ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC
EMERGING ISSUES AND DEVELOPMENTS AT THE REGIONAL LEVEL: REGIONAL ECONOMIC COOPERATION
(Item 6 (a) of the provisional agenda)
EMERGING ISSUES AND DEVELOPMENTS RELEVANT TO THE SUBPROGRAMME: TRADE AND INVESTMENT
Note by the secretariat
1. Before the economic crisis, Asia was considered the most dynamic region in terms of trade performance. A closer look at the pattern of regional trade reveals that Asia's trade was largely driven by a handful of economies: China; Hong Kong, China; Indonesia; Japan; Malaysia; Republic of Korea; Singapore; Taiwan Province of China; and Thailand. It is therefore no surprise that, with most of these economies in crisis, regional trade performance took a dramatic turn for the worse.
2. Most projections of early recovery in the crisis-hit countries were based on the assumption of growth in exports generated by improved competitiveness. Indeed, the current accounts of some South-East Asian countries, notably Indonesia, Malaysia and Thailand, registered major improvements. However, so far the improvements have generally resulted mainly from import contraction. The total exports of five Asian countries (Indonesia, Malaysia, Philippines, Republic of Korea and Thailand) in United States dollar terms were roughly unchanged as a marked increase in export volumes virtually offset declines in prices, in part reflecting declines in primary commodity prices. The overall performance of exports from the five countries masks a sharp contraction of regional trade, especially with Japan, and a strong rise in export revenues from outside Asia. Weaker activity and exchange rates elsewhere in Asia have reduced revenue from exports to regional trading partners.
3. On the import side, the fall in dollar import bills can be attributed partly to the decline in domestic demand of the five countries and partly to sharp increases in the relative price of imports. The end of output contraction in Japan and the five countries, expected in 1999, should result in the stabilization of import volumes. This trend should also be encouraged by the substantial recovery of East Asian currencies in the course of 1998, especially for the Japanese yen and the Republic of Korea won.
4. The external position of China remains strong. The current account is projected to remain in surplus. Foreign exchange reserves are large. Its relatively closed capital market has helped China maintain its exchange rate vis-à-vis the United States dollar. Generally, the exports and imports of all East Asian economies declined sharply, which is attributable to domestic recession and declining demand in Asia.
5. South Asian countries are still relatively insulated by the structure of their economies from the immediate fallout from the crisis, although its effects have been felt through trade (and foreign direct investment (FDI)) links. A significant share and growth of South Asia's exports come from export markets in East Asia. Competition from East Asian countries in these markets will slow the growth of exports. Depreciation of the Indian rupee against the dollar over the past year, however, has offset some of the loss of export competitiveness to members of the Association of South East Asian Nations (ASEAN). On a more positive note, the steep drop in oil prices is a boon to the region's oil importers, as resulting improved terms of trade have increased overall purchasing power.
6. Weak demand conditions in export destinations throughout Asia somewhat dampened the trade performance of South-West Asian countries. Lower oil prices are mainly responsible for the lower export values of the Islamic Republic of Iran, but constituted a positive factor for net oil importers in this subregion. In general, both exports and imports of South-West Asian countries registered lower growth rates in 1998.
7. In the Commonwealth of Independent States (CIS) economic area, the 30 per cent decline in oil prices and similar drops in metals and agricultural-resource prices pressured the Russian Federation's current account into deficit. Resource-dependent Azerbaijan, Kazakhstan and Uzbekistan also saw a decline in growth. The size of merchandise trade and current account deficits continues to be a source of concern. In general, the terms of trade for CIS countries are unfavourable.
8. Except for Papua New Guinea and Solomon Islands, which have substantial trading links with Asian developing countries, and, to a lesser extent, Fiji, the economic crisis has so far had little effect on Pacific island economies. However, some were affected indirectly because of the impact of the crisis on Australia, Japan and New Zealand, which absorb a sizeable portion of exports from the Pacific. Most Pacific island economies recorded current account deficits, even though the service accounts of some were in surplus.
9. Australia and New Zealand, both big commodity producers, were adversely affected by the severe weakening of commodity prices. A decline in demand from Japan, a major trade partner for both Australia and New Zealand, and weak demand in other Asian economies, were partly offset by the robust economic growth in the United States of America and, to a lesser extent, in Europe.
