FDI, greater trade openness can counter the risk of rising protectionism: ADB

Strengthening trade linkages and attracting Foreign Direct Investment (FDI) will contribute to Asia and the Pacific’s growth and help improve resilience to emerging protectionism, according to a new Asian Development Bank (ADB) report.

The Asian Economic Integration Report 2016, released last week, examines current trends in trade, finance, migration, remittances, and other regional cooperation and integration issues, with a special chapter on the factors behind the growth of FDI in the region.

“Trade and FDI have been key drivers of growth and prosperity in Asia and the Pacific,” said JuzhongZhuang, ADB’s Deputy Chief Economist. “The region should guard against the threat of rising protectionism and make concerted efforts to push for freer trade and better investment policies to preserve the region’s growth momentum.”   

The report notes that the anemic global economic recovery continues to weigh on the region’s trade growth, which continues to decelerate. Last year, trade growth in Asia slowed to 2.3% in 2015, below the global average of 2.7%. The structural transformation underway in the People’s Republic of China has also contributed to the region’s trade slowdown. The risk of rising protectionism has increased and nontariff barriers have become major obstacles to trade.

The report highlights that greater trade openness and FDI can strengthen the region’s resilience to slow global growth, but countries need to improve their institutional quality, business environment, and policy effectiveness to encourage FDI. Asia and the Pacific attracts almost a third of global FDI, among which more than half is now intraregional, driven by the expansion of global and regional value chains. Greater trade openness through more regional trade agreements and bilateral investment treaties can also increase FDI.

FDI can contribute to economic growth through job creation, capital mobilisation, and infrastructure development, while promoting productivity through technological and knowledge spillovers. It also fosters inclusiveness through better working conditions and rising wages. 

The report cautions that the benefits of FDI are not automatic. Different types of FDI will bring different benefits and what works in one country may not necessarily work for another. For example, FDI in extractive industries can be less beneficial than FDI that promotes trade, which strengthens the host country’s links to international production networks. 

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, ADB in December 2016 will mark 50 years of development partnership in the region. It is owned by 67 members—48 from the region. In 2015, ADB assistance totalled $27.2 billion, including cofinancing of $10.7 billion.