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Foreign direct investment

Advancing sustainable development in Asia: What role for trade and investment?


Published 03 November 2021

The world is now at a moment when the positive notions of trade are in flux. To prepare for uncharted challenges, the international community must take advantage of trade and investment policy – with a sustainable development mindset – that can enable more innovation, cooperation, and solutions.

This roundtable was originally published by the National Bureau of Asian Research, with support from the Hinrich Foundation.

The triumph of global trade and investment is a key milestone of the latter part of the twentieth century. As the pace of growth for world trade accelerated, at times by more than double the rate of global GDP, new jobs were created and incomes improved. Around 120 million people rose out of poverty between 1993 and 1998, partly due to these trends.[1] By the year 2000, global GDP had multiplied by seven times in five decades. Study after study has outlined the benefits of trade. For example, the International Monetary Fund estimates the value of liberalization at more than ten times the costs of deregulation and has tracked the faster growth enjoyed by developing countries with lower tariffs.[2] Meanwhile, FDI in many cases has contributed to the improvement of skills, technology, labor rights, and environmental standards.

Today, the trust that has bound and upheld the global system for trade and investment is, at best, tenuous. Not only are trade partners increasingly skeptical of one another—and the notion that potential allies may be mutually supportive of their interests—but there is increasing distrust in trade itself. Governments issue regulations that are wary of foreign investment even as they make welcoming announcements. More parties view economic integration and globalization as a source of ills, be they loss of jobs, competitiveness, or market power. Confidence is waning in vehicles for global integration, such as the World Trade Organization (WTO).

This shifting mindset is concerning because collective, cross-sectoral global action is needed to effectively address the critical challenges of our time: the climate crisis and growing inequality. In this Asia Policy roundtable, four essays examine the connection of trade, investment, and sustainability in terms of both climate adaptation and social welfare.

The roundtable opens with Gary Sampson’s examination of sustainable trade in the context of the WTO and the Sustainable Development Goals (SDGs). Focusing on the interface between trade rules and the goals of sustainable development, Sampson describes some of the transformative effects of trade liberalization in Asia he has seen firsthand under the WTO, where he was director from 1995 to 2005. He argues that the WTO can play a critical role in fostering sustainability if the execution of the multilateral trading system is an interdisciplinary task. As an example, Sampson highlights the WTO’s negotiations over fisheries subsidies, presented as a policy deliberation centered on “the nexus of trade policy, natural resources economics, and environmental conservation.” If this deadlock can be unwound—and that is not assured given years of stalled negotiations—the breakthrough could create more opportunities for the global trading system to better reflect the SDGs.

Sampson presents another opportunity for the WTO to play a critical role in climate adaptation. By exploring the tools available to accommodate efforts at carbon border adjustment mechanisms—currently proposed by the European Union and under consideration in other countries—the WTO could offer solutions that defy expectations. The key issue is trust or the lack thereof. After more than a decade of criticism of the global agency, can the WTO regain public trust?

Trust is also explored in Ellen Frost’s essay on the geopolitics of trade and investment in Asia. This topic, keenly debated in academic discourse and around the proverbial water cooler, has received no shortage of analysis. Frost’s question is simple, however: In Asia’s changing landscape for trade and investment, whom do countries trust?

Predictably, the answer is multifaceted. Japan, the benign benefactor and Southeast Asia’s top investor as of 2019, wields less influence than the world’s two largest economies. But overall, with superpower leadership absent, nations in Asia are first and foremost putting trust in themselves. They prefer to retain their new agency and exercise what Frost describes as “selective multilateralism, regionalism, and protectionism.” If or when the United States reverses course, removes trade barriers, and takes a seat at the table to listen rather than to lead, more meaningful conversation may ensue.

Asia has forced itself to accept this reality. As the African proverb reminds, when elephants fight, it is the grass that suffers. The ten nations that make up the Association of Southeast Asian Nations (ASEAN) know too well that their economic fortunes have been dependent on the shifting of geopolitical winds. And for several decades, recounts Vasuki Shastry in his essay, ASEAN expertly attracted and absorbed FDI to transform some of its members into low-cost manufacturing hubs. Singapore, Vietnam, Thailand, Malaysia, Cambodia, and, to a lesser extent, Indonesia thrived on more open trade, investment, and supply chains, particularly with China. ASEAN trusts commerce and distrusts efforts that distract from commerce, such as taking sides or stoking geopolitical tension. But investors looking to contribute to climate resilience have an opportunity. Through their investments, they can ensure better implementation of environmental, social, and governance standards and advocate for more tangible action on climate change.

If trust of the superpowers is the issue in Southeast Asia, in India it is investors who are wary of the investment landscape. As the world’s second-largest country by population, with a buoyant technology sector that aims to rival China’s, India should be a magnet for FDI. Yet, as Mihir Sharma explains in his essay, FDI in India has been “disappointing,” and nowhere more so than in manufacturing. Given the “catastrophic capital loss” experienced by several multinational corporations, the relatively low level of FDI in India becomes understandable. Trust is a two-way street and FDI is a long-term game. To attract more players, India’s government must commit to sustained regulatory reforms—and political, judicial, and administrative ones too.

As with the other essays, Sharma points out a critical opportunity for India. FDI inflows into the clean energy sector account for only 1% of total FDI flows. It is now up to the government to walk the talk in sustainable investing and minimize the risks posed to would-be investors, even in relatively successful sectors such as solar power generation. Given the persistently populist tone of the Modi administration’s pronouncements, however, such an outcome may be wishful thinking.

The Hinrich Foundation is guided by the concepts of mutual benefit in trade and investment and sustainable trade through sustained trust and reciprocity. History has shown that lasting and successful trade results from such a dynamic. We support informed policy discussions, such as those facilitated in this Asia Policy roundtable, to remind the beneficiaries of trade and investment—policymakers and citizens alike—to not take these benefits for granted.

The world is now at a moment when these positive notions are in flux. Populist leaders are emerging to test public commitment to community and globalization. Continued tests to the experiment of deep economic integration—the failure of the Trans-Pacific Partnership, the success of Brexit—are encouraging an alphabet soup of bilateral agreements and a fixation on protectionist policies. The slogans say it all: “Buy American.” “Stand Up India.” Borders are closing, even for data, an essential element of the digital economy.

Who will suffer most from a turning away from openness? One study finds that the lowest decile of consumers would face a 63% loss in purchasing power as the costs of goods and services increase.[3] These consumers, and the rest of our communities, already face uncharted challenges, from climate change to the possibility of future pandemics even more catastrophic than Covid-19. To address these challenges, the international community must take advantage of trade and investment policy—with a sustainable development mindset—that can enable more innovation, cooperation, and solutions.

In this Asia Policy roundtable, four essays examine the connection of trade, investment, and sustainability in terms of both climate adaptation and social welfare. It is our hope that by supporting informed policy discussions, we can remind the beneficiaries of trade and investment – policymakers and citizens alike – to not take these benefits for granted.

***

[1] International Monetary Fund, “Global Trade Liberalization and the Developing Countries,” Issue Brief, November 2001, https://www.imf.org/external/np/exr/ib/2001/110801.htm.

[2] Ibid.

[3] Pablo Fajgelbaum and Amit Khandelwal, “Measuring the Distributional Effects of Trade through the Expenditure Channel,” VoxEU, November 28, 2015, https://voxeu.org/article/pro-poor-bias-trade-new-research-expenditure-channel.

© The Hinrich Foundation. See our website Terms and Conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).


Ms. Djalal is Associate Director for Editorial at the Hinrich Foundation, commissioning and managing trade research, content, and partnerships.

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