As developed countries struggle to recover after the global recession and try to confront the looming sovereign debt crisis in Europe, big emerging markets are now driving global growth.

Given the slow down in developed countries, emerging economies are trying to boost domestic demand to sustain growth — and this is particularly the case in China. But in recent months these developing economies have started to feel the pressure from the slowdown in the West, leading the G20 to put global growth high on its agenda.

Emerging economies have managed to keep up their growth rates and exports, and have thus experienced a trade surplus, while developed countries are facing huge trade deficits and have come to favour protectionism. The importance of recovering growth and jobs in the US, for example, and efforts to sustain export-led growth in China are now creating trade and currency friction between these two countries. For several decades there has also been a consistent increase in the trade deficit between the two — in favour of China — and this imbalance reached over US$200 billion per annum in 2010. The US kept quiet over this for a long time, as the trade deficit helped contain inflation due to cheap imports from China, and the unemployment level was still manageable. But as soon as the US realised this trade friction with China was affecting employment and there was no level playing field for its domestic industries, the Americans resorted to protectionism.

A major allegation against China is that its exchange rate is fixed and is not allowed to appreciate — all in the name of stability. As a result, China’s currency is undervalued, making its exports particularly competitive in the international market. The US has adopted several measures to counter the growth of Chinese exports and boost its own domestic economy. First, it has upped the number of anti-dumping cases against China. And second, the US government passed legislation to punish Chinese exports, as it believes that China is heavily subsidising its export items to the US. There have also been instances of tariff hikes on several import items from China.

The currency friction between China and other developed and developing economies is a matter of concern for the G20. China and the US are not only the world’s biggest economies, but they are highly dependent on each other for their growth — and of course the rest of the world also depends on them. China has nearly US$1.5 trillion worth of dollar-denominated assets, and it will be problematic for the US if China stops buying US government bonds. The US is equally dependent on China for its exports of primary commodities such as meat and fruit, and many US companies are based in China in the hope that domestic demand will rise and they will make profits. But Chinese domestic demand is still largely suppressed, meaning the US is not able to obtain sufficient market access. Meanwhile, China depends largely on the US market to sell its labour-intensive manufactured items. Nearly five per cent of China’s GDP comes from exports to the US. So, the trade friction continues.

The world’s two largest economies must work together toward solving this trade friction and to help avoid a currency war. China must allow its currency to be market determined, while the US must do away with its harsh protectionist measures.

India is an active member of the G20 and works alongside China and other developing countries on major international issues, including the restructuring of global financial architecture, and achieving progress on climate change and the Millennium Development Goals. India is aware the trade and currency friction between the US and China will not only hurt the G20’s agenda and the world economy, but will also affect its own future growth prospects. The US and China are India’s major trading partners, and any slowdown in these two countries would affect India as well. So Delhi has been opposing any protectionist measures adopted by developed countries, and pushing for market reforms by phasing out wasteful and distorting subsidies in countries like China.

India also understands the impact of China’s undervalued currency on its exports and expects China to understand the fair principles of trade. India believes there are bigger and more pressing problems that need the attention of the G20. Its member countries need to focus on solving the European debt crisis, help countries resolve trade and currency friction and give fresh impetus to the Doha Round. Against this backdrop, India needs to play a proactive role in the G20 to make it an effective body for dealing with these issues.

Dr Geethanjali Nataraj is a Fellow at the National Council of Applied Economic Research, India.

1. India losing ground to China on trade with Bangladesh
2. The India-China Strategic Economic Dialogue
3. India, China and Asian economic integration

While the Indian car sector is travelling in the fast lane, road and public transport projects have not kept pace. Indians bought about 2.5 million cars last year, worth US$30 billion, while another half a million were exported.

This year, assuming that car-loan rates decline and the economy improves, the market could grow by 10 to 12 per cent — and even if rates remain static, the car market will still grow by 5 to 7 per cent. But even these figures pale in comparison to the 30 per cent growth experienced in 2010, at which time interest rates were lower and the economy was booming, and the double-digit annual sales throughout the 2000s. No wonder global automakers scrambled to attend the 2012 Delhi Auto Expo earlier this year, where some 60 new models were launched.

Significantly, almost all cars sold in the country are now ‘made in India’, meaning they use between 70 and 98 per cent Indian components. The logic is simple: the more ‘Indian’ the car is, the cheaper it becomes, partly because it is cheap to manufacture cars in India, and partly because the tax structure is skewed in favour of domestic manufacturing. Economic analyst Jayanta Roy Chowdhury has argued that this is the result of shrewd planning by Indian policy makers, who in the 1990s lured global automakers to India with the bait of its huge domestic market, but cleverly brought in a tax structure that discourages imports of built-up and knocked-down car kits.

This policy brought automotive majors like General Motors, Honda, Mercedes Benz, Audi and the now-defunct Daewoo to India. These firms all made huge investments in setting up factories and developing Indian vendors who could eventually make quality spare parts. Thanks to this policy, India’s automotive industry today is worth an estimated US$35 billion and provides direct and indirect employment to over 13 million people.

