Why did many asian countries turn to countertrade following the 1997 currency crisis?

Regional economic integration occurs when countries come together to form free trade areas or customs unions, offering members preferential trade access to each others' markets. The article reviews the economic effects of such agreements on member countries and on the world trading system. Effects on member countries include the benefits and costs of trade creation and trade diversion, as well as gains from increased scale and competition. ‘Deeper’ integration can be pursued by going beyond abolition of import tariffs and quotas, to further measures to remove market segmentation and promote integration. Effects on the world trading system are not clear-cut. There is little evidence that regionalism has retarded multilateral liberalization, but neither is there support for the view that continuing expansion of regional agreements will obviate the need for multilateral liberalization efforts.

Active integration into the regional economy, culture and education

Since the 1990s, regional economic cooperation has seen rapid development, promoting the process of regional economic integration as well as driving the communication and cooperation among nations and regions in culture and education. As an important part of the integration of the regional economy, culture and education, the internationalization of higher education plays a significant role in regional social and economic development, higher education reform and talent development quality. With the speeding up of reform and opening up and the participation of Chinese higher education into a regional bilateral or multilateral economy, culture and education cooperation increases, so it is becoming more urgent to constantly improve the internationalization of Chinese higher education which not only should conduct communication and cooperation with the counterparts from the developed nations and regions, but also adapt to the tide of regional economic integration, adopting more open and flexible policies to strengthen communication and cooperation with the counterparts from surrounding nations and regions, to promote international communication of students and teaching staff among regions, to encourage and support colleges and universities to conduct talent development and academic exchange programs, and to promote the mutual recognition of academic credits, diplomas and degrees among regions.

4.3 Regional Integration in Economics

In economics, regional economic integration is a particular case of international economics and monetary economics. In international economics, states have liberalized trade to promote comparative advantage and economies of scale. From this perspective, the United States (in the ninteenth century), the European Union, the North American Free Trade Area and the World Trade Organization are all examples of the same phenomenon. In all these cases, the removal of barriers to the free circulation of factors of production was then followed, to a greater or lesser extent, by the creation of common regulations to address market failures, such as unfair competition (through merger rules), asymmetric information in market transactions (through rules on consumer protection), and negative externalities (through rules on environmental protection).

In monetary economics, the process of economic and monetary union in Europe, with the creation of the single currency, has led to the resurrection of the old ‘Optimum Currency Area’ (OCA) theory of monetary unions (Eichengreen and Frieden 1994). In the OCA theory, nations decide to form a monetary union when the benefits of keeping independent exchange rates and interest rates (to address asymmetric demand shocks) are lower than the benefits of establishing a common currency (of lower transactions costs and greater certainty). However, through the empirical and theoretical study of monetary integration in Europe, this theory has been refined to take account of both political and economic calculations, how costs and benefits change with different levels of trade integration, and how different assumptions about the trade-off between inflation and unemployment change these calculations.

X Bonded Warehodses

In countries or regional trading blocs where the local content restrictions cannot be met, the postponement (CTO) process should be set up at the point of a bonded facility. A bonded facility is where inventory is stored without paying the duty/tax (or nationalizing) until the product is moved from the facility. If the product is to be used in country the duties need to be paid; if the product is shipped out of the country no duties are paid.

For example, in Brazil where the duties, importation taxes, and customs processing times are the highest in Latin America, the government offers three options for bonded warehouses: distribution, virtual, and product for reexportation. The last type is self-explanatory: the product will not stay in Brazil for too long; it may be modified or changed but eventually it will be exported out of the country with no additional duty or tax levied. The distribution bonded warehouse is used for items that will eventually be used in country. The advantage is that if the product is not moved out of the bonded facility it can eventually be reexported with no additional duty or tax levied. This is advantageous for products where demand is uncertain.

