Modified Grubel-Lloyd Index: Intra-industry Trade and Intra-regional Trade in East Asia

Transcription

1 PRA unch Personal RePEc Archve odfed Grubel-Lloyd Index: Intra-ndustry Trade and Intra-regonal Trade n East Asa Tr Wdodo Economcs Department, Faculty of Economcs and Busness, Unverstas Gadjah ada, Indonesa 11 January 9 Onlne at PRA Paper No , posted 1 Aprl 17 3:9 UTC

2 odfed Grubel-Lloyd Index: Intra-ndustry Trade and Intra-regonal Trade n East Asa By: Tr Wdodo Economcs Department, Faculty of Economcs and Busness, Unverstas Gadjah ada, Indonesa Current alng Address: Faculty of Economcs and Busness, Gadjah ada Unversty, Jl. Humanora No. 1, Bulaksumur, Yogyakarta 55281, Indonesa. Phone: 62 (274) 54851; fax. 62 (274) E-mal address: kocwd@yahoo.com.

3 odfed Grubel-Lloyd Index: Intra-ndustry Trade and Intra-regonal Trade n East Asa Abstract Intra-ndustry trade (IIT) has ncreased sgnfcantly n the world trade. eanwhle, ntra-regonal trade has also rsen n parallel wth the prolferaton of regonal economc ntegratons. One of the promnent emprcal tools wdely employed to analyze IIT s the Grubel-Lloyd ndex (Grubel and Lloyd [1975]). Ths paper ams to examne the ntra-ndustry trade n the ntra-regonal trade n East Asa. Frstly, we modfy the Grubel-Lloyd ndex by consderng ntra- and nter-regonal trade. Secondly, the modfed ndex s then appled to nvestgate IIT n East Asa. We fnd that the ntra-ndustry trade has ncreased sgnfcantly n the regon. The ncreases are greater n the ntra-regonal trade than n the nter-regonal trade. The nterndustry trade of Japan and Indonesa s stll domnant n both ntra- and nter-regonal trade. In contrast, n the case of the Phlppnes, ts ntra-ndustry trade has overtaken the nter-ndustry trade n both ntra- and nter-regonal trade. JEL: F1, F14, F17. Keywords: ntra-ndustry trade, ntra-regonal trade, Grubel-Lloyd ndex 1. Introducton The Heckscher-Ohln model n nternatonal trade mposes very strct assumptons 1. Two most mportant ones are that the producton of each commodty follows constant returns to scale (CRS) and the markets for commodtes and factors are under perfect competton. However, such strct assumptons are dffcult to fulfll n the real world. Several new approaches relaxng the assumptons have emerged ncludng the mtaton lag hypothess (Posner [1961]), the flyng geese model (Akamatsu [1961, 1962]), the product cycle theory (Vernon [1966]), the Lnder theory (Lnder [1961]), the gravty model (Tnbergen [1962]) the Krugman model (Krugman [1979]), and the recprocal dumpng model (Brander [1981]; Brander and Krugman [1983]), among others. The exstence of wdespread economes of scale may be obtanable from the dfferent szes of plants. arket dstortons, such as tarff and non-tarff barrers, stll exst wdely. Snce the 196s, the dscourses about economes of scale and mperfect competton n 1 The model assumes two countres-two homogenous goods-two homogenous factors of producton (2x2x2 model), dentcal technology, constant returns to scale (CRS), dfferent factor ntenstes, dentcal tastes and preferences (utlty functons), perfectly compettve markets, perfect moblty of factors of producton wthn each country and ther perfect mmoblty between the two countres, zero transportaton costs, and no trade barrer or no polcy restrcton. 1

4 the theory of nternatonal trade have taken much attenton. Verdoorn [196], Balassa [1963, 1966, 1967] and Grubel [1967], among others, examned the effects of tarff reductons on the pattern of specalzaton. Kojma [1964] nvestgated the ncreasng and the pattern of nternatonal trade among advanced countres. In ths context, the concepts of ntra- and nter-ndustry trade become sgnfcant to be consdered. The ntra-ndustry trade s defned as trade n the same ndustry; n contrast, nter-ndustry trade s defned as trade among dfferent ndustry. There have been changes n the pattern of world trade due the development of technology n transportaton and communcaton (nformaton technology, IT). World becomes borderless. Transacton costs n nternatonal trade have greatly decreased. Searchng a country s comparatve advantage may not focus on fnal products anymore but may focus on ntermedate products. Internatonal producton fragmentaton has become an nterestng phenomenon 2 n East Asa. It s defned as cross-border dsperson of component producton/assembly wthn the vertcally ntegrated producton process, wth each country specalzng n partcular stage of the producton sequence (Athukorala and Yamashta [6]). The nternatonal producton sharng s strongly supported by the belef, that the most mportant determnant of productvty (economes of scale) or unt costs s not the sze of plant but the organzaton of producton wthn a plant for a gven sze (Verdoorn [196]). Havng ths large number of producton sharng actvtes, East Asa s sometmes called as the East Asa's de facto economc ntegraton. Intra-regonal trade, especally n parts and components ndustry, has ncreased. Assembly actvtes have ncreased drastcally n the regon. Gauler et al. [6] found that vertcal producton/dstrbuton 2 The alternatve names are frequently used such as vertcal specalzaton (Hummels et al. [1], Y [3]), slcng the value chan (Krugman [1995]). 2