India emerged as Asia’s fourth-largest exporter of passenger cars in 2009, behind Japan, South Korea and Thailand. It is estimated that India could be making five million cars by 2015, or seven million by 2020.

But even after taking into account a commensurately higher number of exports,  most of these cars will still likely be driving on Indian roads. This raises an inevitable question: are there enough roads in India to take these vehicles?

While the automotive industry is booming, road and transport projects have not kept pace. Outside of the few key highways and roads in major cities, many Indians still commute using lanes and unpaved roads. The boom in the automotive sector is the direct consequence of poor public-transport infrastructure that has not kept up with India’s rapid urbanisation.

The national capital is the best example of how road and transport projects are now trying to keep up with the booming automotive industry. Ravaged and resurrected over centuries and sitting over the ruins of seven earlier cities, New Delhi has found its face changed in the last decade by railway engineer Elattuvalapil Sreedharan. New Delhi first came to realise its need for a mass rapid transit system in the early 1970s, but the ‘transport lobby’ of influential politicians caused delays. Many plans, studies and committees chased this for a full 25 years before the Delhi Metro Rail Corporation (DMRC) was formed. The lessons learnt from building the first metro helped Sreedharan build the DMRC from scratch. He demitted office last year after a 14-year stint, having changed the very definition of public transport in India.

At least 26 cities — including Chennai, Hyderabad and Bangalore — are now planning new metro systems. And Mumbai, perhaps the most congested and difficult to build, is already in the construction stage.

These metro systems are a great improvement and the visitor has a choice now: take a limousine or ride the swank Metro. But there is little doubt that investment in India’s public-transport infrastructure must continue to be expanded and gear up a notch if it is to keep pace with the booming automotive sector and help serve the country’s vast population.

Mahendra Ved is a New Delhi-based writer and columnist.

An earlier version of this article was originally published here in the New Strait Times.

1. Indian mining ban will cripple economy
2. Now for an Indian ‘miracle’
3. Indian economy hardly misses a beat

The muddy floodwaters in Thailand having receded, one of the truths to emerge will be just how important the Thai economy is in both regional and global terms.

Thailand is a manufacturing powerhouse. Countless small and large factories churn out a broad range of finished consumer goods for export, as well as component products vital to global supply chains.

But, as an exception to broader regional attitudes toward Thailand, Australian business has largely failed to recognise the importance of the Thai economy to international commerce. Instead Thailand is seen through the narrow prism of beaches and bars. The US, China, Japan and Korea — among others — have all moved past this perception, and for them Thailand is now a serious business destination.

While the worst of the Thai floods has passed — and putting aside the tragic human toll — the disaster’s economic impact is becoming clearer. The central bank slashed economic growth expectations for 2011 from 4.1 percent to 2.6 percent. Despite frantic efforts to protect the many purpose-built industrial parks dotted around the country (which are largely the product of Thailand’s highly effective Board of Investment promotion activities), many remain inundated. An estimated 1,000 factories are submerged in a quagmire the size of Australia’s island state, Tasmania, or otherwise shut down due to supply-chain shortages, labour absences, transport roadblocks or other flood-related factors. Approximately 20,000 businesses and 780,000 jobs within Thailand are said to be affected. And there are many top-tier multinationals among them, highlighting Thailand’s quiet emergence into the word economy. Overseas, big-name buyers from Thai factories have been hit by supply shut-downs, including Hewlett Packard, Dell and Apple. Global output of hard drives, for example, is projected to fall by 30 per cent.

Equally, with Thailand manufacturing over 1.6 million vehicles in 2010, the floods are expected to induce a production drop of between 6,000 and 10,000 units per day — not to mention dramatic shortages of auto component parts for export. The latter has seen production delays in Japan, the United States, the United Kingdom, the Philippines, and elsewhere. For both Thailand’s export-dependent economy and in the current international economic climate this latest blow to the region is an unwelcome setback. And that some analysts are comparing the Thai floods’ economic impact with that of the Japanese tsunami is hardly surprising.

Australia will celebrate its 60th anniversary of diplomatic relations with Thailand next year, a feat which underscores the relative stability of Thailand’s place in the region and relations with its allies. But while the Australian diplomatic presence in Thailand is one of the largest globally, the same cannot be said for the business relationship with its Southeast Asian partner. Merchandise trade is strong — Thailand is Australia’s sixth-most-important merchandise trading partner — but investment tells a different story. Thailand’s A$4.99 billion of investment in Australia in 2010 was almost two and half times greater than the A$1.9 billion flowing the other way. The disparity can partly be explained by several large one-off Thai investments, but this tells only part of the story.

Each year there are over 700,000 Australian visits to Thailand. Yet some estimates put the Australian business community’s visits there at less than 3,000. To be fair, Thailand’s protectionist tendencies — particularly the Foreign Business Act — stymie participation in areas where countries like Australia excel, such as professional services and mining. And corruption, political instability and graphic scenes of violence in Bangkok do not help investor confidence. But many other nations have chosen to focus instead on Thailand’s strengths. As a place to do business Thailand offers a strategic location, world-class infrastructure, cheap business inputs and a cost-competitive labour force with good skills potential. And the World Bank has positioned Thailand 17th in ease of doing business — only Singapore ranks higher in Southeast Asia.