In principle, the virtual bonded warehouse is exactly the same as the distribution type but the difference is in how both are administered. The virtual bonded warehouse relies on a computer system for inventory tracking and an audit system to verify its accuracy. The distribution bonded warehouse relies on posting an agent at the facility and building security around the inventory to guarantee accuracy. Any of the three types can be done within the company's facility or subcontracted to a third party. There is the added fixed expense of modifying the companies' facility to support the bonded environment and 100% of the cost of the agent. In a third-party facility, these expenses are spread across all the customers (based on volume of movement through their facilities).

To reiterate the bonded facility makes sense for products where the demand is uncertain. Thus this inventory can be returned to the supplier without any duties applied. A postponement (CTO) process helps to eliminate the need for a bonded facility because the intermediate (generic) products typically have reliable demand because of demand pooling and the extra MRO demand.

7.2 Latin America Integrated Market (MILA)

Pacific Alliance came up as a trade bloc (Chile, Peru, Colombia, and Mexico) to counter Mercosur (Brazil, Paraguay, Argentina, Uruguay, and Venezuela) in Latin America. Initiatives like visa-free travel and integrated visa offices/trade offices in other countries have been taken, apart from intraregional trade.

MILA was the integrated capital market initiative of Pacific Alliance launched in 2011. It combined the stock exchanges of Chile, Peru, and Colombia as a common trading platform. Last year, Mexico was also integrated. In terms of market capitalization, MILA now rivals Brazil’s Bovespa stock exchange. The initial efforts went toward building awareness of the platform and the regional markets/economies among each other’s investors. The idea was to make the investors familiar with the companies and sectors of opportunity in the other markets. A communications system between the brokers of these countries was put in place, to make it easier to coordinate for cross-border trades.

However, the trading volumes have been slow to pick up. Even after Mexico’s inclusion, the uptick in turnover has been slow to pick up. One factor has been the investor confidence during times of elections, as that brings some element of uncertainty on the economic roadmap. Second, currency conversion is to/from US dollars with each of the local currencies, which can be a challenge for investors in terms of exchange rate loss and forex costs. Varying taxation policies in the participating countries has been another concern. A final challenge was that the local stock markets were skewed toward one/more sectors rather than being broad-based across all sectors, which restricted the variety of investable options available to prospective investors. Regulations related to brokerage-sharing among the regional brokers are also an area of concern, as it can impact the commission accruing to each broker from the trade.

Nevertheless, the biggest beneficiary of MILA has been the smaller markets like Peru, as it gives them access to a wider array of investors and products, while ensuring liquidity and depth. It also brings the smaller markets in the focus of global institutional investors, as they may not have evinced that extent of interest just by themselves. Moreover, as a common platform, it can give access to a variety of sectors, which may not be likely if the exchanges market themselves separately, given the sectoral skewness in each market. Mutual funds which would invest in the platform have also come up, and these can become vehicles to mobilize retail monies into the markets. MILA is a good example of a slow-and-steady road toward integration, a definite plus.

3.3.2 Additional Harmonization Efforts through Regional Economic Integration and Bilateral Agreements

In conjunction with global trade integration under the auspices of WTO, the trend towards regional economic integration has also encouraged harmonization of food safety regulations within various geographical regions.

Perhaps most notably, Europe has experienced a long history of regional integration, underpinned by a strong supranational institutional framework (McKay, Armengol, Pineau, 2005). Since the founding Treaty of Rome in 1957, the European Economic Community—which later became the European Union (EU)—has placed particular emphasis on agriculture (van der Meulen & van der Velde, 2008). At first, mainly directed at the creation of an internal common market for food products, European food policy underwent a first period of harmonization through vertical legislation (i.e. standards of composition), followed in the mid-1980s by a second period of harmonization through horizontal legislation. In the mid-1990s, the BSE crisis and other food scares led to the development of a third and new phase of EU food law aimed at assuring high levels of food safety. The entry into force of the cornerstone Regulation (EC) No 178/2002, which set out the general principles of food law and established an independent European Food Safety Authority (EFSA), forms the basis for food and feed legislation in the now 27-member bloc.

