Information about Asia and the Pacific Asia y el Pacífico
Chapter

IV. The Evolution of Trade in Emerging Asia

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
October 2007
Share
  • ShareShare
Information about Asia and the Pacific Asia y el Pacífico
Show Summary Details

Over the past two decades, emerging Asia has experienced rapid trade growth and stronger interdependence among economies in the region. Although this change has a number of dimensions, booming intraregional trade with China has played a central role. This appears to be largely a result of still-ongoing geographical dispersion of production, with assembly operations migrating to low-wage economies, while more developed economies specialize in production of high-value-added components. The resulting increase in vertical intraindustry trade, fostered by foreign direct investment, has created a sophisticated production network in emerging Asia, facilitating the “catch-up” process through technology transfer.

While this process is well known at a general level, a fuller understanding can contribute to betterinformed policymaking. For example, to evaluate the potential impact of a U.S. or global growth slowdown on Asia, a clear picture of the factors behind Asia’s stronger interdependence in recent years is needed. Similarly, the effect of increased exchange rate flexibility in China on the other economies of emerging Asia, and on the global economy more broadly, would depend on the precise role that China is playing in regional trade processes. While the IMF and a number of analysts have addressed these broad issues 35 and much anecdotal evidence has been presented, a comprehensive analysis of Asia’s changing trade patterns has been lacking. This chapter uses the IMF Direction of Trade Statistics and the UN COMTRADE database to attempt to help address this gap.36

The main findings are as follows:

  • The importance of exports to the region has reached an unprecedented high level. Thus, the conjecture that Asia can effectively de-link from either the U.S. or the global economy appears to be premature.

  • The expanded presence of emerging Asia in world trade has—as has been widely reported—resulted largely from increased regional trade integration. However, in contrast to more developed economies’ trading blocs, where intraregional trade is concentrated on final goods, emerging Asia’s export growth has been driven by trade in intermediate goods in response to vertical specialization. And, as emerging Asia has become a manufacturing center, China has dramatically raised its position as a destination for intraregional exports, acting as the region’s exporting platform.

  • Emerging Asia has recently begun to move away from a concentration in lower-end products toward a more diversified export base. Within Asia, the pattern of manufacture trade by country is broadly in line with levels of economic development, although our analysis does not exclude the possibility of occasional “leapfrogging.”

  • The degree of competition appears to be intensifying within Asia. While the export structure is still largely complementary and there remains a clear division of labor among countries, the picture is evolving. In particular, China appears to be outgrowing its role as a final-stage assembler in recent years and is increasingly competing with other Asian countries.

We turn now to consider each of these developments in detail.

Evolving Asian Trade

Increasing trade by emerging Asia has largely been driven by vertical intra-industry trade, which is ultimately dependent on access to world markets outside the region. Increasing intraregional trade implies stronger interdependence among countries in the region as well.

The Rise of Emerging Asia in World Trade

The export-oriented growth strategies of emerging Asian economies have been reflected in high trade growth and a steady increase of their share in world trade. The share of emerging Asia in world trade flows reached 34 percent in 2006, up sharply from 21 percent in 1990 (Figure 4.1). Moreover, the rise in emerging Asian trade accounted for about 40 percent of the total increase in world trade over the period.37

Figure 4.1.Asia’s Share in World Trade Flows

(In percent)

Sources : IMF, Direction of Trade Statistics and staff calculations.

Perhaps not surprisingly, emerging Asia is highly dependent on exports. While 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 (Figure 4.2). This high exposure can be attributed in part to the small open NIEs, especially Hong Kong SAR and Singapore, for which the 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.

Figure 4.2.Exposure to Exports

(Total exports in percent of GDP)

Sources: IMF, Direction of Trade Statistics and staff calculations.

Booming Asian Intraregional Trade

A large part of the increase in Asian trade is the result of regional integration. While trade flows outside emerging Asia roughly tripled between 1990 and 2006, inter-regional trade involving emerging Asia rose by 5 times, and intraregional trade within emerging Asia increased by 8.5 times (Figure 4.3). 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. The intraregional share of total imports is approaching 50 percent.

Figure 4.3.Trade among Industrial Asia, Emerging Asia, NAFTA, and EU–15 1

In billions of U.S. dollars, 2006)

Sources: IMF, Direction of Trade Statistics and staff calculations.

