Precrisis Trade Patterns

The decoupling thesis is based on the traditional notion of horizontal specialization according to which international trade is an exchange of goods that are produced from start to finish in just one country. It ignores the implications for trade flow analysis of the ongoing process of international production fragmentation the breakup of the production processes into geographically separated stages and the increasingly important role played by the PRC and other East Asian countries in the resultant global production network. In a context where fragmentation-based trade is growing rapidly, trade flow analysis based on the assumption of horizontal specialisation can lead to misleading inferences about the nature and extent of trade integration among countries for three reasons.

First, in the presence of production fragmentation, trade data are double-counted because goods in process (components) cross multiple international borders before becoming embodied in the final product. Thus, the total amount of recorded trade could be a multiple of the value of final goods. Second, and perhaps more importantly, trade share calculated using reported data can lead to wrong inferences as to the relative importance of the “region” and the rest of the world in terms of dynamic growth, even controlling for double counting in trade. This is because trade in components (“fragmentation trade”) and trade in related final goods (“final trade”) are unlikely to follow the same patterns. Third, the intra-regional trade ratio, estimated by lumping together imports and exports, tends to hide a significant asymmetry in regional trade patterns for imports and exports, where trade in components is growing rapidly. These considerations are far more important for trade flow analysis in East Asia compared with total global trade or the trade patterns of NAFTA, EU, or any other region in the world. While fragmentation-based specialization is growing and now a global phenomenon, such trade is both far more important and growing more rapidly in East Asia than elsewhere in the world (Athukorala 2005, Athukorala and Yamashita 2009, Ng and Yeats 2003).

Rapid export growth in Asia over the past half a century has been underpinned by a pronounced shift in the structure of exports, away from primary commodities and toward manufactures (Table 1 [ PDF 10.2KB | 1 page ]). By 2007 manufactures accounted for 87.4% of total exports from Asia, up from 78.3% three decades ago. Within manufacturing, machinery and transport equipment (SITC 7) (henceforth referred to as ‘machinery') has played a pivotal role in this structural shift. Within machinery, there has been a heavy concentration of exports in information and communication technology (ICT) products and electrical goods which together accounted for nearly three fourths of total exports from the region in 2007.² Export dynamism in these product lines has been driven by the ongoing process of global production sharing and the increasingly deep integration of East Asian countries into the global production networks. As can be seen in Table 2 [ PDF 13.5KB | 1 page ], trade in parts and components accounts for a much larger share of manufacturing exports from East Asia compared with the rest of the world.³

2.1 Intra regional trade patterns

Intra-regional trade shares of East Asia, and its major subregions, as measured using the standard trade data (that is, trade data which does not make a distinction between parts and components and final trade) are reported in Table 3 [ PDF 9.2KB | 1 page ]. Intra-regional shares are given separately for exports and imports in order to illustrate possible asymmetry in trade patters resulting from East Asia's increased engagement in fragmentation-based international exchange. The series for the entire East Asian region⁴ are plotted for Figure 1 [ PDF 14.6KB | 1 page ].

It is common in the available studies on trade patterns in the region to use the intraregional share of total trade as a measure of regional trade integration⁵. The time pattern of this indicator is of course consistent with the view that East Asia has become increasingly integrated through merchandise trade. During the two decades from 1986/7 to 2006/7 the share of intra-regional trade (the total of imports and exports) as a percentage of the total non-oil trade in East Asia increased from 34.4% to 52.1%. The level of intra-regional trade in East Asia was higher than that of NAFTA throughout this period and was rapidly approaching the level of EU-15)⁶. For developing East Asia (East Asia excluding Japan) and ASEAN +3⁷, the ratios are lower than the aggregate regional figure, but those ratios have increased at a much faster rate. The share of total trade for intra-regional trade of ASEAN has been much lower compared with the other two subregions. When East Asia's total trade in disaggregated into primary products and manufacturing, primary trade seems to have a greater intra-regional bias compared to manufacturing trade. However, the pattern of intra-regional shares of manufacturing trade is stinking similar to that of total trade given the rapidly diminishing share of primary products in total trade.

The intra-regional shares calculated separately for imports and exports clearly illustrate the risk of making inferences about regional trade integration based on total trade (imports plus exports) data. There is a notable asymmetry in the degree of regional trade integration in East Asia. Unlike in the EU and NAFTA, in East Asia the increase over time in the intraregional trade ratio has emanated largely from rapid increases in intra-regional imports; the expansion of intra-regional exports have been consistently slower. The dependence of East Asia (and its individual countries) on extra-regional markets (in particular those in NAFTA and the EU) for export-led growth is far greater than is revealed by the standard intra-regional trade ratios commonly used in the debate of regional economic integration. For instance, in 2006/7 only 44.5% of total East Asian non-oil exports were absorbed within the region, compared to an intra-regional share of 62.7% in total non-oil imports. For developing East Asia the comparable figures were 34.4% and 47.0% respectively. This asymmetry is clearly seen across all sub-regions within East Asia. In sum, the region is much more heavily dependent on extra-regional trade for its growth dynamism than what is suggested by the total regional trade share.

