Digital trade integral to East Asia's recovery and dynamism

19 April 2021

By Editorial Board, ANU

This article first appeared on East Asia Forum

For decades, trade hovered confidently over the Asia Pacific region as its vital growth engine. As average tariffs fell from 17 per cent in 1989 to 5.3 per cent in 2018, regional trade multiplied — faster than the rest of the world — along with jobs and incomes. Deepening integration even helped the region to bounce back from shocks as severe as the Asian financial crisis of 1997 and the 2008–09 global financial crisis.

Escalation of geopolitical tensions seems to have unsettled trade from its perch. As rivalries heightened and criticism of globalisation grew in recent years, the multilateral trading system on which Asia’s prosperity and security had been based was challenged and the WTO’s relevance called into question.

It took a global pandemic to shift the narrative. What the COVID-19 pandemic has done more than anything else is accentuate the importance of the digital economy in the future of the global economy, and how Asia is set to lead its rapid digital transformation.

Our latest issue of East Asia Forum Quarterly, ‘Reinventing global trade’, launched today, illustrates how the region’s economies have emerged from the COVID-19 crisis bruised but not defeated. Supply chains have proven surprisingly resilient, partly because of their greater interconnectivity within Asia. Lockdowns have accelerated digital transformation to the benefit of small and medium-sized businesses. Some countries such as Singapore, New Zealand and Chile have finalised partnerships aimed at expanding the digital economy. Even long-brewing mega trade agreements like the Regional Comprehensive Economic Partnership (RCEP) came to fruition in the middle of the COVID-19 crisis, highlighting the leadership of regional groupings such as ASEAN.

In our lead article from EAFQ this week, Homi Kharas and Meagan Dooley observe that ‘East Asian economies are famous for delivering growth with equity and for their export orientation, as reflected today in their participation in global and regional value chains’. In a world that continues to live with COVID-19, these features are likely to become more important.

‘East Asian trade will rise in global trade importance because the scale of the region’s economic recovery is larger and faster than anywhere else’, say Kharas and Dooley. ‘Asia was already the second most integrated regional trade network after the European Union in 2019’. ‘East Asia’s trading system is likely to become more inclusive and sustainable as it shifts to using digital platforms. Although there is still a digital divide in the region … new digital platforms are encouraging the participation of small farmers and small firms in international trade, including those owned by women, and opening opportunities for many near-poor people’.

East Asia already accounts for 40 per cent of the world’s middle class, Kharas and Dooley point out. In a decade it is likely to exceed the middle class in Europe, North America and Latin America combined. Increasing competition to serve this new consumer market is now driving East Asian innovation. Companies are quickly adopting new digital tools that expand consumer choice and shrink the distance between the producer and consumer. East Asia is leading the global e-commerce revolution, with Chinese tech giants like Alibaba and Tencent driving growth and the application of digital technologies in daily commerce. Of the estimated US$3.8 trillion in revenue generated worldwide on digital platforms (including e-commerce, online travel, advertising technology, transportation, e-services and digital media) US$1.8 trillion was in Asia. Nearly 60 per cent of global e-commerce business alone was transacted in Asia. China is at the forefront with 45 per cent of global e-commerce sales. In the next decade, according to Kharas and Dooley, the digital economy is expected to add US$1 trillion to Asia’s GDP.

East Asian recovery and growth beyond the COVID-19 pandemic will be powered by digital platforms. It’s likely to be strong and inclusive if countries continue to invest big in digital infrastructure and human capital. The challenge will be to coordinate on essential oversight and regulatory arrangements necessary to a flourishing cross-national border digital economy. There’s an urgency in the development of multilateral digital principles to guide international digital commerce and avoid a fractured global system. As the G20 and other groupings discuss ways forward, middle powers in Asia, such as ASEAN, can work to shape global outcomes through acting in Asia and the Pacific to build an inclusive and workable cooperation agenda.

Asia’s economic bruise from COVID-19 is real. Many countries are still struggling under fiscal pressures exacerbated by the pandemic. But speculation about China losing ascendancy is yet unproven. Even as investors pursue China+1 policies, foreign direct investment in China remains robust — it was the largest destination for global FDI in 2020, topping the United States for the first time. China is also increasing its investments across Southeast Asia, while ASEAN helps to shape the region’s new trade architecture. The modern high-octane fuel for resilient East Asian supply chains and tenacious economic integration is digital technology.

In anticipation of the WTO’s 12th Ministerial Conference this November, Asia’s eyes are on two key players whose roles are not yet clear: India and the United States. If India continues to forge its own separate way, that will certainly weigh down on the region’s future and the diffusion of economic growth. Similarly, where the United States heads, particularly in response to the new WTO leadership and on its posture towards competitors and partners in the Pacific, will influence how the digital economic revolution that’s sweeping across Asia is embraced across the world.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.