By World Bank, June 2003

Countries of East Asia face a substantial challenge to sustain income growth and poverty reduction in today's competitive global economy, as they continue to recover from the 1997 financial crisis and to adapt to China's emergence as a major world and regional trader.

But even as they make decisions about the pace and extent of change needed to compete in the new East Asia, governments also face fundamental challenges to ensure that the benefits of regional and global trade are shared more evenly, among and within countries and social groups.

These challenges can be met if action is taken to promote formal economic cooperation through trade and investment liberalization, consistent with a strong development orientation, according to the World Bank’s latest research on trade in East Asia.  East Asia Integrates: A Trade Policy for Shared Growth, released today in Singapore, urges that this emerging, complex agenda, be addressed through an integrated regional trade strategy for East Asia – one that is more open and equitable than in the past.

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Policy Recommendations:

To guide countries on the priorities in each of these areas, the research points out a broad set of policy actions:

   1. Broadening agreements to include services. Several international studies suggest that the gains from liberalizing services could be substantial. This is an area where East Asia has lagged behind other developing regions. With the emergence of China as a low-wage, efficient manufacturer, other countries in the region will find it difficult to compete in international markets on the basis of wages and instead must rely on better producer services and reduced corruption to improve their competitiveness.

   2. Adapting agricultural trade policies. China’s approach to agricultural trade liberalization offers scope for the region to benefit significantly, especially South East Asia through the proposed China-ASEAN Free Trade Agreement. China will emerge as a major importer of agricultural and natural resource-intensive commodities that many ASEAN countries produce. Regarding  agricultural exports to the developed world, East Asian countries need to improve their ability to meet sanitary and photo-sanitary standards through better laboratories, and negotiation of mutual recognition agreements. Rich countries need to reduce the degree of cascading tariffs in agricultural processing.

   3. Easing adjustment in labor-intensive industries. Certain sectors, especially garments, are likely to be seriously affected by expanded output and exports from China. The region’s more developed economies will be able to shift out of garment-making into higher-value added industries, and the presence of current account surpluses today implies that the external adjustment should be manageable. For other countries, adjustment must be managed by the growth of new businesses responding to programs that improve overall competitiveness.

   4. Improving logistics. Logistics play a critical role both in determining aggregate levels of trade and in ensuring that development benefits spread beyond coastal regions. For East Asia’s less open and accessible countries and regions, the development of more tightly integrated domestic markets and logistics systems is a high priority. Besides promoting an appropriate mix of transport modes, complementary institutional actions are needed to extend better transport services to remote areas and to establish better conditions for market development. Beyond strengthening physical infrastructure, governments also need to improve the regulatory environment and reduce bureaucratic procedures for handling cross-border trade.

   5. Framing policies on intellectual property rights. Strong protection of intellectual property rights encourages innovation, but is not a magic bullet; other conditions (including investments in skills and provision of a competitive business environment) are also needed. Several of the region’s more advanced countries, and parts of China, can hope to stimulate technological advances if they better protect intellectual property and pay more attention to competition policy. Stronger copyright laws, provided they can be enforced, may yield some significant gains for domestic software industries as well as the arts and music sectors. As to traditional knowledge, a number of important conceptual and practical problems need to be sorted out before progress can be made in protecting its ownership or linking traditional knowledge issues to WTO agreements or other mechanisms for managing research and development.

   6. Reconsidering environmental and core labor standards. There is no evidence from East Asia to support the argument that improved environmental and core labor standards would unfairly affect manufacturing competitiveness. Quite the reverse: evidence suggests that East Asian countries can raise their environmental and labor standards without adversely affecting their exports and investment inflows. The fierce resistance of many in the region to considering these issues in line with broader development strategies may be misplaced.

   7. Ensuring access by poor to benefits. The fear that globalization has increased volatility seems to be misplaced. Available evidence for East Asia suggests that greater openness to trade does not make workers more vulnerable; indeed, greater openness has in fact stabilized wage incomes and employment across all skill categories. To ensure that the poor within countries benefit from openness, policies are also needed to support workers’ geographic and occupational mobility, as are specific actions to reduce transport and marketing costs to improve farm-gate prices for products that the poor rely on.

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