The US, China, Japan, Korea and increasingly others have identified Thailand’s commercial potential. They have invested significantly and — despite the floods’ heavy toll — stand to make a very positive return. 

Thailand’s economic fundamentals remain strong despite suggestions that the floods reveal an infrastructural weakness. But such suggestions ignore the fact that these floods are a one in 50 year event. And given the huge amount of water this year, the fact that Thailand’s infrastructure — and logistics — has stood up so well says a great deal. Also, the eastern seaboard, where much of the heavy manufacturing occurs, has not been affected by water at all. Any shut-downs or reductions in that area have been because of supply shortages from factories up north. Some of the major roads are also designed to be flood barriers and have worked very effectively. Other major highways are raised completely.

Thailand’s role as a production base is certain to increase, and bold infrastructure projects (largely financed by overseas interests) are set to take advantage of Thailand’s central geography. It has great potential as a transport and logistics hub for goods moving south from China into Southeast Asia and the Pacific. And with modest Burmese overtures to normalisation there is increased potential for an East-West economic corridor through Thailand.   

Australian companies have been slow to identify the business prospects in Thailand, and for them the receded floodwaters should reveal a new terrain of opportunity.

Mark Carroll is Executive Director of the Australian-Thai Chamber of Commerce, Bangkok.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Where is Thailand Headed’.

1. The Japan-Thailand economic partnership agreement: Utilization and implementation issues from the perspective of Thailand
2. Australia’s floods and farming
3. Thailand, a nation caught in the middle-income trap

Joining the WTO in 2012 marks the culmination of a long period of transformation for Russia, which first applied for membership in June 1993, and finally had its terms of entry accepted on 16 December.

To join the WTO, Russia has had to overhaul its national laws to bring them into conformity with the global trade regime, and work out bilateral market-opening deals with all other members. Russia has agreed to slash tariffs, get rid of industrial subsidies and allow foreign companies greater access to its domestic market. The most important of these concessions is market access for foreign service-sector companies and banks, which was eagerly sought by European Union states.

WTO membership will offer Russia some of the tools needed to rebalance its economy, which relies heavily on selling the nation’s oil. As a major oil exporter, over 50 per cent of its foreign trade is already tariff free. But the metallurgy and chemicals industries stand to gain from increased market access and protection from anti-dumping measures. In time, other industries will benefit from restructuring and increased productivity stimulated by increased competition.

Russia needs foreign capital in order to modernise, and is aware of the need to project a more positive investment image. The largest gains from WTO membership will come from increased foreign investment in the Russian market for services. Clearly, WTO membership alone will not convince cautious investors — but opening the Russian economy to international practices can only have positive benefits for the business climate. Russian citizens will also benefit from WTO membership, not just because they will obtain access to cheaper goods, but also because greater infrastructure will be created to support local industries. WTO membership will ultimately mean a more predictable trade market in Russia, which is very important given the current global financial situation.

Yet it presents challenges, too. While membership promises increased market access for Russian exports, Moscow will have to open the country to foreign imports. Agreements will need to be implemented as a means to attract investment, stimulate trade and increase competition.

The challenges of membership are not limited to economic policy — they also undermine the political model that has come to define Russia since 2000. Under Putin, Russian citizens accepted reduced political freedoms in exchange for stability and economic growth. As a WTO member, Moscow will have fewer means to support inefficient industries against competition from abroad. This could cause problems for the many towns that rely on one factory or industry for jobs and public utilities.

In the short run, reducing tariffs and other protective measures for import-sensitive industries, such as cars and aircraft, and opening up key financial service industries — banking and insurance — to foreign competition could lead to the loss of jobs in those areas. As such, the Russian government may need to provide unemployment insurance and other adjustment assistance. But globally competitive industries, such as the raw-material producers, could see international markets opening up and an increase in foreign investment as accession forces Russia to restructure its economy.

In the long run, evidence from economies that have gone through similar transitions suggests that trade liberalisation will lead to a more efficient Russian economy and better living standards for the average Russian citizen. New industries will probably emerge over time, helping to diversify the Russian economy.

Until now, Russia has been the largest and most populous country not party to the WTO. Russia’s accession will significantly expand the geographical coverage of WTO rules to all major economies, bringing a larger degree of stability and transparency to the international trading system. At the same time, Russia’s entry into the WTO would continue a trend in which, as the WTO becomes larger and more diverse, it becomes more difficult for that membership to reach a consensus on important issues. In addition, trade disputes between Russia and its trading partners will be brought to the WTO for resolution rather than being addressed bilaterally, adding to the WTO’s ever-growing caseload.

Still, to become a truly open economy, Russia will need to use WTO membership as a springboard for wider economic change. It still looks likely that Putin will be the one to face the tough realities of implementing WTO commitments, but he leads an elite that has long favoured protectionism and subsidy over serious reform. The long-term benefits of membership should nevertheless outweigh its initial costs. Russia will have to make courageous decisions on which industries are truly sustainable, and take measures to protect the population from the costs of adjustment.

Abdur Chowdhury is Professor and Chair at the Department of Economics, Marquette University, Milwaukee. 

