Background

Since the early 1990s, international production networks have developed within the Association of Southeast Nations (ASEAN) and East Asia. Extensive production networking and the regional division of labor have resulted in massive vertical intra-industry trade in parts and components within the region, effectively becoming the de facto economic integration in East Asia. Figure 1 [ PDF 24.1KB | 1 page ] shows the share of intra-regional trade (exports and imports) within several economic areas. The share of intra-East Asia trade, where East Asia is defined as the 10 ASEAN countries, the People's Republic of China (PRC), Japan, Hong Kong, China, and the Republic of Korea (hereafter Korea), rose remarkably from 34.9% in 1980 to 52.4% in 2003. Surprisingly, this figure is higher than that of the North American Free Trade (NAFTA) area, which stands at 44.6%, though a bit lower than 58.7% of the European Union (EU). East Asia has no doubt achieved a high level of de facto economic integration in terms of international trade transactions within the region. The integration process has not been seriously interrupted, not even by the Asian currency crisis that occurred in the late 1990s.

However, economic integration in East Asia does not seem to have developed in an even manner. The share of intra-regional trade of the ASEAN 10 and PRC-Japan-Korea in 2003 remains at only 22.2% and 25.8% respectively, against that of East Asia as a whole (52.4%). This suggests that economic activity requires a large space in which to expand, such as the whole of East Asia, as spatial economists argue. Figure 2 [ PDF 24.1KB | 1 page ] shows trade shares of East Asia by partner countries or regions. Such a trend suggests that countries at relatively low-income levels have played a significant role in the expansion of the intra-regional trade in East Asia.

The trade pattern inside East Asia has changed, from a traditional pattern in which capital goods and final products, such as consumer and intermediate goods, have been traded with each other to a pattern where parts and components are traded instead. To put it differently, intermediate goods in the same industry have been actively traded among the Asian countries, expanding intra-industry and intra-regional trade. For instance, import shares of parts and components within East Asia increased from 7.2% in 1980 to 32.2% in 2003, while those of processed goods decreased from 37.3% to 28.0% in those same years. Parts and components as shares of trade have become the largest among commodity groups (see Figure 3 [ PDF 19.9KB | 1 page ]).

East Asia is experiencing an explosive increase in trade in intermediate goods, particularly in machinery industries, based on the international division of labor and production processes among countries at different income levels and development stages. Trade patterns, in today's global competition where economies of scale are a strong consideration, are quite different from the traditional ones based on the static concept of comparative advantage. The whole production process now involves sequential production blocks that are located across countries. Different stages of production are undertaken by different suppliers located in different countries. Products traded between firms in different countries are components instead of final products.

This phenomenon is known as cross-border production sharing or the fragmentation of production. Production processes are finely sliced into many stages and located in different countries in East Asia. In theory, with such vertical specialization a slight decline in trade costs would induce an increase in the trade of intermediate goods since goods may move across national borders multiple times. For example, an intermediate good is exported from country A to country B and is imported back to country A again after processing in country B. In this case, the good crosses a national border twice in country A and twice in country B. This is what actually happens in East Asia; when trade cost goes down, the competitiveness of the whole of East Asia increases greatly.

Figure 4: Production Network in East Asia [ PDF 29.8KB | 1 page ]

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