10. On the trade policy front, despite uncertainty on the regional economic scene, World Trade Organization (WTO) members in Asia and the Pacific reaffirmed their commitment to the multilateral trading system by honouring their Uruguay Round obligations. This was particularly significant for countries hit by the crisis, as, although financial in origin, it inevitably had, and would continue to have, repercussions for regional trade.
11. There has been a general drive towards greater regional and unilateral liberalization. Countries such as Indonesia and the Philippines are implementing medium-term tariff reduction programmes that go well beyond their WTO commitments. The Republic of Korea has made significant moves in financial services liberalization. Turkey has carried out tariff cuts on a most favoured-nation (MFN) basis. ASEAN leaders, at their December Summit held at Hanoi, called for increased liberalization of trade in goods, investments and services and faster implementation of a regional tariff agreement. Members of Asia-Pacific Economic Cooperation (APEC) completed a "fast track" liberalization programme for nine priority sectors of the early voluntary sectoral liberalization package and set out to advance work on the remaining six sectors. Peru, the Russian Federation and Viet Nam were admitted as new members, bringing the total number of APEC economies to 21. Members of the South Asian Association for Regional Cooperation (SAARC) are committed to the establishment of a free trade area and have taken steps towards the drafting of a treaty. In the interim, India and Sri Lanka have already concluded a free trade agreement. Members of the Economic Cooperation Organization (ECO) are making progress in removing tariff and non-tariff barriers. Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan decided to deepen economic cooperation and renamed their union the Central Asian Economic Community. In December 1998, Kyrgyzstan became the first member of WTO from Central Asia. In the Pacific, the South Pacific Forum Economic Ministers Meeting began to discuss prospects for a free trade area. There has been liberalization of garment industry exports in the South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA). New Caledonia became an observer of the Melanesian Spearhead Group and joined the organization's trade agreement.
12. Developing countries in Asia are now striving to participate effectively within the WTO system. This implies improving their capacity to exploit export opportunities, meet their obligations, defend their acquired rights, formulate development-oriented trade policies, and pursue these policy objectives in the course of trade negotiations. In response to this, the ESCAP secretariat, together with the WTO secretariat, is examining the possibility of establishing a joint WTO/ESCAP training programme. Activities that are being considered range from general trade policy seminars to enhancing negotiating capacity etc.
13. Many countries find themselves simultaneously engaged in trade negotiations at the global and subregional levels. Subregional integration among developing countries is providing them with a training ground for competing in the global market, thus facilitating their participation in trade negotiations.
14. Against this background, some selected issues are presented below which are perceived to have the potential for strengthening regional trade.
15. In today's ever more interdependent world, no sector of the world economy has contributed more to globalization or grown as fast as the service sector. Much of this growth took place in developing countries of the ESCAP region with the majority of foreign investments directed at the service industries. In the first half of the 1990s, services exports from developing countries grew twice as fast as those of developed countries, with the result that the services orientation of trade is now higher in some developing countries of the region than in developed countries.
16. Perceptions about the nature and role of services in economic development have changed considerably over the past two decades. Until recently, services were viewed as non-tradables with low growth potential. Now services are viewed as major contributors to economic growth and long-term development. Much of this change was the result of the rapid technological advances of the 1990s which fostered the internationalization of services, especially through the use of advanced telecommunication networks. These trends are best summed up in the words of the WTO: "The new trade routes of the 1990s are laser flashes and satellite beams. The cargo is not silk or spices, but technology, information and ideas".
17. Such global developments pose new challenges for both developed and developing countries. The extent to which developing countries manage to meet these challenges will depend largely on two interlinked issues: their ability to develop internationally competitive services, and the extent to which they are able to commit to further liberalization in services. These issues are discussed below.
Services as a determinant of export competitiveness
18. Access to efficient services is critical for the international competitiveness of an entire economy on account of their interlinkages with other sectors of the economy. High-quality services inputs make exports more competitive. Similarly, financial services require an efficient and innovative telecommunication industry. An important means of ensuring increased efficiency in the provision of services is the opening up of the domestic market, because, first, it allows services to be provided that may not otherwise be available, thereby reducing the need for the import of expensive service inputs; and second, it fosters competition and tends to improve the efficiency of domestic producers, thereby improving the international competitiveness of the entire economy. This is especially important in the current recessionary climate, where cost reduction is a major determinant of a country's ability to maintain market shares and resume export-led growth.
