Asia's Trade Flows: A Rising Trend

Trade volume in Asia has been rising fast since the early 1970s. Asia today contributes one fourth of world trade in goods, after Europe (Table 1 [ PDF 84.1KB | 1 page ]), where about 50% of Asia's exports are conducted within the region (Table 2 [ PDF 142.8KB | 1 page ]). In parallel to growing intra-regional trade, Asia's inter-regional trade has also grown over time. Europe (18.4%) and North America (21.4%) have become the two largest destinations of Asia's exports (Table 2 [ PDF 142.8KB | 1 page ]). The growth of the PRC's trade is unparalleled. With a world share of about 7% in 2006, the PRC is driving Asia's exports, be they intra-regional or otherwise. India's rise in the late 1990s has further fuelled Asia's trade. There have been some important and distinct changes in Asia's trade patterns.

First, serving the growing international demand of goods and services over the last several decades, Asian economies have undergone a structural change from labor-intensive to capital-intensive technology-driven industrial production. Asia's trade is now conducted more in manufactures than services.

Second, Asia's trade in manufactures is quite large and there has been a sharp expansion in trade in most manufactures from Asia. Unlike exports in agriculture and fuels and mining products, exports in manufactures are mostly concentrated in Asia. Countries in Asia are gradually specializing in trade in intermediate and capital goods. Table 3 [ PDF 173.4KB | 1 page ] shows that about 33% of world exports in manufacturers in 2006 (US$2.68 trillion) was contributed by Asia, increased from about 29% (US$1.36 trillion) in 2002. Except for trade in food and fuels (which reduced marginally in last five years), a large part of trade in manufacturers is increasingly sourced from Asia. In some manufactures, Asia is the single major source. For example, about 68% of world trade in integrated circuits (US$267 billion in 2006) originated in Asia, which was about 58% in 2002. Office and telecom equipment and textile and clothing are the two major commodity groups that dominate Asia's exports to the world. Asia's share in world exports in manufactures ranges from lowest 7% in pharmaceuticals to highest 68% in integrated circuits.

Third, the changing composition of Asia's trade has become an important issue. Integrated circuits has the highest share (78.33%) in intra-Asia exports in manufactures, whereas the personal and household goods has the lowest share (20.42%).. Intra-Asia exports in agriculture and fuels and mining products are even less than their exports to the world.

To summarize, a majority of traded products in Asia are intermediate and capital goods, feeding a country's production (import demand) where variations in trade cost elements, could be crucial for the region's competitiveness in manufactures (Kuroiwa 2006). Pan-Asian connectivity would, therefore, play an important role in sustaining Asia's trade growth. Sustaining growth would also require better, faster, and more reliable connectivity for those goods which are transport-intensive, demand-driven, and traded more than others. To evaluate pan-Asian transportation needs, it is useful to evaluate the weight-value ratio and barriers to trade (tariff vs. transport costs). This issue is discussed in the next section.

2.1 Weight-Value Ratio of Trade in Asia

The weight-value ratio of a product is the major determinant of transport cost. Hummels and Skiba (2004) concluded that a 10% increase in product weight-value leads to a 4% increase in ad-valorem shipping cost. Most Asian countries are net importers of weights in merchandise trade (De 2009). The variations in weight-value ratio would help us evaluate the transportation needs in Asian countries more precisely. We report the weight-value ratio (measured in twenty-foot equivalent unit [TEU] per US$10,000) for each country's imports in Table 4 [ PDF 98.1KB | 1 page ].

First, it appears that the heavier the goods, the larger the transportation cost is, except in Japan. As Japan is a developed economy, it imports much less weight, implying less transport congestion and subsequently less transportation costs due to its relatively superior quality of infrastructure.

Second, Asian countries have higher trade in automobiles and transport equipment. As a result, transport equipment across all Asian countries has a high weight-value ratio. Japan shows the highest weight-value ratio (1301.10) in automobiles and transport equipment.

Third, the PRC's imports are comparatively heavy in transport equipment, electrical and electronics, automobiles and components, food products, and leather, which are basically heavier raw materials and intermediate products used as inputs for high value production and exports by the PRC. In contrast, except for transport equipment, automobiles and components, and electrical and electronics, Japan's imports are mostly low weight finished products.

Fourth, all the Asian countries considered here (except Japan) are importers of weight of semi-finished capital goods and raw materials.

2.2 Tariffs vs. Transport Costs in Asia's Trade

The significance of studying a pan-Asian transportation network is that prices of the vast majority of traded goods are exogenous (uncontrollable). On one hand, Asia conducts increasingly higher trade, and higher trade costs mean landed price of imports (or exports) is more expensive. On the other hand, Asia's trade covers an increasingly large number of intermediate and capital goods, and expensive trade resulting from higher trade costs escalates the cost of production (Hummels 2009).

With this rising trade, Asia is witnessing a reduction in tariffs in manufactures. However, unlike developed economies, transport costs continue to impede the trade in Asia.

Propensity to increase trade is likely to be higher with the reduction of transport costs, rather than tariff reduction (see De 2008a, 2008b). Tariffs in Asia, although showing a declining trend, are still a crucial barrier to trade,⁵ and except transport equipment, which is classified as project goods used for infrastructure development, trade in all other sectors is influenced by tariffs, transport costs, and infrastructure quality.⁶ This can be seen in Figure 1 [ PDF 41.5KB | 1 page ]. The congestion at the origin and high dispersions in Figure 1 clearly indicate that both tariffs and freight rates in Asia are high. Therefore, Asia's integration agenda has to expand beyond tariffs.

On the demand side, Asia has been witnessing a sharp rise in merchandise trade and has been showing greater regional trade interdependence on a large variety of goods. However, on the supply side, lack of regional connectivity has continued to impose higher trade costs, thus impeding trade growth and eroding the benefits of trade liberalization in Asia. There is potential for improving regional transport networks to reinforce regional production and trade. Any attempt to deeper integrate the economies of the region thus holds high promise if accompanied by initiatives that help integrate the region through improved cross-border transportation networks.

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