ISSUES/CONSIDERATIONS IN TRADE

The international trading system is currently experiencing tensions that have been growing for
decades. Many are worried that not everyone follows through by the collaboratively agreed on rules,
that significant levels of state protection and assistance are still in place in important industries, and that
the development of new multilateral rules is not keeping up with today's economic situations.
Protectionism is on the rise in regard to this. There are restrictions on trade between countries.
Various taxes (duties) are imposed on imports or exports. These can be in lump-sum form or ad
valorem. Sometimes licenses are granted to export or import particular goods. Alternatively, the law
may ban some exports or imports. All of these different taxes or regulations distort the workings of the
free market and nullifies the law of comparative advantage.

Effective Rates of Protection in Developing Asia

The effective rate protection is the percentage by which the value-added of a product at a particular
stage of processing in a domestic industry can exceed what it would have been without protection. In
other words, by what percentage would the sum of wages, interest, profits, and depreciation
allowances payable by local firms, as a result of protection, exceed the sum that would have been
incurred if these same firms had to face unrestricted competition, that is, no tariff protection from
foreign producers. It is the difference between the value-added in domestic prices and that of world
prices, expressed as a percentage of the latter.

The effective rate of protection is higher than the nominal rate, which is the rate of tax levied on the
final product. This is because the effective rate is computed on a lower base as the value-added is less
than the total price.

Asian countries in the region uniformly began their industrialization with tariffs that protected a wide
range of domestic industries. This was true for Japan, Korea, Taiwan, and later on, the other Southeast
Asian countries. Only Hong Kong and Singapore were basically free traders from the outset.

Japan briefly protected a number of industries in the early stages, but it removed these barriers
gradually as its export competitiveness improved. Even as late as the 1970s, however, the rates of
protection were still high in textiles and non-ferrous metals. In Korea, although protection was slowly
reduced, by 1983 most sectors were still being protected by some combination of tariffs and nontariff
barriers. While exporters faced competition from international prices, there was considerable protection
for goods sold on the domestic market, and the same can be said for Japan, but to a lesser extent.
Taiwan's experience is similar to that of Korea, and as late as in 1980, more than 40 percent of imports
still received nominal protection in excess of 31 percent. In Southeast Asia, there has been a reduction in
tariffs in recent years, but a relatively high rate of protection still exists for manufactured products,
resulting in higher prices domestically, although the dualism between the external and internal markets
is much less than it is in Japan and the NIEs. ln Chapter 3, we noted that the mean tariff rates and trade
taxes decreased between 19.80 and 1999. However, the mean tariff rate remains fairly high in Southeast
Asia, and even higher in South Asia.

How Do Manufactured Exports Increase Productivity?

The relationship between exports and productivity arises from the role that exports play in helping
economies adopt international best-practice technologies. In the NIEs, a higher level of labor and
cognitive skills permitted more firms to quickly adopt new technology and also to adapt existing
technology to local conditions. Even if exports began on the basis of productivity change due to
domestic effort such as plant reorganization, the cumulative magnitude of productivity growth over
many years is most unlikely to have been the result of domestic efforts alone. Clearly, an important
benefit of export orientation has been an increased ability to tap into the best-practice of world
technology and business practices, as well as the business network.

Statistical analysis by the World Bank (1993), Jeffrey Sachs and Andrew Warner (1995), and others
show that outward-oriented trade policies are very important variables in explaining growth in a
cross-section of developing countries. The World Bank study also shows that human capital and exports
are important determinants of total factor productivity. A high level of total factor productivity is found
in the high growth Asian economies. In particular, the studies have found that manufactured exports
and the share of manufactured exports in total trade are particularly important in explaining growth.
This is probably because of the crucial role of manufactured exports in technology transfer and
innovation and the move toward best-practice methods, as explained above, combined with better
education.

Fallacy of Composition

Are there fallacies of composition in the export strategy? Can latecomers succeed? The argument here is
that if all developing countries adopted an export-growth strategy, then there would be a flood of
products into developed country markets and this would give rise to protectionist pressures. This is
the thrust of an article by William Cline (1982) some years ago. He developed a simulation model
where he assumed that all developing countries follow the example of the NIEs. With this model, he
then derived the export penetration of developing countries in industrial country markets. He argued
that the simulations suggest an intolerably high level of penetration in developed country markets
that would only lead to further protection by the developed countries.

The paper was written more than two decades ago and since then, the developing countries share of
world exports has continued to increase. The Uruguay Round has also been successfully completed, the
WTO IS functioning well, and the volume of world trade is increasing more rapidly than ever. Yet this kind
of argument is still popular in some development circles. What it fails to recognize is the dynamic, nature
of comparative advantage, the growth of new products, and the influence of new technology on the
product mix. It also fails to recognize that the trade component of North America, Europe, and Japan as
a share of total outputs still small, despite the rapid growth in trade. Therefore, the impact on domestic
output and employment is relatively insignificant even if the share in total trade of the developing
countries increases.

Adopting and Accessing Technology

Despite the protectionist nature of the trade regime in the early years, the Asian “miracle” economies
were the most open to foreign technology among the world’s economies, according to a study by
David Dollar (1990). Thus, the protection of the domestic economy did not extend to the importation
of new technology. This is because all the economies exempted imports used for processing exports
from their tariff schemes through a system of duty drawbacks or exemptions. This is one important
difference from other countries that began industrialization on the basis of import-substitution.