The North American Free Trade Agreement (NAFTA), encompassing Canada, Mexico and the USA, offers another example of regional alliance, albeit with a lower degree of formal institutional cooperation than the EU (McKay et al., 2005). Overlapping with the Uruguay Round negotiations, the NAFTA negotiations raised similar concerns over the potential for arbitrary health and safety rules to serve protectionist ends (Bruinsma, 2003). As a result, the three trading partners included into NAFTA an early version of what eventually became the SPS Agreement.

Among the more ambitious regional initiatives in the area of plurilateral coordination of food regulations is the Asia-Pacific Economic Cooperation (APEC) process (Bruinsma, 2003; Josling et al., 2004b). APEC considered establishing an APEC Food System, which would have included both food safety and trade liberalization instruments. The food safety part of the program has yielded a framework, the APEC Food Mutual Recognition Agreement, which builds on the SPS Agreement and allows countries to negotiate agreements to facilitate food trade in the Asia-Pacific region.

In the Southwest Pacific, the bilateral Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), commonly known as CER, led to the formation of a bi-national food agency (Bruinsma, 2003). Since 1996, these two countries regulate food safety jointly through the Australia New Zealand Food Authority (ANZFA), later renamed Food Standards Australia New Zealand (FSANZ).

At the other end of the spectrum of bilateral approaches to food regulations is the attempt to use the transatlantic partnership between the United States and the EU (Bruinsma, 2003). While a number of potentially significant agreements have been negotiated, these tend to be agreements for the mutual recognition of testing and certification, rather than the recognition of the standards of the transatlantic partner. Particularly of note are the growing and unresolved trade tensions, which have ensued between the world’s two largest economies over GM food regulations (Patterson & Josling, 2001). Nevertheless, both partners have long recognized the need for scientific cooperation to better protect public health. In 2007, the US Food and Drug Administration (FDA) and the European Food Safety Authority (EFSA) signed a landmark agreement to facilitate the sharing of confidential scientific information in the area of assessing food safety risk (FDA/EFSA, 2007). In this first formal step lies the promise of a closer collaboration that could help forestall future regulatory discrepancies.

Decolonization and Partition

During World War II, US anticolonialism revived. President Franklin D. Roosevelt believed that imperial trade blocs and the rivalry for control of colonies had contributed both to the Great Depression and to world war. “The colonial system means war,” Roosevelt argued. “I can’t believe that we can fight a war against fascist slavery, and at the same time not work to free people all over the world from a backward colonial policy.”

To address the problems associated with the old, ‘imperial’ interstate system, Roosevelt proposed dissolving it and creating a new one, which would be based on the principle of self-determination and organized around nation-state republics. With the 1941 Atlantic Charter as a template, US officials organized a series of superpower summits during and after the war to lay the groundwork for a new interstate system, which found institutional expression in the United Nations. The Soviet Union supported US efforts because Stalin thought that decolonization would weaken European empires and promote communist revolution in a postcolonial world. Although the United States and Soviet Union soon became adversaries in a Cold War, they never abandoned their joint commitment to decolonization and, on this issue, cooperated even when general US–Soviet relations were frigid.

When the United States and Soviet Union organized the United Nations, they allowed, with only a few exceptions, only ‘self-governing’ states as members. By limiting membership and controlling the admission process, US and Soviet officials created an organization in which nation-state republics outnumbered multinational imperial states by a two-to-one margin. With the voting power of this bloc of republics behind them, the superpowers could insist that self-determination and decolonization be adopted as central principles of the new organization, dissolve enemy empires, and then press for the breakup of allied empires.

After the war, the superpowers and the United Nations quickly dismantled Axis empires, detaching Austria, Czechoslovakia, and Poland from Germany, taking Tunisia, Libya, Somalia, Eritrea, and Ethiopia from Italy, and separating Formosa, Manchuria, and Korea from Japan. The republics in the United Nations then authorized special commissions to investigate colonial conditions and accept petitions from colonial populations, forcing empires to submit political information about their treatment of colonial subjects and fix timetables for their eventual independence.

