ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC
POLICY ISSUES FOR THE ESCAP REGION: DEVELOPMENT THROUGH GLOBALIZATION AND PARTNERSHIP IN THE TWENTY-FIRST CENTURY:
AN ASIA-PACIFIC PERSPECTIVE FOR INTEGRATING DEVELOPING COUNTRIES AND ECONOMIES IN TRANSITION INTO THE INTERNATIONAL TRADING SYSTEM ON A FAIR AND EQUITABLE BASIS
(Item 5 (b) of the provisional agenda)
Note by the secretariat
1. Globalization has opened up vast new opportunities for economic and social progress in developing countries through greater integration into the world economy. The ability to import ideas, technology, investment, intermediate inputs and goods and services from more advanced countries can boost economic growth. Increased trade and capital flows have generated gains in productivity and efficiency that have spurred growth and created jobs. Access to foreign capital markets has helped developing countries mitigate the serious obstacle to rapid growth caused by meagre domestic savings.
2. However, integration into the world economy comes with potential costs. For instance, increased reliance on volatile international capital flows can be a source of instability, as witnessed in Asia in recent years. There can be social costs in the form of marginalization of individuals or social groups that are not equipped to take advantage of new opportunities and challenges created by global integration. Economic competition on a global scale implies that even a minor shift in domestic costs can lead to shifting comparative advantage, resulting in painful volatility in production and employment.
3. The policy challenge in today's world therefore is how to manage globalization by designing and adopting a set of policies and institutions which will ensure that a country can seize new opportunities created by globalization while minimizing costs.
4. The purpose of the theme study is to develop a regional perspective on globalization by examining policy challenges faced by developing countries and economies in transition with respect to their integration into the multilateral trading system on a fair and equitable basis. The following is a summary of the findings and recommendations of the study, the full text of which is available as an ESCAP publication.(1)
5. World merchandise trade has continued to grow faster relative to world production throughout the post-war period despite periodic downturns in the global economy, in particular the economic crisis propelled by the Organization of the Petroleum Exporting Countries (OPEC) in the 1970s and deflation in the 1980s. In some respects the increased trade orientation is not novel in world history and has merely meant the return of world trade to the "normal" levels before those were interrupted by the two world wars and the Great Depression. The heightened perception today about international trade is due to its dramatic rise in the post-war period, particularly during the last three decades or so. But there is more to the present phase of globalization than the mere rise in the trade-to-world production ratio.
6. First, increased internationalization of production by multinational enterprises in combination with rapid convergence in technological ability and know-how among the developed countries has made competition among firms across nations fierce. The margins of competitive advantage have become thinner: a small shift in costs somewhere can now be decisive to a firm's competitiveness.
7. Second, technological advances have made it possible to "slice up" the value-added chain in modern high-tech industries and relocate integral parts of firms to cheaper locations across the globe.
8. Third, there has been a rise in trade in services, with information technology dramatically expanding the "boundaries of tradability". The enhanced monitoring capability provided by information and communication technology is completely changing the nature of intra-firm services and the outreach of the services sector of the economy.
9. Fourth, international financial flows have been expanding much faster than world trade. The number of countries that are part of the global capital market is far larger today than it was at the beginning of the 1990s. The growing importance of these short-term capital flows, coupled with increased integration of the regional and global financial markets, poses new challenges for national stabilization policy.
10. Finally, an important characteristic of globalization has been the adoption of some form of market economy in an increasing number of countries. This "widening" of economic integration has complemented the above-mentioned "deepening" of integration, resulting in an accelerated drive towards globalization in many formerly centrally planned economies.
11. Developing countries of the Asian and Pacific region have participated actively in the global economy in the areas of trade, investment and finance. However, owing to a wide diversity in their economic and socio-political circumstances, the levels and pace of integration have differed. The impact of globalization has varied accordingly. The more industrialized East Asian economies have almost fully integrated into the world economy and have benefited enormously from globalization, while South-East Asian countries, although on their way to successful integration, have had a more mixed outcome.