Export orientation facilitates the move toward international best-practice. The importation of
technology, either through the FDI of transnational corporations (TNCs), or through subcontracting
arrangements with foreign firms, forces exporters to continually upgrade and improve their productive
facilities if they want to compete in export markets. As a secondary effect, this international
competitiveness indirectly forces domestic firms to become more competitive as trade barriers are
reduced and foreign competition is reflected by pressure on local producers. Research has shown that
subsidiaries of TNCs are more productive than domestic firms, and FDI does result in a more effective
use of resources. However, the evidence of several plant-level studies does not show that there are
positive spillovers from TNCs to their direct domestic competitors, although these spillovers could have
also been vertical in nature rather than horizontal (Saggi, 2002).

Knowledge of new technology becomes available even if markets are imperfect, if regimes are open and
exports are encouraged. Markets may be subject to problems of imperfect and asymmetric
information and moral hazard, resulting in the reluctance of the holder of the technology to share it
for fear that licensing will leak the information to competitors or that there will be a violation of
patent laws. Nevertheless, an emphasis on exports allows this information asymmetry to be overcome
through several channels. The purchase of new equipment required to maintain competitiveness of
exports is encouraged by an open trade regime. Furthermore, foreign direct investment is encouraged in
a high- export environment.

Having a foreign partner who has invested directly allows a domestic firm to have access to know how on
marketing, industrial organization, new technology, and so forth. The foreign partner can also bring with
it technological licensing, which is particularly important for new products. The support of exports by
domestic firms, with or without a partnership with foreign firms. allows the transfer of non-proprietary
technology. This is crucial at the low end of the technological scale. For example, the technology for the
production of footwear and textiles/apparel can be purchased on the market without license restriction.

Information from customers can be helpful in designing new products that are more reliable, have better
quality, and are more acceptable to consumers in overseas markets. Knowledge from returning nationals
can also be utilized, particularly when they have been trained in best-practices overseas. As a result,
domestic research and development can be enhanced. Thus, Aa focus on foreign markets and partners,
as well as technology, is particularly relevant to the NIEs as they reach the higher stages of development.

Pattern of FDI Inflows

The pattern of foreign direct investment in Asia demonstrates how this relationship has evolved over
time. In 1980, only Hong Kong had a large stock of FDI, amounting to nearly 80 percent of all the FDI in
the region, according to the UNCTAD estimates shown. However, over the next two decades, other
countries, particularly China and Singapore, were also able to attract large inflows of FDI. In 2001, these
three countries accounted for about 70 percent of all FDI in Asia. Other countries in the region, including
Malaysia, Indonesia, Korea, Taiwan and Thailand, were also able to attract FDI. While much of the
investment in Indonesia was in the petroleum sector, the other countries were able to attract inflows
into the electronics and the information and communication technology (ICT) sectors. The annual rate of
increase in this foreign-controlled capital stock was also quite rapid in the decade of the 1990s. There
was a thirteenfold increase in India (from a very low base) between 1990 and 2001, and a ninefold
increase in China, an eightfold increase in Korea, a fivefold increase in Malaysia, and three to fourfold
increases in the Philippines, Singapore, Taiwan and Thailand.
There are several reasons why capital flows to Asia increased in the 1980s and 1990s. Liberalization of
trade and current accounts continued and this served to attract both FDI and portfolio inflows. There
was also a partial or complete opening of capital accounts in several countries which facilitated both
the movement of portfolio investment and the easy repatriation of funds for multinational
corporations (MNCs) wishing to change strategy and repatriate rather than reinvest within the
country. Furthermore, the 1990s was a period of rapid and vibrant growth in Asia compared with the
low profitability and slow growth in the industrial countries. Finally, rules governing the holding of
domestic assets, including stocks and bonds by foreigners, were relaxed and there was a perception that
the supervision and regulation of equity markets in Asia was improving.
Employment, Migration, and Skills Issues

Education and timing had a lot to do with the difference in how technology was adopted in different
parts of Asia. East Asia had an already highly educated labor force, and thus was able to adopt overseas
technology either by licensing or purchasing directly. These countries, especially Japan and Taiwan, also
had high saving rates or they borrowed heavily from overseas technology to augment their saving. As a
result, they had very small amounts of foreign direct investment, with the exception of Japanese
investments in Korea.

The countries in Southeast Asia started to industrialize later. They had a less well-trained labor force
and thus relied on primary exports for foreign exchange revenue to a greater extent that did the NIEs.
Although they had a rapid buildup in saving when the growth period began, they also relied on foreign
funding to a larger extent than did Japan or Taiwan. Thus, their paths to development were somewhat
different. For the Southeast Asian countries, the Plaza Accord brought a strong inflow of FDI from the
neighboring countries which were ready to move offshore with some of their more elementary
technology and force industry alliances. The same options were not available to the NIEs as Japan was
the only developed country in the region when they were in the market for FDI. Of course, the United
States was a factor, but as the region developed, the regional alliances became more important,
particularly the Asian alliances. Still, Japan had to overcome the stigma of its war role in many of these
countries.