Introduction

The reemergence of Asia as manifested in its growing share of global economic power has drawn attention, particularly within the region, to the possibility of the area decoupling its vulnerability from sharp impacts created by business cycle fluctuations in other parts of the world, particularly in North America. An increasing sense of self-reliance has been reinforced by the rise of intra-regional trade within Asia's export profile. At the same time, the region's growing share of world trade, the importance of trade to Asia's growth, and the close connection between globalization and the region's participation in geographically fragmented production chains are strengthening trade links between developing Asia and the Group of Three (G3) economies.¹ The opposition of these two countervailing influences has called their relative balance into question.

Initially, international trade connects countries through the flow of goods and services and the compensatory flow of finance to pay for those goods and services.² Trade also connects countries through transfers of capital goods to substitute for or produce traded goods. In addition, traded goods and their production often involve the international extension of externalities such as transfer of information or impacts on demand for substitutes or complements. At the aggregate level, the terms of trade, exchange rates, and macroeconomic balances or growth rates may be influenced.

This paper presents a brief overview of the ways in which international trade links trading partner economies and how these linkages have changed in recent decades. It looks first on the macroeconomic linkages where trade enters economic models primarily through one or two lines in the balance of payments. It then explores changes in the microeconomic foundations of trading patterns to see how demand patterns, changes in product characteristics, transportation technology, and general trading environment influence the transmission mechanisms through which macroeconomic trade linkages operate. Two particular factors of great importance for Asia—the reemergence of the People's Republic of China (PRC) and production fragmentation—are discussed in greater detail.

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