Trade facilitation and Regional Cooperation in Asia

Trade facilitation and Regional Cooperation in Asia

Author(s): Douglas H. Brooks and Susan F. Stone (eds)

ISBN: 978-1848449862

Publisher: Edward Elgar Publishing

Year: 2010

Price: ₤65.00

Reviewed by Ellen L. Frost, Visiting Research Fellow, Peterson Institute for International Economics, Adjunct Research Fellow, National Defense University’s Institute of National Strategic Studies.

Of all of the aspects of Asian regionalism, trade facilitation is surely the least glamorous. Since everyone agrees that cooperation designed to expand trade is a good thing, there is little in the way of political tensions and rivalries to attract the attention of foreign policy analysts. Yet as this dense, fact-filled little book shows, dismissing trade facilitation as the bottom rung of trade policy and a poor relation of foreign policy is a mistake.

What exactly is trade facilitation? The World Trade Organization defines it as “removing obstacles to the movement of goods across borders (e.g., simplification of customs procedures).” Likewise, Doha Round negotiators seeking agreement on trade facilitation have confined themselves to border-based inspection and approval, rather than the entire logistical support chain.  Broader definitions include domestic improvements in both “hard” (physical) and “soft” (services) infrastructure, undertaken by both public and private sectors, to lower transit costs.

Lowering transaction costs conveys a host of benefits. Broad-based trade facilitation often exceeds the economic value of tariff reductions, stimulating faster economic growth. Greater efficiency requires a more supportive business climate and hence better governance. Making transportation easier alters the relative fortunes of domestic constituencies. Tourism expands, boosting cross-cultural contacts. China, South Korea, and Japan use “infrastructure diplomacy” to boost their influence, which allows smaller powers to play big ones off against each other. Small wonder that trade facilitation is a key pillar of the regional integration movement.

In short, trade facilitation in Asia deserves more attention from the policy community than it has gotten to date.

Trade Facilitation and Regional Cooperation in Asia is a start. Its framework is primarily economic; two chapters are based on economic models, and many technical terms are left undefined. The text is studded with references to economic articles. Nevertheless, political scientists and other non-economists will find plenty of practical descriptions, common-sense policy proposals, and broad conclusions.

Eight authors contributed to the book. The editors, Douglas H. Brooks and Susan Stone, are employed by the Asian Development Bank and the OECD, respectively. The other authors are from Malaysia, China, India, and New Zealand.  There are five chapters: one is a regional overview, two others focus on specific countries (Malaysia and China), and the remaining two look at sub-regions (the Greater Mekong sub-region and South Asia).

The first chapter, written by Douglas H. Brooks, names infrastructure as one of the three “key determinants of overall growth and the magnitude and productivity of capital inflows.” (The other two are incentives and institutions.) Improvements in infrastructure not only facilitate trade; they also expand inclusiveness, reduce poverty, strengthen linkages, and provide incentives for innovation. Conversely, poor infrastructure poses risks of damage, loss, and spoilage; higher insurance costs; de facto restrictions on market access; and lost opportunities for job creation and growth.

Citing numerous studies and statistics, the author points out that “soft” infrastructure is an “essential partner of expanded physical infrastructure.” He asserts that regional cooperation activities work particularly well when their targets include credit and foreign exchange at reasonable rates, legal recourse and dispute resolution, and training relevant personnel. This finding may be a bit generous, since only the richer countries have signed and actually implemented key infrastructure agreements. Both South Asia and the poorer countries of the Great Mekong region lag far behind.

A particularly significant finding centers on the symbiotic relationship between trade facilitation and global and regional economic integration. According to the author, “the more deeply a country is involved in global production networks, the more likely it will benefit from trade-related infrastructure investment.” This conclusion suggests that the government-driven movement to deepen Asian regionalism should go hand in hand with the spontaneous, market-driven process of regionalization. It also highlights the role of the private sector, a topic not widely discussed in this book.

The second chapter, written by Tham Siew Yean, looks at ASEAN’s “Open Skies” agreement and its implications for Malaysia. In an interesting twist, the government privatized Malaysian Airways and then renationalized it in 2000 because of its poor performance. Since the pace of regional expansion of air transport capacity may outstrip demand, the author emphasizes the importance of realizing the ASEAN Economic Community to encourage travel. Writing from a purely Malaysian perspective, she suggests several ways of expanding tourism to her country. Indeed, the chapter strikes the reader as advice to Malaysian aviation officials and tourist authorities on how to strengthen Malaysia, rather than as a contribution to regional trade facilitation.

