While the main trading partners of the East Asian economies are the leading OECD members, the trade consequences of the region´s financial crisis are also being felt by developing countries, mainly in Asia but also elsewhere. East and South-East Asian economies account for around a quarter of world merchandise trade and nearly a third of world services imports.
In an address today to the G15 Trade Ministers meeting in Cairo (Egypt), UNCTAD Secretary-General Rubens Ricupero explained how the impact on developing countries´ trade is being felt through slower growth in their export markets, declines in commodity prices and sharp changes in exchange rates.
According to a preliminary assessment of the trade implications of the Asian financial and economic crisis for developing countries (contained in a note prepared by the UNCTAD secretariat for the Cairo meeting), economic slowdown now encompasses not only those countries where an acute financial crisis has erupted since July 1997, but also the rest of East and South-East Asia. UNCTAD anticipates that the economic malaise emanating from the region is likely to have a far greater impact on global trade and the world economy than could be concluded by focusing only on those countries where an acute financial crisis has erupted since mid-1997.
The latest data show a downward trend in the merchandise imports of Indonesia, the Republic of Korea, Malaysia, Taiwan Province of China and Thailand in 1997, with noticeable declines in the second half of the year. For countries with a high share of exports to Asia, there are already signs of a fall-off in exports to the region.
Two factors seem critical at this stage to Asia´s recovery through exports. The first is that given the pattern of manufacturing investment and exports of some of the countries in crisis, the import content of exports (such as electronics) may be quite high, thus offsetting to a significant degree the competitive edge provided by the nominal currency depreciations. This may slow down the adjustment process. Secondly, the recovery of exports will also depend on the availability of financing for the expansion of export production (e.g. the procurement of raw materials and parts) and for export marketing.
As most of the countries of the East and South-East Asia are experiencing difficulties at the same time, with sharp contractions of domestic demand, the region as a whole may require an expansion of net exports to resume their pre-crisis rate of growth. Thus, open markets and the continued growth of global trade may be crucial for overcoming the crisis. The imposition of barriers to trade or resorting to competitive devaluations would slow down the adjustment process of the countries in crisis, and endanger world-wide growth.
The Asian countries trade intensively with each other and are already experiencing an interactive downward spiral in regional trade. For example, Japanese trade figures for February 1998 show that exports in that month to Asia fell by 11.9 per cent as compared with February 1997.
Declines in Japanese exports to Indonesia, Thailand, the Republic of Korea and Malaysia were dramatic: 56 per cent, 41 per cent, 38 per cent and 24 per cent, respectively. On the import side, Japanese imports from Indonesia, Malaysia and Viet Nam fell by 23 per cent, 22 per cent and 30 per cent, respectively.
For the first quarter of 1998, Taiwan Province of China recorded its first quarterly trade deficit in 17 years. From January to March, exports dropped 27 per cent to South-East Asia, 24 per cent to Japan, and 3.2 per cent to the Hong Kong Special Administrative Region.
The impact of the crisis has also spread further afield. Data for India show that for the period April-November 1997, India´s rate of growth of exports to the rest of Asia decelerated relative to the previous period, with actual declines in exports to the Republic of Korea, Thailand and Singapore, and slower export growth to Indonesia and the Hong Kong Special Administrative Region. India is also concerned about an acute loss of competitiveness vis-à-vis Indonesia, Malaysia, Thailand and the Republic of Korea due to their currency devaluations.
For Latin America, while exports to Asia represent about 10 per cent of the region´s total merchandise exports, for some countries (Chile, Peru and Ecuador) exports to Asia represent a significant share of total exports (ranging up to 38 per cent). Although Latin American exports to Asia grew quite rapidly in the first eight months of 1997, there was a sharp fall-off in exports in late 1997. The fall in exports is particularly notable for Chile, whose Asian exports are concentrated mainly on the countries in crisis.
For Africa, the crisis could mean smaller exports to Asia for Zambia, the United Republic of Tanzania and the Democratic Republic of the Congo, as well as for South Africa and Angola. The crisis could also have another adverse consequence for Africa, reducing inward FDI. Some developing Asian countries, such as Malaysia, have become large investors in Africa.