12. The active participation of these developing countries of the region in global trade and investment flows has been accompanied by substantial increases in intraregional flows. The share of intraregional trade flows in terms of merchandise exports increased from about one fourth in 1980 to nearly two fifths by 1995. Similarly, while transnational corporations of developed countries remain the major source of foreign direct investment (FDI), intraregional sources from developing countries have become increasingly important in FDI. Significant transfer of technology and modernization of the economies has occurred particularly in manufactured goods, through joint ventures, licensing agreements and other enterprise partnerships.
13. For other developing countries of the region, such as those in South Asia, economic reforms in the 1990s have stimulated their integration, although it is by no means of the same depth and scope as in South-East Asia. South Asian countries too have attracted an increasing share of FDI flows, particularly in labour-intensive manufactured goods as part of regional industrial restructuring patterns, given their low wage costs. Investments in software and computer-related industries in India and the exponential growth experienced are noteworthy. Nevertheless, the overall level of integration of South Asia is much lower than that of East Asian and South-East Asian countries.
14. On the other hand, the least developed countries, the Pacific island countries and economies in transition have largely remained unintegrated. Despite their efforts to deregulate and liberalize their policy regimes with the aim of greater participation in the international division of labour, their capacity to do so is limited. The small size of these economies, the poor state of development of their transport and communication infrastructures, their disadvantaged geographical locations far away from the major metropolitan centres of international trade and finance place formidable constraints on their integration into the globalization and regionalization processes.
15. On the whole, however, the dominant trend for developing countries of the Asian and Pacific region has been towards increased integration. Open markets have underpinned this process and for many years East Asian and South-East Asian countries received universal acclaim as the fastest growing economies in the world. Globalization therefore widened the opportunities for national development and prospects into the twenty-first century appeared promising for the region as a whole. Yet, it is these same dynamic trading economies that bore the brunt of the most serious economic crisis of the past 50 years. Enhanced participation in the globalization process therefore brings with it certain risks. The Asian crisis amply demonstrated such participation is by no means smooth, nor does it guarantee equitable gains for all countries and peoples.
16. Some of the developing countries in Asia and the Pacific adjusted their domestic policies and institutions earlier towards more market-oriented economic regimes and have been able to benefit enormously from the integrated world economy. Many other countries, however, find it extremely difficult to integrate into the world trading system. In order to make the global trading system truly global, it is imperative for these countries to become an integral part of this system without being further marginalized. Some selected mechanisms by which developing countries and the economies in transition can be integrated effectively into the world trading system on a fair and equitable basis are described below.
17. The establishment of the World Trade Organization (WTO) in 1995 was a landmark development in world economic history. Prior to this, developing countries were effectively exempt from most of the disciplines imposed under the General Agreement on Tariffs and Trade (GATT). WTO now has more than 100 developing countries in its membership of 136 countries, all following the same set of agreements collectively known as the Uruguay Round package.
18. Some of the important contributions of the World Trade Organization to the integration of developing economies into the multilateral trading system are as follows:
(a) There is now a rules-based framework that enables all members to participate in world trade in a more predictable and credible environment. Under the GATT system, an offending government was capable of stalling any decision that went against its self-interest. By contrast, WTO rules apply equally to every country, rich or poor so that, in principle, the world's economically powerful countries cannot impose their will unilaterally on their smaller trading partners.
(b) Traditional barriers to trade have been reduced all around so that the average world tariff is currently around 4 per cent. Traditional non-tariff barriers, such as quotas, have been prohibited and apart from permissible exceptions indeed appear to be on their way out.
(c) Trade in textiles/clothing and agriculture, which are two of the biggest avenues for integration of the Asian and Pacific developing countries, has been put on the negotiating table for the first time in 50 years of international trade negotiations.
(d) By extending the coverage of WTO rules to services, conditions have been created to facilitate the flow of foreign investment to this sector of growing importance for developing countries. There are indications that the pattern of FDI in the Asian and Pacific region has, of late, been characterized by an increasing share being received by the services sector.
(e) Finally, from a longer-term perspective, the multilateral disciplines imposed by WTO can be an important catalyst for good governance on both domestic and global policy fronts.
