Opening Statement at the High-Level Dialogue on Regional Economic Cooperation and Integration for Enhancing Sustainable Development in Asia and the Pacific

Delivered at the High-Level Dialogue on Regional Economic Cooperation and Integration for Enhancing Sustainable Development in Asia and the Pacific in Bangkok, Thailand.

Excellencies,
Distinguished delegates,
Ladies and gentlemen,

The Regional Economic Cooperation and Integration (RECI) has assumed renewed significance given the emerging threats from attempts to dislodge globalization and derail multilateralism, evolving political challenges and dynamics, and opportunities offered by the all-encompassing 2030 Agenda for Sustainable Development. Our region’s experience tells us deepening RECI holds great potential to further reduce poverty and deliver inclusive sustainable development. It needs to be at the heart of our efforts to meet the 2030 Agenda’s Sustainable Development Goals.

ESCAP has long standing mandate for promoting RECI in Asia and the Pacific. Over the past three decades, RECI has benefited our region significantly - powering trade, economic growth and stability. It has attracted investment as markets were liberalised and competitiveness increased, and strengthened the ability of policy makers to overcome domestic challenges.

Yet as we work to deepen economic integration here in the Asia-Pacific region, it is critical that we deal prudently with attendant risks from rising inequalities that have marginalized communities and economies. This approach will help us deal with the rising tide of discontent with globalization given the sensitivities over free trade, global value chains and labour migration are rising. A resurgence of economic nationalism carries inherent risks of shaking the foundations of free markets and development agendas. A misdirected focus on bilateral trade balances – rather than on overall current account balances – could undermine the multilateral approach which has supported free trade, competition and growth for decades.

At this year’s World Economic Forum, President Xi Jinping underscored the significance of promoting trade, investment and greater liberalization – and saying no to protectionism. Or as the Chair of ASEAN Economic Ministers put it: global growth needs to be sustained through more integrated economies. Whereas protectionism - to paraphrase Mr. Putin - would “slow down the recovery of the global economy”, and “hamper trade and investment”. Only last week Christine Lagarde of the IMF, warned that restricting trade flows would be a “self-inflicted wound” that would harm workers and consumers. Leaders are calling for a move away from protectionism and to keep an open mind in order to not only allow the continuity of free trade, but also to deepen free trade.

There are growing calls to enhance international cooperation and multilateralism more energetically than ever. Our region is well placed to lead the way, as you can see from the statements that I quoted from leaders of Asia and the Pacific. By driving regional economic integration forward with renewed vigour, the Asia-Pacific can help foster and strengthen global governance structures to deliver the tangible socio economic gains. I have to bring in here what the United Nations Secretary-General has been articulating. His approach places emphasis on promoting peace, security and ensuring preventive diplomacy. Development and RECI are direct interventions that can enable preventive diplomacy. The spirit of prevention is being infused into all of ESCAP’s work streams, including in sustainable development and RECI. The several RECI reports that have recently been made available have produced an aggregate outlook of RECI. In addition, subregional RECI reports have been produced for your benefit, as many member States are focusing their efforts at this level.

I would like to take stock of the progress we have made: outline some of the benefits further integration could deliver, including reducing rising inequality; touch upon the importance of financial cooperation; and finally, set out the how ESCAP can support this agenda.

Let me begin with the current state of RECI in the Asia-Pacific region.

An even-handed assessment of integration in the region as a whole can lead to only one conclusion. For all its past successes, our region remains at an early stage of economic integration. The untapped potential is great and there are significant differences in the levels of integration across the Asia and the Pacific region. East Asia enjoys an overall level of integration comparable to Europe and North America. Southeast Asia ranks second, followed by South Asia and Central Asia – where intraregional trade and financial cooperation remains low, despite great growth potential.

The experiences of East and South East Asia show regional cooperation can indeed deliver. They demonstrate clearly why trade and investment should be liberalized to increase choice, competition and productivity. The economic growth resulting from these reforms, particularly where coupled with human capital advancements and measures to increase skills in the labour market, has raised living standards and made a major contribution to reducing extreme poverty in the region. The question is how can we replicate this experience of successful integration in part of the Asia-Pacific and take RECI further across the region?

