TRADE & INVESTMENT – Hinrich Foundation Launches Sustainable Trade Index

To promote a meaningful discussion among policy makers, business executives and civil society leaders in managing and advancing international trade sustainably, a new index measuring 19 Asian countries and the US economically, socially and environmentally highlights the importance of a global trading system which can support the long-term goals of economic growth, environmental protection and strengthened social capital across the region

By Wilson Lau and Kenny Lau


International trade has been key to the economic growth of many developing countries across the globe and has been credited for moving hundreds of millions from poverty to middle-class income earners. The phenomenon is most pertinent in Asia where global trade has transformed countries into rising economic powerhouses in a region considered far less developed than North America and Europe just half a century ago. The progress as a result of international trade and economic growth, however, “is not without costs and risks,” according to the Hinrich Foundation, a Hong Kong-based NGO founded by Executive Chairman of trade media company Global Sources Merle A Hinrich to promote sustainable global trade by fostering international trade policy research, supporting trade-related education and training as well as cultivating export-led job creation.

“The flow of goods and services across borders can disrupt labor markets, accelerate environmental degradation and contribute to worsening inequality,” it points out. “With the right policies, these costs can be reduced, if not eliminated, and trade can become more sustainable.” More importantly, “sustainable global trade promotes peace between nations” by driving equality in trade development in a balanced approach and supporting open, free, transparent and fair global trade.

As such, Hinrich Foundation has recently commissioned the Economist Intelligence Unit (EIU) to compile an index measuring the capacity of various Asian countries in supporting the long-term goals of domestic and global economic growth, environmental protection, and strengthened social capital in the international trading system. The focus is on Asia because it includes the world’s two most populous countries and two of the world’s top three economies.

Covering the Greater China area, 10 member countries of ASEAN, South Asia’s four largest economies as well as Japan and South Korea while using the US as a global benchmark, Hinrich’s first Sustainable Trade Index was born out of the notion that “Asia has proved beyond a doubt the power of trade in raising people out of poverty –   contributing far more than its fair share of the billion-plus people in the past generation whose incomes have risen above the poverty line.”

“Countries understand the importance of trade to their economic prosperity, and they put a great deal of effect into preparing for the infrastructure needs of trade. But a country’s decision to become more successful in global trade should not be at all costs,” says Hinrich, founder of the Hinrich Foundation. “This index seeks to identify the full effects of trade-oriented economic expansion on a country, including the social and environmental preparations countries should make in order to expand their trading capability.”

The Index

The Sustainable Trade Index – for which numerous industry experts were interviewed – was “created for the purpose of stimulating meaningful discussion of the full range of considerations that policy makers, business executives, and civil society leaders must take into account when managing and advancing international trade.” The first edition of the index measures 19   countries in Asia across three recognized pillars of sustainability: economic achievement (profit), social effect (people), and environmental impact (planet).

The index is more than a simple ranking or survey of wealth and economic development of countries in that it not only measures their economic conditions but also their environmental and social fronts that are “necessary for trade to be sustainable.” While a country’s performance in the index is closely correlated with its wealth, there are a number of countries found to either over- or under-perform relative to their economic status when compared with other neighboring countries.

And the index is able to tell a trend about the future of sustainability in trade with past and present data for a score based on measures of how a country has performed in the past and is performing now. “It is primarily a snapshot of a country’s performance in recent years across a range of sustainability indicators, and several of these indicators can potentially suggest future performance,” notes Stephen Olson, Research Fellow of the Hinrich Foundation.

The indicators on “growth in labor force” and “educational attainment,” for example, are by definition somewhat forward-looking in nature, Olson points out. “On both these metrics, Singapore outperformed Hong Kong. Singapore was ranked 8th among all the countries on their growth in labor force, compared with Hong Kong’s near-bottom 19th place. In terms of educational attainment, Singapore came in 2nd place, and Hong Kong trailed in 5th place.

“Obviously, these are just two indicators, but there might be some useful inferences to be drawn,” he adds. “This year’s index is the inaugural edition, and future iterations of the index will have more to say about the trajectories that countries seem to be on for a comparison of performance in previous years.”

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Key findings

According to the findings, sustainable trade tracks closely with a nation’s wealth: rich countries top the index, mid-income countries fall in the middle, and low-income countries make up the bottom. But there is more: countries also over- or under-perform relative to their income in certain categories. South Korea, Vietnam and Cambodia can punch above their weight in terms of per capita GDP. China, on the other hand, has not performed as well, given that it is the world’s second largest economy.

On the very top of the overall rankings combining all three pillars is Singapore, followed by South Korea and Japan, and these are three Asian economies with rankings ahead of the US. In fifth and sixth place are Hong Kong and Taiwan, respectively, while Mainland China comes in 12th place, ahead of the Philippines and behind Vietnam, scoring poorly in environmental protection, sustainability of labor force, and educational attainment.

“Trade has been central to Singapore’s development, and no other country can match the benefits it has delivered to its citizens over the past 50 years through targeted economic policy and careful stewardship of its human and natural capital,” the report says.   But, “rising levels of inequality have attracted increasing criticism, and it ranks only seventh in terms of environmental standards in trade – an issue that is biting as its air quality suffers from actions taken by its neighbors and trading partners.”

7The economic pillar – in which Singapore tops the rank while Hong Kong comes in second place –   highlights a country’s ability to trade globally based on its current account openness, infrastructure, tariffs and technology, and economic resilience (exchange rate stability). Whether or not “a country’s export mix is suitably diversified in terms of markets and products” is also taken into account.

