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Asian Exports: Intraregional Trade Key to Asia's Export Boom

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 2008
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As almost any shopper in the industrial countries knows, Asian exports are booming, with growth built increasingly around rapid expansion in intraregional trade that has China playing a central role.

Despite the current slowdown in the world economy, the IMF projects Asian growth to moderate only slightly, with developing Asia growing by a projected 8.6 percent in 2008. China's growth is forecast to slow to 10 percent from an estimated 11.4 percent in 2007.

The export boom reflects an ongoing geographical dispersion of production, with assembly operations migrating to lower-wage economies, and more developed Asian economies specializing in production of high-value-added components and capital goods.

The resulting increase in vertical intra-industry trade, fostered by foreign direct investment, has created a sophisticated production network in emerging Asia, facilitating the “catch-up” process of developing Asian countries through technology transfer.

Growing share of world trade

The export-oriented growth strategies of emerging Asian economies have been reflected in a steady increase of their share in world trade. Emerging Asia's share in world trade flows reached 34 percent in 2006, up sharply from 21 percent in 1990. Moreover, the rise in emerging Asia's trade accounted for roughly 40 percent of the total increase in world trade over the period.

The importance of exports to the region has reached an unprecedented level. Although the share of exports in GDP was already high for emerging Asia in 1990, it increased further over the past decade, reaching almost 50 percent in 2006. This is attributed in part to the small, open, newly industrializing economies, especially Hong Kong SAR and Singapore, whose exports-to-GDP ratios are 109 and 184 percent, respectively. However, high and rising exposures of other economies in emerging Asia, including China, suggest that this trend is key to understanding economic developments in the region.

Asia's growing share of world trade has resulted largely from increased regional trade integration. While trade flows in the rest of the world roughly tripled between 1990 and 2006, interregional trade involving emerging Asia rose by five times, and intraregional trade within emerging Asia increased by eight and a half times. As a result, trade between the economies in emerging Asia has risen steadily from about 30 percent of total exports by the region in 1990 to more than 40 percent in 2006. China has become Asia's export hub, dramatically raising its profile as a destination for intraregional exports and the source of exports from Asia to the rest of the world.

Intra-industry trade is also booming. This trend in emerging Asia tracks developments in the more advanced economies, but the motivation in Asia is quite different. There, intra-industry trade is primarily a reflection of greater vertical specialization that exploits differences in comparative advantage to build a production network targeting foreign markets. In contrast, intra-industry trade in the developed economy groups (the North American Free Trade Agreement and the European Union) appears to stem primarily from demand for product variety in their large domestic markets. This difference can be seen clearly in Asia's increasing intermediate goods trade.

Implications

What are the implications of growing interdependence among economies in emerging Asia?

  • Decoupling from the global economy is unlikely. Developed economies outside Asia remain the chief destination of emerging Asia's final good exports. Indeed, the exposure of Asian economies to interregional exports has increased over the past 15 years.

  • The impact of exchange rate fluctuations on Asian final good exports may be limited. Exchange rate changes will be mitigated by a countervailing movement of import prices that represent a sizable portion of production costs.

  • Policies are needed to enhance complementarities. Structural reforms in the leading countries to encourage smooth upgrading of their technological competitiveness are important.

  • Free trade arrangements can help.

    Market access to third countries, especially in Europe and North America, appears to be crucial for further trade expansion and, hence, for industrial development.

Paul Gruenwald and Masahiro Hori IMF Asia and Pacific Department

For more information, please see Chapter 4 of Asia and Pacific Regional Economic Outlook, October 2007.

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