The World Trade Organization’s new Agreement on Trade Facilitation has the potential to significantly reduce East Asia’s trade costs along the entire supply chain, increasing regional gross domestic product (GDP) by 2.7 percent and employment by 1.2 percent. At present, the region’s developing economies suffer from trade costs well above those of the newly industrialized countries and of developed economies, owing to the large number of inefficient border and behind-the-border procedures. Countries have been adding to their stock of nontariff measures, which now account for as much as 90 percent of (non-transportation) trade costs. The ATF defines a new reform agenda for East Asia with potentially far-reaching effects on private sector development, especially for small businesses that need greater transparency and simplification of procedures to enable them to readily access regional and global value chains.

Proponents of the decoupling view argue that Asian economies now have more diversified export markets, and they also point to more robust domestic and intra-regional growth drivers that are independent of the US and other developed economies. China in particular has the potential to drive that intra-regional growth, a phenomenon that has already by exemplified by the emergence of its large trade and investments with East and Southeast Asia. There are, nonetheless, a large number of opponents to this view. Those who argue that decoupling is unlikely to occur point to the fact that intra-regional and extra-regional trade flows in Asia are largely made up of parts and components that eventually supply the United States and other developed economies. Reversing that pattern in Asia, they argue, would be neither feasible nor desirable.

The present study examines the empirical evidence underlying these arguments as a means of establishing some forwarding looking views about what options are available to the Asian economies. First, it demonstrates that the strong linkages both within Asia and between Asia and the United States and Europe have not waned in the last 25 years. Second, the study finds that there are significant downside risks for the recovery of growth in the United States and Europe. Thirdly, the types of goods produced in Asia as outsourcing for large enterprises is likely to incorporate more second-generation technology that could increasingly promote intra-regional production networks. Another finding of the study is that stock market indicators in Asia are highly correlated with the major financial centers in the United States and Europe. Finally, pegged and managed exchange rates will likely continue to form part of the policy tools used in most Asian economies, notwithstanding the lessons from the Asian financial crisis.