General equilibrium analysis reveals potential for massive loss

If governments in Asia raise protectionism to the maximum levels consistent with trade agreements, $16 billion in GDP and $44 billion in exports could be lost, worsening the effects of the worldwide recession in the region’s economies.

This is the sobering conclusion of a study of how the global downturn is affecting trade between OECD countries and Asian countries. Working with the Asian Development Bank, Nathan Associates’ economists studied the effect of the downturn on the trade and published their findings in the ADB’s Economics Working Paper Series.

Employing general equilibrium simulations they showed that the trade channel is crucial in transmitting economic distress from OECD countries to developing Asia. They project that developing Asia will continue to suffer from demand decline in OECD countries, and that China and India will be the most affected. Overall, the study projects that Asian economic growth will be between 6 percent and 10 percent lower at the end of 2010 than it would have been had the OECD countries continued to grow at the same rate as the average for 2002,2007.

Fiscal stimulus from the largest economies,including China, the EU, Japan, and the United States,could boost trade and economic growth in developing Asia but will not offset entirely the effect of the recession. Sectors most likely to suffer heavy impacts include heavy manufactures followed by light manufactures, electronics, and textiles. Countries and regions that resort to protectionism may find themselves particularly vulnerable to negative effects.

Download Trade Structure and the Transmission of Economic Distress (52 pages)