1. Russia debates the impact of WTO membership
2. Russia and APEC 2012: imaginary engagement?
3. China’s development since WTO accession

India’s decision against allowing FDI in the retail sector has evoked strong reactions. According to the Indian Parliamentary Standing Committee on Commerce (PSCC), this sector accounts for about 10 per cent of GDP and is the second-largest employer after agriculture.

It employs about 40 million people (8 per cent of the workforce) and thereby affects as much as one-sixth of India’s population. This sector absorbs large numbers of unemployed youth, particularly in towns and cities, by offering them entrepreneurial opportunities. But about 95 per cent of retail business still happens in the unorganised sector, because of which the Parliament views India as the ‘land of retail democracy’.

In a recent contribution to this forum, Dr Rajiv Kumar, the Secretary-General of India’s oldest industry association (the Federation of Indian Chambers of Commerce and Industry) and a former Director of the Indian Council for Research on International Economic Relations, blames ‘retail Luddites’ for the knockback. He concludes his argument with the plea that ‘a public case has to be built and propagated strongly to push back the Luddites’. But by arguing that India’s decision is driven by those who equate FDI in the retail sector with the East India Company’s arrival in 1612, Dr Kumar is fighting his case against straw men. He is overlooking the pragmatic considerations that may have driven the decision to reject such legislation — which has far-reaching implications and was hastily introduced with little preparation and hardly any public engagement.

Dr Kumar bemoans that ‘a mere 10 million owners of traditional and self-organised retail and wholesale trade have held a country of 1.2 billion people to ransom and thwarted progress… by evoking the fear of 40 million people associated with the sector’, and that this interest group is ‘yet to explain how an expansion in business from US$450 billion to an expected US$840 billion’ will result in the displacement of ‘mom and pop’ stores. Note that according to the PSCC about 200 million people depend on the retail sector. In any case, according to Dr Kumar, this ‘unfortunate episode’ is another instance of the triumph of ‘untruth’, fuelled by ignorance and competitive populism. But his argument is flawed. It is based on an erroneous understanding of the relationship between regulatory efficiency and size of an organisation. More importantly, it overlooks distributional concerns discussed below.

No one denies that the pie is going to expand. At stake are the shares. The ‘Luddites’ draw attention to the entertainment industry, for example, where the entry of mutliplex cinemas completely eliminated single-screen neighbourhood cinemas and crowded out space for alternative cinema. They also draw attention to the fact that soft-drink giants like Pepsi and Coca Cola monopolised their market very quickly. The PSCC also seems to have anticipated the ‘Luddites’ when it observed that global retail giants will undoubtedly resort to predatory pricing to eliminate local competitors.

So, while Dr Kumar’s argument is driven by the belief that FDI in retail will increase total welfare, opponents of the policy are concerned about distributional issues. These two groups are essentially talking past each other, possibly because Dr Kumar’s camp overlooks four distributional problems that agitate the ‘Luddites’.

First, since the organised sector (and companies with longstanding global experience in particular) uses manpower far more efficiently, one is not sure if the total income of those employed by the retail giants would be more than the income of displaced entrepreneurs and their employees.

Second, even if it could be shown that the first doubt can be resolved favourably, it is difficult to deny that those who lose jobs would be relatively older, self-employed and have family responsibilities, and lack English-language skills. But new jobs would go to those who can speak some English, who have urban exposure and who are young. The government and retail giants have no plans for retraining and re-employing those who lose jobs.

Third, the entry of retail giants will transfer wealth to their shareholders, and away from relatively poor retailers.

Fourth, once established, retail giants will dictate upstream and downstream prices and transfer wealth to the shareholders of these companies from consumers and small-scale suppliers.

So, the ‘Luddites’ fear that FDI in the retail sector will not only reduce their share in the growing pie but will also leave them with a smaller absolute share. (It bears noting that they are also opposed to domestic retail giants.) Unless the distributional concerns of this demographic are addressed it would be unreasonable to expect a policy reversal until after the 2014 general election, because of state elections in Uttar Pradesh in 2012, and Madhya Pradesh in 2013.

Vikas Kumar is Assistant Professor at Azim Premji University, Bangalore.

1. Beating back India’s retail Luddites
2. Is India in need of a new investment policy?
3. Kurlantzick’s distaste for nouveau riche democracy

As if undermining the WTO’s Doha Round of global free-trade talks was not bad enough (the last ministerial meeting in Geneva produced barely a squeak), the US has compounded its folly by actively promoting the Trans-Pacific Partnership (TPP).

President Barack Obama announced this with nine Asian countries during his recent trip to the region.

The TPP is being sold in the US to a compliant media and unsuspecting public as evidence of American leadership on trade. But the opposite is true, and it is important that those who care about the global trading system know what is happening. One hopes that this knowledge will trigger what I call the ‘Dracula effect’: expose that which would prefer to remain hidden to sunlight and it will shrivel up and die.