The case for doing so is becoming increasingly strong. Since the onset of the global financial crisis, the Asia-Pacific’s traditional export markets have decreased as a share of global GDP. With a combined GDP of $27 trillion and a 40% share of global trade, robust growth in the Asia-Pacific would sets us on course to become the most important market in the world, as well as being more prosperous than we are today. As our share of world GDP increases and as protectionist sentiment grows in our export markets, the case for strengthening RECI to support intraregional trade and investment as an engine of regional growth is clear.

Deepening market integration - with goods, services, capital and labour moving more freely across the region – will be central to the RECI agenda. High costs are the main barrier to trade across borders. They are compounded by a multitude of inconsistent legal and regulatory frameworks which weigh on trading activity and deter foreign direct investment - and by excessive government involvement in parts of the region’s economy and financial system. Costs of trading between countries in the Asia-Pacific region can range from 51 per cent to a prohibitively high 368 per cent of the value of exports. Subregional differences are significant. Trade costs are lowest in East and North-East Asian economies and highest in the Pacific island economies. North and Central Asian economies trade costs are about three times higher than in East Asia.

If cross-border paperless trade could be rolled out across the region, exports could increase by up to $257 billion annually. It could reduce shipping times by 44 per cent and cut costs by 31 per cent. The full implementation of the WTO Trade Facilitation Agreement (TFA) could reduce trade costs in the region by up to 17 per cent. Significant progress in implementing both the TFA and the electronic trade document exchange mechanisms has so far only been made in East Asia. The untapped gains in other parts of the Asia-Pacific region are significant. This is why ESCAP has supported the development of a Framework Agreement on Facilitation of Cross-Border Paperless Trade in Asia and the Pacific.

Market integration requires seamless connectivity through holistic transport, energy and information and communication technology linkages. Most cross-border projects in the region have been negotiated bilaterally, leading to fragmented networks. Yet harmonized and coherent intergovernmental agreements do provide a solid basis to build improved infrastructure networks and services. A coordinated multilateral approach to developing physical networks for transport, energy and ICT could reduce costs significantly, and accelerate the pace of planning and implementation of projects. For example, integrating the development of internet broadband networks into the planning of major roads, railways, energy pipelines, or waterways could deliver major efficiencies. The harmonization of technical standards and rules would pave the way for inter-operable systems across borders. It could also help infrastructure projects connect rural, low-income and geographically distant areas with the main markets of the region.

The potential RECI has to support sustainable growth and development in the Asia-Pacific region has been recognized by ambitious regional integration proposals such as the Eurasia Initiative and the Belt and Road Initiative (BRI). They provide valuable momentum to regional integration and, if we can quicken the pace of implementation, could make a major contribution to meeting the 2030 Agenda for Sustainable Development.

Our analysis confirms the benefits these initiatives could bring are significant. The BRI alone could help raise economic output levels by an average of 6 per cent in participating countries. If BRI-linked countries lowered border transaction costs and import tariffs, the difference the BRI could make would be greater still. Our studies show for example, a 30 per cent reduction in trade and investment barriers in the China-Indochina corridor could generate nearly 2 per cent GDP growth in China and up to 17 per cent GDP growth for other participating countries. Comparatively, a 1 per cent improvement in three areas - trade facilitation procedures, the quality of transport infrastructure and ICT – in all corridors would respectively deliver 1.5 per cent, 0.7 per cent and 1.4 per cent increases in the region’s exports. Gains would be higher where trade agreements already exist, underscoring the importance of multilateral cooperation.

Examples of existing subregional cooperation initiatives demonstrate how RECI can be successful and could be replicated further. Through consultation and consensus ASEAN has raised living standards and promoted stability in South East Asia for over 50 years. The Eurasian Economic Union which is still evolving, the region’s only customs union, is another useful reference point. More specific projects, including the CASA 1000 and TAPI electricity and gas projects connecting Central and South Asia are noteworthy. As is the common electricity market in the Greater Mekong area made up of South East Asian countries and China (Yunnan Province and Guangxi Zhuang Autonomous Region). This innovative approach has saved the area $19 billion in energy costs since it was created. ASEAN nations have set out a bold ambition to create an integrated ASEAN Power Grid to address energy insecurity and promote the use of renewables. Our region is now a leader in renewable energy. Other energy connectivity proposals include the Asian Energy Super Ring - connecting Russia, Japan, Korea and China with electricity from hydro and gas resources, as well as wind and solar energy from Western China to supply North East Asia.