Decolonization was a difficult and protracted process, but European empires were persuaded to surrender their colonies by a combination of developments. First, the superpowers used their economic and political power to pressure them from above. Second, movements in the colonies organized direct-action campaigns or guerrilla insurgencies to demand independence. And third, the war had crippled imperial finances and wrecked their armies, which made it difficult for them to reassert their authority in the colonies.

Decolonization began in the late 1940s with the British withdrawal from South Asia and the Middle East, and the Dutch departure from Indonesia. The pace of decolonization accelerated after 1956, in the wake of the French and British defeat during the Suez War and the French disaster in Dienbenphu, which crippled their efforts to reassert imperial power by force. During the next 10 years, 26 countries in Africa won their independence from British, French, and Belgian rule. By 1965, with minor exceptions – Portuguese colonies in Africa – most of the world had been decolonized and nation-state republics established in their place.

The postwar interstate system was more homogeneous than its predecessor because it was composed primarily of nation-state republics. It was no longer plagued by the inter-imperial rivalries that had led to world wars. For post-imperial states in Western Europe, decolonization helped create conditions that lay the groundwork for cooperation and prosperity in Western Europe through the Common Market, European Community, and then the European Union. In the postcolonial world, the system gave people the opportunity to practice self-government, participate as members of the United Nations, and provide them with new rights, responsibilities, and safeguards against attack by neighbors.

But while decolonization and the new interstate system solved important problems, it created others. During the war, the United States and Soviet Union agreed to recognize each other’s ‘spheres of influence’ around the world and inserted articles in the UN charter that allowed them to create political and military blocs outside the organization. But they neglected to demarcate the precise boundaries of these spheres, and postwar disputes over the borders of US and Soviet spheres led to a series of disagreements and conflicts collectively known as the Cold War.

Where the superpowers disagreed, and where indigenous movements competed for power in postwar settings, the United States and Soviet Union sometimes decided to partition countries, turn separate states over to different indigenous movements, and assign them to different spheres. Between 1946 and 1956, the superpowers agreed to partition Korea, China, Vietnam, and Germany. They also briefly partitioned Austria, but in 1955 allowed it to be reunited as a neutral state assigned to neither sphere. These Cold War partitions were designed both to settle differences between the superpowers and to resolve conflicts between indigenous movements, who competed for power in postwar states.

Great Britain also used partition to settle conflicts between competing independence movements as Britain decolonized. In 1947, Britain divided power between Moslem and Hindu parties and created two successor states in India. The British also proposed partition as a solution to conflict between Jewish and Arab movements in Palestine, then turned over the issue to the United Nations, which adopted partition as a solution in postcolonial Palestine. In the war that followed the British withdrawal in 1948, an Israeli state was created but a Palestinian state was not, and the lands assigned to it were absorbed by Israel, Jordan, and Egypt.

As a separatist mechanism, partition was supposed to solve problems for superpowers and for indigenous movements. But it did not, for reasons that the great powers did not anticipate. First, partition triggered massive migrations across newly drawn borders. Hundreds of thousands of people crossed borders in Palestine and Germany and millions in Korea, Vietnam, and China. In India, 17 million migrated in the first 6 months, the largest, fastest migration in human history, and 1 million died in the fighting that accompanied it. These socially disruptive migrations contributed to ongoing problems with resettlement and return. Second, the movements that took power in divided states typically discriminated against residual minorities, which contributed to acrimony and civil strife. Third, movements frequently organized dictatorships to protect their power, adopted constitutions that lay claim to sibling states, and waged war to reunite their countries. In Korea and Vietnam, divided states waged wars that drew neighboring states and superpower states into their conflicts. India and Pakistan have fought four wars since partition in 1947, and both countries have acquired nuclear weapons, a dangerous development. Israel has fought five wars with neighboring states and battled two insurgencies in the occupied territories. Although partition did not trigger war between the two Chinas or Germanies, it contributed to various conflicts and crises between sibling states.