The TPP is a testament to the ability of US industrial lobbies, Congress and presidents to obfuscate public policy. It is widely understood today that FTAs, whether bilateral or plurilateral (among more than two countries but fewer than all), are built on discrimination. That is why economists typically call them preferential trade agreements (PTAs). And that is why the US government’s public-relations machine calls what is in fact a discriminatory plurilateral FTA a ‘partnership’, invoking a false aura of cooperation and cosmopolitanism.

Countries are, in principle, free to join the TPP. Japan and Canada have said they plan to do so. But a closer look reveals that China is not a part of this agenda. The TPP is also a political response to China’s new aggressiveness, built therefore in a spirit of confrontation and containment, not of cooperation.

The US has been establishing a template for its PTAs that includes several items unrelated to trade. So it is no surprise that the TPP template includes numerous agendas unrelated to trade, such as labour standards and restraints on the use of capital account controls, many of which preclude China’s accession.

From the outset, the TPP’s supposed openness has been wholly misleading. Toward this end, the TPP was negotiated with the weaker countries like Vietnam, Singapore and New Zealand, which were easily bamboozled into accepting such conditions. Only then were bigger countries like Japan offered membership on a ‘take it or leave it’ basis.

The PR machine then went into overdrive by calling the inclusion of these extraneous conditions as making the TPP a ‘high-quality’ trade agreement for the 21st century, when in fact it was a rip-off by several domestic lobbies.

American regionalism closer to home shows the US now trying to promote the Free Trade Agreement of the Americas (FTAA). But its preferred template was to expand the North America Free Trade Agreement (Canada, Mexico and the US) to the Andean countries and include huge doses of non-trade-related issues, which they swallowed. This was not acceptable to Brazil, the leading force behind the FTAA, which focuses exclusively on trade issues. Brazil’s former President Luiz Lula Inácio da Silva, one of the world’s great trade-union leaders, rejected the inclusion of labour standards in trade treaties and institutions.

The result of US efforts in South America, therefore, has been to fragment the region into two blocs, and the same is likely to happen in Asia. Ever since the US realised that it had chosen the wrong region to be regional with, it has been trying to win a seat at the Asian table. The US finally got it with the TPP, simply because China had become aggressive in asserting its territorial claims in the South China Sea, and vis-à-vis India and Japan.

Many Asian countries joined the TPP to ‘keep the US in the region’ in the face of Chinese heavy-handedness. They embraced the US in the same way that East Europeans rushed to join NATO and the European Union in the face of the threat, real or imagined, posed by post-Soviet Russia.

America’s design for Asian trade is inspired by the goal of containing China, and the TPP template effectively excludes it, owing to the non-trade-related conditions imposed by US lobbies. The only way that a Chinese merger with the TPP could gain credibility would be to make all non-trade-related provisions optional. Of course, the US lobbies would have none of it.

Jagdish Bhagwati is Professor at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations, and is the author of Termites in the Trading System: How Preferential Agreements undermine Free Trade. This article was originally available here at Project Syndicate and is published here with the permission of the author. 

1. U.S. trade policy in Asia: Going for the Trans-Pacific Partnership?
2. Trans-Pacific Partnership Agreement: Carrying the water for America
3. Is the Trans-Pacific Partnership idea a dead end?

The euro crisis hijacked the G20 Summit in Cannes — even by late December Europe’s leaders still had not fully diagnosed the problem, but without an accurate diagnosis how can there be an effective prescription?

This missing link accentuates two challenges that Asian integration will face in 2012: the consolidation of regional architecture and the need for deeper structural adjustments. The prevailing crisis prescription in Europe focuses on regional architecture: Germany insists on fiscal union and the implied centralised power over national budgets. This is in return for giving the European Central Bank more room to apply the tools of lender of last resort. But this focus comes at the expense of essential attention to the structural adjustments necessary to restore growth impetus in the deeply indebted southern members. Growth and restructuring are the only acceptable ways to reduce debt. Faced with shrinking economies and rising unemployment, and lacking exchange rate flexibility to restore price competitiveness in external markets, how will they grow? Other countries have successfully dealt with such situations; Canada, for example — which in the late 1990s faced a serious fiscal imbalance — restored its books to balance with a depreciating exchange rate and by focusing on trade with strongly growing international markets. Clearly Europe’s prospects for export-oriented growth do not lie in the OECD countries, but in emerging markets like those in Asia.

But external expectations of Asia are growing much faster than Asia’s capacity to meet them. Of course regional architecture is required for cooperative action. Yet with some notable exceptions, Asia’s focus remains on the architecture rather than the domestic and regional economic adjustments required to sustain growth momentum in the face of potentially serious external shocks from renewed European recession and near-stagnation in the US.

Following the Cannes Summit (3–4 November), Asian leaders participated in a series of summits: APEC in Honolulu (12–13 November), the ASEAN summit (17–19 November) and the East Asia Summit (EAS) (19 November). Despite the Cannes fiasco and Europe’s continuing troubles, the prominent feature of the Asia Pacific meetings was the ‘return’ of the US: as host at APEC, where President Obama re-launched the Trans-Pacific Partnership (TPP) negotiations, targeting a 12-month completion date; and as one of the newest members of the EAS, which some see as the forum most likely to link regional and global strategic issues.