2. Unfinished agenda
19. A number of implementation problems and inherent weaknesses are becoming apparent within the multilateral trading system and a lot more needs to be done in WTO before the integration of developing countries can be said to be fair and equitable. Some areas of concern are outlined below:
(a) The outcome of WTO trade negotiations appears to have favoured developed countries much more than developing countries. Thus, for example, while negotiations have been successfully completed in the areas of telecommunications services, information technology products and intellectual property rights, developing countries are still waiting to receive the benefits of free trade in labour services, primary products and textiles/clothing in which they have comparative advantage.
(b) While the GATT/WTO rounds have largely curbed the use of traditional trade barriers like tariffs and quotas, they have not prevented the emergence of new forms of trade barriers such as anti-dumping measures, technical and hygiene standards and subsidy investigations that thwart developing countries' access to developed country markets.
(c) Participating effectively in WTO negotiations, bringing cases to the Dispute Settlement Body and implementing trade agreements in new areas can be very costly activities and rich countries have been better placed to exploit the WTO system to their advantage. Insufficient financial, human and institutional resources have prevented developing countries, especially the less developed among them, from participating more actively, complying strictly with the many obligations and notification requirements, and deriving more benefits from the multilateral trading system.
(d) The implementation of disciplinary/regulatory provisions under various WTO agreements, in particular intellectual property rights, anti-dumping, sanitary and phytosanitary requirements, has in practice placed developing countries at a disadvantage. This tendency has coalesced towards a "culture of litigation" entailing costly and time-consuming negotiations, an unexpected burden on many developing countries.
(e) The poorer of the acceding countries in particular have been frustrated by the discriminatory standards that WTO has been using for new applicants. As a result, none of the region's least developed countries outside WTO has been able to take this important first step for entering the global mainstream.
(f) There has been a gap between prescription and practice with regard to non-binding special and differential provisions. There is also a strong case for extending transition periods in areas where developing countries face real difficulties in meeting the deadline for trade policy reform.
(g) The Plan of Action and the Integrated Framework for least developed countries adopted at the first WTO Ministerial Conference held in Singapore in December 1996 with a view to improving trade opportunities for least developed countries has not so far yielded any tangible results.
20. Regional trading blocs have emerged as economic arrangements of great utility throughout the world. In recent years they are seen as effective ways to address the difficult challenges arising from globalization, many of which often are beyond the capacity of individual developing countries to handle. This has led developing countries to look for opportunities both to form regional trading arrangements (RTAs) among themselves and to establish preferential trading arrangements (PTAs) with developed countries on a non-reciprocal basis.
21. There are at present about 10 RTAs in the ESCAP region. While each of these is grounded in regional political alliances or in strong cultural affinities, they vary considerably in membership, coverage of goods, services and factors of production, depth of cuts in tariff and non-tariff barriers, factor movements and relationship with non-members. Likewise, the results achieved vary considerably.
22. The most integrated arrangements are those based on negative list (as opposed to positive list) approaches to liberalization such as the ASEAN (Association of Southeast Asian Nations) Free Trade Area (AFTA). AFTA is sometimes cited as an example of an RTA that has contributed positively to the agenda of the multilateral trading system. As one of the relatively advanced RTAs in the region, its liberalization agenda includes trade in services in which seven priority sectors have been identified for further liberalization. Similarly, although agriculture is an intractable issue, AFTA has included unprocessed agricultural products under its liberalization programme with minimal exceptions. It demonstrated therefore, that negotiations among a small group of neighbouring countries closely associated with each other may make it easier to reach the necessary understanding, and in this sense contribute as building blocks, to wider concessions under the multilateral negotiation process.
