Trade has always been a powerful engine of economic growth and poverty reduction in Asia, although the momentum for lowering trade barriers has slowed in recent years.
While tariff barriers to trade in Asia are generally low, a new measure of non-tariff barriers suggests that they remain high in many emerging markets and developing economies in Asia. Unlike tariffs, these barriers include policies that introduce frictions such as licensing requirements or restrictions on trade, payments, or the exchange of foreign currency.
According to recent research, detailed in the IMF’s Asia-Pacific Regional Economic Outlook, easing non-tariff barriers can increase gross domestic product by around 1.6%, potentially healing around a quarter of expected pandemic scars. The results take on additional significance as IMF forecasts suggest that GDP in 2024 will be 6% lower than the pre-crisis trend in emerging and developing economies in Asia, which equates to losses of ‘about $ 1 trillion a year.
For a better understanding, it allows us to question the history of cross-border activity in the region. Strong GDP growth in Asia has been accompanied for decades by steadily increasing measures of trade openness, such as the share of trade in goods and services in GDP, and greater participation in retail chains. global value. However, that openness has stagnated in recent years, suggesting that Asia’s traditional growth engine was slowing even before the pandemic.
This coincided with slower reforms. Average tariffs in Asia fell sharply from over 50 percent in the 1970s to single digits in the early 2000s, leaving little room for improvement. But the levies are not the whole story. Non-tariff barriers have long been viewed as a significant barrier to trade, although concrete analysis has been difficult due to data limitations.
To overcome this constraint, an upcoming IMF Working Paper compiles a comprehensive measure of trade restrictions for 159 economies since 1949. This index uses detailed data on trade barriers in the IMF’s annual report on exchange rate agreements and restrictions on trade. exchange. This grabs various hurdles such as licensing requirements or documentation hurdles to free up foreign currency.
The index shows that, unlike the significant drop in tariffs over the past half-century, non-tariff barriers have fallen less and remain relatively high. The level for Asia rose from nearly 20, the highest level, in the 1960s to around 15 in 1995, but has not changed much since.
Benefits of open trade
These scores tend to be particularly high for low-income countries such as Nepal, Bangladesh and Myanmar, although large emerging economies such as China and India also have room for reform. The average reading among Asian emerging markets and developing economies is also significantly higher than that of other regions.
Empirical analysis suggests that lowering non-tariff barriers offers potentially significant economic gains. A significant reduction in our measure, such as Sri Lanka’s removal of export licensing, financing and documentation requirements in the early 1990s, can help increase GDP by around 1% to short term. These gains increase to about 1.6 percent after five years.
In particular, improvements come from increased investment and productivity, not directly from higher net exports. This highlights how progress in trade liberalization occurs through multiple channels that include the benefits of specialization, technology transfer and reallocation of resources to more productive firms.
As vaccinations promote recovery from the pandemic, policymakers must prioritize economic reforms to support growth and minimize the scars of the crisis, especially in emerging and developing economies. These may include policies aimed at reversing the pandemic-induced setback in education and labor force skill levels, as well as labor and product market reforms.
Our research shows how reducing international trade costs can help:
Lower barriers to goods: Many Asian economies require import and export licenses, require full documentation to release foreign currency, or restrict the use of foreign currency. Removing these barriers can reduce administrative delays and lower the costs of international transactions.
Reduce service restrictions: There is significant room to ease restrictions on transactions beyond physical goods in areas such as travel, shipping and advice, and on international transfers, as Australia has done in 1980s. Such reforms are likely to offer more benefits in the years to come, as trade in services grows faster.
While reducing trade barriers can help boost production in the medium term, it can also have potentially negative distributive consequences. The reallocation associated with the reforms generates winners and losers, the better-off often benefiting more. Therefore, it is essential to accompany trade reforms with policies aimed at mitigating the impacts on inequalities, including financial support for the hardest hit and retraining programs to help workers find new jobs.
As economies grapple with years of lingering effects from the pandemic, resuming trade openness is a promising avenue to explore. Healing the scars of the pandemic is a priority, and our research shows that lowering trade barriers can jump-start Asia’s growth engine.
The index of trade restrictions 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.
* About the authors:
- Deb Pragyenne, is an Economist in the Regional Surveillance Division of the Asia-Pacific Department of the IMF and Office Economist for Myanmar.
- Julia Estefania-Flores is a research analyst in the Asia and Pacific department of the IMF and previously worked in the research department. His work focuses on the macroeconomic effects of trade restrictions, the quantification of forecasting accuracy, and the distributive effects of monetary policy.
- Siddharth Kothari is an Economist in the Asia and Pacific Department of the IMF, where he covers Australia as well as broader regional developments under the Regional Studies Division. His main research interests are in macroeconomics and development. He holds a doctorate 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 an office economist for Malaysia.
Source: This article was published by IMF Blog