The immediate problem remains global rebalancing: current account surplus countries should rely more heavily for growth on domestic demand and allow greater exchange rate flexibility. Yet the issues were at best tangentially discussed at these summits, which were mainly focused on trade and integration. The EAS came closest with its emphasis on connectivity, among 10 other issues.

What, then, should Asia’s priorities be in 2012? Two stand out: macroeconomic rebalancing and trade liberalisation.

To carry out macroeconomic rebalancing, discussions among ASEAN+3 governments should take place in the multilateralised Chiang Mai Initiative, yet little has been seen or heard of the secretariat’s activities. In its inaugural year this silence may be understandable, but it is troublesome when viewed in the context of potential risks from the global economy.

In terms of trade liberalisation, recent indications of interest in the TPP by Japan, Canada and Mexico ignited debate about a possible US hidden agenda of excluding China. Additional entrants will not be invited to join — they must apply. And the TPP’s uniqueness is its refreshingly explicit admission bar: applicants must be prepared to talk about everything. Just as in any serious trade agreement, the outcome is based on bargaining over potential gains and losses, with phase-in periods for sectors that must adjust. China should apply while the negotiating parameters are still up for discussion. Otherwise it faces the prospect, as do other latecomers like Canada, of being a policy taker rather than a policy maker.

It is understood that Asian economic integration is a long-term process based on consensus decision making. But a lot of bad things can happen while this long-term process is unfolding. The likelihood of new external shocks from Europe through financial markets and trade flows is not declining. The shocks of the 2008 global financial crisis revealed the vulnerabilities of continued reliance on export-led growth strategies and created, at least for a time, incentives to rebalance the sources of domestic and regional growth. But has enough progress been made?

Asia’s growing economic weight brings with it growing responsibilities within cooperative responses to the global imbalances that weigh so heavily on our collective growth prospects. But will it take another crisis to catalyse the emergence of Asian leaders and institutions as champions of a stable and open global economic system?

Wendy Dobson is co-director of the Institute for International Business in the University of Toronto’s Rotman School of Management and a former Associate Deputy Minister of Finance in the Canadian government.

This is part of a special feature: 2011 in review and the year ahead.

1. Asia, Europe and regional cooperation in 2012
2. The 2012 G20 Summit: facing down global challenges in Mexico
3. G20: step towards a new global architecture

Russia’s bid to join the WTO was approved on 16 December at long last. This event marked the end of some of the longest negotiations in WTO history, with Russia making its initial decision to join the General Agreement on Tariffs and Trade — the precursor to the WTO — in 1993.

But despite the decision to join, domestic debate about the appropriateness of Russia’s membership continues unabated.

On the one hand, sceptics about Russia’s involvement believe the decline in tariff protection will considerably worsen the plight of many Russian industries and be particularly detrimental to Russia’s light industry and agriculture.

Russia’s forestry and car industries are likely to be especially impacted. As WTO membership requires maximum duties on unprocessed timber to be reduced from the current 25 per cent to 15 per cent, the forestry industry will find it increasingly hard to compete. Products such as paper, for example, will be cheaper to import than to produce until the industry becomes more efficient. And from 2012, Russia’s car industry will no longer be able to depend on state subsidies or the protection it receives from duties imposed on imported cars. Similarly, foreign investors will have less incentive to relocate production facilities to Russia in exchange for customs exemptions.

The WTO’s emphasis on trade liberalisation will have a large impact on Russia’s insurance and banking industries as well. In four years, foreign insurance companies will be allowed to sell compulsory insurance and life insurance products to the Russian public, and in nine years these companies will be allowed to establish branches in Russia. This will help diminish the monopoly that Russia’s banks and insurance companies currently enjoy.

In addition to the sceptics, there are also optimists who believe that joining the WTO will benefit Russian consumers. Prices of industrial consumer goods, such as electronics and furniture, will drop and pharmaceutical drug prices are estimated to decrease by 5-10 per cent. Russian consumers can also look forward to cheaper mobile phone services as foreign telecommunication companies enter the Russian market from 2015. At the same time, joining the WTO will boost key segments of Russia’s economy as foreign markets are opened to Russian products like grain, transport, tourism, construction and engineering

The impact of Russia’s accession to the WTO will be softened by a phased approach to trade liberalisation. In particular, the average import duty in Russia will fall from 10.3 to 7.1 per cent, including for agricultural products — from 15.6 to 11.2 per cent, and industrial — from 9.4 to 6.4 per cent. The Government will continue to regulate domestic prices for gas Russia has three years to reduce tariffs by a quarter, but longer periods are allowed for specific goods. Also, if tariff reductions result in substantial losses for a particular industry, the WTO rules allow the use of special protective measures to limit such imports for a period of between five and seven years.

 It should also be emphasised that Russia’s membership greatly benefits the WTO. Although Russia accounts for just over 2 per cent of world trade, it is the sixth-largest economy in terms of GDP, and foreign trade turnover in Russia increased seven-fold in nominal dollar terms between 1999 and 2011.