23. A number of other RTAs in the ESCAP region are based on a product-by-product, positive list approach to liberalization, among which are South Asian Preferential Trading Arrangements (SAPTA) in South Asia and the Melanesian Spearhead Group (MSG) in the Pacific. Initially only a small number of products were covered but more products are being added to the positive list. Recently, however, concern has been expressed that significant trade diversion may result unless the high external barriers are brought down. At the other end of the spectrum, the Economic Cooperation Organization (ECO) in Western Asia is at the initial stages, having established a protocol providing for tariff preferences among its members on a very limited range of products. There is also a proposal to create a Pacific Regional Trade Agreement (PARTA), open to members of Forum island countries including MSG members.
24. The South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA), is a "hub" and "spokes" non-reciprocal RTA that provides virtually all products from a number of Pacific island countries with duty free and unrestricted access to the Australian and New Zealand markets, subject to compliance with a number of rules of origin.
25. The Bangkok Agreement, the only regionwide trade agreement, is a preferential tariff arrangement that aims at promoting intraregional trade through exchange of mutually agreed concessions by member countries. This has not been an effective regional agreement due to limited coverage of product categories, low margins of preference and limited membership. However, the recent accession of China to the Agreement is expected to have a significant impact on regional trade relations in Asia and the Pacific. Several other countries have indicated their desire to join.
26. Finally, Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic Cooperation (BIMST-EC) is a fairly recent agreement involving two ASEAN countries and three South Asian Association for Regional Cooperation (SAARC) countries. A cooperative work programme has been established which includes developing trade among the member countries through liberalization and facilitation measures.
27. Asia-Pacific Economic Cooperation (APEC), on the other hand, has a unique approach to liberalization. Contrary to RTAs, it is based on the principle of "open regionalism". Furthermore, commitments are voluntary and each member is free to determine its own liberalization path. The term "concerted unilateralism" perhaps best describes this process.
28. Trade facilitation measures in the form of harmonizing and simplifying the administrative aspects of individual trade transactions are a necessary accompaniment to wider, macro level trade policy reforms for global integration. Liberalization initiatives at the macro level may not yield the anticipated increase in trade volumes if individual firms continue to face a multitude of procedural obstacles to trade.
29. Some of the ways in which trade facilitation measures can help developing economies integrate into the global economic system are outlined below:
(a) Lowering the transaction costs of trade. Obstacles to trade at the border in the form of not only obsolete technology at the port of entry/exit but also complex customs procedures, irrational documentation requirements, unfair customs valuation or unnecessary inspections are commonly found in many Asian and Pacific developing countries. Because of this, foreign markets usually figure less in the business strategies of firms in developing countries compared to their counterparts in developed countries. Simplification, automation, harmonization and greater transparency in customs procedures can act as a huge incentive to do business internationally.
(b) Improving the climate for FDI. Procedural barriers to import plant and machinery act as a major disincentive to potential investors from abroad as do obstacles to the rapid passage of finished goods through customs controls. Given the worldwide competition for FDI, a developing country successful in attracting foreign investment would have to be one that has taken care to streamline its customs and other facilities essential for the smooth conduct of international trade.
(c) Increasing revenue receipts. The use of automated and transparent trade procedures reduces revenue leaks through evasion and fraud or through corrupt practices. Increases in net customs duty collections through trade facilitation measures can offset some of the revenue losses from trade liberalization measures such as tariff reduction and thereby enable developing countries to integrate better into the global trading system.
30. Information technology, with techniques such as electronic data interchange, the Internet and electronic commerce (e-commerce), allows a fast and efficient exchange of data, permits automating of many administrative processes and creates new ways of carrying out international trade. It therefore has the potential to change the environment in which trade facilitation measures have operated thus far in a number of ways:
(a) Applying the new technology to customs administration and other links in the trade transaction chain such as payment systems and transportation can bring about exponential savings in time and costs.
(b) Electronic commerce of the type where goods are delivered in a digitized form which prevents the use of traditional trade barriers like customs duties and quotas, brings with it the efficiency benefits of free trade.
(c) By facilitating the electronic supply of services like software consultancy and back-office operations where developing countries had a comparative advantage that they could not exercise due to restrictions on the movement of natural persons, e-commerce provides new opportunities for firms in developing countries to integrate into the global market.
(d) By making available an enormous amount of information about business opportunities, the Internet offers an almost costless way for firms in developing countries to integrate their products and services into the world market.
