Governments in Asia must undertake national as well as regional actions to reap the full benefits of integration initiatives like the ASEAN Economic Community (AEC) and be in a strong position to face global economic volatility going forward, says a new report from the Asian Development Bank (ADB).
“Strengthening regional integration will help developing Asia become more productive and efficient at a time when the global economy still in flux,” said Iwan J. Azis, Head of the Office of Regional Economic Integration which produced the report. “To do that and to avoid falling prey to domestic protectionist pressures, governments must act now to ratify, implement, and enforce regional agreements.”
The Asian Economic Integration Monitor (AEIM), a semi-annual report from ADB, notes Asia has seen mixed progress in regional cooperation and integration recently against the backdrop of a shifting economic and financial landscape. Cross-border trade and equity flows have slowed modestly despite improvements in cross-border foreign direct investment, bond purchases, bank credit, and tourism flows.
Progress toward the AEC has been steady but slow. The region needs to work harder on tackling barriers to trade in economically sensitive sectors such as agriculture, steel, and motor vehicles as well as reducing the non-tariff barriers that are increasingly replacing tariffs as constraints to international trade.
Liberalizing trade in services and enacting competition policy and intellectual property rights protection – all difficult areas of reform – require national rather than regional actions. As such, 2015 will be a milestone rather than an end-point in fully achieving the AEC goals laid out by the ASEAN.
Work needs to continue beyond 2015, the report says, particularly to increase labor mobility so that unskilled as well as skilled workers can move across borders more easily. Greater labor mobility will allow the region to reap the full benefits of all its other reforms.
There is a need to address other impediments to trade including fees, excessive paperwork at customs, and trade finance. Tackling these issues are where the main trade benefits lie. Every 1% saving in trade-related transaction costs is estimated to yield a worldwide benefit of $43 billion. National actions combined with a multilateral agreement on trade facilitation — expected to be signed at the World Trade Organization’s 9th Ministerial Conference in Indonesia on 3-6 December — are key to realizing these gains.
The report says regional cooperation can address economic uncertainties and other cross-border challenges such as climate change, health issues, and territorial disputes. This can be achieved notably through greater policy dialogue, stronger regional institutions, better transport links, deeper regional capital markets, and financial safety nets.
Economies also need to be aware of rising exposure to borrowing from Japanese and Australian banks, given the size and behavior of bank credit flows in the region, particularly as they replaced European banks in providing a substantial amount of the region’s funding needs after the Eurozone crisis.