Urata 6 2 06

A Shift from Market-driven to Institution-driven Regionalization in East Asia: 

A Shift from Market-driven to Institution-driven Regionalization in East Asia June 2, 2006 Shujiro URATA Waseda University

I. Introduction: 

I. Introduction * Recent developments in the World Economy: Globalization and Regionalization * Two drivers of regionalization: Market mechanism Regional institution (Free trade agreements) * The purpose of the paper: examine the changing characteristics of regionalization in East Asia (ASEAN+3) with a focus on international trade and foreign direct investment and derive the implications

II. Changing Pattern of Foreign Trade in East Asia: 

II. Changing Pattern of Foreign Trade in East Asia 1. Expansion of intra-regional trade (Table 1) * The importance of China for other East Asian countries increased in foreign trade (Table 2) * The importance of East Asia for East Asian countries except China increased in trade * South Asia accounts for a small part of East Asia’s trade

Intra-regional Trade (%): 

Intra-regional Trade (%)

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2. Rapid expansion of Machinery trade * Especially, electrical and electronic products (Table 3) * Commodity composition of trade became similar among East Asian countries and for exports and imports (Table 4)

Changing Composition of East Asia’s Trade (%): 

Changing Composition of East Asia’s Trade (%)

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3. Expansion of intra-industry trade * For the machinery sector (Table 7) * Vertical intra-industry trade (Table 8) 4. Large share of parts trade in intra-regional trade in East Asia (Table 9) * East Asia is a factory of the world * Inter-process division of labor (fragmentation of production process)

Intra-industry trade index : 

Intra-industry trade index

Types of Intra-industry trade in East Asia (%): 

Types of Intra-industry trade in East Asia (%)

Share of Parts in Overall Trade (%): 

Share of Parts in Overall Trade (%)

III. Foreign Direct Investment: 

III. Foreign Direct Investment * Rapid expansion of FDI inflows to East Asia since the mid-1980s: major recipients, NIEs → ASEAN4 → China, Vietnam →India (?) * Intra-regional FDI, not notable compared to foreign trade (Table 10) * Concentration in electric and electronics (Table 11)

FDI Inflows as a Proportion to Domestic Capital Formation (%): 

FDI Inflows as a Proportion to Domestic Capital Formation (%)

Sectoral Distribution of FDI Inflows (%): 

Sectoral Distribution of FDI Inflows (%)

IV. Foreign Trade by Multinational Corporations (MNCs) : The Case of Japanese MNCs: 

IV. Foreign Trade by Multinational Corporations (MNCs) : The Case of Japanese MNCs 1. Geographical Orientation * Strong export orientation by MNCs in East Asia * Strong reliance on East Asia in both exports and imports (Table 12) 2. High share of intra-firm trade (Table 13) 3. Creation of Regional Production Network by Japanese MNCs

Geographical Allocation of Trade by Japanese MNCs in East Asia: 

Geographical Allocation of Trade by Japanese MNCs in East Asia

Share of Intra-firm trade in overall trade (%): 2001: 

Share of Intra-firm trade in overall trade (%): 2001

V. The Factors Behind Rapid Expansion of Intra-Regional Trade, Creation of Regional Production Networks: 

V. The Factors Behind Rapid Expansion of Intra-Regional Trade, Creation of Regional Production Networks * Trade and FDI Liberalization Unilateral Multilateral * Technical progress in communication and transportation services →　Reduce the cost of conducting trade and FDI

Tariff Rates (unweighted, %): 

Tariff Rates (unweighted, %)

VI. Institution-driven Regionalization: 

VI. Institution-driven Regionalization 1. Frameworks * Regional and Bilateral FTAs (Table 15) #East Asia FTA (under study) #Special characteristic: Comprehensiveness (trade/FDI liberalization and facilitation, economic assistance) * Monetary cooperation (Chaing Mai Initiative, Asian Bond market) 2. Reasons * Asian currency crisis * Expansion of FTAs in other parts of the world * Little progress in Doha Round under the WTO * WTO+α (new areas such as movement of natural persons, FDI, economic assistance, etc) * Rivalry (Japan, China, ASEAN, Korea)

FTAs in Action and Negotiation in East Asia: 

FTAs in Action and Negotiation in East Asia

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3. Expected Impacts * Positive impacts for FTA members +Increase in intra-regional trade (Table 16) + Promote economic growth (Table 17) + Increase mutual understanding * Negative impacts + Low quality FTAs discourage trade: complicated rules of origin + Spaghetti bowl + Distract resources away from WTO negotiations + Negative impacts on non-members

VII. Concluding Comments: 

VII. Concluding Comments * Rapid economic growth of East Asia: FDI played an crucial role by creating regional production networks * India has not been successful in attracting FDI + Problems (Survey by Japan Bank for International Cooperation, 2005) # Underdeveloped infrastructure # Lack of transparency in rules and regulations # Lack of information * For East Asia, to maintain growth momentum, avoid closed regionalism: High-quality FTAs (WTO consistency, broad coverage, simple ROOs, etc)