Rapid Development of East Asian Trade

In the past quarter-century, foreign investment in East Asia has greatly boosted the expansion of East Asian trade and enhanced its role at a startling speed. Emergent East Asian economies have more than tripled their share of world exports in the past quarter of a century, from 5.4 per cent in 1975 to 19.8 per cent in 2002. Their trade with one another has grown faster than their trade with countries outside the region, and now makes up 7.2 per cent of global trade (Krumm and Kharas, 2004). In 2003, the share of Japan, China and the "East-Asian 6" (ANIEs plus Malaysia and Thailand) in world trade exceeded 20 per cent (Table 10.1).


The growth in the trade of East Asia has been accompanied by a historic change within the region. Increasing volumes of exports and imports are being exchanged in East Asia itself. Since the mid-1980s, this intra-regional trade has been increasing at twice the rate of world trade, and much higher than the incremental rates of internal trade within NAFTA or EU. The share of internal trade between the developing countries of East Asian and the ANIEs increased from 2.2 per cent in 1985 to 6.5 per cent in 2001 of world trade. At the same time, their share of trade with other countries in the world trade rose from 7.5 per cent to 12.1 per cent. Up to 2001, more than 50 per cent of trade of East Asia was intra-regional (Table 10.2).





The share of Japan in world merchandise export has decreased from 10 per cent in 1993 to 6.3 per cent in 2003. In contrast, the influence of China in international trade has been rising since the beginning of reform in 1978. Its foreign trade has jumped forty-fold from $20.6 billion in 1978 to $851.2 billion in 2003. Consequently, China's share in the world merchandise export rose from less than 1 per cent in 1979 to 5.9 per cent in 2003 in a five-fold increase within a short period (Prasad, 2003). In 2003, China ranked fourth in world merchandise export after the US, Germany and Japan, and third in merchandise import after US and Germany (Table 10.3). The enormous imports and exports of China are linked closely to and promote significantly the collective growth of the world economy.

Asian Production Network

The rising of trade in East Asia has fostered closer links between East Asia and the world's industrial economies as well as between economies within the region. The rapid and large inflows of FDI into East Asia have strengthened economic linkages and interdependence of East Asian economies considerably during the last two decades. Investments and trade have given birth to a new East Asia international production network.




International or cross-border production networks have been variously defined by different authors. According to Borrus and his co-workers (2000), a lead firm's "cross-border networks" are the "inter- and intra-firm relationships through which the firm organizes the entire range of its business activities; from research and development, product definition and design, to supply of inputs, manufacture (or production of a service), distribution, and support services". It thus includes not only "the entire network of cross-border relationships between a lead firm and its affiliates and subsidiaries, but also its subcontractors, suppliers, service providers, or other firms participating in co-operative relationships, such as standard setting or R&D".

It is shown that East Asian trade is concerned not so much with finished products as with the import of raw materials (浦中秀次郎, 2003). The trade pattern is dominated by imports within the region rather than export to other regions. This phenomenon reflects the production network of MNCs in East Asia many of which regard the region as their export base. MNCs shift assembly operations to relatively low-wage countries while retaining the more specialized functions at home.

Multinational computer manufacturers generally purchase components from different markets in Asia to undertake different phases of production in different economies. For example, the components manufactured in high-wage countries such as Singapore or South Korea are generally assembled in low-wage countries such as China for export in the world market. From 1995 to 2001, mechanical components imported into China increased by six times, and micro-circuit products import saw a nine-fold jump. From the perspective of "supply chain management and manufacturing for export", Asia and its low-cost manufacturing industries have become the main beneficiaries of this phenomenon (Wolf, 2003). East Asia has thus become an interlinked economic region and its impact may be comparable with that of EU or NAFTA (Mallet, 2003).

In recent years, much of the increase in East Asian regional trade is due to strong import growth in China, which has been the fastest-growing destination for the exports of other economies in the region. While this import growth has partly been related to domestic demand, much appears linked to China's own rapidly expanding exports.