5 networks n the regon have formed a trangular trade pattern, where the multnatonal corporatons (NCs) use Chna as an export base for the fnal assembly, n order to export fnal goods to the Unted State (US) and the European Unon (EU). As far as regonalsm, trade lberalzaton, and economes of scale are concerned, ntra-ndustry trade and ntra-regonal trade become an mportant ssue n East Asa. Ths paper ams to examne the phenomena of ntra-ndustry trade and ntra-regonal trade n East Asa 3. Specfcally, ths paper s addressed to answer some questons. Frst, has the ntraregonal trade had bgger porton than the nter-regonal trade n the regon? Sprt of regonalsm and trade lberalzaton through free trade agreements (FTA: the ASEAN- Chna FTA, the ASEAN-Korea FTA) and comprehensve economc partnershp agreements (CEP: the ASEAN-Japan CEP) among countres can push the trade flows n the regon. Trade creaton and trade dverson consderably affect the trade pattern n the regon. Second, has the ntra-ndustry trade been stronger n the ntra-regonal trade rather than n the nter-regonal trade? The rest of ths paper s organzed as follows. Part 2 descrbes trends n the nterand ntra-regonal trade n the East Asa regon, the European Unon (EU), the North Amerca Free Trade Area (NAFTA) and the Rest of the World (ROW). Part 3 shows the methodology. In ths part, we descrbe the modfcaton of the Grubel-Lloyd ndex. The modfed ndex ncorporates the ntra- and nter-regonal trade. It s appled to analyze the trade patterns of the East Asan countres. The calculaton results and analyss are exhbted n Part 4. Fnally, concludng remarks are presented n Part 5. 3 In ths paper, the East Asa conssts of Japan, Chna, Hong Kong, Korea, Sngapore, Indonesa, alaysa, Thaland, the Phlppnes. 3

6 2. Trends n the Intra- and Inter-regonal Trade The regonal trade depends on the complementartes of countres n the regon. any emprcal researches applyng the gravty model, e.g. Feenstra [1998] and Ng and Yeats [3], among others, commonly suggest that the most mportant trade partners of a specfc country are countres wth short-geographcal dstance, large economc dstance (gap of GDP), relatvely smlar language, etc. Hence, neghbor countres wth large number of complementartes are potental trade partners. Ng and Yeats [3] found a negatve relatonshp between blateral trade ntensty and the geographcal dstance. The WTO [7] found that the nter-regonal trade flows between North Amerca, Europe and Asa accounted for only 23 percent of the world trade n 6. eanwhle, the ntraregonal trade flows of the three regons took 53 percent of the world trade and almost two thrd of the total trade of these regons. In addton, the Europe s ntra-regonal trade represented the hghest share (31 percent), followed by Asa (14 percent) and North Amerca (8 percent), whle the other regons (Commonwealth of Independence States, South and Central Amerca, ddle East and Afrca) account only for 2.5 percent of ther total exports n the same perod. The ncreasng regonal trade has also affected by the exstng trade agreements and cooperaton among countres. Regonalsm and economc ntegraton have prolferated snce the 198-s and 199-s. The specal treatments among member countres n such regonalsm and economc ntegraton, to some extent, have encouraged ntraregonal through trade creaton and trade dverson (Vner [195]). Fruedenberg and Paulmer [6] found that East Asa as a whole s more protected regon compared wth the NAFTA and the EU. Ironcally, they also found that East Asa dscrmnates aganst tself vs-à-vs these two major regons. For All products, East Asa mposed hgher tarff 4

7 on commodtes orgnatng from East Asa tself (7.4%) than that from the NAFTA (5.5%) and the EU (7.2%). The EU mposed lower tarff on commodtes orgnatng from the EU tself (1.9%) than that from the East Asa (7.6%) and the NAFTA (7.7%). Smlarly, the NAFTA mposed lower tarff on commodtes orgnatng from the NAFTA tself (.7%) than that from the East Asa (5.7%) and the EU (5.3%). Relatvely hgher tarffs have been mposed n the senstve sector.e. Agrculture, Food and beverages and Lght ndustry. Fgure 1 descrbes the trends n ntra- and nter-regonal trade flows (based on exports and mports data) n the East Asan regon, the NAFTA, the EU and the rest of the world (ROW). Intra-regonal trade n the EU (n both exports and mports) was very hgh around 66% for In the early 198, nter-regonal trade flows of the East Asa and the NAFTA were around 7% of ther total trade flow, meanwhle ntra-regonal trade was only around 3%. However, there have been upward trends n the ntraregonal trade of the both regons. In exports, the NAFTA had slghtly hgher ncreases n ntra-regonal trade compared wth the East Asa. The NAFTA recorded ntra-regonal trade around 54%; meanwhle the East Asa had ntra regonal trade about 44% n 6. However, n the case of mports, the East Asa had hgher ntra-regonal trade (.e. about 49% n 6) than that of the NAFTA (.e. about 34% n 6). In the case of East Asa and the NAFTA, ncreasng ntra-regonal trade flows n exports have been followed by ncreasng ntra-regonal trade n mports. Reallocaton of ndustres (especally low level of technology ndustres, labor-ntensve ndustres) from the US and Japan to exco have created hgher exports of these products from exco to manly the US. The Japanese nvestments to the US are manly ant-trade type of nvestments (Kojma [1995]). These nvestments requred products from the East Asan 5

