Asia's Trade and the Significance of the People's Republic of China

While the macroeconomic balances display some statistical relationships between trade and synchronicity of business cycles among trading partners, developments more at the microeconomic level yield greater insights into the nature and evolution of those linkages. For instance, after conducting a correlation analysis to gauge the degree of integration among the PRC's provinces, Tang (1998) noted that treating the PRC as a single macroeconomy may be misleading in analyzing its business cycles. This can be expected to change over time, but looking at spillovers between emerging trading partners may require more detailed analysis than has been common in looking at trade linkages between Europe, Japan, and the US. Starting from the fundamentals, a closer look at trade itself may be useful.

This section first examines changes in the direction of trade flows, then turns to factors influencing their composition. Relevant characteristics of trade shipments include the content of shipments (and how those have been changing in weight and value over time), the length of shipments in both time and distance (and trade costs more generally) and how the shipments are being influenced by technology and modal interoperability, and the certainty or reliability of delivery. The significance of evolving production sharing or vertical offshoring arrangements, which have been especially prominent in Asia, is also considered. The PRC is seen to play a central role in the region's trade development.

Table 5 [ PDF 9.1KB | 1 page ] reports values of imports and exports (in billions of 2000 US$) for 11 Asian countries in 1995 and 2005 from the United Nations' Commodity Trade Statistics (COMTRADE) database. The countries are roughly grouped with the emerging markets above and the more developed Asian markets below. Aggregate trade volumes are seen to have been growing rapidly in Asia.

The export and import growth rates in the PRC and India have been exceptional. From 1995 to 2005, the PRC's exports grew at an average of 15.4% per year, while Indian exports grew at 10.4% per year. Similarly, growth in PRC imports averaged 15.2% per year and Indian imports averaged 13.6%. The result was that, in just 10 years, Indian trade tripled and PRC trade quadrupled—with the PRC becoming the largest trader in Asia, surpassing Japan's trade by a significant margin. The other countries also increased trade, but at rates generally near or below the worldwide average of 4.9% per year for this period.

Many countries have sizeable merchandise trade imbalances. The PRC had a merchandise surplus in 2005 equal to 15.6% of imports, while India's merchandise trade deficit was equivalent to 45.4% of exports. Trade imbalances are normally thought to be a concern only insofar as they reflect problems with exchange rates or with domestic savings and investment rates and, subsequently, employment. But from a broader, longterm perspective, they also matter for infrastructure and transport planning purposes, which, in turn, will affect the strength of future links between countries.

The reemergence of the PRC as a major world trading economy merits particular attention and may be most easily seen by comparing Asian trade with and without the PRC. The far right columns of Table 5 report the PRC's share in exports for each country in 2005, as well as the growth in exports to the PRC and to the rest of the world. As a destination, the PRC represents less than 10% of exports for the emerging market economies, but much more for the developed economies—over 13% for Japan, just under 22% for Korea and Taipei,China, and almost 45% of Hong Kong, China's exports. Note that these are larger shares of larger export flows from the more developed Asian economies, since exports to the PRC grew very rapidly, with rates as high as 65% per year for Taipei,China. Even the modest 6.6% annual growth for Hong Kong, China's exports to the PRC represents a very large US dollar growth given that those exports started from an already high base in 1995.

For the emerging markets and Singapore, exports to the PRC are growing fast but still represent less than 10% of aggregate exports. The consequence is that if the PRC were eliminated from the aggregate growth totals, the initial effect would be small for these economies, typically lowering export growth by one percentage point a year or less. For the remaining, more developed economies, the PRC is a major export destination, and so after netting out growth in exports to the PRC from their overall trade growth, Hong Kong, China's and Taipei,China's exports would barely grow at 1.3% and 0.4% per year, and Japan's exports would actually decline. Asia's trade with the PRC is thus seen to be important in aggregate, but its importance varies by country. More microeconomic developments will be considered below.

Table 6 [ PDF 9.3KB | 1 page ] shows five countries or regions increasing in world market share and five regions decreasing in world market share between 1990 and 2005. The exports of East Asia and the PRC prominently gained world market share (8.7 percentage points and 5.8 points respectively). The exports from East Asia to the PRC gained 2 percentage points of world market share from 1990 to 2005, with a rapid annual growth rate of 17.8% during this period. The exports of the US, Japan, and the EU experienced decreasing world market shares in the same period.

Table 7 [ PDF 12.9KB | 1 page ] presents the export value and shares of intra-regional and extra-regional trade for East Asia and regional trade agreements in other regions. The EU and NAFTA experienced slightly lower growth rates (6.1% and 6.9%, respectively) than the annual growth rate (7.7%) of world exports between 1990 and 2005. All regions in the table experienced an increasing dependence on intra-regional trade except the EU15 which saw a slight decline in the share of intra-regional trade in its total exports.³

Intra-regional trade for East Asia accounted for 42.2% of its exports in 2005, and increased marginally more rapidly than extra-regional trade. Its annual growth rate from 1990 to 2005 was 13.4% versus 10.4% for extra-regional trade. The growth rate for intraregional trade in East Asia also far exceeded growth of intra-regional trade for NAFTA (9.0%), EU15 (5.4%), and Mercado Común del Sur (MERCOSUR) (11.5%). Indeed, the rapid increase in intra-regional trade flows formed a solid basis for the high synchronization of business cycles in East Asia (Shin and Wang 2004).

