Concluding remarks

Intra-regional trade data, based on conventional measures, are generally consistent with the view that Asia, in particular East Asia, has become increasingly integrated through merchandise trade. But, considering both the ongoing process of international production fragmentation and East Asia's unique role in the related global production networks, it is clearly evident that the increase over time in the ratio of intra-regional trade has emanated largely from a rapid increase in intra-regional imports; the expansion of intra-regional exports expansion has persistently lagged. The asymmetry in the share of intra-regional trade between imports and exports is much sharper when reported trade data are adjusted for trade in parts and components. Clearly, the region's dependence on the rest of the world for its trade expansion has in fact increased over the time.

This inference is basically consistent with the behavior of trade flows following the onset of the global financial crisis. The remarkably synchronized nature of trade contraction across countries in the region is generally consistent with the close trade ties among the East Asian countries forged within regional production networks. Naturally, the rate of contraction of exports from East Asia, both as a whole and for its countries, to the US has been much sharper compared with exports to the PRC and other destinations. But, the PRC has failed to provide a cushion against this export contraction, as postulated by the decoupling thesis. Taipei,China, Korea, and Japan have suffered the highest rates of contraction in exports to the PRC compared with the other countries in the region, reflecting their greater dependence on that market. PRC imports from most countries in the region have contracted at a much faster rate compared to exports to the region, perhaps an indication of liquidation of imported parts and components by Chinese firms given the gloomy outlook for exports.

What are the implications of our findings for the new policy emphasis on rebalancing growth in East Asia through the expansion of domestic demand, particularly in the PRC?

It is not realistic to anticipate a dramatic shift in the PRC's developing strategy away from export-orientation and toward domestic demand-led growth. There is strong domestic pressure in the PRC to maintain the momentum of employment-intensive growth through export orientation. Moreover, the PRC has immense potential to continuing with efficient export-oriented growth. China is still a labor-surplus economy and, given that capital is mobile, export-orientation and import-substitution are not mutually exclusive policy priorities. The policy emphasis should be on removing constraints on domestic demand expansion and redressing export incentive biases.

The emphasis on redressing policy biases against domestic-oriented production needs to be accompanied by attempts to avoid a backlash against openness to foreign trade. The pressure for maintaining export competitiveness in the face of shrinking export demand would naturally lead to resurgence of “new protectionism” (as happened in the world economy—mostly in developed countries—during the era of slow growth following the oil crisis in the early 1970s).

Can a region-wide FTA help? Notwithstanding significant tariff cuts over the years, tariffs on some dynamic manufacturing product lines, in particular electrical goods and transport equipment still remain high in most developing East Asian countries. Therefore, at first impression, promoting intra-regional trade through an FTA seems possible. In theory, the trade-stimulating effect of FTAs would be higher for network trade than for normal trade, other things remaining unchanged. The experience to-date with FTAs in the region (and beyond), however, does not leave room for much optimism. The tendency so far has been that the political power of producer interests usually succeed in insulating a few heavily protected sectors against any attempt to cut tariffs through FTAs; the same sensitive products, which are proving hard to liberalize in the Doha Development Agenda of the World Trade Organization or among APEC economies, are also routinely exempted from “free trade” deals. There are also a number of formidable difficulties involved in formulating ROOs for network-related trade. The actual utilization rates of tariff concessions offered under the existing FTAs are not only rather low but vary considerably across industries and sectors, casting doubt on the usefulness of FTAs as a means of promoting intra-regional trade in a neutral, broad-based fashion. In any case, chances of negotiating a region-wide FTA look rather slim given the ongoing crisis.

In this context there is a strong case for devising strategies to fight new protectionism as part of a long-term commitment to nondiscriminatory multilateral and unilateral trade liberalization. Perhaps the East Asian policymakers want to consider seriously the example of the ITC Agreement and examine the possibility of extending it to cover trade in electrical goods and possibly a wide range of other new products.

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