The Future of East Asia’s Trade: A Call for Better Globalization

• Author: Lili Yan Ing,Gracia Hadiwidjaja,Mari Pangestu
• Published date: 01 July 2018
• Date: 01 July 2018
• DOI: http://doi.org/10.1111/aepr.12220

The Future of East Asia’s Trade: A Call for

Better Globalization

Mari PANGESTU,

1

Lili Yan ING

2

†and Gracia HADIWIDJAJA

3

1

University of Indonesia,

2

Ministry of Trade of Indonesia and

3

Economic Research Institute for ASEAN and East

Asia (ERIA)

This paper is about how East Asia should respond to the challenges of the external environment.

The first challenge is the current slowdown in trade, which has been due to cyclical and struc-

tural factors such as the decline in productivity and the maturation of global value chains. The

rise in protectionism as measured by rising trade restrictiveness has not impacted on trade, but

political and policy uncertainty regarding the direction of trade policy seems to have begun to

impact on trade growth. The policy stance of increased protectionism and a retreat from the

multilateral rules-based trading system is linked to the pockets of the population who have not

seen their incomes improve and who have blamed their plight and increased inequality on glob-

alization. In fact, the issue is more about the lack of effective responses to manage the costs of

trade liberalization. East Asian economies need to respond to these challenges by upholding the

multilateral rules-based trading system, continuing the various pathways to regional economic

integration, and ensuring better globalization through effective capacity building and policies to

address the negative effects of trade liberalization.

Key words: East Asia, globalization, productivity, trade, value chains, WTO

JEL codes: F1, F13, F15, F16, F6

Accepted: 21 March 2018

1. Introduction: Trade Slowdown

One current underlying concern in current developments is that trade growth has slo-

wed down for the last decade or so (World Trade Organization [WTO], 2016). Trade

has long been one of the engines of the modern economy and drivers of development,

especially in East Asia (World Bank, 2014). Given that the growth and development in

the last three decades in East Asia have been driven by a conducive, open and rules-

based multilateral trading system, the slowdown in global trade is of key concern

(Pangestu & Armstrong, 2018).

The slowdown in the world economy since the Global Financial Crisis (GFC) in

2009 led to lower demand and reduced world trade. In 2015–2016, the slowdown of

The view expressed here is Lili Yan Ing’s personal view and does not represent the view of the

Ministry of Trade of the Republic of Indonesia. The research was conducted when she was with

the Economic Research Institute for ASEAN and East Asia (ERIA) and University of Indonesia.

†Correspondence: Mari Pangestu, Faculty of Economics, University of Indonesia, Kampus Baru

UI Depot, Jawa Barat 1646, Indonesia. Email: mari.pangestu@ui.ac.edu

© 2018 Japan Center for Economic Research 219

doi: 10.1111/aepr.12220 Asian Economic Policy Review (2018) 13, 219–238

global trade has become increasingly concerning, with the growth of the value of trade

contracting by 10.6% in 2015 and 2.3% in 2016 (Comtrade, 2017). The average annual

growth of the share of total trade to gross domestic product (GDP) has also been low

at 0.6% from 2005 to 2016, compared to an average annual growth rate of 2% in the

1990–2004 period (Figure 1). The sharp ups and downs in the growth of trade are

related to commodity price increases such as the oil booms in 1973 and 1979 and the

commodity boom in the 2003–2008 period, and the postfinancial crisis price declines,

especially in 2015. Peaks have also been linked to Black Monday in 1987 which

increased trade by 17% due to depreciated exchange rates, and the formation of the

WTO which led to a reduction of trade restrictions and increased confidence in the

world trading system in 1995 and increased trade by 19%.

After almost 70 years of trade liberalization, the average value of trade growth is slow-

ing down and the role of trade in GDP has also been declining, even before the GFC

(Figure1).Thegrowthtrendwasdoubledigitinthefirst three decades (1961–1989). In

the 1990s, the growth trend declined slightly to be around 10%, and then declined slightly

again to be around 6–10% in the 2000 decade. At the time of the GFC and thereafter

trade growth has declined considerably. The average annual growth of world trade was

5.4% from 1990 to 2004, then it declined to 4.8% in the period of 2005–2016.

The slowdown in the growth of the value of trade occurred not just globally, but in

most regional blocs (Table 1). When we look at the intraregional trade of regional

blocs, we find that the growth of both the value and share of intraregional trade

decreased in the last two decades compared to the period of 1990–2000. The share of

intraregional trade was high in the year when each bloc was founded, faced an increas-

ing trend for some period, but then became stagnant or declined. Table 1 also shows a

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1961

1963

1965

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2015

Growth of Trade Growth of Trade/GDP Poly. (Growth of Trade)

Figure 1 Trend of value of World Trade and trade to GDP ratio 1961–2016.

Source: Authors’calculations based on Comtrade (2017).

The Future of East Asia’s Trade Mari Pangestu et al.

220 © 2018 Japan Center for Economic Research