1 Numbers in brackets indicate how many times trade flows increased from 1990-2006.

Booming Asian trade integration is not confined to emerging economies. The share of industrial Asia’s exports to emerging Asia has also risen, from 30 percent in 1990 to 47 percent in 2006, mirroring the decline of exports from these economies to NAFTA and the European Union (Table 4.1). Likewise, the share of industrial Asia’s imports from emerging Asia also has increased, to 43 percent from 27 percent in 1990 (Table 4.2). As a result, intraregional trade now accounts for more than 50 percent of total trade in Asia, approaching the levels seen in NAFTA and the European Union.

Table 4.1Direction of Exports, 2006 1

(In percent of total exports)

Sources : IMF, Direction of Trade Statistics and staff calculations.

1 Numbers in parentheses are changes in shares from 1990 to 2006. Shaded cells indicate intraregional trade flows.

Table 4.2Direction of Exports, 2006 1

(In percent of total exports)

Sources : IMF, Direction of Trade Statistics and staff calculations.

1 Numbers in parentheses are changes in shares from 1990 to 2006. Shaded cells indicate intraregional trade flows.

The Rise of China in Intraregional Trade

China is playing a key role in the rise of the intraregional trade in Asia. While trade within emerging Asia, excluding China, increased by 6 times from 1990 to 2006, China-related flows increased by 12 times (Figure 4.4). The rise in the China-related trade accounts for almost 60 percent of intraregional trade growth in emerging Asia in 1990–2006 (Figure 4.5), and its contribution has been gaining momentum in recent years.

Figure 4.4.Trade among Industrial Asia, China, NIEs, and ASEAN–5 1

(In billions of U.S. dollars, 2006)

Sources: IMF, Direction of Trade Statistics and staff calculations.

1 Numbers in brackets indicate how many times trade flows increased from 1990-2006.

Figure 4.5.Intraregional Trade in Emerging Asia: China-Related vs. Other

Sources: IMF, Direction of Trade Statistics and staff calculations.

As a result, China has raised its position as an export destination, as well as a source of imports, for other Asian economies (Table 4.3). At the same time, China increased the share of its exports to regions outside Asia, reflecting its role as the region’s exporting platform to the rest of the world (Table 4.4). For example, the share of NIE exports going to China reached 25 percent in 2006, compared with just 7 percent in 1990, while the share of Chinese exports going to regions outside Asia reached almost 60 percent, up from 41 percent in 1990.

Table 4.3.Direction of Exports in Asia, 2006 1

(In percent of total exports)

Sources: IMF, Direction of Trade Statistics and staff calculations.

1 Numbers in parentheses are changes in shares from 1990 to 2006. Shaded cells indicate intraregional trade flows.

Table 4.4.Source of Imports in Asia, 2006 1

(In percent of total imports)

Sources: IMF, Direction of Trade Statistics and staff calculations.

1 Numbers in parentheses are changes in shares from 1990 to 2006. Shaded cells indicate intraregional trade flows.

The Rise in Intra-Industry Trade

Booming intraregional trade in Asia has been driven by an increase in intra-industry trade.38 Across all regions, the share of trade accounted for by intraindustry trade is generally higher in intraregional trade than in inter-regional trade (Figure 4.6). And intra-industry trade has tended to rise faster than total trade in most parts of the world. In Asia, the share of intra-industry trade in regional trade was relatively low until the early 1990s but has increased sharply.

Figure 4.6.Intra-Industry Trade Index by Region 1

Sources: UN Comtrade database; and IMF staff calculations.

1Grubel and Lloyd Index measured at the SITC 2-digit level.

The rise in intra-industry trade in emerging Asia tracks developments in the more advanced economies, but the motivation behind this structural change in Asia is quite different. Intra-industry trade in emerging Asia is primarily a reflection of greater vertical specialization that exploits differences in comparative advantage to build a production nexus targeting foreign markets, while intra-industry trade in the developed economy groups appears to stem primarily from demand for product variety in the context of their large domestic markets. This difference can be seen clearly in the increasing intermediate-goods trade in Asia. The share of intermediate goods in trade flows into emerging Asia has increased to the 60–65 percent level, while the share in trade flows among more developed economies is barely 40 percent (Figure 4.7). On the other hand, the share of intermediate goods flowing from emerging Asia to the more developed economies is low, at around 30 percent, as exports to the rest of the world tend to be final goods.