Countries with the best scores in the economic pillar are noted for their ability to withstand internal and external shocks with a balance of long-term resilience and near-term goals. The Asian Tigers – namely Hong Kong, Singapore, South Korea and Taiwan – are indeed among the top four economically among all jurisdictions covered in the index. Malaysia is the best performer among emerging Asian economies, tying with Japan for 6th place in this category.

Singapore and Hong Kong are known to be fierce competitors as “Asia’s pre-eminent entrepôts.” Singapore’s total trade in 2014 was over three times the country’s GDP; for Hong Kong it was more than four times. Hong Kong is a gateway to China while Singapore is a hub along a vital maritime trading route. Apart from their large ports, both economies are noted to share similarities: state-of-the-art infrastructure and logistics, world-class legal systems, low corruption, and a robust financial sector.

Developing countries in South and Southeast Asia, including Bangladesh, Myanmar and Pakistan, are at the bottom of the overall rankings. Despite the fact that they are often held back for a lack of export diversification or a failure to develop human capital, each has the potential to trade more sustainably, according to the report. Myanmar, having only recently opened its economy, is in many respects a “blank slate” in this area and is in a position to learn the most from other economies.

9In the social pillar – where South Korea, the US, and Japan rank best – countries are scored for their levels of social inequality, educational attainment, labor standards, and political stability. These are challenges facing Asia’s poorer countries – Bangladesh, Cambodia, Myanmar, Pakistan, Sri Lanka and the Philippines – where political uncertainty and instability “played a large role in discouraging spending and investment.”

The issue of inequality – of which education is named to be the single most important factor – is an important aspect of sustainable trade because it “hampers the ability of economic growth to further reduce poverty, may hollow out a country’s middle class, and might ultimately lead to political unrest,” and global awareness of labor standards among consumers in developed markets is becoming more apparent.

Countries with the best scores in the environmental pillar of the sustainable trade index generally avoid over-reliance on exports of natural resources, are minimally polluted with low carbon emissions, and pursue high environmental standards according to international and regional agreements. Wealthy and services-focused economies such as Hong Kong and Singapore excel in environmentally sustainable trade policies and practices, while both China and India score poorly due to their enormous impact of trade on the natural environment.

Although Hong Kong is notoriously known for its poor air quality due to local traffic congestion and smog flowing from neighboring China, it takes the top place in the environmental pillar largely because of its environmental standards in trade: few indigenous exports of carbon-intensive products, a good record on reforestation and acceptable standards of water pollution, according to the index. “Hong Kong does many things right and does not export environmentally unsound practices.”

China

In 12th place among 19 Asian economies measured, China’s ability to maintain international trade sustainably is questionable. It has relatively high trade costs because of corruption and a weak legal system. The country faces the growing problem of an aging population with a shrinking labor force, and lags behind in educational attainment. It is also challenged on the environmental front in terms of pollution and carbon emission as a direct result of trade.

What’s most interesting about China is its “rise to become the world’s biggest trader despite the tight control over flows of capital into and out of the country,” the report notes. “It belies arguments that open capital accounts are necessary for sustainable trade and economic growth” – a reason capital account openness is not considered a factor in the economic pillar of the index. However, some theories suggest that a gradual opening of capital accounts in China may help stimulate trade and economic growth.

“In general, if a more open capital account were to result in increased financial sector depth and improved foreign trade and payment risk, it would certainly improve China’s standing as a sustainable trade nation,” Olson says. “Indeed, these are two of the indicators included under the economic pillar. The potential downside risk would be if a more open capital account resulted in greater exchange rate volatility.”

Because of China’s “well-documented battle” in cleaning up its natural environment and slow progress in shifting from infrastructure- and manufacturing-led growth to a less pollution-intensive model, it is somewhat surprising that China is not at the bottom in the index’s environmental pillar, the report points out, citing the result of an “explicit decision to prioritize growth over environmental concerns over the last three decades.”

“Where China would really need to improve its trade sustainability – and hence its performance on the index – would be on the social and environmental pillars, where China ranked 12th and 15th, respectively,” Olson says. “More specifically, China scored especially low on the income inequality indicator (16th), air pollution (20th) and carbon emissions in trade (18th). To the extent ‘supply side structural reform’ can address any of these issues, it would be positive for China’s performance in trade sustainability.”

Although China is finding ways to tackle its environmental problems because of the massive environmental costs accumulated over the years, it may well be a “bargain” other developing countries are prepared to strike, the report adds. “It highlights that environmental sustainability becomes easier once countries evolve into wealthier service and knowledge- driven economies.”

Nonetheless, China is found to have scored well in one of the many environmental indicators of the index:   it is signatory to a number of international environmental pacts dedicated to conservation, including those related specifically to a balance between environmental protection and trade. “While China scored at the top in terms of environmental standards in trade, it ended up in 15th place overall on the environmental pillar, clearly suggesting that more needs to be done,” says Olson.

“There is no basis however to conclude that this is solely or even primarily the result of any lack of implementation of the environmental treaties it signed,” he stresses. “From the onset, it was very important to us that the index be based on relevant and reliable data, rather than judgments or opinions. Since there really aren’t any objective and reliable data points on how well any of these countries are doing in implementing the various environmental agreements, we are limited in what we can say.”

“But to be clear, true sustainability in trade requires that these environmental commitments be fully and faithfully implemented,” he adds. “We recognize that implementation and enforcement can vary widely; however, there was no objective way to capture this in the index. We view the index as a starting point for discussion – not the final word.”

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