Since the 1980s, China's contributions to nearly all categories of world trade have increased, especially in office machinery and telecommunications and electronics products. More recently, China has made substantial gains in more "high-tech" exports, including automated data processing equipment. These products now account for 27.4 per cent of China's total export (冯蕾 / Feng Lei. 2004).

The rapid growth of exports in China is accompanied by sharp increases in imports, especially items for processing and re-export, which in turn help to expand regional trade in Asia. The export growth of electronic products has led to a remarkable increase in China's import of electronic components in recent years. The share of "high-tech" products is 29 per cent of China's total import (冯蕾 / Feng Lei, 2004).

It is clear that China's emergence in the world trade system has facilitated the process by which countries specialize in specific stages of the production process of various products, rather than undertaking the complete manufacture of a limited number of products. This "vertical specialization" has resulted in China's increasingly important role in the final assembly of a broad range of export products.

A related development is the trend towards intra-industry trade in East Asia. Intra-industry trade accounted for 42.5 per cent of the growth in total East Asian trade in 1986-90 and 75 per cent in 1996-2000, compared with 34.5 per cent in South America, 26.1 per cent in the Middle East and North Africa, and 13 per cent in Africa. This substantial increase in intra-industry trade in East Asia is attributed to greater vertical specialization and the increased demand for intermediate goods. The share of East Asia's exports of intermediates within the region almost doubled from about 25 per cent in the late 1970s to 47 per cent in 2002, while the corresponding shares in the EU, Japan, and the US have declined during the same period (Zebregs 2004).

These changes in regional specialization have nurtured an East Asian international product network with far-reaching consequences on the trade pattern between China and its neighbours. China is now a conduit of export for numerous products from Asia to US and EU. In addition, China's WTO membership has widened its access to the markets of developed countries.

Driving Forces of the East Asian Production Network

The emergence of the East Asian production network is driven by several factors.

Firstly, since the mid-1980s. East Asian economies have witnessed a rapid expansion of both FD1 and FDl-induced manufactured trade. Driven as part of the international business of MNCs, FD1 has stimulated rather than reduced trade, particularly intra-industry trade, and the region's active participation in foreign trade further induced FD1 activities among MNCs. The emergence of a mutually reinforcing process of trade and FDI flows, the so-called "FDI-trade nexus", is a reflection of regional production chains and networks formed largely by MNCs. These networks have promoted the specialization of production in East Asia by way of fragmenting the production process into specialized sub-processes within the same industry and located in different countries to reap the benefits of comparative advantage. Its natural result is a rise in regional economic interdependence through trade and FDI.

The rapid development of East Asian trade is closely linked with the FDI of MNCs in the region, especially China. Global FDI in 2004 was estimated to rise by 6 per cent to $612 billion. The United Nations Conference on Trade and Development (UNCTAD) estimated that inflows to Asia and the Pacific reached $166 billion, or a 55 per cent increase over 2003. Improved economic performance, a more conducive policy environment, higher corporate profitability and a rise in merger and cquisition activities in the region are key factors behind this performance. China, South Korea, Hong Kong and Singapore all received higher inflows (UNCTAD, 2005). FDI not only directly increases employment but also transmits technology and organizational knowledge. It has contributed to the economic growth of China, in particular its coastal regions, Hong Kong, Singapore and other Asian economies. Cumulatively, FDI inflows into Asia up to 2002 amounted to $1.305 trillion, or 55 per cent of the total volume to all developing countries (Wolf, 2003).

Secondly, a substantial amount of FDI absorbed by East Asia originates from within the region. Japan and other countries/economies in the region accounted for more than half the FDI inflows to China, 65 per cent to Thailand, and 45 per cent to Indonesia during the 2001-03 period (World Bank, 2004).

In China, more than 70 per cent of inward FDI up to 2002 came from other economies in East Asia, of which Hong Kong, Taiwan, and Macao accounted for 54.2 per cent. The FDI from four Asian countries, namely Japan, Singapore, South Korea, and Malaysia to China exceeds the combined total from the US, UK, Germany, France, Holland and Canada (Table 10.4).