Figure 4.7.Intermediate Goods among Manufactured Goods Trade Flows

(Share in percent)

Sources: UN Comtrade database; and IMF staff calculations.

Again, China’s role is key: intermediate goods are increasingly flowing into China, while final products are flowing out of the region through China. If we compare the direction of exports among the different types of commodities—i.e., intermediate, capital, and consumer goods—the share flowing to markets outside the region is the lowest for intermediate goods and the highest for consumer goods (Table 4.5). Within Asia, China is gaining as a destination for intermediate good exports, offsetting the declining importance of Asia’s intermediate-goods exports to the developed economies. Capital goods appear to be going through a similar change, albeit to a lesser degree: more of Asia’s exports are going to China and less to the rest of the world.

Table 4.5.Direction of Manufactured Goods Exports in Asia, 2005 1

(Share in percent)

Sources: UN Comtrade database; and IMF staff calculations.

1 Numbers in parentheses are changes in share from 1992 to 2005. Shaded cells indicate intraregional trade flows.

Finally, China continues to be a relatively small market for Asian consumer goods, although here too its share is rising. At the same time, China has drastically increased its share of exports destined for the rest of the world across all three categories of goods.39

Explaining the Changing Pattern of Trade: The Role of Comparative Advantage

Using detailed product-level trade data, this section analyzes the changing pattern of comparative advantage among emerging Asia economies. We find that while China’s export structure is rapidly catching up with that of more advanced Asian economies, the regional pattern of trade remains broadly in line with countries’ levels of economic development, suggesting a complementary relationship aimed at exploiting differences in comparative advantage among countries in the region.

To analyze the changing role of the emerging Asian economies in world trade, we have constructed a proxy for the level of technology content in each manufactured export item.40 First, we calculated the share of the top seven high-tech countries in world exports of manufactured goods at the SITC (revision 3) 5-digit level.41 Based on these export shares, we then ordered the individual goods from high-value-added to low-value-added, under the assumption that high-value-added products are those that are exported from countries with a hightech infrastructure. Given this ranking, we then divided manufactured good exports into nine groups, from high-value-added to low-value-added, and examined the performance of emerging Asian exports in each group. Our key findings are as follows:

  • Emerging Asia is gradually moving away from a concentration in lower-end products toward a more diversified export base (Figure 4.8). In the early 1990s, emerging Asia’s share in the lowestend manufactured good exports, mainly consumer goods, had already reached about 45 percent, while in the highest-end goods, its share stood at about 5 percent. However, by 2005, the situation had changed: while the share in the lowest-end products has remained stable, emerging Asia gained shares in all export markets in the middle range and, to a lesser extent, in the high end. That is, emerging Asia moved up the value chain, with its exports becoming similar to those of the more (technologically) advanced countries in the world.

  • In intra-Asian trade, as expected, the more technologically advanced countries have supplied the less advanced countries with intermediate products. Beginning the analysis in 1995, the NIEs were a supplier of mid-value-added intermediate goods to the rest of emerging Asia, while exports of consumer and capital good exports were limited, probably by the size of markets (Figure 4.9a). NIE exports were more diversified from highend to low-end than other subregions in emerging Asia, but generally less sophisticated than commodities imported from more developed economies (Figure 4.9d). ASEAN-5 also played a role as a supplier of intermediate goods, but its contribution in the higher-end exports was limited compared with NIEs, while its modest exports of final goods were concentrated at the lower end (Figure 4.9b). Chinese exports centered on the lowest-value added commodities, mainly consumer goods (Figure 4.9c).42

  • By 2005, emerging Asia had moved up the ladder of technological sophistication in intraregional trade. NIEs have increased their share in the mid- to highend products, in both intermediate and capital goods, and started to lose market share of lowend intermediate goods (Figure 4.9e). ASEAN-5 also has gained a foothold in the export of midrange intermediate products, exhibiting a pattern of exports similar to that of NIEs in the mid-1990s (Figure 4.9f). While Chinese exports still center on the low-end consumer goods, China has started to export intermediate goods and capital goods within emerging Asia (Figure 4.9g). In this sense, China appears to be outgrowing the role of an “assembly line,” and is increasingly competing with regional neighbors. However, still-modest intraregional consumer good exports suggest that emerging Asia may still be too small to count on as a leading market for final products.

