropped significantly to -5.9% in 2015 and only recovered slightly to 0.5% in 2016 Similarly, Asian commercial service imports experienced a decline, with growth rates of -3% in 2015 and a modest 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 due to a decrease in goods trade Consequently, the growth of trade in Asia remains lower than 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, saw a significant contraction of 13.2%, impacting the overall trade performance in the region Consumption goods, making up 20% of total trade, experienced a smaller decline of 1.9%, while capital goods, accounting for approximately 12%, fell by 3.6% The decrease in intermediate goods trade growth may suggest stagnation or a weakening of global and regional value chains, as highlighted by the ADB in 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 prominently include electrical machinery, sound recorders, mechanical appliances, and mineral oils However, there has been a noticeable decline in these sectors, particularly in mineral fuels and products of distillation, as well as in machinery and related parts.
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
In the realm of service trade, key export sectors encompass travel, transport, telecommunications, and computer and information services While trade in services across Asia experienced less severe declines compared to commodity trade, it remained stagnant overall Notably, sectors like telecommunications and information services have shown consistent 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, which has an intraregional trade rate of 63%, while North America lags significantly behind at 25%.
Firgue 2.4 Intraregional trade shares of Asia, EU and North America
In 2015, intraregional trade value experienced a decline of 7.4%, following a modest growth of just 1.3% in 2014 When excluding the People's Republic of China (PRC), the decline in intraregional trade growth was even more pronounced, dropping by 10% Additionally, trade between Asia and the PRC contracted by 3%, while trade with non-Asian countries fell by 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 favoring non-tariff barriers (NTBs) over traditional tariff barriers to restrict imports and exports According to a WTO report from 2016, between October 2015 and June 2016, WTO members implemented an average of 22 new trade restrictions each month.
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
Governments are responding to consumer demands for enhanced product safety and environmental protection by tightening existing regulations and introducing new policies These regulations, referred to as technical barriers to trade (TBTs), outline specific product characteristics such as shape, size, design, and performance, as well as the processes and methods employed in production.
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 frequency of these 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 agricultural trade Following the analysis by 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, the 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) consist of interconnected stages of production for goods and services that extend across international borders These chains typically involve the integration of both imported and domestically produced goods and services, resulting in products that are exported either as intermediates for further production or as final consumption goods (ADB, 2015).
Between 2000 and 2015, the value of domestic value added (DVA) in gross world exports saw significant growth, increasing 2.6 times from 2000 to 2011 and 1.1 times from 2011 to 2015 In contrast, foreign value added (FVA) rose 2.8 times between 2000 and 2011 but only 0.8 times from 2011 to 2015 Similarly, returned domestic value added (RDV) grew 2.1 times and 0.9 times during the same periods, while purely double-counted terms (PDC) experienced a dramatic increase of 3.2 times followed by a decline of 0.5 times Despite the continued growth of DVA from 2011 to 2015, other components reflecting an expanding production network through multiple border crossings saw a decrease in absolute value.
Asia plays a significant role in international trade and the enhancement of global value chains (GVC) The analysis of value added in Asia's gross exports indicates a trend of increasing integration into the GVC from 2000 to 2011, highlighting a shift in direction 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 through cross-border production networks The GVC participation ratio experienced an increase from 63.2% in 2000 to 65.5% in 2011, before declining to 58.7% in 2015.
Between 2000 and 2011, the value of Domestic Value Added (DVA) in gross world exports increased by 2.6 times, followed by a 1.1 times rise from 2011 to 2015 In comparison, Foreign Value Added (FVA) grew 2.8 times during the first period and 0.8 times in the latter Returned Domestic Value Added (RDV) saw increases of 2.1 times and 0.9 times, while purely double-counted terms (PDC) surged by 3.2 times and then fell by 0.5 times in the same respective periods.
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 resulted in 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 about future trade relations, following the British public's vote for a new relationship after over 40 years of EU membership This uncertainty is heightened by a slowing Chinese economy, which has been a significant growth driver since the 2007-2009 financial crisis, and the rise of far-right nationalism in Europe The IMF estimates that Brexit could result in a 0.2% reduction in global GDP for 2017, while the changing European tariff and regulatory landscape may restrict access for Asian-based subsidiaries operating in the UK and Europe.
Recent political developments, including Trump's election victory, indicate a growing wave of anti-globalization and anti-establishment sentiment among voters globally Trump has proposed several immediate measures aimed at boosting economic growth in the United States, such as withdrawing from the Trans-Pacific Partnership (TPP) and imposing significant tariffs—45% on imports from China and 35% on goods produced in Mexico, along with arbitrary tariffs ranging from 15% on various other imports.