Overall, WTO membership should encourage Russian companies to produce more competitive products, and the growth in international trade will create thousands of new jobs. But how quickly and effectively Russia will implement reforms in accordance with the WTO’s required standards is unknown. This is because the WTO rules are vastly different to the ‘manual’ methods of economic management currently used in Russia. Still, it is clear that WTO membership will foster institutional change, helping Russia contribute more directly to the development of rules in the global markets. In turn, this will spur Russia’s integration with Belarus, Kazakhstan and Kyrgyzstan through the Eurasian Customs Union and Common Economic Space. This should also accelerate Kazakhstan and Belarus’ accession to the WTO.

The benefits of Russia’s WTO membership will only become fully apparent in the long run. In the short to medium term, it is likely that Russia’s entry into the WTO will disappoint some sectors of Russian society, as its effects are slow to take off. But, until recently, Russia was the only country in the G20 that was not a WTO member and such a step is necessary if Russia wants to maintain a strong position in the global economy. And without active participation in international trade, it will be impossible for Russia to achieve the radical modernisation it so desperately needs.

Boris Kheyfets is Professor, Chief Research Fellow at the Institute of Economics, Russian Academy of Sciences.

1. Russia in the Asia Pacific: a bleak outlook
2. Russia’s accession to the WTO
3. Russia-North Korea trade

The proliferation of FTAs over the past two decades has sparked a debate in Australian and international policy forums about their implications for the operation of the global trading system and ways of mitigating likely discriminatory effects on both partners and non-signatory countries.

An examination of the impact of the Australia–Thailand free trade agreement (TAFTA) of January 2005 on trade between the two countries provides valuable input into this debate. In particular, TAFTA has significant implications for the debate surrounding the discriminatory effects of rules of origins (RoOs) on the use of tariff references.

RoOs are eligibility criteria imposed to identify the true ‘originating status’ of products. In an FTA, the participant countries maintain their own external tariffs, which usually differ between member countries, while offering concessional tariffs to the member countries. It is therefore necessary to combine tariff concessions with RoOs to prevent ‘trade deflection’: imports from non-member countries into the member country with the lowest tariffs for trans-shipment to other FTA members. Stringent and complicated RoOs can diminish, or even render worthless, the preferences offered to traders.

The preference utilisation rate is the percentage share of trade accounted for by RoO certificates and the actual trade of products eligible for trade preferences. According to our estimates, on the export side (Australian imports from Thailand) the average annual utilisation rate ranged from 60 to 70 per cent during 2005–2010. The utilisation rate on the import side (Australian export to Thailand) was much lower, at around 15 per cent. An inspection of the distribution of preference margins and preference utilisation patterns across products/product groups suggests that the restrictiveness of RoOs are a major factor in determining preference utilisation.

For instance, fully-built automobiles account for over 50 per cent of Australian preferential imports from Thailand. From the late 1980s, the export-oriented motor vehicle industry has grown rapidly and a strong domestic parts and component supply network has evolved side by side with final assembly. As a result, exporters can easily meet the RoOs. By comparison, the figure for electrical and electronics goods, which account for a much larger share (about 20 per cent) of total Thai world exports compared to automobiles (14 per cent), amounts to a mere 5 per cent. Tariff preferences for most products belonging to the latter product group are subject to more complex RoO criteria. Australian preferential exports to Thailand are dominated by primary products like wheat, malt, zinc and aluminium. All these products, being entirely domestic-resource based, easily satisfy RoOs.

The emerging patterns of Australian trade with Thailand under the TAFTA closely mirror the preference utilisation patterns. There has been a notable increase in the total bilateral trade (imports plus exports), from US$5billion in 2004 to US$15.1 billion in 2010. But these figures hide a notable asymmetry in the growth of imports and exports: trade expansion has occurred predominantly on the import side. The share of imports from Thailand in total Australian imports increased from 2.8 per cent in 2004 to 5.2 per cent in 2010, whereas the share of exports to Thailand in total Australian exports varied only slightly around an annual average of 3.5 per cent.

In Australian imports from Thailand, the most striking development has been a sharp increase in automobile imports. Thailand’s share in total automobile imports to Australia increased from 5.4 per cent during 2000–04 to 17.2 per cent in 2010. Thailand is now the second-largest source country after Japan. Thailand’s gain in market share largely mirrors the market share losses of Japan (from 55.9 during 2000–04 to 38.8 per cent in 2010). Given the tariff preferences, Japanese car producers have opted to meet part of the demand in Australia by expanding their assembly operations in Thailand instead of exporting directly from Japan. Notwithstanding the same tariff preferences offered to the US under the Australia–USA free trade agreement, which came into effect in the same year as TAFTA, the US share in total Australian imports of automobiles has remained virtually unchanged during the ensuing years.

Processed food (in particular fish and fish products, chicken meat, canned fruits) and electrical goods and electronics have been Thailand’s other dynamic export products over the past ten years. Yet these products still account for a much smaller share in Australian imports from Thailand, even though most of these products are at the upper end of the distribution of FTA tariff preferences.

In Australian exports to Thailand, the share of manufacturing in total exports has declined from 42.5 per cent to 36.1 per cent between 2000–04 and 2005–10, even though most of the tariff concessions offered by Thailand are concentrated in this product category and these concessions are much larger in magnitude than those on the import side. Interestingly, the share of exports to Thailand in some manufacturing product categories has recorded a decline between the two periods. The post-TAFTA average annual growth rates have been negative in some product categories.

