East Asia in world trade: the decoupling fallacy, crisis, and policy challenges

The ‘decoupling’ thesis  - that the East Asian region has become a self-contained economic entity with potential for maintaining its own growth dynamism, independent of traditional developed market economies, was a popular theme in Asian policy-making until the onset of the recent financial crisis.

But the global financial crisis has served to reveal the fragility of the decoupling thesis since all major East Asian countries, including China, have experienced precipitous trade contractions

This paper examines the export experience of China and other East Asian economies in the aftermath of the global financial crisis against the backdrop of pre-crisis trade patterns.

The document indicates the behaviour of trade flows following the onset of the global financial crisis and that the region’s dependence on the rest of the world for its trade expansion has increased over this time. Identically, the simultaneous contraction of intra-trade in the region is consistent with the close trade ties within East Asian, forged within regional production networks.

As a result, the authors doubt whether a free trade agreement (FTA) approach to trade liberalisation is feasible in a context where global production networks are rapidly expanding, encompassing many industries. On the contrary, the recent developments in the global economy following crisis make a strong case for China to go ahead with the speedy implementation of its growth-rebalancing policy.

The paper introduces these main findings:

• promoting domestic demand-oriented growth and engagement in global production sharing are not exclusive policy priorities for China over the medium term
• successful growth rebalancing has the potential to facilitate the further expansion of network trade by averting trade friction with and retaliation from the US and other major trading-partner countries
• an enlarged domestic market would also have potential to improve international competitiveness of exporting firms within production networks by reducing unit cost of production 
• these two factors provide the setting for china to move up the value ladder within global production networks and to become one of developed countries
  

The authors conclude that a policy backlash against openness to foreign trade is unlikely. Conversely, the document makes a strong case for a long-term commitment to non-discriminatory multilateral and unilateral trade liberalisation.