A 45% tariff on countries identified as currency manipulators would prompt the U.S Trade Representative to initiate trade cases against China for violating WTO rules This protectionist approach could trigger a harmful chain reaction, negatively impacting manufacturers and consumers in both the U.S and Asia, leading to disrupted supply chains, strained trade relationships, and the potential for 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 slowdown anticipated in the coming years, dropping from 4% year-on-year in Q4 2017 to 3.5% by Q4 2018 and further to 3.1% by Q4 2019, which is expected to weaken world trade volume growth Additionally, while the US economy remains resilient, it is unlikely to counterbalance the challenges faced by the Asia and Emerging Markets (AEJ) Furthermore, tightening domestic financial conditions in Asia, marked by rising interest rates in India, Indonesia, and the Philippines, along with increasing corporate debt financing costs in China, could soon impact other countries in the region.
Implications for Asia
The WTO projects a 2.4% growth in global trade for 2017, yet significant uncertainties surrounding economic and policy developments pose risks to this forecast The unpredictable trajectory of the global economy and unclear government actions regarding monetary, fiscal, and trade policies heighten concerns that trade activity may be hindered.
Increased trade offers significant economic advantages, such as leveraging comparative advantage, enhancing competition, promoting technological advancements, and allowing the import of essential capital goods As trade has positively impacted Asian economies, a slowdown in global trade could 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 increasing external surpluses By fostering domestic consumption and permitting a reduction in surpluses, the region can inject vital demand into the global economy while simultaneously supporting its own economic expansion.
Reforms that lower trade costs can enhance efficiency by improving market access and expanding global value chains Reducing tariffs and non-tariff barriers for goods and services, along with addressing transport and logistics inefficiencies, can significantly decrease trade costs.
In the 2000s, average applied tariffs significantly decreased, dropping from nearly 30% to less than 15% in emerging and developing countries, and from 10% to under 5% in industrial nations, highlighting the ongoing importance of trade policies in shaping international trade costs With weak investment already hampering trade, it is crucial to resist protectionism and revitalize trade liberalization efforts to eliminate remaining barriers, which could foster trade growth and potentially initiate a new phase of global value chain development.
Engaging more deeply in global value chains by enhancing knowledge and technology in production and exports can position a country as an appealing destination for foreign direct investment and stimulate new economic sectors Additionally, optimizing the efficiency of labor, product, and financial markets is essential for effectively 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, the enhancement of infrastructure services and the development of 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 recent decline in trade growth across Asia, highlighting that both exports and imports have experienced a slowdown since 2011, with their growth rates now trailing behind GDP growth.
In Asian trade, intermediate goods dominate the commodity group, followed by consumption and capital goods Despite a steady growth in trade services, overall trade in goods is experiencing a decline The trade relations within Asia are weakest with non-Asian countries, followed by trade among Asian nations (excluding the People's Republic of China) and then with the PRC.
The decline of Asian trade can be attributed to several key factors: a downward trend in the growth of major Asian exporters, increasing protectionism, a decreasing participation ratio in Asia's global value chain, political and economic instability, and shifts in the components of trade.
The thesis suggests that fostering domestic demand is crucial for driving growth, promoting technological advancements and knowledge sharing, and implementing reforms to lower trade costs These measures aim to counteract the decline in Asia's trade and enhance the service sector's performance.
ADB (2015), Key Indicators for Asia and the Pacific 2015, part IV: Global value chains indicators for international production sharing
ADB (2016), Asian economic integration report 2016: What drives foreign direct investment in Asia and the Pacific, Asian Development Bank
Albrow, Martin and Elizabeth King (1990) Globalization, Knowledge and Society London: Sage ISBN 978-0803983243 p 8
Cristina; Aaditya; Michele (2015), The Global Trade Slowdown: Cyclical or
Structural? Policy Research Working Paper;No 7158
Dominick Salvatore (2012), International Economics, 11 th edition
ESCAP (2017), Asia-Pacific trade and investment report 2016, Recent Trends and Developments, United Nations Publication
Giddens, Anthony (1991) The Consequences of Modernity Cambridge: Polity Press p 64 ISBN 9780745609232
Hufbauer, Gary, and Euijin Jung (2016), Why Has Trade Stopped Growing?,
Washington, DC : Peterson Institute for International Economics
Hummels, David (2007) Transportation Costs and International Trade in the
Second Era of Globalization Journal of Economic Perspectives, 21(3): 131-154.