31. The ability of a country, and particularly of the more isolated communities within a country, to integrate into the international economy depends crucially on the quality of the transport and communication infrastructure that allows them to access the world trading system.
32. To date, the maritime sector has been the principal facilitator of trade flows in the Asian and Pacific region. The region has already achieved a lot in this area. A network of ports has enhanced natural sea routes, with 12 of the world's 25 busiest container ports located in Asia. Regional member countries own more than 40 per cent of the world fleet. In addition, 80 per cent of the world's new shipping tonnage and 83 per cent of all maritime shipping containers are manufactured in Asia.
33. International sea routes and ports alone, however, cannot facilitate the development of the hinterlands, which, for most developing countries, provide great potential for future growth. This will be achieved only when adequate road, rail and inland water transport infrastructure is developed and the process of intermodal (sea-land) transport is fully integrated and institutional bottlenecks removed.
34. Until recently, conditions were not conducive to the development of intraregional and interregional land transport linkages. Civil wars in a number of countries, subregional conflicts and the cold war constrained the development of international land transport systems in many countries. These events made it impossible to gear transport networks towards commercial and trade interests.
35. Since about the early 1990s there have been some notable moves towards increased cooperation between countries in this area. In addition to the activities of ESCAP, there are a number of initiatives being taken at the subregional level in ASEAN, ECO and SAARC to extend maritime links and facilitate the movement of vehicles and goods across borders. The proposed Asian Highway and the Trans-Asian Railway networks demonstrate the commitment of member countries to work towards an integrated surface transport system linking countries in the ESCAP region with each other and providing transport corridors to Europe. But progress has been slow considering the magnitude of the challenge posed by rapid globalization.
36. Despite the failure of international trade negotiators at the Third WTO Ministerial Conference, to launch a new round of multilateral trade negotiations, the overall paradigm shift in development policy towards open economies makes it inevitable that sooner rather than later members of the World Trade Organization will be settling down to negotiate a new set of trade liberalizing commitments. Unlike the previous rounds where they spent much of the time blocking proposals, developing countries are likely to have their own positive agenda this time. Whether such an agenda will be able to integrate them into the multilateral trading system on a fair and equitable basis may largely depend on their ability to build a consensus within the WTO membership on a number of issues, some of which are listed below:
(a) Bringing the dispute settlement mechanism within the financial reach of all by creating a fund for legal assistance for least developed countries and developing countries with an annual per capita income below US$ 1,000.
(b) Strengthening special and differential provisions of various agreements by making non-binding clauses mandatory and extending the transitory periods in sectors where developing countries have severe difficulties in meeting deadlines.
(c) Reducing tariff peaks and tariff escalation on exports from developing countries. All countries may also need to review the need to use anti-dumping measures as well as the methods adopted for tarrification of agricultural quotas.
(d) Making meaningful the liberalization of trade in agriculture and textiles/clothing.
(e) Expediting the harmonization of rules of origin and providing for flexibility in the application of technical and sanitary and phytosanitary (SPS) standards for developing country exports.
(f) Expanding developed countries' commitments on the movement of natural persons under the General Agreement on Trade in Services (GATS). At the same time developing countries may also need to liberalize their commitments especially in infrastructure related services sectors.
(g) Restoring the balance between private profit and public good in trade-related aspects of intellectual property rights (TRIPs) by bringing down the period of exclusivity of ownership and creating an institutional mechanism that oversees the actual transfer of technology from developed to developing countries.
(h) Doing away with "WTO plus" conditions for accession and automatically extending the provisions for special and differential treatment to developing countries in the accession process.
(i) Incorporating free market access for exports of least developed countries as a binding commitment in WTO schedules and incorporating debt relief into the Integrated Framework(2) for least developed countries.
(j) Increasing the quantum and speed of technical assistance to developing countries.
37. The next round of trade talks should aim at improving the quality of integration of least developed, developing countries and economies in transition. But if negotiations follow past patterns (hard bargaining motivated by special interests within developed countries, with too little attention paid to the interests of the developing countries) the round could strengthen the hands of those in the developing world who resist outward orientation and market-oriented reforms.
