Can We Count on Intra-regional Trade as a Source of Growth?

Topics East Asia in the world Economy and Linkages within the Region Intensification of Intra-regional Trade in East Asia Final Demand and Trade Linkages within East Asia Potential and Trends of Intra-regional Trade Policy Implications for Thailand

Export of Thailand and East Asian

East Asia in the world Economy and Linkages within the Region

Four new aspects of Modern world trade 1.The rise of the intra-trade. 2.Trade in similar goods between similar countries. 3.The ability of producers to slice up the value chain. 4.Breaking the production process into many geo-graphically seperates steps.

Intra-regional Trade in East Asia

Intensification of Intra-regional Trade In East Asia

We spread the argument into 2 topics : 1.)Disaggregation by Countries 2.)Disaggregation by Products

Disaggregation by Countries!

Disaggregation by Countries The 5 major players in the East-Asia intra-region trade : 1.) China 2.) Hong Kong 3.) Taiwan 4.) Korea 5.) Singapore These 5 countries account for 78% of the intra-regional exports and 72% of imports. These 5 countries account for 78% of the intra-regional exports and 72% of imports.

Disaggregation by Countries

2 Group of trading area by geography 1.) North East Asia : China, Korea, Hong Kong, and Taiwan 2.) South East Asia : Thailand, Malaysia, Indonesia, Singapore, and Philipines Disaggregation by Countries

$240 billion $87 billion $240 billion $87 billion

Disaggregation by Countries

Why Chinese trade lines keep rising? 1) It ’ s new market with population of more than 1200 millions. 2)Low-cost of labor which can help lower costs of the total production. The US market share of East Asian countries are declining, except China that its share grows rapidly.

Disaggregation by Countries

Disaggregation by Products!

After 1989, there was a “ changing of production structure ” from less sophistcated products to more sophisticated products. Disaggregation by Products

Account for 45% Increase 14-17% per year

Disaggregation by Products “ Moving Up the Product Ladders ” The export production will be shifted from more advanced countries to less advanced countries.

Disaggregation by Products

ASEAN-4s is moving up product ladder by producing more sophisticated products such as machinery products,and reducing the productions of less sophisticated. Especially year 1998(after the crisis).

Disaggregation by Products Thailand was constantly moving up the product ladders over time, especially after the financial crisis and sharp depreciation of the Baht.

Disaggregation by Products

“ The rise of international division of labor and intra-industry trade ” Disaggregation by Products The growing “ internationalization ” of production system, which increasingly involve vertical trading chains spanning a number of countries, each specializing in a particular stage of production, is an important feature behind the changing nature and the increasing scale of the trade …

Disaggregation by Products

Final Demand and Trade Linkages within East Asia

Disaggregate by country suggests that intra region trade may be driven by Demand from outside East Asia. Disaggregate by type of product suggests that intensified intra-regional trade may change supply side (especially manufacture product). Interpretation

The estimation equation is in this form = export volume growth of country i at time t = lagged G3 economic growth using manufacturing production index as a proxy = weighted average of domestic demand growth of East Asian countries = lagged export price of country i at time t Demand structure for Exports

Total exports depend on final demand in both region Demand structure for Exports

Trade Cycle Synchronization and Intra-regional Trade as a Buffer to Demand Shocks from G3

Potential and Trends of Intra-regional Trade

We use this model to predict the potential and trends of intra-regional trade. Gravity Equations

We can see that, trade or export is depending on distance and GDP in both two countries. Income level of both countries as measured by GDP. The distance between two countries, the closer will trade much more because of transportation costs, cultural barrier, and the other trade barriers.

Gravity Equations

Export is not depending on only distance and GDP but also another variable. The other variables are FDI, currency and tariffs.

Gravity Equations

Potential for Trade We use the coefficients from gravity equation and actual data on GDP and distance between two countries to get the predicted level of trade. The difference between the predicted level of trade and the actual level of trade is potential trade.

Potential for Trade

We can predict the future trend by coefficients from gravity equation and possible growth different between G3 and East Asia region. Future Trend

G3 countries G3 countries are the highest countries which have high technological and high labor productivities in the world. For increase their GDP, these countries must depend on their technological capability. Future Trend

East Asia region East Asia is still young region. They still have much to catch up to G3 countries by transfers of production techniques and knowledge from the west. Future Trend

Year 2022

Intra-regional trade will be more important for expanding East Asian economies. In short run, Thailand gain export growth to China. In the long run, Thailand can grow faster than G3 because they will have more prosperity which could be the power of growth. Future Trend

The countries in region are still behind G3 countries in term of development with GDP per capita. If we together as a region manage to repeat catching up experience by Japan and NIES, intra-regional export will serve as a new resource of growth for Thailand for the medium-term. Future Trend

Policy Implications for Thailand

Bilateral Free Trade Agreements and Regional Integration

Example of Free Trade Agreements in East Asia  ASEAN Free Trade initiative with China in 2001  Singapore VS New Zealand (2000) Japan (2002) European Free Trade association (2002) Australia (2003) The US (2003) Canada, India, Korea, Mexico, and Taiwan (currently under negotiations) Bilateral Free Trade Agreements and Regional Integration

FTA can create “trade diversion”  Trade Diversion: DWL occurred because of what should be traded with country outside the block but due to the reduction in tariff via the FTA, it has been instead produced by members of the group at higher costs Arguments against Trade Arrangements

Renato Guggierro, the former WTO Director General (2003)  (Regional agreements) might become a substitute for - rather than a complement to- multilateral liberalization at the WTO”  Leading to a fragmentation of the world trade system rather than freer global trade Arguments against Trade Arrangements

Renato Guggierro, the former WTO Director General (2003)  “competitive regionalism” (defensive, or even hostile, regional blocs)  In any case, regional and bilateral deals are a poor second-best to global free trade.  Preferences granted to some are handicaps imposed on others. Countries that are excluded from such agreements suffer. Arguments against Trade Arrangements

Policy direction  Priorities for free trade agreements  The supply structure within the region  The demand structure of South East Asia Implications for Thailand

Priorities for Free Trade Agreements

Groups of East Asian, based on Kwan (2002) methodology (according to their export structure)  Japan  Newly Industrialized Asian Economies (NIES)  ASEAN-4 (Thailand, Malaysia, Indonesia and the Philippines)  China and India Priorities for Free Trade Agreements

Japan

Newly Industrialized Asian Economies (NIES)

ASEAN-4

China and India

Presently, the Royal Thai government has made much progress on this front with the FTA between China and ASEAN signed FTA with India to be signed later this year as well as any more in the negotiation process. Priorities for Free Trade Agreements

In the 1990s;  how to use the region as a platform for the world market. Now;  the internationalization of the production process and how countries in the region can come together as one part of the assembly line The supply Structure within the Region

Demands within ASEAN are quite fragmented compared with China and India. Creating a more integrated market The Demand Structure of South East Asia

List of possible regional preferential trading arrangements to be considered (Lloyd and Crosby; 2002)  Free trade area, custom unions, common market, single market, economic union, monetary union, and fiscal union Fragmented ASEAN is not an option  SE Asia will be at the disadvantage with respect to the neighbors with large markets. The Demand Structure of South East Asia

Intra regional trade will become more and more important in the external trade of East Asia countries. This region will become one of the largest trading areas in the world with the largest consumers Conclusion