Infrastructure’s Role in Lowering Asia’s Trade Costs

Infrastructure’s Role in Lowering Asia’s Trade Costs

Building for Trade

ADBI series on Asian Economic Integration and Cooperation

Edited by Douglas H. Brooks and David Hummels

This book analyses and draws policy implications from infrastructure’s central role in lowering Asia’s trade costs.

Chapter 1: Infrastructure’s Role in Lowering Asia’s Trade Costs

Douglas H. Brooks

Subjects: asian studies, asian development, development studies, asian development, development economics, economics and finance, development economics


Douglas H. Brooks Infrastructure services can reduce distribution margins, narrowing the gap between prices faced by producers and consumers, and thereby facilitating welfare improvements for both. On the supply side, the expansion or quality improvement of infrastructure services can lower marginal costs, raising the minimum efficient scale of production, transportation, or marketing. These lower costs and greater economies of scale raise the potential for increased sales overseas, as well as domestically. Indeed, a significant part of infrastructure’s contribution to growth and poverty reduction in Asia comes through its facilitation of international trade expansion. It expands both the scope for domestic absorption and supply to export markets, while stimulating linkages with and between different sectors and industries, and encouraging innovation. Asia benefits from market-driven integration, where large trade and FDI (foreign direct investment) flows respond to infrastructure development, outward-oriented policies and international production networks. Both Asian and non-Asian multinational corporations have developed international supply chains in the region. Financial integration has supported these developments by increasing access to credit and innovative financial instruments. Tariffs and quotas have been reduced under successive rounds of multilateral negotiations under the General Agreement on Tariffs and Trade (succeeded by the World Trade Organization) and the recent plethora of bilateral and regional trade agreements, and openness to FDI is promoted. In this economic environment infrastructurerelated trade cost reductions have become relatively more important than direct policy barriers as sources of further cost savings (Brooks et al., 2005). Efficient infrastructure...

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