The Export-Led Model is Evolving, Not Dying

03/23/2024

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Jayant Menon | East Asia Forum

While the rise in anti-globalisation sentiment may have preceded COVID-19, the pandemic reinforced it, leading to an increase in protectionism in East Asia and around the world. Many pandemic-era barriers to labour mobility have been slow to come down and, in some countries, have not been completely reversed.

Industrial policy has enjoyed a major return to popularity in the United States, with the introduction of the Inflation Reduction Act and the CHIPS and Science Act in August 2022, driven by the need to expedite the clean energy transition and mitigate geostrategic concerns by reducing dependence on China.

The subsidies linked to domestic content requirements in these statutes have shifted sourcing patterns, while restrictions on the exports of advanced microchips to Chinese firms have directly affected trade. The World Bank’s October 2023 East Asia Update measures how these laws have reduced Chinese and ASEAN exports to the United States and increased those from Mexico and Canada.

The direct impact of US industrial policy extends beyond its borders by providing preferential treatment to FTA partners and discriminating against others. It may also have spillover effects by contributing to an already growing appetite for similar policies in East Asia and around the world, particularly Europe. This tit-for-tat policy game could apply to subsidies and other instruments of protection as countries try to compete on an increasingly uneven playing field.

To some, these developments signal the end of the export-led model in spearheading growth. While trade growth in East Asia averaged over 8 per cent in the years leading up to the 2008 Global Financial Crisis, it is expected to fall to 4.4 per cent in the post-pandemic years.

While diversifying trade patterns will increase the resilience of trade flows and the sustainability of the export-led model, the two-decade steady decline in the region’s trade growth rate is a cause for concern. Supply chains are shortening and some policy-induced reshoring has taken place. But the slowdown has mainly affected goods rather than services trade. There is huge potential for growth in services trade, especially intermediate services, with digitalisation further reducing barriers.

This has led some commentators to assert that globalisation is not dead but simply transforming. Similarly, if the export-led model of old is dead or dying, then it may be superseded by one in which the composition and the pattern of trade changes, but not its role or importance. The composition will shift away from goods towards services while the pattern of trade will be determined less by efficiency and more by geopolitical factors.

Rapid growth in digital trade is related to this compositional shift towards services. Digitalisation increases the scale, scope and speed of trade and will affect assessment of the export-led model’s viability in at least three ways.

First, digital goods and services are likely to make up most future trade growth, while digitalisation will facilitate future services trade growth. Second, reported statistics on trade may underestimate the true volume of digital trade, given a host of measurement difficulties. Third, many of the barriers that inhibit goods trade in developed countries do not apply to services trade, while increasing digitisation enhances the ability of traders to circumvent protectionist barriers.

The export-led model is unlikely to die anytime soon. Though the shift towards embracing industrial policy may represent more than a transitory phenomenon in the United States, the fact that Washington’s security-driven trade policy has favoured friend-shoring and near-shoring more than reshoring implies a change in the pattern rather than the volume of trade.

Such policies have so far favoured countries which have free trade agreements (FTAs) with the United States, at the expense of China and ASEAN member states. But this could change if attempts by ASEAN countries like Indonesia and the Philippines to sign limited FTAs with the United States for critical minerals materialise.

Similarly, the rapid growth in digital trade is altering the product composition of trade, as new digital goods and services are traded and modes of delivery change. Trade statistics probably underestimate the true significance of these changes on volumes of trade, given measurement difficulties that lead to under-reporting.

The main reason why the export-led model is likely to survive, in one form or another, is the region’s long-standing commitment to free and open trade, which has facilitated massive economic transformation and social progress. The growth and spread of supply chains in the region has underpinned its economic success and is largely irreversible.

There is evidence that this commitment is still present. Recently, Malaysia decided to remove price controls and subsidies on sensitive agricultural products. The Philippines has removed the long-standing and controversial foreign equity limitation on public services, allowing 100 per cent foreign ownership in all public service sectors outside of public utilities. The ASEAN-led Regional Comprehensive Economic Partnership initiative, with its open rules of origin at a time of global pressures against liberalisation, is another indicator of the region’s commitment to openness, as is the recent launch of negotiations for the ASEAN Digital Economy Framework Agreement.

If there is a risk to the export-led model, then it is likely to come from outside. But the primary question, of whether the region’s long-standing commitment to openness will be sufficient to withstand disruption and fragmentation from a sharp escalation in geopolitical tensions, remains.

Jayant Menon is Senior Fellow at the ISEAS-Yusof Ishak Institute in Singapore.

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