Partition was not the only problem associated with the creation of the postwar interstate system. The widespread creation of nation-state republics also contributed to the rise of secessionist movements in some states.

III Economic Cooperation

Echoing the establishment of the EU and the NAFTA, there was the call for more regional economic cooperation within the Asian economies to promote trade and growth. The response came in early 1989 when the Australian prime minister, Mr. Bob Hawke, called for the first meeting of the APEC forum attended by ministers from 12 countries. Due to the June 4th, 1989, political turmoil in Tiananmen Square in Beijing, the three Chinese economies of the People’s Republic of China, Hong Kong, and Chinese Taipei (Taiwan) were excluded until 1991. In the 1990s, the member economies increased to 21. Since 1993, sovereign state members would take turns to host the APEC head of state meeting in November. The annual host of APEC has so far been based in the sovereign states, as both Hong Kong and Taiwan have not hosted APEC.

Trade promotion has been the single most important issue. For example, it was intended in 1993 that the leaders’ meeting would help bring the stalled Uruguay Round of trade talks back on track, and leaders called for continued reduction of trade barriers. The Bogor Goals established in 1993 aimed for free and open trade, investment by 2010 for industrialized economies, and by 2020 for developing countries in the Asia−Pacific region. Subsequently, the APEC Business Advisory Council (ABAC) was established in 1995. The call for open trade among APEC economies continued, even after the failure of the 2002 Doha Round of trade liberalization talks conducted by the World Trade Organization (WTO). While the Doha Round concerned trade in services, agriculture, and market access, the disputed areas that emerged in 2003 related to the extent of agricultural subsidies and “Singapore issues” that included rules on competition, transparency in public procurement, and investment and trade facilitation.

The APEC forum adopted two approaches to economic cooperation. The sector approach allowed exchanges of views, knowledge, and cooperation in such economic sectors as tourism and information technology. The macroeconomic approach involved cooperation in trade and finance, especially after the Asian financial crisis in 1997, when members saw the need to have better exchange of financial information to avoid currency attacks. Between 1989 and 1996, the establishment of APEC passed through three stages. The “setting the scene” stage in 1989−91 saw the expansion of member economies to include the three Chinese economies. The second stage of 1992−95 involved the structural setup. Since 1996, member economies can propose two types of action plans in the cooperation agenda. Individual Action Plans are proposed by individual economies, while Collective Action Plans involve actions applicable to a number of member economies. Over the years, APEC has looked into a large number of issues (Yamazawa, 2012).

APEC members do produce a complementary effect, as some members are suppliers of capital while others are suppliers of labor. But, there is also an element of competition, as the rise in exports of one member economy could mean a reduction of exports in a neighboring member. The major criticism is the nonbinding or nonmandatory nature of the agreements, implying that members can discuss and agree, but individual member economies have the choice of not implementing the policy. As compared to the EU, APEC does not have any supranational power over other members. Indeed, it is very often reduced to a “talk shop,” though various “good practices” have been discussed and disseminated in meetings, and member economies have fruitfully learned from each other’s experiences. Another criticism is the geographical diversity among member economies. While the Asian economies are traditionally closer to each other, the incorporation of far economies in South America may be thought to cover too wide a region. Nonetheless, one can only argue that APEC is still in its early stages as a regional body, and is far from being a body that aims at regional integration.

Although APEC has developed a high profile internationally since it has been established, there are other regional bodies that serve to promote economic cooperation. Other than the ASEAN countries, there is also the Pacific Economic Cooperation Council (PECC) which is a voluntary organization comprising representatives from businesses, governments, and academies involving research and regular meetings. There are also the international groups of institutions, such as the United Nations representative bodies, namely the Economic and Social Commission for Asia and Pacific (ESCAP), and the United Nations Development Program (UNDP). Both the IMF and the Bank of International Settlement (BIS) have offices in many Asian economies, though their role is more for monitoring than promoting cooperation.

