Trade, Investment and Economic Development in Asia

Debashis Chakraborty, Jaydeep Mukherjee, Debashis Chakraborty, Jaydeep Mukherjee

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317207818
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

In an era of globalization, trade in goods and cross-border services and capital flows play a key role in determining the economic growth path of countries. Over the last two decades, countries have embarked on several alternate tracks to liberalize and deepen their linkage with the world economy. The growing trade-investment nexus and the emerging developments lead to deeper international production networks, rise in cross-border trade in services and in regional trade agreements and so on.

The debate of whether it is possible to empirically validate the potential benefits of this deepening trade-investment linkage is ongoing. The evidence in literature is, however, ambiguous. This book contributes to the literature by looking at Asian economies and at the EU, Maghreb countries and Pacific Island economics. It examines the issues under four broad areas, namely: (1) trade: theoretical and policy issues, (2) factor flows: impact on trade and welfare, (3) impact of trade and factor flows on environment and (4) institutions, international trade and policy issues.

1
Editors’ introduction

An Asian perspective of global trade and investment dynamics

Debashis Chakraborty and Jaydeep Mukherjee

Evolving trade-investment nexus: through the looking glass of literature

Over the last two decades, countries have embarked upon several alternate tracks (viz., unilateral, bilateral, regional and multilateral) to liberalize and deepen their linkage with the world economy. This growing strength of globalizing forces have resulted in a phenomenal rise in world trade and investment flows over the past three decades, which has been hailed by the multilateral bodies. The World Trade Report (2013) has noted that in gross terms, the dollar value of world merchandise trade has increased by more than 7 per cent per year on average between 1980 and 2011, reaching a peak of US$18 trillion at the end of that period. The trade in commercial services grew even faster, at roughly 8 per cent per year on average, and stood at around US$4 trillion in 2011. In all, since 1980, world trade has grown on average nearly twice as fast as world production (WTO 2013).

The evolving volume and pattern of trade and investment flows has called for fresh inquiries through advancements in theoretical and empirical frameworks for explaining them in newer light from time to time. The rise in trade across countries at similar development planes from the sixties onwards highlighted the limitations of the traditional factor endowment model in explaining these trade flows and paved the road for intra-industry trade (IIT) models, which explains simultaneous exports and imports within product categories (Grubel and Lloyd 1975). Empirical investigations have revealed that a significant proportion of trade flows across countries are of the IIT type, explained by trade in parts and components, and the trend has only deepened in the recent period. The IIT analytical framework has been further extended, with segregation of overall IIT in vertical and horizontal types (Greenaway, Hine and Milner 1994), and the growing literature on this front imparts deeper understanding of trade patterns.

The limitation of the classical trade theories in explaining the frequent use of trade practices like dumping, emerging specialization patterns and the like paved the stage for the imperfect completion literature during the late seventies. In particular, the specialization patterns were explained with internal and external scale considerations, thereby discussing the possibility of establishing comparative advantages in narrower product lines (Krugman 1980). The rise in regional trade agreements (RTAs) from the eighties fuelled this effect further by creating scale and competition advantages for the local firms, in addition to ensuring higher foreign direct investment (FDI) inflows through the market expansion effect (Urata 2002). The gravity model framework contributed significantly in understanding the trade flows in the context of old and new trade theories as well as the trade effects of the RTAs (Bergstrand 1989).

In addition to deepening of trade flows in merchandise products, trade in knowledge-intensive services has significantly increased since the nineties in line with technical progress, crucially contributing in raising productivity of value-added merchandise products (Markusen 1989). Furthermore, the rise in FDI flows, particularly within RTAs, and greater access to high-end technical services over the last decade has contributed significantly in deepening the international production networks (IPNs) and cross-country participation in value chains, with significant influence on off-shoring and outsourcing decisions (OECD, WTO and World Bank 2014).