The goal of the third chapter, written by Li Shantong and Wang Huijiong of China’s State Council, is to persuade other Asians to cooperate and “coordinate” their policies with China.  Eschewing competition, they cite regional trade agreements as positive examples of coordination and call for an Asia-wide coordinated industrial policy. While theories of competition are well established and documented, they write, “there is no real niche for theories on ‘coordination.’” But they say nothing about the fact that government-sponsored “coordination” bears suspicious resemblance to government-approved cartels (about which there is substantial theoretical and empirical literature). Cartels block new entrants, stifle innovation, and distort the efficient allocation of resources. Nor do the authors acknowledge something far more basic: the proven inability of government bureaucrats to keep up with rapidly changing markets. There is clearly a role for government in correcting market failures, but that is quite different from what the authors propose.

The authors preface their recommendations with a long string of comparative indices and rankings illustrating almost every aspect of China’s economic position in Asia and the rest of the world. Regional free-trade agreements are spelled out in great detail. This wealth of material reflects exhaustive research and contains many nuggets, but it is not clear why much of this information appears in a book about trade facilitation.

The fourth chapter, written by Nilanjan Banik and John Gilbert, examines prospects for deeper integration in South Asia. It examines South Asia’s readiness for deeper integration, identifies and quantifies the sources of trade costs that inhibit such integration, and draws policy conclusions. It applies a gravity model, which posits that bilateral trade between any two nations is positively related to their national income and inversely related to the geographic distance between them.

The authors’ equations are beyond the grasp of the general reader, but their conclusions are not: South Asian countries pay a huge price for their poor infrastructure,  barriers to trade in services, bureaucratic and legal obstacles to new business start-ups, and political disputes (particularly India-Pakistan and India-Bangladesh).  According to one study cited in this chapter, exports from South Asia increased from $17 billion in 1980 to only $120 billion in 1994, whereas exports from East Asia jumped from $80 billion to nearly $1 trillion in the same period. No South Asian country except the Maldives scores well on the International Finance Corporation’s index that measures the ease of doing business. A useful chart in this chapter lists no fewer than 43 steps needed to start a company, many of which incur delays and “special fees” (bribes) to get through.

Among the authors’ recommendations is a call for governments in rich countries to transfer funds for infrastructure development to poor regions, as was done in the European Union. The current budget climate precludes this option, at least in the near term. Moreover, problems of governance in the region, especially corruption, act as a deterrent to investment, especially in South Asia.

The final chapter, written by Susan Stone and Anna Strutt, centers on the Greater Mekong sub-region, which includes not only mainland Southeast Asia but also China’s Yunnan province and the Guanxi Zhuang Autonomous Region. The Asian Development Bank has devoted major resources to fostering what it calls “connectivity” in this area. In 1995 governments adopted a master plan for transportation, and in 2003 they signed a cross-border transport agreement. In 2007 three transport corridors targeted for development were expanded to nine.

Like previous chapters, this one attempts to quantify the economic benefits of trade facilitation. Instead of the gravity model, the authors apply the Global Trade Analysis Project (GTAP) model, which is a version of the Computable General Equilibrium (CGE) model. They are candid about the weaknesses of these models. They also acknowledge the occasional negative effects of trade facilitation, such as a widening income gap.  Like Chapter 1, this chapter emphasizes the need for a comprehensive set of policies. The authors demonstrate, for instance, that marginal benefits from improvements in domestic land-transport infrastructure are highest when programs devoted to trade facilitation are in place.

This book is useful, but it has some shortcomings. It strikes the reader as a collection of self-contained conference papers tacked together, without any overview chapter linking major findings and identifying points of disagreement and uncertainty. Although the book was published in 2010, most of the tables and charts stop at 2005 or 2006. The private sector receives scant attention. Only one chapter contains a map, and there is no index of tables and charts. Neither regulatory issues nor problems of governance receive much attention. Still, those who seek a deeper understanding of Asian regional integration would do well to peruse this book.