19. Liberalization of trade in services poses a number of challenges to developing countries. In their preparatory work for further negotiations on services scheduled for 2000 under the framework of the General Agreement on Trade in Services (GATS), developing countries will need to identify carefully their liberalization priorities compatible with their levels of development. In particular, the determination of the pace and sequencing of liberalization will need to be carefully analysed, involving extensive data collection. Although developing countries are increasingly competitive service exporters, statistical information on volumes and destination markets is often under-reported and inaccurate. Moreover, extensive consultations with leaders of specific service industries are needed because liberalization in the service sector determines to a large extent the pattern and growth of future FDI flows and consequently the long-term economic growth and development of a country.
20. The promotion of trade liberalization in the service sector is further complicated by the sensitive nature of many components of the sectors. Those components, which are characterized by traditional technologies, well-established incumbent suppliers who stand to lose from reform, significant levels of government ownership or where governments have obligations towards the community, such as in postal, health, education and public transport services, raise a number of difficult equity, social and cultural issues. Moreover, as the experience of the Asian crisis has shown, liberalization needs to be complemented by an effective regulatory framework. Achieving the right balance between liberalization and regulation will continue to pose a difficult challenge for many policy makers in the region.
International competitiveness and emerging export opportunities
21. Traditionally, the export interest of developing countries in services has been in areas such as tourism, transport and labour. Services exports of current and potential interest to developing countries include finance, hotel, low-cost professional services, computer, information and communication services. Some developing countries are already quite competitive in many areas, notably computer services and increasingly in the cross-border supply or "tele-commuting" of professional services (for example, consulting engineering, market research, architectural and accountancy services). Other developing countries are beginning to specialize in "back office operations" which provide not only long-distance offshore data entry, but also services with higher added value, notably data capture and repair, design and management of Web sites, electronic publishing, and central hotel reservations. However, as these are technology-driven services with a propensity to change rapidly, they require a capacity for rapid adaptation and high-quality service. Therefore, in order to thrive in this highly competitive environment, supply-side constraints, especially skill development, and technical and professional advancement, need to receive special attention. At the same time, developing countries need to secure greater market access for those emerging exports, for which the new round of services negotiations will offer the opportunity.
22. Under GATS, most developing countries did not make significant liberalization commitments in environmental services but the pressure to do so could increase in the forthcoming negotiations. Since November 1997, APEC ministers have identified environmental goods and services as one of the sectors targeted for early, voluntary liberalization. The European Union has also indicated that it is a priority area for the forthcoming round of negotiations under GATS.
23. Liberalization may result in overall net benefits for developing countries insofar as it would contribute to improved environmental conditions. Reaping the benefits, however, depends on certain preconditions being met. In particular, appropriate domestic environmental legislation needs to be established with an associated effective enforcement mechanism. Economic incentives also need to be provided to generate a sustainable demand for environmental goods and services. A number of developing countries have made significant progress in these areas, while other less advanced countries are increasingly concerned with avoiding the high costs involved. There is considerable potential, therefore, for regional cooperation to promote the exchange of experience and sharing of expertise.
24. Excessive price instability has always been and remains one of the perennial problems facing commodity-producing countries. Indeed, the volatility of commodity prices not only introduces an important element of uncertainty into commodity trade but also brings an element of risk for producers, traders, processors and consumers. Moreover, the resulting instability in export earnings adversely affects domestic savings, government budgets, and the import of intermediate and capital goods. In effect, commodity price instability constrains investment and growth. While the reasons which characterize price instability are many, vagaries in the weather tend to be the main cause of price instability for many agricultural commodities. Tropical beverage prices are very sensitive to its inherent investment/production cycle and the long gestation period between new planting and production. In the mineral and metal sector, changes in industrial activity and resulting demand are the major causes for price instability. The surge in recent years in the flow of speculative capital into and out of commodity markets into financial markets has also tended to accentuate commodity price instability. The recent Asian crisis has also exerted downward pressure on commodity prices owing mainly to depressed demand in many commodities, especially agricultural raw materials and metals.
