How Trade Can Help Speed Asia’s Economic Recovery

IMF Blog, November 19, 2021

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Bibliographic details

• Authors: Pragyan Deb, Julia Estefania-Flores, Siddharth Kothari, Nour Tawk
• Published: November 19, 2021

Summary of findings

• Trade has historically driven economic growth and poverty alleviation in Asia, but momentum in lowering trade barriers has slowed in recent years.
• While tariff barriers in Asia are low overall, a comprehensive measure of nontariff barriers for 159 economies (as far back as 1949) shows nontariff barriers remain relatively elevated in many Asian emerging market and developing economies.
• The nontariff trade-restrictions index is compiled using detailed trade-barrier data in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions.
• The index for Asia declined from near 20 in the 1960s to around 15 by 1995, but has since remained little changed.
• Empirical analysis suggests easing nontariff barriers can boost GDP by about 1.6 percent after five years, with short-term gains of about 1 percent illustrated by Sri Lanka’s removal of export licensing, financing, and documentation requirements in the early 1990s.
• IMF forecasts suggest GDP in 2024 will be 6 percent below the pre-crisis trend in Asian emerging and developing economies, equal to losses of about $1 trillion annually.
• Gains from lowering nontariff barriers arise mainly through greater investment and productivity (specialization, technology transfer, reallocation to more productive firms), not primarily through higher net exports.
• Nontariff barrier scores tend to be particularly high for low-income countries such as Nepal, Bangladesh, and Myanmar; large emerging economies such as China and India also have scope for reforms.

Trade-barrier context and historical trends

• Average tariffs in Asia fell sharply from more than 50 percent in the 1970s to single digits in the early 2000s, leaving limited room for further tariff reductions.
• Nontariff barriers include licensing requirements, documentation hurdles for releasing foreign currency, restrictions on trade, payments, or exchanging foreign currencies, and other administrative obstacles.
• Openness measures (share of goods and services trade in GDP, participation in global value chains) rose for decades but have stalled in recent years, indicating a slowdown in Asia’s traditional trade-driven growth engine even before the pandemic.
• A forthcoming IMF working paper compiles a comprehensive index of trade restrictions for 159 economies dating back to 1949.

Quantified economic impacts

• Short-term GDP boost from significant reduction in nontariff barriers (example: Sri Lanka reforms): about 1 percent.
• Five-year GDP boost from similar reforms: about 1.6 percent.
• Potential to heal about a quarter of expected pandemic scarring via easing nontariff barriers (research detailed in the IMF’s Asia-Pacific Regional Economic Outlook).
• IMF forecast: GDP in 2024 will be 6 percent below the pre-crisis trend in Asian emerging and developing economies, equal to losses of about $1 trillion annually.

Policy recommendations and reform priorities

• Reduce goods-related barriers:
  • Remove import and export licensing requirements where present.
  • Simplify or eliminate extensive documentation for releasing foreign currency.
  • Lift restrictions on the use of foreign exchange to ease administrative delays and reduce transaction costs.
• Reduce services restrictions:
  • Ease restrictions on transactions beyond physical goods in areas such as travel, shipping, consulting, and international transfers.
  • Consider reforms similar to Australia’s 1980s liberalizations to support expanding services trade.
• Complement trade reforms with measures to mitigate distributional impacts:
  • Provide financial support for the hardest hit populations.
  • Implement retraining programs to help displaced workers find new jobs.
  • Pursue policies reversing pandemic-induced setbacks to workforce education and skill levels.
  • Reform labor and product markets to enhance adjustment and inclusion.
• Prioritize economic reforms as vaccinations foster recovery to minimize post-pandemic scarring, especially in emerging and developing economies.

Mechanisms of benefit and risks

• Mechanisms:
  • Increased investment and productivity through specialization, technology transfer, and reallocation to more productive firms.
  • Administrative cost reductions and faster international transactions when licensing and documentation barriers are removed.
• Risks and mitigation:
  • Reallocation effects can produce winners and losers, often favoring the already better-off; accompanying social and labor-market policies are essential to mitigate inequality.

IMF Blog — How Trade Can Help Speed Asia’s Economic Recovery (November 19, 2021).

References

• 日本語
• Asia-Pacific Regional Economic Outlook
• Annual Report on Exchange Arrangements and Exchange Restrictions
• Brave New World: Tracking Trade from Space
• How Countries Can Diversify Their Exports
• After a Strong Crisis Response, Asia Can Build a Fairer and Greener Future
• Divergent Recoveries in Asia: History is not Destiny