As for Asia's manufacturing trade, however, the intra-regional share of final manufacturing exports in developing Asia actually declined from 35.8% to 31.8% between 1992/1993 and 2005/2006 (Table 8 [ PDF 32.8KB | 7 pages ] and Athukorala 2008). This decline was driven by the PRC, whose intra-regional export share declined from 42.9% to 25.8% in this period, reflecting its rising role as a final goods assembler for extra-regional markets. Most other Asian countries have exhibited a mild increase in intra-regional trade, but still rely on extra-regional markets for more than 50% of their final manufacturing exports. While the difference between intra-regional shares of total trade and final goods trade is observable for both exports and imports, the magnitude of the difference is much larger on the export side. The difference in magnitude between regional trade shares estimated in gross and net terms is much larger for countries in Southeast Asia than for the entire region. Unlike in East Asia (or developing East Asia and AFTA), the estimated intra-regional trade shares for NAFTA, the EU, and the other regional groupings are remarkably resilient to including or excluding trade in components.

The estimates for different developing Asian sub-regions clearly show that intra-regional trade within Association of Southeast Asia Nations (ASEAN) is rather low compared to the average for broader Asia (including or excluding Japan). In 2005/2006, of the total manufacturing exports of ASEAN, only 19.4% were to markets in the subregion. The comparable figure for imports was 28.5%. When parts and components are excluded, these figures decline to 19.5% and 25.4%, respectively. Among the 6 major ASEAN countries, Viet Nam has the lowest intra-regional trade share. Even the three newer ASEAN member countries (Myanmar, Cambodia, and Lao PDR, reported as “Other SEA” in Table 8), appear to rely heavily on extraregional markets for both export and import trade, despite their strong cross border trade flows with Thailand. In 2005/2006, trade within ASEAN accounted for only 26.7% and 37.2% of their total non-oil exports and imports.⁴

Interestingly, a comparison of intra-regional import and export shares reveals a startling asymmetry in the degree of measured trade integration among developing Asian countries. Unlike the EU and NAFTA, in East Asia, the increase over time in the intraregional trade ratio has resulted largely from the rapid increase in intra-regional imports; intra-regional export expansion has lagged consistently behind. In 2005/2006 intraregional import flows amounted to 58.6% of total manufacturing imports of developing Asia, up from 41.5% in 1992/93. The intra-regional share in total regional exports was, however, significantly lower: 37.7% in 1992/1993 and 40.0% in 2005/2006. In other words, the region is much more heavily dependent on extra-regional trade for its growth dynamism than is suggested by the total regional trade share, and this dependence has remained virtually unchanged for the last decade. The magnitude of this asymmetry remains virtually unchanged when we remove parts and components from total trade (see section d of Table 8). In other words, the widely reported aggregate (exports plus imports) intra-regional trade shares deflect attention from the continuing importance of extraregional trade for growth dynamism in East Asia.

1. Recent Patterns in Asia's Trade Flows

Key characteristics of Asia's trade are changing over time, with implications for the strength of shock transmission and the mechanisms through which that transmission operates. Notable among these characteristics are the trade content, costs (as influenced by length in time, distance, and their interaction), and reliability of delivery. The role of production fragmentation and the significance of the PRC in this process have important implications.

Closely related to changes in the composition of trade have been changes in transportation technology, most notably in air freight and containerization. Multimodal shipping and improvements in logistics services have facilitated trade expansion to more destinations in less time, often at lower monetary cost (Brooks and Hummels forthcoming 2009). Hummels (2007) estimated that increasing the share of containerized trade lowers shipping costs from 3% to 13%. However, these savings were outweighed in the 1970s by sharp increases in fuel and port costs, and again in recent years by increasing fuel costs and port congestion in countries with rapidly growing trade volumes.

Following changes in technology, production, and consumption, the balance of trade between merchandise and services is shifting. More generally, the weight-to-value ratio of trade is declining, both within merchandise trade and in trade more generally. The telecommunications and internet revolution has led to growing trade in information and technology, services outsourcing, and migration of highly skilled professionals. The declining weight-to-value-of-trade ratio is a primary factor in influencing transport modal choice, length and destination of trade flows, and production processes.

2. Distance and Destination

Roughly a quarter of world trade takes place between countries sharing a common border and half of world trade occurs between partners less than 3,000 kilometers apart (Berthelon and Freund 2004). For air shipping, advances in technology have propelled a sharp decline in costs: average revenue per ton-kilometer shipped dropped by a factor of 10 between 1955 and 2004 (Hummels 2007). As air transport costs drop relative to ocean transport costs, long distance trade becomes relatively more attractive, and diversification of export destinations becomes broader. As the weight-to-value ratio of traded goods becomes lower (and, similarly, for the ad valorem share of trade costs in delivered goods prices) this pattern is reinforced.

