1. Background
When the economic crisis hit Asia and the Pacific in the course of 2008, exports and economic growth rates tumbled while unemployment rose sharply and results for 2009 look set to be even worse. The World Trade Organization (WTO) expects world trade to drop by 10% in 2009. The severity and speed of the crisis were largely unpredicted and triggered widespread populist pressure on governments to protect national markets and jobs.

As international trade and investment has been the engine of growth of many Asian countries and the most important contributor to the “Asian miracle” that lifted millions of people in the region out of poverty, it is imperative that trade is restored as soon as possible. To do so, it needs to be supported by financial and regulatory reforms which will address market failure and ensure that trade is not only efficient but also stable.

At the same time, the crisis offers an opportunity for the Asia-Pacific region to take a long-term approach and reposition itself for the future by boosting its competitiveness. If the Asia-Pacific region is to live up to expectations of the twenty-first century as the “Asian Century,” the region will have to invest in innovation, in new environmentally sustainable products and processes, and in improved business models. Furthermore, countries have to review and reformulate trade to serve the poor and ensure that trade benefits society as a whole. Also modalities have to be explored to prevent or reduce the likelihood of such crises from reoccurring. This will require both regional and international cooperation.

For this reason, the theme of the 2009 edition of the report is “Trade-led recovery and beyond”. The central message of this report is that trade is not an end in itself but an important, and even necessary, means towards achieving inclusive and sustainable development. In order for trade to achieve inclusive and sustainable development, trade itself should be inclusive (i.e. serve the poor and other marginalized groups and regions and be gender neutral) and sustainable (i.e. trade and production of goods and services take place on the basis of sustainable practices and contribute to sustainable development).

The objective of this report is to sensitize policymakers to various trade policy tools which could be used to counter the economic and social impact of the crisis and achieve long-term inclusive and sustainable development. It analyses the role of trade in development, looks at the role of government and business in trade for development, and explores the various modalities of trade policy. In this regard, the report reviews the role of the multilateral trading system and regional trade agreements in enhancing both global and intraregional trade. It discusses the importance of trade facilitation and availability of trade finance in times of crisis and beyond. It also reviews the changing determinants of competitiveness and the role of business in promoting trade for inclusive and sustainable development. The report makes a case for promoting intraregional trade and explores various modalities to promote regional cooperation and integration for this purpose, including the development of regional supply chains.

The report serves as the main background document to the First Session of the Committee on Trade and Investment, which is held from 4 to 6 November 2009 in Bangkok.

2. Conceptual framework
Given the importance of trade for development, the challenge is how to formulate trade policy which promotes inclusive and sustainable trade and thus contributes directly to inclusive and sustainable development. The crisis has demonstrated that there is a need for a strengthened role for governments to address market failure and ensure that trade is indeed inclusive and sustainable. Three types of trade policies can be distinguished: (a) policies affecting market access; (b) policies directly promoting exports; and (c) policies strengthening national supply-side capacities. As successful export promotion basically depends on the extent of market access and level of supply-side capacities, these two policy dimensions take centre stage in a trade strategy for development. However, trade policy has a social and environmental dimension as well. Therefore, there is a need to strengthen coherence and consistency of trade policy with other development policies. For this purpose, trade must be mainstreamed in development policies while development objectives must be mainstreamed in trade policy.

As trade is by definition international, trade policy is influenced by, and in turn influences, trade governance systems at the global level (i.e. the multilateral trading system (MTS) and generalized systems of preferences) and the regional/bilateral level (i.e. the large number of regional and bilateral trade agreements).

In this context, the primacy of the MTS as the only universal system of enforceable rules for global trade needs to be emphasized. Within the context of the MTS, aid for trade (AfT) has emerged as a powerful tool to strengthen national supply-side capacities of countries. It is therefore important that Asia-Pacific economies remain actively engaged in the MTS and contribute to strengthening the system. They should also prioritize the current Doha Round of multilateral trade negotiations and strive towards concluding the Round soon with clear development benefits.