8 countres. As the result, the NAFTA s mports from East Asa are hgher than from the EU or the ROW. Fgure 1. about here. 3. ethodology In the prevous Part, we have shown the ncreasng porton of ntra-regonal trade n the East Asa, the EU and the NAFTA. We wll analyze further the pattern of ntraand nter-regonal trade n the East Asa. Are they more domnated by the ntra- or nterndustry trade? In ths Part, we modfy the Grubel-Lloyd ndex of ntra- and nter-ndustry trade by ncorporatng ntra- and nter-regonal trade Data Ths paper uses data on exports and mports by commodtes, by exporter countres and by mporter countres taken from the UN-COTRADE for the perods 198, 1985, 199, 1995, and 6. The classfcaton of commodtes follows 3- dgt SITC Revson 2, consstng 239 groups of products. Ths classfcaton s chosen because t provdes us wth the long-range avalablty of data. In analyzng ntra- and nter-ndustry trade n East Asa, ths paper focuses the nne exporter and mporter countres,.e. Japan, Korea, Hong Kong, Chna, Sngapore, Indonesa, alaysa, Thaland and the Phlppnes Trade by ndustry and trade by regon any researches have been conducted to analyze the phenomena of ntra-ndustry trade. Grubel and Lloyd [1971] examned the ntra-ndustry trade n the cases Australa and the major ndustral countres of OECD. Greenaway and lner [1981] nvestgated the trade balance effects n the measurement of ntra-ndustry trade. Hamlton and Knest 6

9 [1991] analyzed the relatonshp between trade lberalzaton and the levels of IIT,.e. whether trade lberalzaton under Australa-New Zealand Closer Economc Relatons (CER) has encourage more IIT. So far, regonal aspects (nter- and ntra regonal trade) are left to be examned. Ths paper, therefore, combnes trade by ndustry and trade by regon, as depcted n Fgure 2. Trade by ndustry conssts of ntra-ndustry trade (IIa) and nter-ndustry trade (IIe). eanwhle, trade by regon covers ntra-regonal trade (IRa) and nter-regonal trade (IRe). Fgure 2 shows the four possble combnatons.e. (A) Intra-ndustry trade n ntra-ntra regonal trade, (B) Intra-ndustry trade n nter-regonal trade, (C) Inter-ndustry trade n ntra-regonal trade, (D) Inter-ndustry trade n nterregonal trade. Fgure 2. about here. Ths paper analyses trade by regons.e. the East Asa (EA consstng the nne East Asan countres), the European Unon (EU) and the North Amercan Free Trade Area (AFTA). The three regons have very bg shares n the total world trade. In 6, almost 83% of the world trade was domnated by the three regons. Intra-regonal trade s trade wthn regon; meanwhle, nter-regonal trade s trade among countres n the dfferent regons. For example, ntra-regonal trade of East Asa s trade among countres n East Asa; and nter-regonal trade of East Asa s trade between East Asan countres and non-east Asan countres. Ther shares n the total exports or mports descrbe the mportance of ntra-regonal trade and nter-regonal trade. Trade by ndustry conssts of ntra- and nter-ndustry trade. Ths paper uses the defnton of ndustry correspondng wth the 3-dgt SITC Revson 2. At 3-dgt level of aggregaton of the SITC, the resultant aggregates of nternatonally trade goods roughly match to ndustres, as the concept s used commonly n economc emprcal analyss 7

10 (Grubel and Lloyd [1975]). Accordngly, ntra-ndustry trade s defned as trade n the same ndustry or n the same SITC. In contrast, nter-ndustry trade s trade n the dfferent ndustry or n the dfferent SITC The measurement of ntra- and nter-ndustry trade We apply a measurement of nter-ndustry trade (IIe) and ntra-ndustry trade (IIa) by Grubel and Lloyd [1975] 4. However, we consder the export destnaton markets (n the case of exports, X) or the regon source of mports (n the case of mports, ) to ncorporate ntra-regonal trade or nter-regonal trade (shown by the subscrpt k) n the analyss. Inter-ndustry trade s defned as net exports or mports of an ndustry, X -. eanwhle, ntra-ndustry trade s defned as the value of exports of the ndustry, whch s exactly matched by the mports of the same ndustry, (X - )- X -. It s clear that ntra ndustry trade s the value of total trade (X+) remanng after subtracton of the net exports or mports of the ndustry X-. For comparatve study, for example across countres, t may be useful to descrbe nter- and ntra-ndustry trade as porton of the total trade. Comparsons regardng dfferent ndustres and countres wll be easer. The measures of nter- and ntra-ndustry trade are respectvely formulated as follows (Grubel and Lloyd [1975:21]): 4 There are other measurements of ntra-ndustry trade trade such as the ones proposed by Verdoorn [196], X n j U j ; Balassa [1966], 1 X j j D ; and chaely [1962], n Xj or j j n Xj j Ej n n X 1 Fj 1 2 n X n ; Lneman [1966], X j j, among others. See, for examples Grubel and j j G n n j 1 Xj n n j X j j Lloyd [1975], Brülhart [1994] and Kol and ennes [1986], for the very good dscusson on the measurements. j j 8