Evolution in investment patterns are also worth mentioning. Until the seventies, cross-border FDI flows could broadly be explained by market-seeking, tariff-jumping or resource-seeking motivations, depending on the scenario in the recipient country in question. The eclectic paradigm based on the ownership, location, and internalization (OLI) framework provided a newer outlook to analyse the determinants of FDI by focusing on the institutional factors apart from other characteristics (Dunning 1977). The gradual liberalization of tariff barriers and industrial policies across countries witnessed a surge in FDI flows during the eighties, and the theoretical and empirical literature on determinants of FDI since then has been significantly enriched (Faeth 2008). Two resulting investment-related developments are worth mentioning. First, in light of the North–South FDI flows, the relationship between environmental governance and trade-investment flows emerged as a key research question in the ‘pollution haven hypothesis’ (PHH) framework. Second, the strategic interest of FDI flows vis-à-vis the regulatory role of the foreign government has become important with the growing volume of sovereign wealth fund (SWF) –supported investments (Chaisse, Chakraborty and Mukherjee 2011). Over time empirical methodologies have come up to measure preparedness of a country for hosting a successful SWF programme (Park and Estrada 2009).

The recent development of IPNs and deepening of the value chains underline the growing intra-firm relationship, thereby emphasizing the firm heterogeneity-related factors for explaining trade patterns. Recent empirical and theoretical evidences reveal that final firm decisions on whether to invest or trade are influenced by several factors, including, relative wage, protection and productivity (Helpman 2006). It is observed that firm-level export decisions to a large extent are reliant on factors like trade costs (Lanz and Miroudot 2011) and efficiency levels (Melitz 2003). With newer developments in theoretical frameworks, advancements in gravity model literature have significantly contributed in explaining trade patterns in light of newer dimensions, such as bilateral trade costs (Bergstrand, Egger and Larch 2013).

Realizing the potential benefits from the deepening globalization waves, the countries, cutting across the development spectrum, are now constantly engaged in negotiating market access for trade and investment, both regionally and multilaterally. In 1995, the General Agreement on Tariffs and Trade (GATT) gave way to its successor, the World Trade Organization (WTO), which has spearheaded the multilateral trade negotiations over the past two decades. Finalizing the modalities for the next level of reforms in agricultural, non-agricultural and service sectors as well as procedural issues like anti-dumping measures are, however, long overdue, owing to the delays in completion of the Doha Round negotiations (Martin and Mattoo 2011). As the perceived need for protection changes with incremental development, WTO members tend to adopt a cautious approach at the negotiating forums, which explains the delay in conclusion of the Round. Moreover, the recent growth in the number of RTAs is particularly notable in the context of the slow progress of WTO Doha Round negotiations. The negotiation experience of the recent mega-regional blocs, such as Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP), indicates that multilateralism still remains the best solution (Menon 2014).

Apart from reforms in the areas of tariff and non-tariff barriers (NTBs), the recent negotiations have focused extensively on enhancing trade facilitation measures to promote commercial exchanges (Beverelli, Neumueller and Teh 2014; Neufeld 2014a). Reaching an agreement on this front at the Bali Ministerial (2013) is expected to augment the cross-border trade and investment flows on one hand and provide a model to break the current stalemate on the other (Neufeld 2014a). In addition, an agreement has been reached there on the question of ensuring food security through public procurement of foodgrains from poor farmers at prices higher than the market price (FAO 2014).

Is it possible to empirically conclude whether the least developed countries (LDCs) and other developing and emerging economies have benefitted by this deepening trade-investment linkage? The Prebisch-Singer thesis during the formative years of GATT argued that the poorer nations specializing in primary products might face deterioration of their terms of trade with respect to richer economies specializing in manufacturing products. The empirical result of the phenomenon is, however, found to be mixed (Arezki, Hadri, Loungani and Rao 2013). Rise of IIT between developed and developing countries from the eighties, however, underlined the expanding industrial base in the latter group. On a macro level, a comparison of the shares of North–North, South–South and North–South exports in manufactured products over the last three decades provides a heartening answer. The share of North–North trade (i.e. trade between developed countries) as a percentage of the global figure has declined from a peak of 56 per cent in 1990 to 36 per cent in 2011, while the corresponding figure for South–South trade has increased from 8 to 24 per cent over the same period. The share of North–South trade over 2000–12 period has remained at around 37 per cent, which is found to be considerably higher as compared to the corresponding 1980 figure (WTO 2013).