While the MTS helps promote global trade, the crisis has revealed the need to reduce dependence of Asian trade on the markets of developed countries and to diversify both export products and markets. Given the diversity of the Asia-Pacific region in terms of economic development and comparative advantages, it is both desirable and feasible to boost intraregional trade. The best way is to strengthen regional integration and to develop regional value chains. In this context, the report reviews various mechanisms for regional cooperation and integration in trade and investment with a focus on the phenomenon of the “noodle bowl” of overlapping and often conflicting commitments of countries under the many bilateral and regional trade agreements (RTAs) and international investment treaties they are members of. Hence, there is a need to consolidate these agreements. Various means exist for this purpose with the Asia-Pacific Trade Agreement (APTA) emerging as a potentially promising modality for enhanced regional integration. At the same time, RTAs can be used to enhance regional cooperation and coordination beyond market access across a wider spectrum of activities, including those related to supply-side capacities, which would strengthen the regional integration process and promote intraregional trade.

It needs to be emphasized that the MTS and RTAs do not exist for their own sake. They exist because national governments entered commitments under these systems for the purpose of boosting national economic development. A large part of trade policy, therefore, is aimed at influencing developments in both the MTS and RTAs to the benefit of national development. At the same time, commitments assumed under these systems will influence national trade policymaking.

But trade policy has national aspects outside the realm of these trade governance systems. Governments can take unilateral measures to expand or restrict access to the domestic market and strengthen national supply-side capacities. The strengthening of supply-side capacities in particular is a national level affair. Governments need to provide an enabling environment for business and promote the new determinants that drive business and investment to ensure that business ultimately also contributes to inclusive and sustainable development. Particular attention needs to be paid to facilitating trade and improving trade efficiency. The role of small and medium-sized enterprises (SMEs) takes centre stage in all policies aimed at strengthening business as they make up the bulk of all enterprises and provide for most of all employment in any given economy.

The resulting framework for trade policy-formulation, which guides the structure of this report, is presented in the figure below.

3. Structure of the report
The report is structured as follows (see the figure below). Part I, “Trends and developments in trade and investment in Asia and the Pacific”, describes and analyses recent trends in trade and investment in the Asia-Pacific region both in qualitative and quantitative terms and with some attention to trends at the sectoral level. It analyses the impact of the current economic crisis on trade and investment and provides a brief overview of measures various governments have put in place to respond to the crisis.

Part II analyses the issues and explores the theme topic of “Trade-led recovery and beyond”. Chapter 1, “Developing coherent and consistent trade policies for inclusive and sustainable development”, explores how trade policy can address the impact of the crisis and contribute to achieving inclusive and sustainable development.

Issues related to the MTS are further analysed in chapter 2, “The role of the multilateral trading system in governing international trade”. It explains the primacy of the MTS in managing international trade for development and the future of the MTS and WTO in light of the global financial and economic crisis. It discusses the role of stimulus packages and the need for their conformity with the rules and principles of the MTS. It also reviews the main issues and development dimensions of the current Doha Round of multilateral trade negotiations and discusses the concept and relevance of AfT for the region.

The regional dimensions of trade governance are discussed in chapter 3, “Managing regional integration”. In this chapter, the case to promote intraregional South-South trade is made and the role that RTAs can play in this process is discussed.

Chapters 4 and 5 discuss the supply-side aspects of trade policy in more detail. Chapter 4, “Facilitating trade and investment”, looks at how the countries in the region could adapt to the challenges of the crisis and beyond by strengthening national and regional trade through trade and investment facilitation and by promoting trade efficiency. The chapter focuses on key short- and long-term policies and measures countries must have in place to enhance the facilitation and efficiency of trade and investment, including the need for uninterrupted trade finance.

In recognition of the fact that it is ultimately the business sector which undertakes trade and investment, chapter 5, “Business survival and development”, considers other issues related to maintaining and developing the competitiveness of export-oriented business, particularly in response to the global crisis. It analyses issues related to: (a) emerging challenges for the business sector and the new determinants of competitiveness, including the need to conform to principles of Corporate Social Responsibility; (b) providing an enabling environment for domestic and foreign investment which has a stronger development linkage; and (c) linking the business sector to regional and global value chains by developing their capacities, with a special emphasis on promoting the competitiveness of SMEs.