## Reigniting Asia’s Growth Engine: The Role of Trade Liberalization and GVCs

## Source details

**Canonical URL:** [Reigniting Asia’s Growth Engine: The Role of Trade Liberalization and GVCs](https://www.imf.org/-/media/files/oap/oap-home/2021/apdreo-chapter-4-trade-presentation.pdf)

## Other formats

- [Markdown version](/-/media/files/oap/oap-home/2021/apdreo-chapter-4-trade-presentation.pdf.md)
- [Structured JSON version](/-/media/files/oap/oap-home/2021/apdreo-chapter-4-trade-presentation.pdf.json)

---

### The pre-pandemic landscape
- After decades of increase, trade and GVC participation have fallen recently (figures based on UNCTAD EORA GVC Database and IMF Staff calculations).
- Trade as a share of GDP presented in weighted averages (2019 GDP) across regions and over time.
- Tariff barriers have limited scope for further reduction; tariff barriers index shown as weighted averages (2019 GDP).
- Non-tariff barriers (NTBs) have received less attention due to data constraints; a novel NTB Index is used to fill this gap:
  - Narrative approach used to construct index—Estefania Flores and others (2021).
  - Exploits detailed information on trade restrictions reported in IMF’s AREAER, including export and import restrictions (payment restrictions, licensing requirements, etc.), multiple currency practices, payments on invisibles.
  - Index ranges from 0 to 20—lower levels indicate fewer barriers.
  - Coverage: up to 159 countries, starting as early as 1949.
- NTBs remain high in Asia, especially in EMDEs (Non-tariff Barriers Index shown as weighted averages, 2019 GDP).

### The uneven impact of the pandemic on trade
- Asian goods exports were hit in 2020 but less than during the GFC (export growth, goods & services, constant prices).
- Sectoral export growth in REO14, 2020 (weighted average, percent) highlights:
  - Pharmaceuticals, Medical equipment including PPE, Machinery (including computers), Agriculture and Mining, Others, Total, and Total excluding China — with varying percent changes (charted in the presentation).
- Methodology to assess medium-term impact on GVCs:
  - Local projection method where Y_t+h,i - Y_t-1,i = α_i + β^h Σ_{k=0}^2 Z_{t-k,i} + γ^h Σ_{k=1}^2 ΔY_{t-k,i} + ε_{t,i} for horizons h = 0,1,2,...5.
  - Z_t,i is trade-weighted partner country growth.
- Empirical impulse-response finding (IMF Staff calculations):
  - An IRF to a 6 percentage points decline in partner country growth (equivalent to the decline in global growth in 2020) at the five-year horizon shows reductions in GVC participation measured as percentage points:
    - Backward linkages: −1.4 percentage points (chart scale indicates around −1.4).
    - Forward linkages and Total GVC also decline (charted values).

### Reigniting Asia’s growth engine through trade liberalization — Empirical analysis
- Methodology for macroeconomic impact of NTBs (long time-series):
  - Local projection method with Y_t+h,i as macro variables (log of GDP, investment, productivity; gini coefficient etc.) and Z_t,i as change in the NTB index.
- Methodology for role of GVCs (shorter time-series):
  - Impact of NTBs on GVCs: dynamic panel regression with backward linkages to export as dependent variable and lagged changes in NTBs as independent variable.
  - Impact of GVC on productivity: dynamic panel regressions using country-industry-year data; labor productivity growth as dependent variable and lagged change in GVCs as independent variable.
- Empirical results on reducing NTBs (Estefania, Furceri, Hannan, Ostry and Rose (2021)):
  - IRF to a two standard deviation decrease in NTB Index shows effects on:
    - Real GDP (%) — short term and medium term (charted up to 3.0 percent in medium term bars).
    - Productivity (%) — short term and medium term (charted up to around 2.5 percent).
    - Investment (%) — short term and medium term (charted up to around 2.0 percent).
  - Light shaded bars in charts indicate results not significant at 90% CI; standard errors calculated using Driscoll-Kraay.
- GVCs as a key channel:
  - IRF to one standard deviation increase in NTBs after the first and fifth year shows effects on GVCs in percentage points (short term and medium term up to around 2.5 percentage points).
  - Impact of backward linkages on sectoral labor productivity (percent) from panel regression:
    - All: up to 0.5 percent.
    - High-tech manufacturing: up to 0.5 percent.
    - Low-tech manufacturing: up to 0.2 percent.
    - Services: up to 0.1 percent.
- Heterogeneity in gains from liberalization:
  - Economic gains from reducing NTBs differ across countries depending on Income, GVC position, Tariffs, and Structural Reform Index.
  - Effect of reducing NTBs on GDP shown by subgroup (AEs vs EMDEs, Low vs High) with values charted between −1.0 percent and 2.0 percent depending on category.
  - Structural Reform Index is an average between labor, financial and product market reforms index.

### Reigniting Asia’s growth engine through trade liberalization — Model simulation
- Model purpose and features:
  - Sectoral, computable, general equilibrium model.
  - Heterogenous firms within sectors — trade liberalization can lead to resource reallocation to more productive firms.
  - Input-output linkages across sectors and borders — amplification mechanism as shocks reverberate across domestic and foreign production value chains.
- Simulation scenario:
  - Assume NTBs in Asian EMDEs are lowered to the level of European EMDEs.
  - Large reform—equivalent to a decrease in NTBs of about 4 standard deviations.
- Simulation results (based on Caliendo, Feenstra, Romalis and Taylor, 2017, and IMF Staff calculations):
  - Effect of reducing NTBs in Asian EMDEs on GDP (percent, weighted average) shown with and without GVCs:
    - APD overall and regional aggregates charted with increases up to around 4.5 percent for APD EMDE on the overall bar and lower values for "Without GVCs" (charts indicate sizeable gains when GVC linkages are included).
  - Simulations suggest large gains from reducing NTBs, amplified by GVC linkages.

---


_Source: https://www.imf.org/-/media/files/oap/oap-home/2021/apdreo-chapter-4-trade-presentation.pdf_