11 IIe IIa X *1 (1) (X ) (X X 1 (X (X ) X ) *1 ) *1 (2) where, j and k are ndustry (SITC), country, the exports destnaton markets or the regon source of mports, respectvely. As far as ths research only focuses on trade n the East Asan regon, k can be East Asan regons (ntra-regonal trade) or non-east Asan regon (nter-regonal trade). X s the country j s value of exports of ndustry to regon k; meanwhle s country j s value of exports of ndustry from regon k. The ndexes of both ntra- and nter-ndustry trade range from to 1 (%). In an ndustry, when the exports exactly equal mports, IIa s 1. When there are exports but no mports, or vce versa, IIa s Adjustment of FOB or CIF In the real world, exports and mports are valued usng dfferent measurements. Exports are measured by FOB (free on board), meanwhle mports are measured by CIF (cost, nsurance and freght). Theoretcally, the values of exports and mports n the ntraregonal trade must be the same. For example, the values of exports and mports n the ntra-regonal trade n the East Asa must be the same. In fact, they are dfferent due to evaluatons made by FOB and CIF. To measure ntra- and nter-ndustry trade, therefore, both exports and mports should be valued consstently n FOB or n CIF (Grubel and Lloyd, 1975). Of the two, FOB valuatons are preferable because they measure the value 5 Nether exports nor mports exst; the measures IIa and IIe (as porton of total trade) are not defned. However, f t s not descrbed as porton of total trade, the nter-regonal trade X - and the ntraregonal trade (X + )- X - are zero. 9

12 of commodtes produced n each ndustry, excludng the value added by nternatonal transporters of the home countres or of a thrd foregn country. The UN-COTRADE records exports n FOB and mports n CIF. Therefore, ths paper makes adjustments from the mports CIF to the mports FOB by employng the procedure as follows. Frst, usng data of exports and mports 3-dgt SITC for ntraregonal trade (trade among East Asan countres) and nter-regonal trade (trade between East Asan countres and ROW), the adjustment coeffcents are calculated: X kl kl (3) kl where αkl s the regon s k adjustment coeffcent ndustry for regon l. Xkl and kl are regon k s exports value for regon l and mport value from regon l, respectvely. Therefore, f l equal to k, αkk s the adjustment coeffcent for ntra-regonal trade. In contrast, f l s dfferent from k, αkl s the adjustment coeffcent for nter-regonal trade. Second, from the fact that exports are FOB and mports s CIF, t s the case that X FOB FOB kl kl kl or kl CIFkl kl CIFkl kl. Therefore, country j s (whch belongs to regon k) mports of ndustry from regon l can be expressed n term of FOB by applyng the followng formula: FOB (4) Substtutng (4) nto (1) and (2), the nter-ndustry trade and ntra-ndustry n the nter-regonal and ntra-regonal trade are formulated as follows (country j s belongs to regon k): - Inter-ndustry trade n nter-regonal trade: 1

13 IIe X kl x1 (5) (X ) - Inter-ndustry trade n ntra-regonal trade: kl IIe X kk x1 (6) (X ) kk - Intra-ndustry trade n nter-regonal trade: IIa X kl 1 x1 (7) (X ) kl - Intra-ndustry trade n ntra-regonal trade: IIa X kk 1 x1 (8) (X ) kk 3.5. The aggregaton The most useful statstc for summarzng the dstrbuton of the calculaton results of the equatons (5), (6), (7) and (8) s the mean. We apply the weghted mean. The weghts are the relatve sze of exports plus mports of each ndustry n the total value of exports plus mports of the set of n ndustres (n ths paper n=239 SITC). Therefore, n the weghted mean of (5), (6), (7) and (8) are: - Inter-ndustry trade n nter-regonal trade: 11

14 n IIe(X ) kl IIe (9) n (X ) - Inter-ndustry trade n ntra-regonal trade: kl n IIe(X ) kk IIe (1) n (X ) - Intra-ndustry trade n nter-regonal trade: kk n IIa (X ) kl IIa (11) n (X ) - Intra-ndustry trade n ntra-regonal trade: kl n IIa (X ) kk IIa (12) n (X ) kk 4. Results and Analyss Theoretcally, f countres have constant margnal rates of transformaton (shown by the straght lnes of producton possblty fronter, PPF), they wll have complete specalzatons,.e. only producng products wth comparatve advantage and mportng products wth comparatve dsadvantage. In contrast, f countres have ncreasng rates of transformaton (shown, for example, by concave PPF), they wll have partal specalzatons,.e. producng and mportng the same products. It s dffcult to fnd a country wth a complete specalzaton. In East Asa, Brune Darussalam mght be close 12

