Asia's Export Day of Reckoning More competitive domestic markets will spur growth.

Whatever else you might say about the global economy, these are not the best of times to be an Asian exporter. From South Korea to Japan, Taiwan, Vietnam and China, exports are weakening. This is a potential crisis in the making for East Asian policy makers, who depend on shipments overseas to fuel growth. It is not a crisis they should waste. *** The most recent numbers are notable. Japan's exports in November fell 4.6% year-on-year, after a decline of 3.9% in October. In Korea, January exports were 6.6% lower than in January last year. For Indonesia, exports excluding natural resources fell slightly overall in December month-on-month. Slack overseas demand has helped tip Taiwan into a recession. As for China, export orders fell in December, leading to skittishness among manufacturers and the government. Some of this is due to Mother Nature. Last year's devastating earthquake, tsunami and nuclear disaster in Japan knocked some exporters, and a 50-year flood in Thailand had a similar effect. But one-off shocks are only part of the problem. Leaders need to recognize that Asia's traditional export markets in the U.S. and Europe are facing a weak recovery and rolling debt crisis, respectively. It's time for Asia to prepare for the possibility that those overseas markets may not be able to absorb enough Asian products to drive regional growth as they previously have. This would have profound effects for Asia, both economically and politically. The region is not export-dependent by accident. For half a century governments have deployed a range of policiesfrom subsidies to trade protection to regulationto encourage exporting at the expense of domestic consumption. Over that time, Asia has sprouted a class of businessmen and bureaucrats devoted to working the system. Exporting factories receive subsidized credit. Government officials enjoy the powerful feeling of being able to direct whole industries (and the corruption opportunities that often go with it), and even foreign investors in export-oriented industries have grown accustomed to government favoritism. As long as incumbents were able to profit from exports, there was little impetus to change. Enlarge Image

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Getty Images An aerial view of Johor's Tanjung Pelepas Port. The policy alternative is to encourage greater domestic consumption. This is often discussed, especially now in China, but rarely acted on. The decline in export revenues provides an opportunity for a rethink. As Asia has become more democratic voters may also demand a change to keep their countries on a faster growth track. Leaders should be on the lookout for new policies to meet changing circumstances. One of the most important is opening domestic markets to greater competition. Asia has benefited from the openness of the U.S. and Europe to its products. Now Asia needs to pursue strategies that will open itself to trade. South Korea seems to have grasped this earlier than most, as evidenced by a half-decade of enthusiasm for trade negotiations, culminating in significant free-trade agreements with the U.S. and European Union that now are coming into effect. These deals will open the Korean economy to an unprecedented degree of foreign participation, offering Koreans new opportunities to consume while also spurring new foreign-led investments to create growth and jobs in the domestic market. Tokyo, a relative latecomer, now says it is interested in joining negotiations for a Trans-Pacific Partnership multilateral trade deal that would have a similar effect in opening up Japan. But China remains a chronic laggard as it falls behind in implementing its agreements under the World Trade Organization. This denies Chinese of a full range of consumption opportunities at home, and it cuts the economy off from foreign investment that could create sustainable domestic growth as the old model of investing heavily in factories, roads and bridges breaks down. Other reforms are also necessary. Southeast Asia's domestic economies are dominated by family-controlled vertical conglomerates that rely on government protection. Dubbed "ersatz capitalism" in the 1980s by economist Kunio Yoshihara, this is why it's rare for entrepreneurs to make the list of the region's richest men as happens regularly in Europe and North America. Tearing down barriers to entry and making regulatory and tax systems more transparent and predictable would make it easier for entrepreneurs to emerge. *** East Asia led the developing world in growth by dumping notions of import substitution and self-sufficiency and instead concentrating on growing exports to the West. Now it's time for governments to take the next step and stop focusing on exports to the exclusion of other growth drivers. Recent dips in export numbers, which may or may not turn out to be temporary, are a warning that if leaders don't choose to diversify now, events may choose for them later. Printed in The Wall Street Journal, page 16

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