This asymmetry in intra-regional trade in East Asia reflects the unique nature of the involvement of Japan and the PRC in regional production networks. From about the late 1980s Japan's relations in manufacturing trade with the rest of East Asia has been predominantly in the form of using the region as an assembly base for meeting demand in the region and, more importantly for exporting to the rest of the world (Athukorala and Yamashita 2008). The emergence of China as a leading assembly center within regional production networks since the early 1990s further amplified this trade asymmetry; the PRC is importing parts and components from the other East Asia countries to assemble final products which are predominantly destined to markets in the rest of the world (Athukorala 2009).

So far we have examined the asymmetry in export and import trade patterns resulting from the growing importance of regional production networks. Now we turn to examining implications of growing network trade for both the asymmetry and the actual magnitude of trade integration, focusing on manufacturing trade. For this purpose, intra-regional trade shares calculated separately for component trade and final trade (total trade –component trade) are reported together with the standard intra regional trade share (for total trade) in Table 4 [ PDF 19.5KB | 4 pages ]. The tables cover total manufacturing trade, machinery trade (further disaggregated into three major product categories therein, ICT products, electrical goods and motor vehicles) and textiles and clothing. For total manufacturing trade each of the sub-categories, intra-regional trade shares are given separately for total trade, and trade in parts and components and final trade are given separately. The three alternative series for total manufacturing exports from East Asia⁸ are plotted for Figure 1.

Let us begin with total manufacturing trade. When manufacturing trade data are systematically decomposed into parts and components and final goods, we clearly see a heavy “component bias” in Asian intra-regional trade. Intra-regional imports and exports shares of parts and components have grown in tandem and these synchronized patterns have become much clearer from about the late 1990s. This reflects multiple border-crossings of parts and components within regional production networks. The asymmetry between intra-regional shares of imports and exports is, therefore, much sharper when the parts and components are netted out. For exports, the intra-regional share of final goods declined continuously from 46% in 1994–05 to 37% in 2006–07, whereas the intra-regional imports share increased from 55.4% to 63.4% between these two time points (Table 4.1c). Clearly, the region's dependence on the rest of the world for its economic dynamism has increased over time.

Turning to the disaggregated data, electrical goods (SITC 77-772-776) are the only notable major product category in which intra-regional final trade has increased between 1994–5 and 2006–07 (Table 4.4). The share of intra-regional final trade of East Asia in this product category increased from 58.8% between these two time points. It seems that there is significant potential for a rapid increase in final goods trade in this product category as domestic demand in countries in the region grows. In all other products listed in the Table, the intra-regional shares of final trade have declined, pointing to the growing importance of global markets. For final trade in ICT products, the intra-East Asian trade share declined from 36.4% in 1994-05 to 34.4% in 200607 (Table 4.3c). The intra-regional share of final trade is the lowest for motor vehicles; it was 16.5% in 2006/7, down from 22.5% in 1994/5 (Table 4.5). This reflects the fact that carmakers in Japan and Korea serve extra-regional markets from their home countries and while serving markets in most of the countries in the regions through local assembly.

2.2 The PRC in East Asian Trade

As mentioned at the outset of this paper, the PRC's role in regional production networks is central to the decoupling thesis and the more recent emphasis on rebalancing growth. In this section we, therefore, examine the PRC's trade patterns with emphasis on its trade links with the rest of East Asia.

The commodity profile of the PRC-East Asia trade in the wider global context is illustrated by Table 5 [ PDF 16.3KB | 2 pages ] and Figure 2 [ PDF 18.3KB | 1 page ]. Manufacturing products dominates PRC-East Asian trade flows, accounting for over 80% of both imports and exports. Among the PRC's total manufacturing imports from East Asia, the share of parts and components increased from 18% in 1994/5 to over 44% in 2006/7. Within manufacturing, the share of parts and components is much larger in machinery and transport equipment imports; nearly three fourths in 2006/7. The ratio of parts and components to total manufacturing imports, as well as the subcategories listed in Table 5 as a share of total manufacturing imports, also increased, but the levels are significantly lower than those in imports. Overall, these patterns reflect the importance of the PRC as the main final assembly center in the region. Interestingly, although the PRC's importance as a market for final goods for the rest of East Asia has increased during the period under study, the importance of the region for the PRC's export expansion has declined notably (Table 5.3). For instance, only 32% of the PRC's total manufacturing exports were destined to the regional markets in 2006/7, compared to 53.3% in 1994/5. By contrast, on the import side the regional share increased from 20% to 32.7% between these time points.

Table 6 [ PDF 12.7KB | 1 page ] summarizes data on the geographic profile of the PRC-East Asia trade relations at the country level. Data on the geographic profile of the PRC's manufacturing imports from the region are in Panel A. Panel B gives data on the relative importance of the PRC as export destination of East Asia economies. Nearly 60% of the PRC's manufacturing imports originate in East Asia. However, the PRC's regional import trade is heavily concentrated among Japan, Korea and Taipei,China. The share of imports coming from the other East Asian countries is small, although growing past. In 2006/7 the PRC accounted for only 21.2% of total manufacturing exports from the rest of East Asia. At the individual country level, the PRC accounted for 33% and 27% of exports from Japan and Taipei,China respectively. For all other ASEAN countries, the figures are much smaller, varying from 8% to 14%. Clearly, although the aggregate data hide significant differences among East Asian countries in trade links with the PRC; the PRC's intra-regional trade is largely concentrated in trade with Japan, Korea, and Taipei,China.

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