15 to the case. It has the export specalzaton only on ol products but mports almost all traded products. arket forces affect trade patterns. Trade n the dfferent ndustry (nter-ndustry trade) mght ncrease due to homogenety of products, mperfect competton and economes of scale. Frst, the homogenety of products means that products from, say, countres A and B are perfect substtutes. As they are not dfferentated, countres A and B wll compete wth each other on that product; those two countres must eventually determne the product wth comparatve advantage. As a result, countres wll have trade n the dfferent products. Second, mperfect competton always means the exstence of market power (Samuelson and Nordhous [1:183]). For example n the monopoly market, the suppler has market power to set the prce of product. Imperfect competton mght happen due to government regulatons or polces such as trade barrers (tarff or non-tarff barrers) and ndustralzaton of mport substtuton, etc. To protect the nfant ndustres n the mports substtuton strategy, a government commonly mposes very hgh tarff on the mports. The government also gves ncentves such as tax exempton, nput subsdy, credt, etc. Snce domestc markets are suppled by the nfant ndustry, countres are oblged to have nter-ndustry trade. Imports substtuton strategy s commonly mplemented by East Asan countres n the 196s and 197s (asuyama, 1997). Thrd, there are sources of economes of scale n a gven ndustry: sze of plants, length of producton runs and sze of frm (Grubel and Lloyd, 1975). Industry, for example n the technology ntensve ndustry, wth very hgh ntal nvestment wll create large sze of frms. Then, advanced countres wll have comparatve advantage n ths ndustry. eanwhle, less developed countres wll have comparatve advantage n the 13

16 ndustres wth low economes of scale. Inter-ndustry trade happens between advanced countres and less-developed countres. Table 1. about here. Fgure 3. about here. Table 1 and Fgure 2 show trends of ntra-ndustry trade and nter-ndustry trade n both ntra-regonal trade (left hand sde) and nter-regonal trade (rght hand sde) n East Asan countres. From the Table and Fgure, we can draw the followng three conclusons. Frst, n the past, nter-ndustry trade domnated nternatonal trade both n ntra-regonal trade and n nter-regonal trade. It supports the manstream nternatonal economcs sayng that country specalzes n product wth absolute and comparatve advantage such that nter-ndustry takes place. The tradtonal nternatonal trade theory, for example Heckscher-Ohln-Samuelson (HOS) model, fals to account for ntra-ndustry trade. Therefore, several models were developed to provde theoretcal bass for the trade n smlar goods snce the 196-s. Lloyd and Grubel [3] noted that publcatons of ntra-ndustry trade started appearng n the 196s. It has been commonly dentfed as a specalzed areas of emprcal and theoretcal research snce the md-197s. oreover, snce the 198s t has become new mportant theores of nternatonal trade, whch are focused on examnng the welfare effects of trade specalzaton and trade wthn ndustres. In the real world where trade s constraned by sgnfcant tarffs, an ndustral core s lkely to develop n every country to supply domestc market regardless of the ntal allocaton of factors. In the past, all East Asan countres mplemented double track strategy.e. protectng domestc ndustry and promotng exports (Hratsuka, 6). In East Asa, the porton of nter-ndustry trade has also declned snce 198s. Untl 6, 14

17 nter-ndustry trade has stll domnated nter-regonal trade of the East Asan countres, exceptng the Phlppnes. Inter-ndustry trade has covered around 7% of nter-regonal trade. Only Sngapore and the Phlppnes have less than 5% of the nter-regonal trade covered by nter-ndustry trade. In the case of the Phlppnes, ntra-ndustry trade has bgger porton than nter-ndustry trade n nter-regonal trade snce. It mght not be very surprsng snce ths country also closely engages n trade wth other countres other than East Asan countres, especally the US and the EU. About 53% of the Phlppnes exports went to the EU and US n 1995 and t became 35% n 5. In the case of Japan and Indonesa, the domnance of nter-ndustry trade stll exsts. Snce Japan as the most ndustralzed country n the regon and as leader n the flyng geese formaton 6, Japan has strct specalzaton n technology ntensve ndustry. Therefore, Japanese nterndustry trade s more domnant than ts ntra-ndustry trade n both ntra- and nterregonal trade. Strct specalzaton creates more nter-ndustry trade than ntra-ndustry trade. The same reason s also appled n the case of Indonesa, whch reles manly on ol exports, prmary products and natural resource-ntensve ndustres. Second, the ncrease of ntra-ndustry trade n ntra-regonal trade s much hgher than that n nter-regonal trade. It s sometmes clamed that de facto economc ntegraton has occurred n East Asa. In an ntegrated zone (de facto ntegraton lke East Asa), and when transportaton cost are not too hgh, producton s concentrated to beneft from economes of scale. Trade lberalzaton may cause a sgnfcant reallocaton of 6 The flyng geese paradgm was ntroduced by Kaname Akamatsu n the 193s artcles n Japanese. Kaname Akamatsu presented to world academa after the World War II n 1961 and 1962 artcles n Englsh. Flyng geese model ntends to explan the catchng-up process of ndustralzaton of latecomer economes from ntra-ndustry, nterndustry and nternatonal aspects. It mght be argued that the structural transformaton of ndustralzaton n East Asa follows ths flyng formaton. Garment, Steel, Popular TV, Vdeo and HDTV are frequently used to llustrate the formaton. Those products have been transformed from Japan to Newly Industralzed Economes (NIEs: Hog Kong, Tawan, Sngapore and Korea); from NIEs to the ASEAN4 (alaysa, Indonesa, Thaland and Phlppne) n the next term; from the ASEAN4 to latecomers and latest-comers. 15

