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How Trade Can Help Speed Asias Economic Recovery
By Pragyan Deb, Julia Estefania-Flores, Siddharth Kothari, and Nour Tawk
Tuesday, 23rd November 2021
 

A renewed push to liberalize trade can invigorate durable growth and minimize post-pandemic scarring.

Trade has historically been a powerful driver of economic growth and poverty alleviation in Asia, though the momentum of lowering trade barriers has slowed in recent years.

While tariff barriers to trade in Asia are low overall, a new measure of nontariff barriers suggests those remain high in many Asian emerging markets and developing economies. Unlike tariffs, these barriers include policies that introduce frictions such as licensing requirements or restrictions on trade, payments, or exchanging foreign currencies.

According to recent research, which was detailed in the IMFsAsia-Pacific Regional Economic Outlook, easing nontariff barriers can boost gross domestic product by about 1.6 percent, potentially healing about a quarter of expected pandemic scarring. The findings take on added significance given that IMF forecasts suggest GDP in 2024 will be 6 percent below the pre-crisis trend in Asian emerging and developing economies, equal to losses of about $1 trillion annually.

Trade barriers

For a better understanding, it helps to consider the regions history of cross-border activity. Strong GDP growth in Asia was accompanied for decades by a steady rise in measures of trade openness, such as the share of goods and services trade in GDP, and greater participation in global value chains. However, this openness has stalled in recent years, suggesting that Asias traditional growth engine was slowing even before the pandemic.

This coincided with slower reforms. Average tariffs in Asia fell sharply from more than 50 percent in the 1970s to single digits in the early 2000s, leaving little room to improve. But levies arent the whole story. Nontariff barriers have long been viewed as a significant impediment to trade, though concrete analysis has been challenging due to data limitations.

To overcome this constraint, a forthcoming IMF working paper compiles a comprehensive measure of trade restrictions for 159 economies as far back as 1949. This index uses detailed trade-barrier data in the IMFsAnnual Report on Exchange Arrangements and Exchange Restrictions. This captures various obstacles such as licensing requirements or documentation hurdles for releasing foreign currency.

The index shows that, in contrast to the major drop in tariffs over the past half century, nontariff barriers have declined less and remain relatively elevated. The level for Asia declined from near 20, the highest level, in the 1960s to around 15 by 1995, but has since remained little changed.

Benefits of open trade

These scores tend to be particularly high for low-income countries such as Nepal, Bangladesh, and Myanmar, though large emerging economies such as China and India also have scope for reforms. The average reading among Asias emerging market and developing economies also is significantly higher than those for other regions.

Empirical analysis suggests lowering nontariff barriers offers potentially large economic gains. A significant reduction in our measure, along the lines of Sri Lankas removal of export licensing, financing, and documentation requirements in the early 1990s, can help boost GDP by about 1 percent in the short-term. Those gains increase to about 1.6 percent after five years.

Notably, improvements come from greater investment and productivity, not directly through higher net exports. This highlights how advances from trade liberalization occur via multiple channels that include benefits from specialization, technology transfer, and the reallocation of resources to more productive firms.

As vaccinations foster the recovery from the pandemic, policymakers must prioritize economic reforms to support growth and minimize scarring from the crisis, especially in emerging and developing economies. These can include policies aimed at reversing the pandemic-induced setback to workforce education and skill levels, as well as reforms to labor and product markets.

Our research illustrates how lowering international trade costs can help:

Lowering goods barriers: Many Asian economies require import and export licenses, request extensive documentation for releasing foreign currency, or restrict the use of foreign exchange. Removing such obstacles can ease administrative delays and reduce costs for international transactions.

Reducing services restrictions: There is significant scope to ease restrictions on transactions beyond physical goods in areas such as travel, shipping, and consulting, and on international transfers, as Australia did in the 1980s. Reforms like these will likely offer greater benefit in coming years as services trade grows more rapidly.

While reducing trade barriers can help boost output in the medium term, it can also come with potentially adverse distributional consequences. The reallocation associated with reforms generates winners and losers, with the already better-off often benefitting more. Therefore, its essential to accompany trade reforms with policies to mitigate impacts on inequality, including financial support for the hardest hit and retraining programs to help workers find new jobs.

As economies confront years of lingering effects from the pandemic, a renewed embrace of trade openness is a promising avenue to explore. Healing the pandemics scars is a priority, and our research shows that reducing trade barriers can reignite Asias growth engine.

The trade restrictions index is included in the forthcoming working paper A Contribution to the Measurement of Aggregate Trade Restrictions and Their Economic Effects by Julia Estefania-Flores, Davide Furceri, Swarnali A. Hannan, Jonathan D. Ostry, and Andrew K. Rose.

Pragyan Deb, is an economist in the IMF Asia Pacific Department’s Regional Surveillance Division and the desk economist for Myanmar.

Prior to this, he was in the IMF’s Strategy, Policy and Review Department, working on IMF lending and surveillance policies, emerging market issues, macro-financial spillovers and policy frameworks to address external shocks. He was also part of the team working on the IMF’s financing arrangement with Mongolia and has done surveillance work on a varied set of countries, including China, Estonia, Finland, Latvia, and Saudi Arabia. He has contributed to multilateral surveillance through the analytical chapters of the Global Financial Stability Report and Regional Economic Outlooks. Before joining the IMF, he worked on macroprudential policy and banking regulation at the Bank of England. He holds a PhD in Finance from the London School of Economics.

Julia Estefania-Flores is a research analyst in the IMF’s Asia and Pacific Department and previously served in the research department. Her work focuses on macroeconomic effects of trade restrictions, quantifying forecast accuracy, and distributional effects of monetary policy. Before the IMF, she was a research assistant at the Bank of Spain, where she was a member of the European Central Bank’s International Relations Committee Task Force on IMF issues. She holds a master’s degree in international relations, with a specialization in international economics, from Comillas Pontificial University and a double degree in political science and sociology from the Carlos III University of Madrid. Julia’s research interests include international trade, development, economic growth and political economy.

Siddharth Kothari is an economist in the IMF’s Asia and Pacific Department, where he covers Australia as well as broader regional developments as part of the Regional Studies division. His main research interests are in macroeconomics and development. He holds a PhD in Economics from Stanford University.

Nour Tawk is an economist in the IMF’s Asia and Pacific Department, where she works on regional developments in the Regional Studies Division, contributing to the Regional Economic Outlook. She is also a desk economist for Malaysia. Previously, she was an economist in the Monetary and Capital Markets department where she contributed to the Global Financial Stability Report, and was part of the Financial Sector Assessment Program teams for Italy and Japan. Her research interests include emerging market economies’ policy responses to capital flows, spillovers from unconventional monetary policies, and systemic variations in bilateral exchange rates. She obtained her MA and PhD in Economics from Keio University in Tokyo.

This article first appeared at the IMFBlog, a forum for the views of the International Monetary Fund (IMF) staff and officials on pressing economic and policy issues of the day. The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board. Reprinted with permission.

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