Thirdly, East Asia is progressing towards economic integration through a process driven by trade and FDI rather than inter-government co-operation. FDI flows to East Asia, initially by Japanese MNCs after the Plaza Accord in 1985, have generated intra-industry trade within the region and contributed to an international division of labour. More recently, the ANIEs and some middle-income ASEAN countries have also emerged as investors, particularly in China, whose emergence as a large trading nation has stimulated merchandise trade and strengthened intra-industry linkages throughout the region.

Fourthly, China is fast gaining economic clout and acting as the "engine" of the Asian economy. In contrast to the 1970s and 1980s when Japanese capital and technology provided the momentum in East Asian development and trade, China is now a major player as an investor in other markets and a producer of an expanding volume and variety of goods with its low-wage labour.



China imports components from neighbouring countries for assembly into finished products for export. This process has yielded a growing trade surplus with US and tTJ and has become a politically sensitive issue. Between 2000 and 2003, the trade surplus of China with the US has increased by $28.0 billion, but during the same period, the trade surplus of Japan, Taiwan, South Korea, Indonesia, Malaysia, Philippines, Thailand and other countries with the US decreased by $26.0 billion (Wolf, 2003).

Problems of the East Asian Production Network

Despite progress in economic integration in trade and production in East Asia, major weaknesses and shortcomings exist.

Firstly, economic integration within the region has increased notabK since the early 1980s, and the share of intra-regional trade in the total trade is now similar to that of the EU. In contrast, the progress made by the official sector in advancing integration arrangements has been relatively modest, though some important steps have been taken in the past five years. Of late, the leaders of some Asian countries have realized the necessity of a more formal form of integration to balance the influence by NAFTA and EU.

Secondly, despite the fact that trade between China and other Asia economies has increased sharply, the health of this trade hinges largely on China's exports to America and Europe. The current Asian production network is sustained by trade ith and investment by these two regions. It is recognized that Asian integration is built on the production chain rather than on a balanced and overall economic integration (Mallet, 2003).

Like other regions. Asia is an integral and interdependent part of the world economy. The current development in Asia depends to a large extent on the continued economic progress of China. However, if China's export trade is affected by protectionist policies of its trade partners, the negative impact on the East Asian production network would be considerable.

The success of the export-oriented growth strategies of East Asia relies on economic development in other parts of the world. Although the rapid expansion of intra-regional trade in East Asia could diminish its reliance on the rest of the world, much depends on the extent to which the expansion in intra-regional trade is sustained by an increased domestic demand that is independent from external markets.

Thirdly, the plethora of bilateral trade agreements between countries in Asia and elsewhere in recent years may thwart efforts to establish an integration organization in Asia. For instance, the tardy progress of AFT A has prompted Singapore to conclude or negotiate its own bilateral agreements with Japan, EU, Australia, New Zealand, Mexico, and Canada. Fourthly. Japan, the richest and most technologically advanced country in Asia, and China, the fastest growing economy in the world, are presently embroiled in political disputes. The key to the development of the Asian production network is co-operation between these two countries. Current relations between the two are close economically but tense politically. Continued political tension will almost certainly dampen the prospects of economic integration of the East Asia region.

East Asia Growth and Co-operation

On average, the rate of growth of East Asia is the highest in the world the prospects of future growth are bright. Although the region has achieved a high degree of market-driven regional integration, progress towards regionalism based on economic integration and co-operation has been quite limited. The major exceptions are AFTA, established in 1993, and the annual forum under the aegis of APEC. The recent past has witnessed new regional trade arrangements to promote bilateral interests rather than to promote regional trade liberalization. These new arrangements include the Framework Agreement for ASEAN-China Economic Co-operation, signed in November 2002. the recent proposal by Japan for an ASEAN-plus-Japan Free Trade Agreement, and negotiations on bilateral agreements by Japan, Singapore, Korea, and Thailand. These agreements in themselves have stimulated economic recovery and strengthened investor confidence, and in turn help to turn this region into a bright spo: in the global economy.

