Evolution of Asia's outward-looking economic policies: Some lessons from trade policy reviews

This Working Paper contains some observations concerning the evolution of trade and trade-related policies in the Asia-Pacific region since the establishment in 1989 of the Trade Policy Review Mechanism (TPRM), whose goal is to improve the transparency of these policies.

It also draws some lessons from the Reviews undertaken.  In particular, the Paper examines how reforms, either unilateral or in connection with bilateral, regional or multilateral trade agreements, can be greatly facilitated by transparency, including cost-benefit (C-B) analyses of policies and measures that take full account not just of the interests of domestic producers, but also those of other groups, including exporters and domestic consumers. While high quality transparency is not cheap, the costs of achieving it pale in comparison with the financial assistance involved and efficiency losses associated with such assistance.  Trade Policy Reviews (TPRs) throw light not only on measures that appear to contravene WTO rules, although that is not their purpose; more importantly, they identify measures not seemingly covered by WTO rules, which can, nonetheless, have economic effects equivalent to measures that are subject to these rules.

One of the main lessons from these TPRs is that impediments to economic development are largely homegrown.  Consequently, unilateral structural reform, of which liberalization of both trade and foreign direct investment (FDI) has been an integral part, is of paramount importance.  By fostering transparency, particularly evaluating the effectiveness of policies and measures in achieving their objectives and their overall impacts (intended or unintended) on the economy, the TPRM can be a catalyst for unilateral reform, including liberalization of trade and FDI.  Although the latter has received added impetus from multilateral liberalization under the auspices of the GATT/WTO, the stalling of negotiations in connection with the Doha Development Agenda (DDA) should not preclude further unilateral liberalization.  By contrast, the benefits of preferential trade agreements are far from obvious, notwithstanding their proliferation during the past decade throughout the Asia-Pacific region, where few governments have subjected these agreements to rigorous cost-benefit analysis.

Economies in the Asia-Pacific region, especially East Asia, have been much more successful than those in other regions in achieving sustained fast growth, and thereby raising living standards and reducing poverty.  This success can be attributed not so much to transparency, which is largely lacking, but to, inter alia, their broad outward-looking development strategy.  This strategy has involved in particular an increasingly high degree of integration into the global economy with heavy reliance on growth of manufactured exports, high rates of national saving to finance high rates of domestic investment, including public investment in physical and social infrastructure (notably education and health), supplemented by FDI (as well as maintenance of macroeconomic stability, reliance on a functioning market system to allocate resources, and committed, capable and credible governments).  However, this development strategy has left growth very heavily dependent on domestic investment and exports, which dropped sharply in the wake of the global financial crisis that erupted in 2008.  This, and resulting current account imbalances, and consequent trade tension, has prompted a rethink in a number of East Asian economies of their development strategies.  As a consequence, China, Chinese Taipei, Korea and Malaysia, for example, are now attempting to wean their economies off investment and exports and give freer rein to domestic consumption.

As circumstances (including comparative advantage) change, and global resources become increasingly scarce, policies need to be continually reviewed in order to ensure that second-best measures are replaced by more cost-effectiveness ones.  As improved productivity is the key to sustained development in the long run, policies need to be adapted to ensure that they facilitate, rather than inhibit, the efficient re-allocation of resources by markets in accordance with evolving comparative advantage.  Reform needs to be ongoing, therefore.  Transparency builds support for, and thus paves the way for, such reform.

No: ERSD-2011-12

Michael DALY — WTO

Manuscript date: August 2011

Key Words:

Trade Policy, Liberalization, Taxation, Transparency, WTO/GATT, Foreign Investment, Industrial Policy.

JEL classification numbers:

F13, F15, F16, F18, F21, F32, H25, H27, H57, O24, O25


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This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title.

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