March 2007
Can Asia Avert a Globalization Crisis?
by Valerie Engammare and Jean-Pierre Lehmann
The occasional rhetorical flourish by political leaders
notwithstanding, the policy agenda for global trade is paralyzed. This
endangers everyone, but especially Asians. Asia's outstanding growth
is to a very considerable extent driven by trade; indeed, a key
feature of the early 21st century is the degree to which many Asian
economies have become truly globalized. Asia has a lot to lose from a
reversal or retardation of open policies, globally, regionally and
domestically.
As part of a growing backlash against globalization, protectionism,
driven by a widespread fear of competition and job losses, is
flouri****ng in many places and in many forms. Policies concerning
trade, investment, and labor mobility, the key factors of economic
integration, are increasingly conceived as defensive mechanisms rather
than instruments creating op****tunities. There is a deepening chasm
between global economic imperatives and domestic political
constraints.
At the regional level as well it seems increasingly difficult to
progress, as highlighted by the obstacles met by the liberalization of
services in the European Union, the moribund state of the Free Trade
Area of the Americas, or indeed in Asia where the concept of an Asian
economic community, as demonstrated in the Second East Asian Summit
held in January in Cebu, Philippines, is still little more than an
embryo. Instead of common vision, ambitions and political will towards
greater integration of markets and communities-and towards greater
global prosperity-there are today many symptoms of a "globalization
crisis."
Crisis may sound like an excessively alarmist term when looking at the
current situation. World trade grew by 9% in real terms in 2004, and
by 6% in 2005, or twice as much as global output growth. The value of
world trade in 2005 exceeded $10 trillion. Outward stock of foreign
direct investment was over $10 trillion in 2005 as well. In 2005,
there were more than 190 million migrants worldwide, about 15 million
more than in 2000. The WTO, even though the current round of
negotiations is stalled, still attracts new members, such as Vietnam
and Saudi Arabia most recently, and probably Russia and Ukraine very
soon.
In addition, opposition to globalization is not particularly new, so
why do we refer to a crisis? What we are seeing today is a new kind of
anti-globabalization that is increasingly driven by governments and
diverse political groups in addition to NGOs. In particular, there is
a loss of sup****t in favor of globalization from those who initially
embraced it and created the framework after World War II, notably in
the U.S. across bipartisan lines. Market-led integration can only be
self-generated up to a point: Collective political will is needed to
address difficult issues such as agricultural liberalization,
migration, energy supply, or environmental issues.
On these issues, unilateral policies are often too inward-looking and
bilateral measures insufficient to tackle the challenges. A failure to
work on multilateral solutions today will have long-term effects. This
is likely to foster mercantilist and protectionist attitudes,
undermining trust between members of the global community.
Protectionism is likely to cause considerable havoc, considering that
goals such as global security and global prosperity are unlikely to be
achieved in the absence of collective vision and action.
What are the implications and policy options for Asia? If the North
Atlantic (North America and Western Europe, joined by Japan) was the
great driver and beneficiary of open trade in the course of the first
few decades following World War II, since the early 1990s the engines
of global trade have rapidly moved to the Western Pacific and Indian
oceans. The benefits accruing to Asia include enormous poverty
reduction and the rise of a middle class, with China, India and Korea
standing out as major global economic players, Malaysia and Singa****e
as key regional and global economic hubs, and other countries such as
Pakistan and Vietnam joining the ranks of the Asian tigers. While
domestic and regional policies played an im****tant role in these
results, they could not have been achieved without fruitful economic
ties with the rest of the world.
However, Asia's success has also made the continent a target of
protectionism, especially, but not exclusively, in the U.S. and the
EU; there have also been growing anti-Chinese trade attitudes and
policies in Africa and Latin America. External problems are reflected
in problems within the region; indeed Asia faces a quite daunting
integration challenge, which requires building trust, long-term
vision, leader****p and genuine commitments. None of these currently
have a conspicuous presence.
The present situation is the result of many elements. Whereas global
economic integration has contributed to prosperity in different parts
of the world, it is no bonanza, and significant imbalances remain. The
world trading system in particular may have suffered from excessive
optimism (fostered notably by multilateral financial institutions) and
hence very high expectations of what it could achieve. In reality,
trade liberalization can enhance economic growth and thus contribute
to a country's development; however, its concrete impact will very
much depend on domestic policies and reforms. Unmet expectations
foster temptations to blame the system.
And the system is indeed far from perfect. Institutions, notably the
WTO, have failed to follow the impressive developments of markets,
leading to a growing gap between exponential developments in markets
and technologies and lineal progression in institutions and mindsets.
In the interim, the multilateral trading system has become a highly
politicized process, often detached from economic efficiency concerns.
