Slowing growth in Asia won't derail trade liberalization

Even before the recent Chinese stock market turmoil, Asian economic growth had been slowing. The 9.3% and 8.6% growth rates achieved in 2007 and 2010-the pre- and post-global recession peaks, respectively-are now painfully out of reach: IHS is projecting this year's growth for Asia, excluding Japan, at 5.6%.

In other parts of the world, governments would respond to the threat by trying to nurture their industries with new trade barriers. But in Asia, the protectionists haven't barred the gates. Instead, diplomats are doing what most macroeconomists say they should do: negotiating even more free trade agreements.

The motives and destinations, however, are changing. China and South Korea, for example, once mostly pursued free trade agreements with wealthier countries to gain access to bigger markets for their exports. Now that they are global industrial powerhouses, however, their domestic labor costs have risen, adding a new rationale for the pursuit of free trade: relocation of manufacturing production to lower-cost countries.

Chinese manufacturers, for instance, see bargains all around them. In 2001, the average Chinese worker earned about 73% of what a Thai did. By 2006, Chinese average wages exceeded the Thai equivalent; by 2013, they were 81% higher. Similarly, China's manufacturing wages are 159% higher than Vietnam's, and 256% higher than Indonesia's.

As good as offshore production can be for Chinese and Korean manufacturers, it may be even more important for countries with cheaper labor markets, such as Vietnam and India-both may be in for the kind of growth opportunity China and South Korea experienced over the past three decades. Already, Vietnam is benefiting from heavy investment and technology transfer by Samsung, the South Korean tech giant. Thanks to Samsung's investment, Vietnam's top exports are no longer clothing and footwear but telephones and related components.

In addition to these new opportunities for labor arbitrage and technology transfer, IHS expects to see a gradual shift in the trade agenda toward more service-related agreements. Liberalization and integration in this area will soon become a necessity if Asia's increasingly complex multi-country value chains are to be managed effectively.

So far, at least, this seems to be the regional game plan. New trade initiatives, such as ChAFTA (the China-Australia Free Trade Agreement) and the ASEAN Economic Community, will place a much greater emphasis on easing barriers in areas beyond merchandise trade such as investment and services- precisely where it would help the most. If these initiatives stay on track, adequate follow-through and proper implementation of a new wave of trade agreements could unleash a new era of rising productivity in Asia.

Simona Mocuta is director, global economics, IHS Economics