Downward pressure on commodity prices
Asia accounts for about 16 percent of agricultural exports and 13 per cent of mining product exports from Latin America. In the case of Africa, the corresponding shares for agricultural and mining exports going to Asia are now around 20 per cent and 13 per cent, respectively. Fifty-seven per cent of Middle Eastern exports of mining products (basically oil), go to Asia.
The impact of the Asian region´s reduced business activity, and thus demand, has already been felt in many commodity markets. Since mid-1997, commodity prices have experienced an overall decline of about 10-15 per cent, with larger falls in agricultural raw materials and metals than in food and beverages. Price declines, some of them very pronounced, have been observed for many commodities, which altogether accounted for about one-third of the non-oil primary exports of the developing countries. Other factors also contributed to these declines.
Among the metals, copper prices declined by 36 per cent between June 1997 and February 1998, nickel prices by 24 per cent, zinc prices by 22 per cent, and lead prices by 16 per cent. Among the agricultural raw materials, sawn-wood prices fell by 34 per cent, rubber prices by 29 per cent, wool prices by 27 per cent, and jute prices by 25 per cent. But while the prices of agricultural commodities appeared to have more or less stabilized, albeit at lower levels than those prevailing in mid-1997, as of February 1998 most metal prices and the price of petroleum were still deteriorating.
The impact of the price declines will vary from one developing country to another, depending on whether the country is a net exporter or importer of the commodity in question. For developing countries that are net importers of some of these products (particularly oil), the balance of trade will benefit. However, for many net exporters there will be a negative effect on export earnings, fiscal revenues and growth. The adversely affected developing countries are from all regions: 12 from Africa, 8 from Latin America and 18 from Asia.
For five of the eight Latin American countries (Colombia, Ecuador, Mexico, Trinidad and Tobago, and Venezuela) petroleum is the principal or a major export item. The trade balance of these countries is significantly affected by the price of oil. Copper is a major export commodity of Chile and Peru, and they will therefore be significantly affected by the fall in copper prices. As Asia is a major export destination, their copper exports are affected in both volume and price terms. Bolivia and Paraguay will be affected by the price declines for tin and cotton.
African countries such as Angola, the Democratic Republic of the Congo, Gabon, the Libyan Arab Jamahiriya and Nigeria, for which petroleum accounts for more than 50 per cent of export earnings, will be seriously affected by the continuing drop in oil prices, as will Algeria, Egypt and Cameroon, for which oil is a major export item. Many African countries, such as Cameroon, Côte d´Ivoire and Swaziland will be adversely affected by the fall in the price of sawn wood; similarly, many exporters on the continent (such as Sudan, Togo and the United Republic of Tanzania) will be adversely affected in the case of cotton. Zambia will be affected by copper, which accounts for more than 50 per cent of its exports.
Asian commodities exporters are affected mainly by the fall in the price of timber (Cambodia) and copper (Papua New Guinea).
The competitiveness effect of the currency depreciations
The large depreciations in the region´s currencies since mid-1997 have major implications for the pattern of international competitiveness both within and outside the region, as well as for the trade adjustment and economic recovery of the countries in crisis. Measured in United States dollars, the currencies of the region have experienced average declines between June 1997 and March 1998, ranging from 11.5 per cent in the case of the Japanese yen to about 74 per cent for the Indonesian rupiah. Other currencies within and outside the region have also weakened significantly against the dollar. These exchange rate movements are likely to alter international competitiveness among countries and trade shares in third-country markets.
However, available statistics do not reveal a significant boost to exports so far, or provide evidence of the extent to which, if at all, the devaluations may be producing competitive pressures on other developing country exporters in third markets.
The experience so far indicates that the relative improvement to date in the current account of the countries at the centre of the turmoil is due essentially to import reduction rather than to a significant expansion of exports. The only limited exception is the Republic of Korea. Meanwhile in US dollars, there was no acceleration in export growth in Thailand, Malaysia, Indonesia, the Philippines, Singapore and the Republic of Korea.