For instance, industrialized countries' companies are aware that their
future markets are in emerging economies, yet the emergence of these
countries (China in particular) is still widely perceived in the
public debate as a threat rather than as an op****tunity.
Thus, it is not only a systemic crisis, but also a crisis of mindsets.
Economic relations are increasingly characterized by mercantilism;
countries are prone to take and reluctant to give, and when the
situation gets difficult, the easiest populist option available is
chosen. With the WTO multilateral negotiations paralyzed, governments
worldwide now devote their best efforts to conclude bilateral trade
agreements, even though these agreements have proved unable to tackle
critical issues (notably agricultural liberalization) and rarely
deliver any meaningful business results.
Grappling with the Implications
Many Asian countries are very much outward-oriented, with high levels
of inward and outward FDI and im****tant trading relation****ps with
countries outside the region. Despite a significant increase in
intraregional trade, Asia remains highly engaged with the rest of the
world, in particular the American and European markets, but also
increasingly the Middle East, Africa and Latin America. Whereas this
openness to the outside played an im****tant role in the development of
the region, it also implies that the region's economies are vulnerable
to external developments. Anti-Asian policies can be seen in the
protectionist measures in respect to Asian textile im****ts not only in
Europe and the U.S., but also in South Africa and Brazil, and with
aborted attempted cor****ate takeovers in Europe and the U.S. by
Chinese and Indian groups. Asia thus has a clear and direct interest
in fighting against protectionist attitudes, and in continuing to
develop a framework that regulates, liberalizes and boosts relations
with other regions.
Prosperity is a long-term process. Many differences remain between
Asian countries (e.g., between Singa****e and Cambodia) and within
countries (e.g., between coastal areas and western regions in China).
Whereas prospects for China and India are positive, both countries
still face serious challenges: poverty reduction (even though progress
has been impressive, a lot remains to be done), structural reforms,
inequalities, improvements of the regulatory framework, environment,
health, education, etc. Global economic integration is no panacea and
domestic policies are key to address these challenges, there is no
doubt that the process will be easier in an open environment than
possibly being stifled by closed policies, both at home and abroad,
and the destructive kind of nationalisms that will inevitably arise as
a consequence.
In addition, even though Asian countries benefited from the
multilateral trading system, a number have become champions of
bilateralism. While there were 42 bilateral free trade agreements in
Asia in 2001 (proposed, under negotiations or concluded), this number
has jumped to 145 in 2006. Singa****e alone counts 28 free trade
agreements, followed by India with 26. The figure (18) is high in
China as well. This is leading to an Asian regional "noodle bowl" of
preferential trade agreements, with high transaction costs, complex
rules of origin, and bureaucracy.
Relying on bilateral trade agreements to sup****t integration in the
world economy implies a focus on short-term benefits, which is
unlikely to be sustainable. Many issues are left outside these
agreements, notably the liberalization of migration or agriculture,
and many countries are excluded as they are not attractive enough as
bilateral trade partners; everyone wants an FTA with Singa****e, nobody
is interested in Laos, hence the gap between the two in a regime of
bilateralism will increase. Even though some argue that bilateralism
and multilateralism are complementary, just the time, energy and
resources that their negotiation requires prove this argument wrong.
Bilateralism is unlikely to bring long-term benefits and cohesion,
whether to Asia or to the rest of the world and ultimately leads to a
counterproductive dispersion of interests and priorities.
Asia Must Act
According to the Economist Intelligence Unit Foresight 2020 Re****t,
between 2005 and 2020 Asia's share in the global economy is expected
to rise to 43% from 35%. Already deeply integrated in the global
economy and benefiting from this integration, there are many things
that Asian countries can do collectively and individually to sup****t
global economic integration, and thereby improve the functioning of
the multilateral trading system.
In the first place, practices must be improved and institutions must
be strengthened at both the national and the regional level. At the
domestic level, these include areas such as the rule of law,
competition policies, administration, transparency, trade
infrastructure, capital markets, foreign exchange regimes,
environmental legislation, energy policies, etc. Improved practices
and stronger institutions can ensure that growth is more sustainable
and facilitate cooperation, preventing counterproductive competition
between the different economies over ex****t markets, energy, etc.
Attempts to set up an Association of Southeast Asian Nations charter
in 2007 introducing sanction mechanisms and reforming to some extent
the consensus rule represent a big challenge, and it remains to be
seen if they bear fruit.
Stronger regional institutions could provide a sound framework for
overcoming potential tensions, but at present these institutions
practically do not exist. A stronger economic framework that could
provide a genuine vision and agenda for the future of Asia and its
relations with the rest of the world would undoubtedly benefit the
region. But so far, Asia's integration with the global economy has
been mostly the result of unilateral policies opening domestic markets
and boosting competitiveness, combined with liberalization at the
global level.