  • In its trade with developed economies, emerging Asia was largely a producer of low-end final goods in 1995. Even the NIEs’ exports were largely in the low-end consumer goods and intermediate goods (Figure 4.10a). ASEAN-5 exports were even more concentrated on the lowest-end consumer goods (Figure 4.10b). The only Chinese products to penetrate developed economy markets as of 1995 were the lowest-end consumer goods (Figure 4.10c).

  • By 2005, there had been a dramatic switch in the exports of low-value-added products to developed markets, from the NIEs to China. The NIEs’ share of the low-end consumer goods market halved to 7 percent from 1995 to 2005 (Figure 4.10e). The NIEs also lost their share in the low-end capital and intermediate goods markets. Over the same period, China doubled its share, to close to a quarter in the lowest-end consumer goods market, and also gained share in the lowto mid-end markets of capital and intermediate goods (Figure 4.10g). These changes—combined with NIEs’ gains in mid-value-added intermediate goods regionally—illustrate the migration of assembly operations from highwage to low-wage countries.

Figure 4.8.Emerging Asia’s Exports by Level of Commodity Sophistication

(In billions of U.S. dollars)

Sources: UN Comtrade database; and IMF staff calculations.

Figure 4.9.Patterns of Exports to Emerging Asia

(In percent of total imports in emerging Asia)

a. Share of NIEs’ Exports, 1995

b. Share of ASEAN-5’s Exports, 1995

c. Share of China’s Exports, 1995

d. Share of Developed Economies’ Exports, 1995 1

e. Share of NIEs’ Exports, 2005

f. Share of ASEAN-5’s Exports, 2005

g. Share of China’s Exports, 2005 1

h. Share of Developed Economies’ Exports, 20051

Sources: UN Comtrade database; and IMF staff calculations.

1 Developed economies include industrial Asia, NAFTA, and EU-15.

Figure 4.10.Patterns of Exports to Developed Economies 1

(In percent of total imports in developed economies)

a. Share of NIEs’ Exports, 1995

b. Share of ASEAN-5’s Exports, 1995

c. Share of China’s Exports, 1995

d. Share of Developed Economies’ Exports, 1995 2

e. Share of NIEs’ Exports, 2005

f. Share of ASEAN-5’s Exports, 2005

g. Share of China’s Exports, 2005

h. Share of Developed Economies’ Exports, 2005 2

Sources: UN Comtrade database; and IMF staff calculations.

1 Developed economies include industrial Asia, NAFTA, and EU-1.5

2 The large share of developed economies’ consumer goods exports in the third category are due to automobiles.

The Rise in Intraregional Competition

While there remains a clear division of labor among Asian subregions, the complementary relationship shows some signs of evolving into a more competitive one.

We examine the extent of competition utilizing two measures. The first measure is the index of export similarity (IES). This measure seeks to capture the extent to which two economies are exporting a similar composition of products.43 This index takes on a value of 100 if the share composition of exports is identical between two countries, and 0 if the sets of goods exported from the two economies are totally different. The second measure, the index of export overlap (IEO), gauges the extent of competition by the share of export overlap between two economies in each economy’s total exports (see Figure 4.11).44 The greater the area of overlap as a percentage of economy A’s (or B’s) total exports, the more economy B (A) is a competitor for economy A (B). This index also takes on a value between 100 (full overlap) and 0 (no overlap). Note that, unlike the IES, the IEO explicitly takes into account the size of an economy’s exports relative to the size of its trading partners’ exports.

Figure 14.11.Competition between Economy A and B: Export Overlap Measure

Sources: IMF staff calculations.

As these two indices are complementary,45 we analyze developments in both dimensions of competition in Figure 4.12. An observation in the upper right quadrant of the chart indicates a higher similarity of export good composition and greater share of export overlap, suggesting relatively intense competition. An observation in the lower left quadrant would, on the other hand, point to regional specialization.

Figure 4.12.Two-Dimensional Charts of Competition Measures: Competition from Other Subregions in Asia

Sources: UN Comtrade database; and IMF staff calculations.

Generally speaking, competition among subregions in Asia is intensifying (Figure 4.12):

  • For industrial Asia, competition from other subregions is becoming stronger, by both measures, although competition with latecomers in ASEAN-5 and China is still modest.

