Trade exposure and the dynamics of regional integration

Abstract

An export-led growth strategy is considered as a sustainable path to growth, and yet many countries are not exporting to their full potential. A country's inability to export to its potential is a reflection of institutional and structural impediments and rigidities at home as well as in its trading partners. As a strategy to overcome these socio-political and institutional barriers, countries engage with each other to improve the exporting environment through negotiating trade agreements. In order to highlight a country's obstacles in realization of its export potential and strategy to overcome these socio-political-institutional barriers through regional agreements, this thesis explores empirically the presence of such barriers and tests the dynamics of regional integration by carrying out four empirical studies. The first study deals with estimating Australia's export potential as it is relatively open among the resource-based developed economies for empirical testing. A major link between export growth and trade agreements is the flow of Foreign Direct Investment (FDI), mostly from the developed economies. Therefore, in order to find the impact of FDI on economic growth, the second study conducts an empirical analysis of six FDI recipient emerging countries. The third and fourth studies gauge the positive and negative impacts of regional integration on economic growth of member countries. The third study analyses the long-term impact of exports and FDI on output growth among the Association of Southeast Asian Nations (ASEAN), ASEAN plus 3 and ASEAN plus 6 groupings. The fourth study identifies the relative importance of shock propagation channels in EU, NAFTA, ASEAN plus 3, MERCOSUR and SAARC and tests the empirical findings for each region by observing the regions' responses to the recent idiosyncratic shocks of 2007 and 2008. The first study examines Australia's export potential and explores whether Australia is realizing its full export potential. A country's inability to realize its full potential is an indication of presence of 'behind the border' constraints influencing negatively a country's exports. The empirical analysis indicates that even in the case of Australia, which is relatively open among the resource-based developed economies, 'behind the border' factors are important to explain the reasons why it does not export its full potential. The impact of FDI on economic growth is found in the second study by conducting an empirical analysis on six FDI recipient emerging countries, Chile, India, Mexico, Malaysia, Pakistan and Thailand, as FDI flows mostly from the developed economies. The study explores the dynamic relationship between exports, FDI and GDP and given that these countries are at different stages of growth, the impact of FDI and exports on economic growth is identified at different stages of growth in both the short and long-term. The third study examines the long-run impact of exports and FDI on output growth among the Association of Southeast Asian Nations (ASEAN), ASEAN plus 3 and ASEAN plus 6 groupings as despite having bilateral and multilateral trade agreements, most of the countries are also linked directly or indirectly as members of regional trade blocs. However, each regional grouping has different characteristics due to the interplay of the forces of regionalism and regionalization. The study indicates the presence of positive impact of FDI and export on output growth in ASEAN and ASEAN plus 3 countries and finds no long-run relationship between FDI and export on GDP growth in the ASEAN plus 6 grouping. As there are risks associated with increased regional and global integration that result in the exposure of economies to shocks from external markets, the fourth study explores the relative importance of shock propagation channels in various regions, namely MERCOSUR, EU, ASEAN+3, NAFTA to the recent idiosyncratic shocks of 2007 and 2008. Trade and financial integration are identified as the two most important idiosyncratic shock transmission mechanisms. The empirical analysis shows that in the EU, ASEAN+3, NAFTA and MERCOSUR, GDP has a short term causal relationship with financial variable and any reversal in financial flows could affect the regions GDP negatively. In addition, only in the MERCOSUR and SAARC regions, GDP has a causal short term relationship with goods exports and any negative goods export shocks affects only these two regions GDP and that too depends on the level of exposure to the shock-originating country. Therefore, economic integration not only helps promote export growth and attract FDI but may also lead to greater volatility in output from negative shocks. The response of each region to these shocks may differ depending on the special characteristics of each region, type of shock and shock transmission mechanisms. The thesis highlights that besides benefits of enhanced growth due to regional agreements, there are also risks associated with regional integration. Furthermore, each region has special characteristics that needs to be identified and this thesis highlights the weak links in different regions due to which the recent financial crisis spread to different regions by analysing the idiosyncratic shocks of 2007 and 2008