Regional Cooperation and Trade-related Infrastructure

Infrastructure services can yield a variety of externalities. For example, developing a new road infrastructure project to relieve congestion in accessing ports produces advantages not only for the direct users of the road project but also for users of other roads where congestion is lessened as a result of the new project. Even those who do not use the new road or alternatives can gain through reduction of pollution and improvement of the natural environment, and the country as a whole can benefit through reduction of oil consumption or oil imports as well as increased trade benefits.

Regional cooperation through international trade strengthens regional economic growth and integration, allowing greater regional investment in trade-related infrastructure projects. At the same time, the international externalities that arise as infrastructure services support cross-border trade flows indicate an important role for regional cooperation to incorporate those externalities and maximize social benefits (Maur 2008).

As infrastructure investment facilitates regional economic integration through trade and investment expansion, it motivates regional cooperation, including cooperation in infrastructure development, generating a virtuous cycle. The diversity of Asian economies, combined with infrastructure expansion and improvement to lower trade costs, has helped the region to benefit as a leader in global patterns of production fragmentation, expanding intraregional trade, and diversification of development opportunities.

As production services become increasingly fragmented and traded internationally, cooperation among the economies participating in those production networks becomes more and more important to maintain or raise an individual host country industry's competitiveness in supplying those services. Regional coordination can lower infrastructure construction, maintenance, and operating costs and limit resulting environmental and other negative social impacts while still contributing to trade expansion. This has been found to be the case in the Greater Mekong Subregion (GMS) where special forums have been established to coordinate transport, telecommunications, and electric power infrastructure developments, particularly for the development of cross-country economic corridors (Asian Development Bank (ADB) 2006).

Weiss (2008) describes a framework for considering the role of infrastructure in regional cooperation. He utilizes a modified formulation of the effective rate of protection to quantify the empirical significance of a range of trade cost barriers that are broader than tariffs and quotas. Infrastructure investments and interventions are then seen to be instruments that reduce trade costs and thereby stimulate closer intraregional and interregional trading linkages. In this manner, the height of barriers posed by different types of trade costs offers a rough ranking of priorities for infrastructure development to reduce these barriers.

Factors like high freight costs, delays in customs clearance, unofficial payment solicitations, slow port loading or landing and handling, and poor governance create barriers to trade. Institutional bottlenecks (administrative, legal, financial, regulatory, and other logistics infrastructure), information asymmetries, and discretionary powers that give rise to rent seeking activities by government officials at various steps of trade transactions also impose costs. These costs can be lowered through cooperation that facilitates merchandise and services trade logistics, for both inbound and outbound shipments.

At the international level, cooperation through preferential trade and investment agreements that strengthen structural reforms and increase the attractiveness of a destination for foreign investment can leverage domestic policy actions and impact on growth, equity and efficiency, and may help to reduce corruption. Cross-border cooperation in infrastructure policies and institutions can therefore lead synergistically to a reduction in trade costs and stimulate further investment, trade, and growth.

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