B. Regional trading arrangements
38. Despite the existence of nearly a dozen RTAs, Asia is the least regionalized continent in terms of preferential trading arrangements notified under Article XXIV of GATT. However, what really distinguishes Asia, especially South-East Asia and more recently the Greater Mekong Subregion, is a substantial movement towards freer trade on a local or subregional basis, outside the conventional customs unions and free trade areas. This movement has taken a number of forms, such as export-processing zones, growth triangles, growth areas and commercial circles. The initiatives are mostly private sector driven while some are under government programmes, all aimed at harnessing trans-border economic synergies.
39. The study has shown that formal regional and subregional trading arrangements can contribute to the integration of developing countries into the global economic system by making them economically viable markets for attracting investments by permitting economies of scale, preparing them for multilateral liberalization and increasing their bargaining strength in multilateral trade negotiations. RTAs also provide scope for coordinated research on subjects of common economic interest, experience-sharing in economic liberalization initiatives like customs reforms and the potential to pool resources for ensuring representative participation in international forums. In view of these advantages, membership of the Bangkok Agreement, a regional framework for trade expansion, is recommended for developing countries and economies in transition.
40. Despite the success stories in using e-commerce and the scope it offers as a catalyst for facilitating trade, developing countries in the Asian and Pacific region need to undertake important policy initiatives to improve their information technology infrastructures before they can take advantage of the opportunities offered by the Internet to integrate into the global economy. Some of these are:
(a) Since Internet usage will ultimately depend on the costs for internet access, efforts to upgrade telecommunications infrastructure need to be accompanied by the introduction of competition in basic telecommunications services (including leased lines) as well as between internet service providers;
(b) It is equally necessary to take steps to lower the cost of telecommunications and computer hardware. One practical way is to reduce import duties on information technology products;
(c) These steps will have to be accompanied by institutional reforms to validate the new way of conducting business. This includes recognition of paperless transactions, electronic payment systems and electronic signatures. Governments may have to set an example by, say, allowing the
use of email for internal government correspondence, allowing electronic payment of taxes and filing of tax returns and direct debit payments for government services.
41. However, developing countries which are only now beginning to use computers need not wait until the entire infrastructure to support information technology has been set up before initiating trade facilitation measures. They need to begin work immediately on making existing trade procedures simple and transparent. This is not only an important first step in the participation of firms in the global marketplace, it is also a precondition for the successful automation of trade-related procedures as information technology is a tool that can best contribute to trade facilitation in conjunction with prior simplification and harmonization of procedures.
42. A number of issues related to the transport sector need to be addressed urgently in order to facilitate the integration of developing countries into the multilateral trading system. These include:
(a) Integrating land and sea transport to provide the potential to open hinterlands further;
(b) Establishing a favourable investment climate to encourage private sector participation in transport financing and operation through the provision of appropriate legal frameworks, implementation of trade facilitation measures, defining equitable risk-sharing strategies and strengthening independent regulatory bodies;
(c) Undertaking corridor studies at both the domestic and international level to identify physical and non-physical barriers and suggest remedies to smoothen the flow of transport and goods;
(d) Formalizing the Asian Highway and Trans-Asian Railway to ensure unhindered access and operationalization of major land bridges;
(e) Enacting facilitating legislation, that recognizes and encourages freight forwarders, multimodal transport operators and the use of e-commerce;
(f) Encouraging the development of logistics services and supply chain management for the benefit of the trade;
(g) Optimizing the opportunities that will come from liberalization by involving government policy makers and industry participants in establishing negotiating positions.
43. The Commission is requested to consider these issues, give policy guidance and make recommendations for further action.
1 Development through globalization and partnership in the twenty-first century: an Asia-Pacific perspective for integrating developing countries and economies in transition into the international trading system on a fair and equitable basis (ST/ESCAP/2054).
2 World Trade Organization, WT/LDC/HL/1/Rev.1 (23 October 1997).