18 factors across countres n the regon. Therefore, ntra-ndustry trade n ntra-regonal trade ncreases n the hgher rate than that n nter-regonal trade. For an example, the European ntegraton was accompaned by an ncrease n ntra-ndustry trade between member countres. The European ntegraton process shows that the observed ncreases n smlar product exchanges could be a result of ths regonal economc ntegraton. Thrd, ntra-ndustry trade can overtake nter-ndustry n ntra-regonal trade n the perod of massve lberalzaton. Hong Kong saw ths n 1985, Korea and Sngapore n 199, alaysa n 1995, and Thaland, the Phlppnes and Chna n. The East Asan countres, as members of the World Trade Organzaton (WTO), are also requred to reduce ther trade protectons such as tarff and non-tarff barrers (NTB). Trade lberalzaton s not only encouraged under the most favored naton (NF) clauses, but also by very actve blateral, multlateral and mult-regonal trade arrangements such as the ASEAN FTA, the ASEAN-Chna FTA, the ASEAN-Korea FTA, the ASEAN-Japan CEP, etc. In ths sense, the lberalzaton wll brng effcent allocaton of factors. Frms, especally multnatonal corporatons (NC), wll search for locatons for ther nvestment wth promsng comparatve advantage and economes of scale. As result, ntra-regonal trade s more lkely ncreasng. 5. Concludng Remarks The prolferaton of regonalsm has ncreased concerns over the changes n nternatonal trade pattern.e. from nter-regonal trade to ntra-regonal trade. eanwhle, trade lberalzaton, economes of scale and dfferentated products encourage ntrandustry trade rather than nter-ndustry trade. any researches on trade by regon and on trade by ndustry have been made. However, they analyze both trade by regon and trade 16

19 by ndustry, separately. Ths paper, therefore, consders them smultaneously. Frst, orgnal ntra-ndustry trade and nter-ndustry trade measures by Grubel and Lloyd [1975] are slghtly modfed, ncorporatng regonal trade. From ths modfcaton, four combnatons are as follows: (1) ntra-ndustry trade n ntra-regonal trade, (2) ntrandustry trade n nter-regonal trade, (3) nter-ndustry trade n ntra-regonal trade, and (4) nter-ndustry trade n nter-regonal trade. Second, the modfed analytcal measures are then appled n the case of East Asan countres. Three man conclusons are wthdrawn. Frst, ntra-regonal trade ncreased sgnfcantly n the case of East Asa and the NAFTA. Second, the more sgnfcant ntrandustry trade has reduced the domnance of nter-ndustry trade n East Asa. Thrd, ntra-ndustry trade n ntra-regonal trade has hgher ncreases than that n nter-regonal trade. It suggests that more trade lberalzaton among East Asan countres s requred to ncrease ntra-ndustry trade n ntra-regonal trade n the regon. Trade lberalzaton can be tarff reducton and elmnaton of non-tarff barrer. Searchng countres comparatve advantage and frms economes of scale s easer n the compettve markets than n the dstorted (mperfect) markets. The ncreasng sgnfcance of ntra-ndustry trade n ntra-regonal trade n East Asa also ndcates compettons among multnatonal corporatons (NCs) searchng for countres comparatve advantages through foregn drect nvestment (FDI). FDI s affected by locaton, transacton cost and nternalzaton advantages. Locaton advantages are determned by domestc market, the avalablty of supplers and human resources, factors endowment, transportaton cost (nfrastructures), and the nvestment facltes measures (ncludng tax ncentve, subsdy, etc) provded by the governments. Transacton cost relates wth contract, whch covers dentfcaton (what should be 17