The results of the attempts of the Association of Southeast Asian
Southeast Asian Nations (the only formal regional grouping in Asia so
far) to institutionalize regional relations have been quite
disappointing. The share of intraregional trade within Asean has only
increased marginally over the last decades. In 2004, less than 10% of
all intra-Asean trade was under the Asean Free Trade Area's common
effective preferential tariff scheme. Similar comments can be made
about APEC. Its highly diluted agenda goes well beyond economic
concerns, thereby losing focus and momentum, becoming impossible to
implement. This was once again vividly illustrated in the APEC summit
in Hanoi in November 2006.
The idea of a regionwide free trade agreement regularly comes back, at
APEC summits or in the context of the recently created East Asian
Summit, but only in quite abstract terms. It is obvious that the
negotiations of an ambitious regional agreement would face the same
challenges as WTO negotiations, given the number of countries
potentially involved, and the reluctance of some of them towards such
an agreement.
However, efforts should concentrate on creating a regional framework
paving the way for future regional cooperation rather than regional
forums giving pretexts to further bilateral cooperation. The East
Asian Summit initiative, launched in Malaysia in 2005, failed in
particular to provide a vision for the future of regional cooperation.
Without effective institutions, it will be difficult to reach regional
cohesion, making it in turn more difficult to achieve Asian leader****p
at the global level. This is in part due to the legacy of failed
Japanese leader****p. As the leading Asian economic power, Japan did
not play a role in Asia comparable to that played by Germany in Europe
as the biggest market and most powerful locomotive. Thus Asia does not
have a role commensurate to its economic im****tance in international
forums or organizations.
At the WTO, Asian interests are very fragmented: Whereas India and
China are both members of the G-20-an alliance of developing countries
established at the WTO ministerial meeting in Cancn, Mexico, in
September 2003 to counter the perceived excessive influence of the
industrialized countries-their interests differ on a number of issues.
Even ASEAN countries have defended different positions in the Doha
Round negotiations.
Stronger regional institutions where multilateral issues are addressed
and common positions discussed could greatly reinforce the role that
Asia is playing at the global level, while benefiting the multilateral
policy process. Whereas this would in particular apply to trade
policy, it would also be useful on other issues, such as energy,
environment and security.
In other words, if the Asian economies can practice free trade
regionally, they will be in a much stronger position to preach free
trade globally. Genuine commitments to multilateralism, as well as
coherent and constructive attitudes and actions would contribute to
trust-building at the multilateral level, which could in turn calm
down fears of emerging markets in industrialized countries.
Even though Asian countries can contribute to fight mercantilism and
protectionism, in order to strengthen the multilateral framework for
global economic integration, a lot needs to be done by politicians and
opinion leaders in the European Union and the United States as well.
One of their first responsibilities is to calm down fears emerging
from globalization. Most im****tantly, developments need to be set in
their context. Not all jobs can be outsourced to emerging countries;
foreign direct investment still concentrates in industrialized
economies, which accounted for close to 65% of FDI inflows in 2005.
Many companies could not or would not want to move abroad, and many
move in order to expand their markets rather than to cut costs. And
Asia is not only a source of cheap im****ts, but also a destination for
ex****ts. Between 2001 and 2005, ex****ts from the EU to China grew on
average by more than 14% annually. The figure was 0.7% for EU ex****ts
to the U.S. China is expected to become the second largest consumer
market in the coming 10 to 15 years, just after the U.S. It is thus
clearly in the interest of the EU to maintain and deepen its economic
ties with China-protectionist measures against Chinese ex****ts or
companies are not sustainable, since the EU needs the Chinese market.
There is clearly a crisis of global economic multilateralism. The
dynamics of Asian growth provide, without any doubt, the greatest
economic op****tunity now and in the foreseeable future for Asians, but
also for citizens worldwide. These ****fts in the economic centers of
gravity, however, are bound, as they always have in the past, to cause
serious dislocations. These in turn, have often resulted in outright
conflicts and tragedies. The best guarantor for ensuring that the
transition occurs in a reasonably robust and smooth manner is not just
the maintenance, but indeed the strengthening of the multilateral
economic system. This is definitely not what is happening at present.
With Asia being the most dynamic economic region of the world, greater
leader****p on the part of Asian economic policy makers, captains of
industry, and opinion leaders in promoting globalization on the basis
of the multilateral rules-based system is not only welcome, but indeed
essential.
Ms. Engammare is regional manager for Southeast Asia at the Swiss
Organization for Facilitating Investments and an associate fellow of
the Evian Group at IMD business school. Mr. Lehmann is professor of
international political economy and founding director of the Evian
Group at IMD. This online version is a slightly extended version of
the original article published in the March 2007 edition of the
REVIEW.
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