  • The export composition of ASEAN-5 is quickly becoming similar to that of the NIEs, while the pace of increase in their export overlap is more gradual.

  • ASEAN-5 is experiencing rising competition with all other subregions, especially China.

  • From China’s viewpoint, export overlap with other subregions has declined recently, while export similarity is rising, owing to the much larger volume and faster rate growth of China’s exports.

While these two indices point to rising competition within Asia, they may overstate the case. First, while our data are quite detailed, it is still the case that within any product category more developed economies tend to specialize in highervalue products. Indeed, the derived unit prices of Japanese exports of a given commodity are 1.5–2.5 times higher than those of emerging Asian exports, while those of China are the lowest in the region (Figure 4.13).46 Second, high-end exports of less developed economies, especially China, are likely to include more imported intermediate goods than exports by more advanced countries. This reinforces the notion that the export structures of Asian subregions are still primarily complementary, although we cannot disregard the possibility of increased future competition as latecomers catch up.

Figure 4.13.Comparison of Unit Prices by Exporters

(Relative to ASEAN-5’s unit price)

Sources: UN Comtrade database; and IMF staff calculations.

Summary and Implications

This chapter has aimed to provide a comprehensive description of the evolution of trade in emerging Asia. We confirmed that, as widely believed, trade expansion has been driven by deepening intraregional trade. This, in turn, reflects the geographical dispersion of production processes, with assembly operations migrating to low-wage countries, especially China, while high-wage economies specialize in the production of high-value components.

China’s rapidly expanding exports, as well as its rising presence in some IT products, have given rise to the perception that it is a special case, breaching the so-called flying-geese pattern of developments in emerging Asia, and moving quickly to high-tech exports. However, our findings suggest that the expansion of vertical intra-industry trade in emerging Asia has been a relatively orderly process in which subregions (including China) largely specialize in the production of goods that broadly coincide with their level of economic development.

Looking ahead, one can expect heightened competition as the latecomers catch up with more advanced countries. China is growing out of its role as a final assembler of goods, embarking on domestic production of parts and components. However, this production still centers for the most part on less sophisticated products. In that sense, the trade relationship in emerging Asia still appears largely complementary.

The findings above have several implications for the interdependence among economies as well as for policymakers.

  • Decoupling. Given the increasing share of intraregional trade, it may be tempting to argue that emerging Asian business cycles will become less synchronized with those outside the region. However, the findings in this chapter suggest that this is likely not the case. Developed economies remain the main destination of final good exports by emerging Asia (Figure 4.14). Indeed, the exposure of Asian economies to inter-regional exports has actually increased over the past 15 years (Figure 4.15).

  • The impact of exchange rate fluctuations on Asian final good exports. Given that the processing trade accounts for an important share of total trade, exchange rates may have only a limited impact on export prices of final goods, as these will be mitigated by a countervailing movement of import prices that represent a sizable portion of production costs.47 However, the observed shift of trade toward higher-end products suggests that exports and imports could become more sensitive to the relative price changes over time.

  • Policies to enhance complementarities. Booming intraregional trade seems likely to facilitate the “catching up” process through technology transfers from more advanced economies to less advanced to latecomers. However, to ensure that this process remains a sustainable impetus to continued regional growth, these positive complementary relationships need to be maintained among subregions. In this regard, structural reforms in the leading countries to encourage smooth upgrading of their technological competitiveness, such as those in labor and financial sectors to facilitate the reallocation of resources along the lines of comparative advantage, are important, as is the further easing of trade and investment barriers in the region more generally.

  • Free trade arrangements. Given the structure of the vertical intra-industry trade with final goods targeted at the developed economies (outside the region), market access to third countries, especially in Europe and North America, appears to be crucial for further trade expansion, and hence for industrial development. A successful Doha Round is obviously in the interest of the region. Additionally, well-designed bilateral free trade arrangements with the developed economies may also benefit the region as long as they complement trade liberalization on a nonpreferential basis.

Figure 4.14.Developed Economies’ Share of Consumer Goods Exports from Emerging Asia

(In percent)

Sources: CEIC Data Company Ltd.; and IMF staff calculations.

Figure 4.15.Breakdown of Exposure to Exports

(Total exports in percent of GDP)

Sources: IMF, Direction of Trade Statistics and staff calculations.

    Other Resources Citing This Publication