What these figures suggest is that RoO set at the individual commodity level in discriminatory fashion, and commodity-specific supply-side factors which enable traders to meet these criteria, determine the rate of preference utilisation and hence the actual trade flow effect of an FTA. This means that the use of officially announced preference rates in trade flow modelling, as is commonly done in computable general equilibrium modelling exercises, is likely to exaggerate the trade flow effects of FTAs. In addition, the notable expansion of automotive imports to Australia from Thailand at the expense of major traditional source countries points to the importance of taking into account the growing role of international production fragmentation and the resulting shifts in export locations when analysing the trade flow effects of FTAs.

Prema-Chandra Athukorala is Professor of Economics at the Crawford School of Economics and Governance, ANU.

Dr Archanun Kohpaiboon is Assistant Professor of Economics at Thammasat University, Thailand.

1. India’s trade deficits with China and Australia
2. The Japan-Thailand economic partnership agreement: Utilization and implementation issues from the perspective of Thailand
3. India-Australia: Skepticism beyond the economics

Politicians in landlocked countries aim to foster balance among the larger countries on whom their economies depend for transit.

But with so many obstacles to continental trade and transit in Central Asia, is the effort worth the exertion?

There has been a lot of criticism of efforts to promote continental trade through Central Asia.  But the prospective benefits undoubtedly outweigh the obstacles. And what is more, these efforts do not need to be undertaken multilaterally in some kind of regional ‘grand bargain.’  Cumulating separate and self-interested, but complementary, bilateral and ‘minilateral’ efforts and agreements among relevant countries can work just as well.

Landlocked economies can face a growth deficit of up to 1.5 percentage points because of high transaction and related costs. So why not try to help reconnect landlocked countries to the world economy and reduce their dependence on a single point of transit?

Central Asia has suffered greatly from a poisonous combination of landlocked geography and very bad economic policies. So as the United States prepares to draw down its military commitments in Afghanistan, it would be wise to renew attention to regional economics.  In fact, that’s where a parallel strand of attention should have been squarely placed all along.

Progress toward fostering more integrated trade and transit regimes will be slow. There has already been a decade of effort by the international financial institutions, particularly the Asian Development Bank, through its Central Asia Regional Economic Cooperation program, and the World Bank. And regional governments, leading scholars and the Bush administration have also been in this mix.

A central challenge to facilitating regional transit is that enthusiasm for cooperation is often far greater in Washington than in Central Asian capitals. While the US has been actively involved in promoting regional arrangements for two decades, it has had very few successes.

At the same time, Central Asian countries desperately need to cooperate with each other. For nearly 20 years, their need for cooperation has too rarely translated into complementary policies. Central Asians and their neighbours are acutely dependent on one another, yet this reality is deeply disquieting to many.

Another challenge is that an Afghan-centred effort is bound to meet especially high hurdles.  Fostering regional trade and transit would all be a lot easier with Iran in the picture. But that is just not going to happen. Iran’s non-compliance with International Atomic Energy Agency safeguards agreements, and its defiance of UN Security Council resolutions, virtually guarantee the US will oppose such linkages. And Washington should be prepared for growing tension with Central Asian states as it enforces Security Council resolutions that call for enhanced vigilance over financial transactions.

But put the US aside for a moment.  The more interesting question is whether developing better policies for continental trade and transit is worth the effort for Central Asian states themselves. The short answer is, yes.

A 2004 paper from scholars at Columbia University helps to show why.  The paper highlighted four types of dependence that hamper the development prospects of landlocked economies: dependence on neighbours’ infrastructure, dependence on sound cross-border political relations, dependence on neighbours’ peace and stability, and dependence on neighbours’ administrative practices.

Landlocked geography can be poisonous. But such dependencies on neighbours can be especially pernicious as well.

The Columbia paper pointed to four options from which Central Asian governments could draw some lessons.

First is to invest in internal infrastructure to lower transportation costs.

Second, they should invest in regional integration strategies — something Hillary Clinton’s ‘New Silk Road’ and the prior Bush administration effort aimed to do. It will not matter if only one Central Asian country gets its infrastructure right — everyone needs to get it right.

Third, regional integration strategies ‘need to focus on administrative coordination’. That means getting customs and border procedures right — something the international financial institutions and the US have focused on for years.

And finally, landlocked countries should invest, where possible, in sectors less affected by transport costs. This will be difficult for Central Asian countries to do, but Kazakhstan, for example, has sought to develop some elements of a services economy.

One of the more trenchant critiques of these various regional efforts in continental Asia is that their origins lie in geopolitics, not economics. But there is plenty of research on the economics of landlocked countries to show why unfortunate geography can be tragic. The real tragedy is that it does not have to be.

Evan A. Feigenbaum is Adjunct Senior Fellow for East, Central and South Asia at the Council on Foreign Relations.

A version of this article was first published here on the Council on Foreign Relations website.

1. An agenda for US-Central Asia relations
2. Pakistan refocuses attention towards Central Asia
3. Why America no longer gets Asia