ESCAP’s analysis underscores the importance of regional financial cooperation which lags behind trade cooperation and needs to underpin further integration. The global financial crisis demonstrated the interconnected nature of the global economy. It has made clear that insufficient financial regulation in one country could have substantial negative spillover effects on its economic partners; and that unsustainable macroeconomic and fiscal policies in one economy could carry much broader regional, sometimes global, ramifications. Coordinated macroeconomic, macro prudential and financial surveillance mechanisms are therefore needed to guard against imbalances building up in the system. Emergency lending mechanisms are important to help tackle crises from their outset, and contain unforeseen economic shocks and financial market volatility. IMF involvement remains important in this area to help ensure effective adjustment programs can be developed and enforced should the need arise. As countries continue to work to gradually liberalize their capital accounts and support the more efficient allocation of capital, a clear policy framework would be helpful to manage the risks that are associated with it.

Yet if part of the answer lies in surveillance and improved regional coordination, deepening financial markets would also be beneficial. These can link savings to growth, provide the funding our companies need to expand and the infrastructure investment our economies need to remain competitive. However, in order for our region to be competitive we must tackle infrastructure bottlenecks. This will require more integrated financial market infrastructure and regulatory architecture. It should include rules governing the issuance and trading of bonds and securities, and gradual steps towards the harmonization of cross-border clearing and settlement systems. Deeper capital markets would foster institutional investors with longer time horizons in the region, which is particularly important for infrastructure projects. By providing alternative sources of financing to bank lending, deeper markets could also contribute to maintaining financial stability.

There is scope for infrastructure projects to be supported by public private partnerships. The multilateral development banks have an obvious role in helping to mobilize funding. They should make it possible to attract private sector investment, particularly if this is accompanied by improvements to the business environment delivered by increased legal certainty and accompanied by the necessary credit enhancement mechanisms to mitigate outstanding risks. Yet domestic resource mobilization will remain fundamental to a successful implementation of the 2030 Agenda. This requires us to redouble our efforts to reform tax and public expenditure policies to support sustainable development at all levels. Taxation structures need to be rationalised, the capacities of tax administration needs to be improved, and legislation needs to be made simpler and more transparent.

RECI and the 2030 Agenda’s Sustainable Development Goals are two sides of the same coin, hence a coordinated approach is critical. The approach to RECI has to be reoriented so it is guided by the framework of the SDGs. In this way, RECI could promote inclusive and sustainable growth paths and promote balanced and equitable distribution of gains, while overcoming shared regional challenges such as rapid urbanization, climate change, energy security and rising inequality. It can also achieve more balanced and sustainable infrastructure; connect low income and geographically distant disadvantaged countries; and address transboundary vulnerabilities and risks, critical for meeting the Sustainable Development Goals.

ESCAP will steadily leverage its capabilities to drive the transition to a more integrated and connected Asia-Pacific. Working together with all member States, we propose four key recommendations to move RECI into the next phase.

First, we would like to see greater market integration; to reduce non-tariff barriers and reach multilateral agreements to streamline regulatory frameworks and agree common standards. The implementation of Framework Agreement on Facilitation of Cross-Broder Paperless Trade in Asia and the Pacific will make a positive contribution to this agenda.

Second, we need to turn the vision of seamless connectivity in the areas of transport, energy and ICT into a reality. We want to build on existing bilateral intergovernmental agreements and projects by developing multilateral agreements and make them coherent across the region as a whole. Our Committee on Transport has already produced many model agreements as good examples.

Third, we need to deepen regional financial cooperation - in particular to improve regional surveillance and crisis management capacity; deepen financial markets; and deliver innovative financing solutions to support infrastructure development.

Fourth, we must address shared vulnerabilities and risks which cut across the policy spectrum - from challenges created by natural disasters, to food security, to climate change. This is the new paradigm of RECI as well as sustainable development. This should also include regional cooperation on disaster risk reduction, particularly for transboundary disasters.

At ESCAP, our ambition is to work with all member States to deliver across the four pillars of RECI. By finding multilateral solutions to shared challenges, the countries of the Asia-Pacific region have an opportunity to move the region’s integration to the next phase, and deliver on the 2030 Agenda for Sustainable Development.

I thank you.