Autumn 2022

Asian economies adjust to growing tensions

Inclusion and sustainability need to be at the heart of a resilient global trade system, writes Roberta Casali, vice president, finance and risk management, Asian Development Bank.

Openness to trade and investment lies at the heart of Asia’s rapid industrial development, income growth and poverty reduction over the past decades. Yet globalisation is now facing challenges on many fronts. Even before the pandemic, many countries were turning to inward-looking strategies and protective measures, turning back the clock on global integration.

Added to that, the pandemic alerted many countries to the risks of heavy reliance on offshoring and outsourcing strategies amid the apparent precariousness of global supply chains. Disruptions to the food and energy supply chains after the Russian invasion of Ukraine – with the consequent acceleration of inflation – have added further deglobalisation pressures, even prompting some commodity producers to espouse protectionist measures such as export bans.

Impact on developing Asia

Developing Asian economies are experiencing a period of heightened economic and geopolitical turbulence and uncertainty. At the beginning of 2022, the prospect was sustained economic recovery: the health impact of Covid-19 became milder, global vaccination rates were rising rapidly, domestic and international mobility restrictions were being eased, and consumer and investor confidence were improving. However, the invasion of Ukraine by Russian forces dented this optimism, as reflected in several downward revisions to growth forecasts by the Asian Development Bank, International Monetary Fund and other institutions.

There is no unified narrative on the invasion’s impact on developing Asian economies. The sanctions especially impact countries with close economic ties to Russia, foremost those in the Caucasus and central Asia. These economies source more than 10% of their imports from Russia and Ukraine, with Kazakhstan’s import exposure being highest at 35%.

Yet due to strong exports to Russia (boosted by appreciation of the rouble), money transfers from Russian citizens and companies relocating to the Caucasus and central Asia, these economies have held up well so far with relatively robust growth in the first half of 2022. However, this is likely to be a one-off effect and is fragile since these Russian flows may reverse when the situation stabilises. Moreover, the recession in Russia will eventually affect employment there and thus remittances as well as exports to them. Over the longer term, sanctions will hurt investment and productivity in Russia, with negative spillovers to economies with close ties.

Most other developing Asian economies have limited exposure to Russia through trade, investment and finance. Nonetheless, these economies are still indirectly impacted via commodity prices. These effects can be substantial. For example, in Laos, Pakistan and Sri Lanka higher energy prices are aggravating already high inflation. But any net energy importing country is facing higher costs with an elevated oil price. At around $100 per barrel — as forecast for this year and next in the Asian Development Outlook 2022 Update — the annual expenditure on crude oil imports reaches about 2.5% of gross domestic product in China and Pakistan, and exceeds 6% in India and Thailand. In the Pacific, where most electricity supply is based on diesel generators, the estimated annual import bill exceeds 10% of GDP in some countries such as Kiribati, the Marshall Islands, Palau and Tonga. The sharp increase in the energy import bill could result in some countries with high level of debt facing a shortage of foreign currency, in particular dollars.

That said, the region’s petroleum and gas exporters – such as Azerbaijan, Brunei, Kazakhstan, Papua New Guinea and Turkmenistan – are benefitting from higher commodity prices through an increase in the dollar value of their exports and a boost to government finances.

‘Rather than looking inward, economies should find opportunities for broader cross-border co-operation to ensure a robust global recovery in the aftermath of the pandemic.’

Russia’s invasion also affects food security in developing Asia and other regions. The food export market is concentrated on only a few countries. Russia and Ukraine are among the largest exporters of many agricultural products. The two countries rank among the top three global exporters of wheat, maize, sunflower oil, sunflower seed, rapeseed and barley. Russia and Ukraine account for over 30% of global exports of wheat and 18% of maize.

Moreover, Russia is the world’s top exporter of nitrogen fertilisers and the second largest supplier of potash and phosphorus fertilisers, disruptions to the supply of which could undermine agricultural productivity and food security globally. And although food prices have retreated from their peaks at the beginning of Russia’s invasion, the food price index of the Food and Agriculture Organization in August remained 7.9% above its value a year ago. The surge in the prices of food and grains has eroded the purchasing power of the poor and vulnerable, as well as bringing a possibility of a long-term food crisis. The ADB is therefore closely tracking the situation in the region and on 27 September launched ambitious plans to provide at least $14bn over 2022-25 to improve food security in Asia Pacific.

What’s next?

Many economies are attempting to cope with the challenges related to supply chain vulnerabilities and geopolitical risks by reinstating or adjusting their industrial policies. These adjustments include reshoring outsourced production facilities, diversifying sourcing capacities or striving for closer economic ties with neighbouring countries or like-minded allies regardless of geographical distances. Legitimate as they might be from economic security perspectives, there are growing concerns about whether these trends will raise de facto barriers against non-allied and non-trading partners.

By reshoring production networks, a country usually intends to decrease reliance on intermediate goods imports and the outsourcing of production, encouraging local processing instead. Diversifying, on the other hand, tries to move part of production networks from existing sources to others, multiplying their numbers at times. When diversification efforts are targeted at regional suppliers, it can promote nearshoring.

Closer economic co-operation among regional allies and new incentives for local businesses to rethink production networks could strengthen regional value chains, generate more trade among neighbours and serve the purpose of securing national economic securities. But when pursued in a way that raises the barriers against non-partners and foreign economies, negative trade diversion and welfare losses at the global level will far outweigh the national or regional level economic gains.

Unfortunately, in the face of a looming economic slowdown, persistent inflationary pressures and geopolitical risks, moves toward protectionism and prioritising national interests over free and liberal trade regimes are intensifying. And the scope of tensions is expanding, from economic to technological and security areas.

One such example is growing tensions around the manufacturing capacity of semiconductors, for which strong pushes for reshoring fabrication facilities and competition for technology and equipment are becoming fiercer.

It remains to be seen where the resurgence of new trade policies will take us. It is important that whatever the intention of the policies, such measures should not raise the barriers against other countries or non-allies. The globalisation reassessment should not be one of exclusion and protectionism.

Rather than looking inward, economies should find opportunities for broader cross-border co-operation to ensure a robust global recovery in the aftermath of the pandemic. Globalisation needs to be viewed through a different lens. Recognising that key threats to long-term global development – climate change and the dramatic loss of natural capital – can only be addressed collectively, the answer can only be more, not less, regional collaboration and integration. A more resilient global trade system that emphasises social inclusion and environmental sustainability can make globalisation work for the future prosperity of all, leaving no one behind.

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