Another active body that was initiated mainly by Japan and contributed to economic development among poorer Asian economies is the Asian Development Bank (ADB), established in 1966 with the aim of providing assistance on food production and rural development. By 2014, the ADB had 67 shareholding members, including 48 from the Asia−Pacific region and 19 from outside the Asian region. Unlike APEC, the 48 Asia−Pacific ADB members consist of a number of small island economies in the Pacific Ocean, such as Samoa, the Solomon Islands, and Tonga, as well as such western Asian countries as Georgia, Nepal, Sri Lanka, Tajikistan, and Uzbekistan. The 19 non-Asian members are mainly developed countries in Europe and North America. The funding of the ADB includes bond issues from world capital markets, as well as contributions from members, retained earnings, and repayment of loans.

The discussion on bilateralism versus multilateralism in world trade also affected Asian economies (Bhagwati et al., 1999; Woolcock and Sampson, 2003; Aggarwal and Urata, 2006; Heydon and Woolcock, 2009). The debate dates back to the establishment of the General Agreement on Trade and Tariff (GATT) in 1947, where multilateral trade was discussed between the developed countries and developing countries. The spirit of multilateralism is that once one developed country allowed exports from one developing country, the same developed country would have to open its market to other developing countries. Typically, developing countries wanted to export as much as possible to the developed countries, but developed countries experienced trade deficits with the exporting countries.

Before 1994, when the WTO was established to replace GATT, multilateral trade negotiations took place through seven “rounds” of negotiations: Annecy Round (1949), Torquay Round (1951), Geneva Round (1955−59), Dillion Round (1960−62), Kennedy Round (1962−67), Tokyo Round (1973−79), and Uruguay Round (1986−94). A major conflict in multilateral trade negotiation is that developed countries have different agendas from developing countries, as the concern was the mounting trade deficit of developed countries. Export advantage was also used to politically favor some developing countries. However, accession to the WTO was based on bilateral negotiations. The advantage of bilateral negotiation is that the developed countries can control where imported goods come from. The emphasis has changed from a situation of export promotion or trade expansion to a situation of trade equalization between trade partners (Tait and Li, 1997). All Free Trade Agreements (FTAs) contained an element of trade restriction (Levy, 1997; Baier and Bergstrand, 2007). Over the decades, bilateral trade negotiations have led to the conclusion of a large number of FTAs. A major problem in FTAs is the high administrative cost in the execution of bilateral trade agreements, as there could be similarities and overlap among the FTAs.

Counter-trade

Counter-trade was a hot item in the 1970s and, in effect, was the basis by which the COMECON trading bloc was supposed to function. The late 1970s and early 1980s spawned a flurry of counter-trade activities. Possibly the best-known deal involving sugar was between Brazil and Iran and Iraq. All three parties were hit in the mid-1970s by the commodity markets – Brazil because it had to pay high prices for oil, Iran and Iraq because they had to pay high prices for sugar.

The Brazilians therefore entered into counter-trade deals whereby they sold sugar to both Iran and Iraq at fixed prices and the latter sold oil at fixed prices, as both oil and sugar then proceeded to decline steeply over the following years. This effectively killed the idea of counter-trade, which was more akin to simple barter.

In today’s financial markets with tighter liquidity, there is growing interest for structured counter-trade. One example of this is to purchase one leg and sell the product. This could be crude oil, cotton or any other item. The proceeds are then paid into a bank account in escrow. Sales of sugar are then made to the counter-party at prevailing market prices out of funds in the escrow account.

A further means of financing is through the supply of equipment to companies against which the sugar company repays in the form of sugar. In most cases the bank will finance the supplier of the equipment and look for its repayment from the sale of sugar.