Liberalization of trade and investment policies are recognized as means to spur efficiency gains. This is in keeping with the emphasis in Asia on innovations and productivity growth in place of the old model of growth through physical and human capital accumulation. There is ample evidence to show that export-oriented firms and those with foreign equity participation are far more productive than domestic-oriented firms, with productivity differentials of 40 per cent in Indonesia and the Philippines and 15-20 per cent in Thailand and Korea. Moreover. China's restructuring provides an impetus for establishing new regional production networks, initially in electronics, that would promote highly productive firms. For now, these production networks are oriented toward export to developed countries, but the growing markets within East Asia provide a potentially large and complementary source of demand (Krumm and Kharas, 2004).

A high degree of economic interdependence, as seen in the EU and NAFTA, confirms that regional integration and co-operation are the way to prosperity. Although the cultural traditions, religious beliefs and political ideologies in East Asia are much more complex than those in Europe, the rich natural resources, large consumption market and low labour costs are advantages that can work in favour of regional economic integration.

Another positive factor is that China's sustained high growth has a "spill-over" effect on its neighbours. Despite earlier uncertainties surrounding China's role, indications are that China's development has promoted regional stability and prosperity. Regional co-operation is a necessary condition for East Asian economic development. Indeed, the level of co-operation that has been achieved to build mutual trust and to maintain regional security has been unprecedented.

While China's economic emergence may bring pressure on other Asian economies that depend on labour-intensive manufacturing, it also promotes efforts of these countries to restructure and upgrade industrial production to become more competitive. In today's competitive global economy and as East Asia continues to recover from the 1997 financial crisis and to adapt to China's emergence as a major world and regional trader, individual governments have to face fundamental challenges to ensure that they gain a fair share of the benefits of regional and global trade.

These challenges can be met if action is taken to promote formal economic co-operation through liberalization in trade and investment. Increasingly, the region's development agenda is focused on growth, employment, and social stability, and its trade policy on market access and competitiveness. Both have become intertwined. With economic integration being a growing trend. East Asia needs to ensure that this process is managed carefully so that its benefits can be broadly shared by all the countries in the region.

The World Bank suggests that East Asian economies must operate on three levels. At the international level, they can influence multilateral negotiations, and should pay particular attention to standards and to liberalization in agro-industries and services. Regionally, they can achieve deeper integration to promote regional production networks, and broader integration with scope for gains in agriculture and other sensitive sectors. Nationally, each country has to adopt a more comprehensive approach to policy by following a consistent development strategy that addresses environmental and labour standards, poverty reduction as well as trade liberalization (World Bank. 2004).

Conclusion

Emerging market forces induced by FDI and trade among East Asian economies are promoting the formation of a regional production network. Having weathered the financial crisis of 1997, the contribution of the region to global economic growth is rising rapidly. Still lacking, however, is a regional regulatory system to manage the often tense political situation in Northeast Asia, particularly between China and Japan.

China has emerged as the major production centre with low labour costs and a large market. Continued inflows of FDI and trade will further enhance its role as the "workshop" in the East Asian production network. This network is still fragile as it is dependent on markets outside the region. Protectionist measures imposed by America and Europe would severely undermine this network as well as East Asian economic integration.

While competition between China and other economies in East Asia is unavoidable, the formation of CAFTA will help to advance economic integration within ASEAN and to promote similar arrangements between ASEAN and Japan as well as South Korea. These trends, together with continued efforts to strengthen co-operation between East Asia on the one hand and US and EU on the other, will contribute to the improvement of the industrial structure and competitiveness of East Asia.

Notes

1. "F.ast Asia" includes C'hina. Japan, the ANIEs (Hong Kong. Korea. Singapore and Taiwan), and other ASKAN member countries (Brunei. Cambodia. Indonesia, Laos. Malaysia. Myanmar, the Philippines. Thailand, and Vietnam). "Lmerging East Asia" excludes Japan.

2. Regional economic integration can he defined as the degree of inter-penetration of economic activity among countries belonging to the same geographic area, as defined by such measures as trade and FD1 and by financial and monetary aspects such as interest and inflation rates. The actual level of economic integration of a region at a given point of time may be interpreted as the outcome of both economic factors and official policies.

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