20 ncluded n the contract, reward and punshment, dspute, etc), mplementaton and montorng. Internalzaton advantage relates wth the ownershp of frm. Intra-ndustry trade mght be ncreased due to the exstence of transport, storage and sellng cost, dfferentated products (wth dfferent nputs requrements, dfferent economes of scale, dfferentaton by style, dfferentaton by qualty), technologcal-gap, product cycle and foregn processng. The establshments of the ASEAN-Korea Free Trade Agreement (AKFTA), the ASEAN-Chna Free Trade Agreement (ACFTA) and the ASEAN-Japan Comprehensve Economc Partnershp (AJCEP) can create more nvestment and trade lberalzatons n the regon. References Akamatsu, K. [1961] A theory of unbalanced growth n the world economy, Weltwrtschaftlches Archv 86: Akamatsu, K. [1962] A hstorcal pattern of economc growth n developng countres, The Developng Economes 1:3-25. Athukorala, P. and Yamashta, N. [6] Producton fragmentaton and trade ntegraton: East Asa n a global context, North Amercan Journal of Economc and Fnance 17(3): Balassa, B. [1963] An emprcal demonstraton of classcal comparatve cost theory, Revew of Economcs and Statstcs 45: Balassa, B. [1966] Tarff reducton and trade n manufactures among the ndustral countres, Amercan Economc Revew LVI: Balassa, B. [1967] Trade creaton and trade dverson n the European Common arket. The Economc Journal 77:1-21. Brander, J. [1981] Intra-ndustry trade n dentcal commodtes, Journal of Internatonal Economcs 11(1):1-44. Brander, J. and Krugman, P. [1983] A recprocal dumpng model of nternatonal trade, Journal of Internatonal Economcs 15: Brülhart,. [1994] argnal ntra-ndustry trade: measurement and relevance for the pattern of ndustral adjustment, Weltwrtschaftlches Archv 13: Feenstra, R. [1998] Integraton of trade and dsntegraton of producton the global economy, Journal of Economc Prespectves 12:31-5. Freudenberg,. and Paulmer, T. [6]. A comparson of de jure economc ntegraton n East Asa: Is East Asa dscrmnatng aganst tself? n: Hratsuka, D., ed., East Asa s De Facto Economc Integraton. New York: Palgrave acmllan:

21 Gauler, G., Lemone, F., and Kesenc, D.Ü. [6] Chna s specalzaton n East Asan producton sharng, n: Hratsuka, Dasuke, ed, East Asa s De Facto Economc Integraton. New York: Palgrave acmllan. pp Greenaway, D. and lner, C. [1981] Trade mbalance effects n the measurement of ntra-ndustry trade, Weltwrtschaftlches Archv, 117: Grubel, H.G. [1967] Intra-ndustry specalzaton and the pattern of trade, Canadan Journal of Economcs and Poltcal Scence/Revue canadenne d Economque et de Scence poltque, XXXIII: Grubel, H.G., and Lloyd, P.J. [1971] The emprcal measurement of ntra-ndustry trade, Economc Record, 47, December: Grubel, H.G., and Lloyd, P.J. [1975] Intra-ndustry Trade. The Theory and easurement of Internatonal Trade n Dfferentated Products. The acllan Press Ltd., London. Hamlton, C. and Knest, P. [1991] Trade lberalzaton, structural adjustment and ntrandustry trade: a note, Weltwrtschaftlches Archv, 127(2): Hratsuka, D. [6] Vertcal ntra-regonal producton networks n East Asa: a case study of the Hard Dsc Drve ndustry, n: Hratsuka, D., ed., East Asa s De Facto Economc Integraton. New York: Palgrave acmllan: Hummels, D., Ish, J., and Y, K. [1] The nature and growth of vertcal specalzaton n world trade, Journal of Internatonal Economcs 54(1): Kojma, K. [1964] The pattern of nternatonal trade among advanced countres, Htotsubash Journal of Economcs, 5(1): Kojma, K. [1995] Dynamcs of Japanese drect nvestment n East Asa, Htotsubash Journal of Economcs 36: Kol, J. and ennes L.B.. [1986] Intra-ndustry specalzaton: some observatons on concepts and measurement, Journal of Internatonal Economcs, 21: Krugman, P. [1995]. Growng world trade: causes and consequences, Brookng Papers on Economc Actvty 25 th Annversary Issue: Krugman, P. [1979] Increasng returns, monopolstc competton, and nternatonal trade, Journal of Internatonal Economcs 9(4): Lnder, S.B. [1961] An Essay on Trade and Transformaton. New York: John Wley and Sons. Lneman, H. [1966] An Econometrc Study of Internatonal Trade Flows. Amsterdam: North-Holland. Lloyd, P.J., and Grubel, H.G. [3] Introducton, n: Lloyd, P.J., and Grubel, H.G., ed., Intra-Industry Trade. The Internatonal Lbrary of Crtcal Wrtngs n Economcs 16. Cheltenham, UK: Edward Elgar Publshng Lmted: x-xxv. asuyama, S. [1997] The evolvng nature of ndustral polcy n East Asa: lberalzaton, upgradng and ntegraton, n: asuyama, S., D. Vandenbrk, C.S., Yue (Eds.), Industral Polces n East Asa. Jont Publcaton: Insttute of Southeast Asan Studes-Sngapore and Nomura Research Insttute-Japan:3-18. chaely,. [1962]. Blateral balancng n nternatonal trade, Amercan Economc Revew LII: Ng, F., and Yeats, A. [3] ajor trade trends n East Asa: what are ther mplcatons for regonal cooperaton and growth? Polcy Research Workng Paper. The World Bank, Development Research Group Trade, June. Postner,.V. [1961] Internatonal trade and techncal change, Oxford Economc Paper, New Seres 13(3):

