Conclusions

The fast-growing Asian region and its potentially enormous economic power raise the hope that its own growing demand may help it both weather the adverse consequences of a US slowdown and ease the impact of a global downturn. At the same time, trade is growing, and growing lighter; exports are expanding primarily by reaching new markets with smaller shipments; and fragmented production networks are becoming the norm. All of these changes put a premium on speed, flexibility, and information, increasing the potential for the transmission of shocks between trading partners.

Much intra-Asian trade is conducted by multinational corporations and their affiliates in the form of intra-firm and intra-industry trade that involves fragmentation of production. The production networks in Asia respond to demand from consumers outside the region rather than being independent of them. Therefore, the G3 economies are still an important source of external demand for Asia, and the region remains vulnerable to shocks from major trading partners. Analysis of business cycle comovements, both within Asia and between the G3 and Asia, and examination of production fragmentation structures generally affirms the linkage between growth in the G3 and Asia.

There is clear evidence pointing to increasing business cycle comovements among Asian economies, particularly between the PRC and the rest of Asia. But there is no mutual exclusivity between intra- and inter-regional economic integration—it is not one or the other. In fact, deepening regional integration appears to reinforce Asia's integration into the world economy. For this reason, Asia remains exposed to cyclical downturns in other regions.

In recent years, there has been little or no evidence that Asia has decoupled from G3 business cycles. In the post-crisis period, strengthening regional ties appear to reinforce business cycle comovements between Asia and the G3, despite the fact that intra-regional trade and financial linkages have, in general, risen more rapidly than extra-regional ones. Underlying this regional interdependence is the structure of rising intra-Asian trade, which is centered on the PRC as a production platform. At the center of multinational corporation regional supply networks, the PRC is important in boosting both intra- and inter-regional trade. But this central role has deepened economic interdependence between the PRC and the rest of Asia as well as between the PRC and the G3.

An important task for future research is to assess the robustness of these observations using detailed data on production sharing, including arms-length transactions, and with more information on the extent of substitutability between production processes and inputs from alternative sources. Greater analysis of the extent to which shock transmission occurs asymmetrically between import and export channels may also help to enhance our understanding of how Asian trade affects global linkages.

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