25. To mitigate commodity price volatility and the resulting export earning instability, governments in commodity-dependent developing countries have intervened in commodity markets with a view to managing commodity price risks. These interventions at the national level include the establishment of commodity marketing boards, government-controlled stabilization funds, exchange rate manipulation, tariffs, price bands and other related measures. However, these methods of risk management have resulted in high costs to the economy, giving rise to price distortions while at the same time causing misallocation of resources and large government budget deficits during times of persistent low prices.
26. Commodity-dependent developing countries have in the past implemented a variety of measures at the international level. One attempt at dealing with price risk at the level of international commodity markets is the establishment of international commodity agreements (ICAs). Two decades ago, under the auspices of the United Nations Conference on Trade and Development (UNCTAD), an international commodity strategy emerged in the form of the Integrated Programme for Commodities (IPC). This was linked to a common pool of finance, the Common Fund for Commodities (CFC), which provided the framework for negotiations to establish a series of ICAs aimed at maintaining prices within a certain range. Another form of intergovernmental intervention was the compensatory finance facilities such as the Compensatory and Contingency Financing Facility (CCFF) of the International Monetary Fund (IMF) and the European Union's STABEX scheme, which aimed at stabilizing export revenues and related incomes. However, at the end of the 1980s all but one of these ICAs had collapsed or were otherwise non-operative, while the compensatory arrangements had lost their effectiveness and initial purpose.
27. The 1990s opened with no effective price stabilization mechanisms in place and, moreover, no interest in the need for such mechanisms. It appeared that as the commodity sector was undergoing gradual changes and facing new challenges, traditional measures to develop commodity trade must give way to new kinds of measures and mechanisms that were more market-oriented and in which governments might still continue to play a supportive and catalytic role. The Agreement on Agriculture, negotiated in the Uruguay Round, proposes a wide range of liberalizing reforms which include, inter alia, the general reduction of tariffs, the elimination of non-tariff restrictions and the dismantling of agricultural export subsidies and price support schemes.
28. In the current wave of trade liberalization and gradual withdrawal of government support to the commodity sector, commodity-dependent developing countries need to adopt new market-based mechanisms, including risk management instruments, to enhance their export marketing capabilities. Several factors, however, seem to reduce the willingness of countries to make use of these new market-based mechanisms and instruments, such as legal and institutional barriers, limited knowledge and lack of know-how to use them effectively. Indeed, the ability to take advantage of risk management activities, such as future trading, is limited because of inadequate understanding and experience.
29. Large exporters and processors are generally knowledgeable about risk management concepts, but small exporters and processors often lack the resources or the opportunity to upgrade their knowledge. In many commodity-dependent developing countries, many private sector players have only limited experience in international trade. Their knowledge and understanding of modern commodity marketing and financing methods are negligible. Moreover, the financial institutions in these countries have not been able to adapt their operations to the changing needs. After years of government-determined financial support policies, they often lack the skills or the required experience to provide their clients with access to these modern financial markets.
30. A major awareness-raising and training effort is required to inform officials, traders and the concerned personnel in both the public and the private sectors of the benefits and costs of different risk management strategies and associated instruments.
31. In order to assist commodity-dependent developing countries in their endeavours, the secretariat will focus on training in risk management techniques for countries with little experience in this field, especially least developed countries, economies in transition, and island developing countries. The secretariat proposes to convene an expert group meeting in 1999 to consider various commodity-related issues, such as the impact of trade liberalization on the commodity sector and commodity-based diversification development, with a view to evolving trade policies and promotion strategies and measures for the benefit of the commodity sector.
III. TRADE FACILITATION AND INTERNET COMMERCE(1)
32. Liberalization and globalization have opened up opportunities for firms to view the world as a market. It has also opened domestic markets, in goods and increasingly in services, to foreign competition. In this environment, firms constantly have to strive to remain competitive. Trade facilitation and Internet commerce make this possible, by providing the environment for simple and harmonized procedures that facilitate trade and the inter-organizational linkages that are necessary for the adoption of modern management techniques. Great benefit can be achieved when the principles of trade facilitation and promotion are combined with electronic commerce, especially those that are Internet-enabled, to make trade simpler, safer and more efficient.