The macro influence of the globalizing forces on the South can also be observed by looking at the FDI inflow figures. In 2013, FDI flows to developing countries reached above US$778 billion, while the corresponding figure for developed countries stood at around $672 billion. On the whole, FDI inflows to the South accounted for a record share of 54 per cent of the total FDI inflows in 2013, reinforcing the key role that FDI is expected to play as a source of financing as well as fuelling the growth-enhancing technology spillovers (UNCTAD 2014). The growing FDI flows to the South can be explained by several underlying motivations, namely, resource seeking, market seeking, tariff jumping and so on. Economic integration and FDI flows in particular have already emerged as an important area of research (Berger, Busse, Nunnenkamp and Roy 2010). For instance, the expected post-NAFTA increase in cross-border investment inflows played a key role for Mexico to sign the agreement (Medvedev 2012). However, the evidence from developing countries suggests that while RTA membership may not necessarily improve FDI attractiveness, adoption of a favourable special economic zone (SEZ) and transnational policy significantly influence the same (Cherif and Dreger 2015). Understandably, specific commitments in the area of investment liberalization have been a defining feature in the recent RTAs, while the number of bilateral investment treaties (BITs) is also on the rise. Subsequently, newer methodologies have evolved to estimate the influence of various regulatory provisions in BITs on FDI inflows (Chaisse and Bellak 2011).

Does such higher trade-investment flow necessarily securing welfare improvement? To measure the welfare effect of liberalization policies, application of both partial and general equilibrium models are widely used. Partial equilibrium studies have generally focused on the influence of trade and investment flows on employment, skill formation, wage rate and so on through sectoral, cross-sectional or firm-level analysis (OECD 2008). Among general equilibrium studies, Global Trade Analysis Project (GTAP) modelling is extensively used for analysing the influence of RTAs, NTBs and the like (Fugazza and Maur 2008; Nag and Sikdar 2011). It is observed that the trade welfare effect of globalization may be mixed, depending on the comparative advantages of the economy in question, which underlines the role of supporting policy intervention (di Giovanni, Levchenko and Zhang 2012; Khan 2005). In addition, evidence from literature reveals that an adverse environmental effect of trade-investment flows may create a negative repercussion on sustainability scenarios (Chakraborty and Mukherjee 2013), thereby leading to a social welfare loss in the long run.

Two decades of deepening globalization waves, the financial crisis of 2008– 2009 and the Eurozone crises of 2011–12 and 2014–15, have significantly influenced the trade-investment patterns in both developed and developing countries. It is widely acknowledged that the spectacular rise in trade-investment share of developing countries and LDCs, such as the South, can be explained by the fact that over the last two decades, the deepening of the IPNs in manufacturing goods, particularly in the emerging countries in Asia, has led to enhanced participation of these economies in global value chains through specialization in narrow product lines. Such specialization and associated welfare effects are in line with the growing importance of scale economies, strategic trade policies and economic geography-related undercurrents (Krugman 1991).

In this background it is important to analyse and address the pending market access reform issues relating to trade-investment flows through negotiations at the appropriate WTO forums. Moreover, given the global climate change concerns, there is a growing need to ensure that the growth trend continues along an environmentally sustainable path. In line with the global scenario, the major challenge for Asian economies in the recent period is to address the imbalances caused by the financial crisis, deepen trade integrations with the world and translate the enhanced trade flows into sustainable development.

Trade-investment scenario in Asia in the global context

Asia has strengthened its presence in the trade-investment sphere with the share of the continent in merchandise export and FDI inward flows over 2001–13, increasing from 30.43 per cent to 38.84 per cent and from 18.41 per cent to 29.36 per cent in that order. Outward orientation of Asian economies has undergone interesting transformations since the sixties. While during the fifties several countries followed import-substitution policies, export orientation received prominence in the aftermath of the industrial export success by the Asian Tigers (i.e. Singapore, Hong Kong, Taiwan and South Korea), thanks to the ‘Flying Geese’ model, aided through FDI from Japan (Hayter and Edgington 2004). The dynamic capital accumulation that followed led to changes in structure of comparative advantage and production and trade patterns of Asian economies (Kojima 2000). Moreover, the selective state intervention in South Korea and Taiwan ensured high rates of return in manufacturing, which fuelled the industrialization process (Jenkins 1991).

Japanese transnational corporations (TNCs) deepened their presence in the East Asian region through sub-contracting, licensing, joint ventures, FDI and so forth (Kasahara 2013). Both real and financial asset flows from Japan led to greater inter-economy linkages (Kojima 1978). Industrial development deepened in Southeast Asia in the subsequent period, when US firms, to counter the Japanese challenge, deepened their operation in the region to procure parts and components on one h...