Building for Trade
ADBI series on Asian Economic Integration and Cooperation
Edited by Douglas H. Brooks and David Hummels
Chapter 1: Infrastructure’s Role in Lowering Asia’s Trade Costs
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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