22 Samuelson, P.A., and W.D. Nordhaus [1] Economcs. Seventh Edton. New York: cgraw-hll, The Unted Natons (UN), 4. Unted Natons- Commodty Trade Statstcs Database (UN-COTRADE). Department of Economc and Socal Affars, Statstcs Dvson. New York, Unted Natons. Accessed arch 11, 7. The World Trade Organzaton (WTO), [7], Internatonal Trade Statstcs, Tnbergen, J. [1962] Shapng the World Economy: Suggeston for an Internatonal Economc Polcy. New York: The Twenteth Century Fund. Verdoorn, P.J. [196] The ntra-bloc trade of Benelux n: Robnson, E.A.G, ed., The Economc Consequences of the Sze of Natons. London: acmllan. Vner, J. [195] The Custom Unon Issue. New York: Carnege Endowment for Internatonal Peace. Vernon, R. [1966] Internatonal nvestment and nternatonal trade n the product cycle, Quarterly Journal of Economcs 8:19-7. Y, K. [3] Can vertcal specalzaton explan the growth of world trade, Journal of Poltcal Economy 111(1):52-12.

23 Exports Trade Flows Imports Intra-regonal trade 5 Intra-regonal trade Share (%) 4 3 Inter-regonal trade (NAFTA) Share (%) 4 3 Inter-regonal trade (ROW) Inter-regonal trade (ROW) Inter-regonal trade (NAFTA) 1 Inter-regonal trade (EU) 1 Inter-regonal trade (EU) a. the East Asa Intra-regonal trade Share (%) 4 3 Inter-regonal trade (ROW) Share (%) 4 3 Intra-regonal trade Inter-regonal trade (East Asa) Inter-regonal trade (EU) Inter-regonal trade (ROW) 1 Inter-regonal trade (East Asa) 1 Inter-regonal trade (EU) b. the NAFTA Intra-regonal trade 6 6 Intra-regonal trade 5 5 Share (%) 4 3 Share (%) 4 3 Inter-regonal trade (ROW) Inter-regonal trade (ROW) Inter-regonal trade (NAFTA) Inter-regonal trade (East Asa) c. the EU Inter-regonal trade (East Asa) Inter-regonal trade (NAFTA) Share (%) 4 3 Inter-regonal trade (EU) Intra-regonal trade Share (%) 4 3 Inter-regonal trade (EU) Intra-regonal trade Inter-regonal trade (NAFTA) Inter-regonal trade (East Asa) Inter-regonal trade (East Asa) 1 1 Inter-regonal trade (NAFTA) d. the ROW Source: UN-COTRADE, author s calculaton Fgure 1. Intra-regonal and Inter-regonal Trade: East Asa, EU and NAFTA

24 Trade by INDUSTRY Trade Pattern Intra-Industry Trade (IIa) Inter-Industry Trade (IIe) Intra-Regonal Trade (IRa) A Intra-Industry Trade Intra-Regonal Trade (IIa-IRa) C Inter-Industry Trade Intra-Regonal Trade (IIe-IRa) Trade by REGION Inter-Regonal Trade (IRe) B Intra-Industry Trade Inter-Regonal Trade (IIa-IRe) D Inter-Industry Trade Inter-Regonal Trade (IIe-IRe) Fgure 2. Trade Pattern: by Industry and by Regon 22

25 Intra-Regonal Trade Trade by Regon Inter-Regonal Trade a. Japan b. Korea c. Hong Kong 23

26 d. Chna e. Sngapore f. Indonesa g. alaysa 24

27 h. Thaland the Phlppnes Source: UN-COTRADE, author s calculaton Fgure 3. Intra-ndustry and Inter-ndustry Trade: East Asan Countres 25

28 Table 1. Intra- and Inter-ndustry Trade (%): East Asan Countres for 198, 1985, 199, 1995, and Growth Japan a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade - Intra-ndustry trade Inter-Industry trade Korea a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade - Intra-ndustry trade Inter-Industry trade Hong Kong a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade - Intra-ndustry trade Inter-Industry trade Chna a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade - Intra-ndustry trade Inter-Industry trade Sngapore a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade - Intra-ndustry trade Inter-Industry trade Indonesa a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade - Intra-ndustry trade Inter-Industry trade alaysa a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade 26

29 - Intra-ndustry trade Inter-Industry trade Thaland a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade - Intra-ndustry trade Inter-Industry trade Phlppne a. Intra-regonal trade - Intra-ndustry trade Inter-Industry trade b. Inter-regonal trade - Intra-ndustry trade Inter-Industry trade Source: UN-COTRADE, author s calculaton 27