Asia's trade is expanding at both the extensive and intensive margins. Consider PRC exports, where the number of shipments and mean shipment size are growing rapidly, as are 90th percentile shipments, while median shipment sizes are falling. Although the PRC has experienced tremendous growth in new shipments, these tend to be very small. At the same time, established flows that were already sizeable in 1995 have grown larger still, increasing the mean shipment size. The pattern across other countries is similar—median shipment sizes are falling while mean shipment sizes are rising (or in some cases, both are falling, but medians are falling faster) (Hummels forthcoming 2009). Diversification is rising at the extensive margin, but susceptibility to shocks is not necessarily declining due to the growth at the intensive margin.

Still, the development of new, small trade flows is encouraging. Besedes and Prusa (2003, 2004) used survival analysis to show that new trade flows suffer high failure rates, but those that do survive go on to increasing trade shares. Creative destruction is alive and well in international trade.

3. Production Fragmentation

As discussed above, greater trade is positively correlated with greater synchronization of business cycles. But when trade is indirect, involving multiple countries in the production of a final good, the relationship becomes more complex. Recent decades have seen rapid growth in international vertical specialization, a process by which firms separate the stages of production (research and development, component production, and assembly) across countries according to comparative advantage. This production sharing accounted for more than one-third of world export growth between 1970 and 1995 (Hummels, Ishii, and Yi 2001) and may have deepened the linkages between economies.

In an examination of US-Mexico trade involving maquiladora production fragmentation, Burstein, Kurz, and Tesar (2008) focused on manufacturing industries which have higher trade shares; they showed that increasing trade has a bigger impact on GDP correlations in the presence of production-sharing trade. The authors found that business cycles are more synchronized between pairs of countries with a higher share of international trade in inputs utilized in the production of vertically integrated goods than between pairs of countries where trade was dominated by inputs used to produce horizontally differentiated goods. They interpreted the difference between these two correlations as evidence that firms engaging in production sharing exhibit a lower elasticity of substitution between home and foreign inputs relative to other firms. This complementarity in the production of vertically integrated goods dampens substitution effects stemming from aggregate shocks to relative costs across countries. A key assumption in this model is that the elasticity of substitution between home and foreign intermediate goods is relatively lower if there is a production-sharing arrangement between locations.

Trade related quantity effects are accompanied by changes in relative prices, but as might be expected, the effects are not symmetric. Bergin, Feenstra, and Hanson (2007) demonstrated the higher volatility of production-sharing industries in host economies relative to source economies.

Although production-sharing arrangements across Asia have given a strong impetus to regional integration since the 1990s, such integration is structurally linked to the business networks of multinational corporations. Decomposition of changes in trade shows that more than 70% of intra-Asian trade consists of intermediate goods used in production, and of this, half is driven by final demand outside Asia. Consequently, about 61% of total Asian exports (instead of 43% of total exports, as indicated by the more aggregated data) is eventually consumed in the G3 (ADB 2007).

Developing Asia's rapid growth in intra-regional trade over the past decade or so, driven largely by trade in parts and components within regional production networks, takes place mostly among the region's high-performing economies (and feeds back into that high performance), with much of it linked to the PRC. Trade in final goods originating in these production networks is driven predominantly by extra-regional demand. In other words, extra-regional trade is still essential for continued growth dynamism in East Asia, both including and excluding Japan (Athukorala 2008).

For all East Asian countries, the share of components in both intra-regional exports and imports have increased at a much faster rate than in extra-regional exports and imports. These patterns are in sharp contrast to those observed for NAFTA and the EU15 (as well as total global trade). In both regions, the shares of intra-regional trade in total manufacturing trade (on both the export and import sides) and in component trade imports remain broadly similar in magnitude.

Athukorala (2008) demonstrated East Asia's heavy reliance on international exchange based on production fragmentation. In 2005/2006 intra-regional exports accounted for 40% of total manufacturing exports. The comparable figure for intra-regional component exports was 60% of total component exports. The intra-regional share in component imports is even larger. These component import and export shares are much higher than those in NAFTA and the EU15 (as well as in overall global trade). Moreover the intra-regional shares in total component imports and exports grew faster between 1992/1993 and 2005/2006 than those in total imports and exports. The increase in component intensity has been particularly noticeable in Southeast Asia's trade with other developing East Asia economies, the PRC in particular. Korea and Taipei,China are also involved in sizable cross-border trade with other countries in the region.

Kimura, Takahashi, and Hayakawa (2007) found that geographical distance penalizes machinery parts and components trade much less in East Asia than in Europe. This implies that service link costs for fragmentation are substantially lower in East Asia than in Europe, contributing to large differences between the two regions in the development of international production and distribution networks, and differences in the transmission of business cycle influences.

Download this Paper [ PDF 287.6KB| 40 pages ].

Post a Comment

We welcome your feedback on this publication. Post a comment. ADBI is not obliged to acknowledge or publish comments and may abridge or edit them before web posting.

Comment(s)

There are [0] comment(s) for this entry. Post a comment.