33. Trade facilitation and Internet commerce both aim to reduce costs and increase competitiveness. "Facilitation" must be balanced with "control". Trade facilitation aims to make it easier for legitimate commerce to move across national boundaries without compromising the ability of governments to control illegitimate commerce, which can jeopardize economic growth and stability.
34. A determined multilateral effort to simplify trade procedures through a framework that integrates and builds upon the Internet commerce technologies, best practices and standards could bring important trade benefits to the countries of the region. Experience demonstrates that trade facilitation through Internet commerce is not an issue involving the exchange of gains and concessions, but one in which all participants gain: governments, in terms of better controls, higher revenue intakes and more efficient administration; and traders, both large and small, in terms of reduced costs and delays, and thus more competitive import and export conditions. Such benefits can accrue in particular to developing countries and provide new trading opportunities for small and medium-sized enterprises.
35. Realizing these benefits requires cooperation at the regional and international levels, in order to develop the harmonized solutions necessary for traders to carry out international transactions most effectively. Initiatives for the harmonization of procedures and processes at the regional and subregional levels are necessary, since non-tariff barriers that exist globally are unlikely to disappear in the foreseeable future. Such harmonization complements macroeconomic agreements that have been discussed and arrived at in WTO and other regional and subregional groupings.
36. In recognition of this need for micro-level initiatives to boost intraregional trade, the secretariat has undertaken the introduction of trade facilitation techniques and Internet commerce, with special focus on the new members of ASEAN so as to integrate their economies into the global economy. The secretariat has also initiated a project for the introduction of trade facilitation measures among the SAARC member countries with a view to supplementing the South Asian Free Trade Area (SAFTA) process for trade liberalization. It also envisages a project for cross-border facilitation in the Greater Mekong subregion in cooperation with the Asian Development Bank.
37. In order to keep this momentum and further assist the countries of the region in introducing modern trade facilitation techniques, as well as create an environment for firms to adopt Internet commerce solutions, the secretariat has drawn up a programme following the recommendations of the Steering Group of the Committee for Regional Economic Cooperation, at its tenth meeting, and the Expert Group Meeting for Trade Promotion Policy Experts.(2) The strategies to reap benefits and meet challenges associated with the introduction of modern trade facilitation techniques and development of Internet commerce are elaborated in the chapter entitled "Electronic commerce" of the theme study for the fifty-fifth session of the Commission. The components of the programme for ensuring greater efficiency in the conduct of intraregional trade encompassing both trade facilitation and Internet commerce include the following.
38. Trade facilitation and Internet commerce are interdisciplinary disciplines concerning processes and procedures of international trade; technical issues related to access to the information highway and security for Internet commerce; and legal frameworks for Internet commerce. These issues are traditionally covered by various ministries and departments, which may not readily agree on many related matters. There is therefore a need to establish institutional mechanisms for coordination at the national level to promote the integrated use and application of Internet commerce.
39. The integration of operations is of paramount importance for international trade since it envisages inter-organization linkages among various groups of players. There is a need to establish policies suggesting inter-operable standards(3) that are necessary to ensure that trade transaction information flows in a seemly manner in and out of the different information archives.
40. Policy issues in the field of trade facilitation that cover import, export and regulatory procedures, which could be developed in a framework of action, include the introduction of automated customs clearance; pre-arrival processing and post-clearance controls; a one-stop clearance mechanism for regulatory approvals; remote filing and simplified clearance procedures; setting an upper limit for clearance time and approvals; the introduction of a mechanism for the speedy redressal of problems relating to technical breaches; and bringing transparency into the regulatory procedures that affect trade etc.
41. The adoption of Internet electronic commerce requires sound legislative backing. Such support has to be technology-neutral and timeless, to accommodate the further changes in technology that are certain to follow.
42. Accordingly, guidelines need to be developed and coordinated at the regional level for the legal considerations regarding electronic documents, handling the issues of computer crime, protection of data/messages for trans-border electronic transaction, dispute resolution mechanism, problems arising out of electronic transactions, electronic contract formulation, and multilateral management of domain name registration and Internet provider (IP) address allocations on the Internet.
