Toward Greater Trade

Asia's trade facilitation has greatly improved, but it must continue to do so in order to sustain economic growth and regional integration. Asia's international trade is growing in value and shrinking in weight per unit value. Exports are diversifying across new markets with smaller flows, and intraregional trade in parts and components for regional production networks accounts for a growing share of total trade. These trends underscore the need for speed, flexibility, and information. Cross-border improvements that facilitate the expansion of trade along these lines will boost a country's export competitiveness and its efficient integration into the global economy.

The sequencing and complementarity of cross-border trade facilitation efforts are important, particularly as transport corridors develop into more diversified economic corridors. Once physical infrastructure has been built, developing complementary soft or ICT infrastructure, and enhancing trade facilitation at the border may be more important for trade than further investments in physical infrastructure. For example, once a two-lane highway has been built, streamlining customs facilities may boost trade more than widening it to four lanes.

As production becomes increasingly fragmented and traded internationally, cooperation among economies participating in production networks is becoming more important. The competitiveness of each country's production depends on that of the other countries in a production network as well as on the efficiency of the trading links among them. They thus have a strong incentive to cooperate with each other, particularly on reducing the costs of trading among them.

Flexibility, as well as timeliness, will become more valuable as greater trade implies greater potential vulnerability to external shocks such as financial turmoil or sharp fluctuations in fuel prices. An extended economic downturn in export markets would diminish export prices, potentially raising ad valorem trade costs and altering the prices of traded goods relative to those of nontradables. In general, one would expect the direct price effect to dominate, favoring trade in goods that are smaller, lighter, and of higher unit value. Trade finance may also be negatively affected, reducing the ability of trade to contribute to economic recovery in a region where it has been highly important in the past.

Factors such as delays in customs clearance, unofficial payments, and poor governance are particularly damaging because they impede this flexibility. They are also barriers to trade that need to be addressed through regional cooperation on trade facilitation measures. Improvements that reduce the costs of international trade are crucial for the region to realize the full gains from recent and prospective trade policy liberalization. This should be a priority in negotiations on bilateral and regional trade agreements, which can provide an added incentive and commitment to reform.

The empirical analysis presented here shows the significant gains from a reduction—even a relatively modest reduction—of trade costs. GDP in the region expands and countries move into a more diversified trading pattern. An examination of individual trends shows that when trade costs are lowered, it allows countries to move into new areas of trade. Some economies, such as Thailand in the scenario presented here, may experience an initial decline in overall exports as the economy moves out of traditional markets and into higher value-added sectors. However, such temporary adjustments are not long lived and policymakers need to be aware of this transition process and develop appropriate measures to manage the process effectively. We also see that some markets expand regionally while for others, trade facilitates trade with economies outside the region as well. However, regional market gains dominate and for those markets outside the region, the changes are not large relative to the gains between APEC Asian partners. The analysis highlights the importance of considering the direction of individual trade flows and the goods involved when planning trade facilitation policy measures and developing policies to handle the inevitable adjustment costs to a more diversified sectoral base.

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