Value Creation and the Role of Intra-industry Trade in ASEAN Santi Chaisrisawatsuk School of Economic Development National Institute of Development Administration Presentation to SEASIA 2017 Conference, 17 December 2017 Chulalongkorn University, Bangkok, Thaialnd

Trading in the Age of Globalization and Technology Dynamism The possibility of IIT (Horizontally IIT) due to monopolistic competition and increasing return to scale despite similar factor endowment (Krugman (1979, 1981), Lancaster (1980), Helpman (1981)) A growing numbers of studies focus on the determinants of IIT, i.e., trade openness and IIT (Greater degree of IIT was found in association with increasing exports but not for imports) and IIT is more likely in the industry with monopolistic competition. Rapid production technology upgrading and networking Decreasing significant of economies of scale and increasing role of economies of scope in global competition Emergence of imperfection competition in global trading especially in the industry where large multinational enterprises dominate the market Heterogeneity in preferences and consumptions. Increasing trend of Industrial fragmentation and product segmentation in recent development.

Framework of the Study Can IIT enhances competitiveness? Any relationship? Can IIT contribute to productivity improvement? (work in progress) Can ASEAN through economic integration benefits from IIT as a way for value creation? Expansion of economic integration such as AFTA, ASEAN+1 and AEC Greater degree of economic integration (services and factors of production) Inter-industry trade (Homogenous and perfect competition) Intra-industry trade (Product differentiation and imperfect competition)

Intra-Industry Trade Increasing numbers of economic integration open up opportunities for trade, services as well as factors of production and hence, fostering value creation through efficiency gain from production networking Gains from intra-industry trade have been pointed out in two folds It is a welfare improvement as domestic consumers enjoy more varieties of product It is also claimed that value of the goods are added through product differentiation both vertically and horizontally

Intra-Industry Trade Theoretically, IIT determinants are both country-specific factors (endowment, economic size, income level, etc) and industry-specific factors (market competition, economies of scale, product differentiation, etc) Horizontal IIT (HIIT) refers to two-way trading of horizontal differentiated goods (Different by the product attributes) Vertical IIT (VIIT) refers to two-way trading of vertical differentiated goods (Different by the product quality) Empirical evidences found more support for country specific factor in IIT determinants. Grubel-Lloyd IIT index is applied in this study on SITC 2-digits trade data IIT = (1 – Σ ( | Xik – Mik | / (Xik + Mik)) * 100

Thailand’s IIT-G by SITC from 2007-2015

Thailand’s IIT-G by SITC from 2007-2015

Thailand’s IIT-G by SITC from 2007-2015

Thailand’s IIT-G by SITC from 2007-2015

Thailand’s IIT in Global market High degree of IIT are observed in most agriculture products, chemical, and machinery and transport equipments. Different trends are observed for IIT in ASEAN market where low IIT are observe for food and live animal sector. Chemical and manufactured goods are relative low IIT in the ASEAN market compare to global market for Thailand Not clear indication of greater intra-industry trade after AFTA or AEC except for some particular sectors such as plastic in primary form (SITC 57), cork and wood (SITC 24) It appears there are more fluctuation of IIT after the completion of AFTA (2010) both in the global as well as in the ASEAN market

Thailand’s IIT-A by SITC from 2007-2015

Thailand’s IIT-A by SITC from 2007-2015

Thailand’s IIT-A by SITC from 2007-2015

Thailand’s IIT-A by SITC from 2007-2015

Thailand’s IIT-G and Export Growth There is no clear association of Thailand’s export growth and intra-industry trade Thailand export growth trend to rely more on cost and price competition rather than on value added created by product differentiation both horizontally and vertically

Thailand’s IIT and Competitiveness

Thailand’s IIT and Competitiveness

Empirical Results Robust standard errors in parentheses (1) (2) (3) (4) VARIABLES REGrcaex FErcaex L.rcaex 0.978*** 0.980*** 0.349* 0.377* (0.0365) (0.0347) (0.189) (0.192) iita -0.000570 -0.00605*** (0.000477) (0.00150) iitg -0.000136 -0.000981 (0.000383) (0.00198) Constant 0.0368 0.0265 0.892*** 0.753*** (0.0438) (0.0338) (0.239) (0.278) Observations 544 R-squared 0.969 0.184 0.147 Number of sitc2 68 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Summary No clear empirical evidence suggests benefits from intra-industry trade after two major economic collaboration agreements; AFTA and AEC. Moving up value ladder through trade among ASEAN and taking advantage in developing production networking and eventually achieve narrowing economic development is still a challenging process for ASEAN Efficiency gains, competitiveness enhancement and benefits of diversification in response to greater market volatility and disruptive technology appear to be the key factors for ASEAN in further economic collaboration