43. The needs and demands are enormous for appropriate awareness and education on initiatives for re-engineering, technical and legal strategies to improve trade facilitation and Internet commerce. There is a need to develop awareness resource kits on trade facilitation and Internet commerce as well as on their dissemination, and upgrading their content.
44. All these strategic initiatives are far-reaching. They need concerted action at the national, subregional and regional levels. The secretariat could assist the countries in the region in implementing these initiatives, especially at the subregional and regional levels, to facilitate intraregional trade.
45. Although the Asian economic crisis had a direct impact on a few countries, its effect on intraregional trade is expected to be quite severe and widespread. The growing interdependence of economies indicates that the dynamism of intraregional trade witnessed up to the crisis in mid-1997 cannot be revived without renewed concerted efforts towards closer cooperation. The sine qua non for such cooperation is information-sharing, especially information that can assist in identifying and seizing market opportunities and overcoming barriers to trade.
46. Through upgrading of the Regional Trade and Investment Information Network (TISNET), the secretariat would be able to provide practical information for trade and investment promotion, while simultaneously facilitating the transfer of know-how and technology for similar upgrading of information systems at the national level in order to achieve more effective networking. This two-pronged strategy will view the region's priority information needs and seek methodologies to increase the quality and quantity of information collection and dissemination, particularly in the following areas.
47. The proliferation of non-tariff barriers militates seriously against the process of liberalization in world trade. Notwithstanding the widespread use of such barriers in areas in which developing countries have comparative advantage, lack of transparency and information on these measures and their impact on trade makes it extremely difficult to deal with them.
48. The secretariat's efforts to build databases in order to improve the diffusion of information on trade and investment through its Web site include a matrix on non-tariff barriers based on information from multilateral agencies, as well as the Trade Analysis and Information System (TRAINS) of UNCTAD. It is proposed to develop this matrix into a TISNET database that could be updated and expanded regularly, to include information on technical aspects; licensing issues; financial measures; quantitative measures; and price control measures, including para-tariff measures(4) on imports.
Trade facilitation and Internet commerce
49. To facilitate the introduction and promotion of trade facilitation and Internet commerce, as discussed earlier, in section III, the regular dissemination of up-to-date information through TISNET would be developed to include information on institutional models; best practices for Internet commerce; guidelines on inter-operable standards; guidelines on legal issues for Internet commerce; guidelines on security issues for Internet commerce; and awareness and educational kits.
Trade in services
50. As discussed under section I, the range of services that can be traded internationally has flourished in this decade, resulting largely from advances in information technology. As a precondition to opening new markets for services, developing countries need to build up supplier and sectoral information in a systematic manner, and disseminate the information on targeted markets.
51. Through TISNET, support could be extended to national initiatives, by facilitating access to information on trade opportunities. It is proposed to develop a database to include the following directory data on enterprises which are suppliers or users of services: investment potential for infrastructures that enhance export; market conditions, especially the regulations on relevant sectors; trade flows among partner countries; and statistical indicators for trade in services.
Ad hoc expert group meeting on trade and investment information networking
52. In order to realize the above-stated objectives and to draw up a concrete plan for the restructuring of TISNET, an ad hoc expert group meeting on trade and investment information networking is scheduled to be held in the second half of 1999.
1. Internet commerce is the new name for Internet-based electronic commerce.
2. The General Assembly, in paragraph 12 of its resolution 53/169 of 15 December 1998 on the role of the United Nations in promoting development in the context of globalization and interdependence, explicitly recognized a role for the regional commissions in promoting development in the context of globalization and interdependence.
3. Inter-operability refers to the ability of two or more systems (both hardware and software) to interact with one another and allowing data to be exchanged according to predetermined methods with predictable results. Standards provide the means by which inter-operability can be achieved. A standard for inter-operability specifies what rules of protocol are to be used in passing information between devices, the data format and the procedures to use.
4. Other measures that increase the cost of imports in a manner similar to tariff measures, that is, by a fixed percentage or by a fixed amount, calculated respectively on the basis of the value and the quantity (United Nations Conference on Trade and Development, A User's Manual for TRAINS TRade Analysis and INformation System 1996).