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Inter-industry trade

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Inter-industry trade

With respect to a FTA between ASEAN and China seem to gain both through inter- and intra-industry specialization. In early 1990’s China accelerated its economic growth. It grew at the annual average rate of as high as 10% throughout the 1990’s. The 1997-98 Asian Crisis which disrupted many economies in East Asia, especially ASEAN members, did not affect China as severely. On the contrary, the Chinese economy continued to grow around 7% annually in the subsequent years.

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Initially the rise of China as an industrial power was regarded as a threat to the ASEAN economies.

Because of its almost inexhaustible supply of unskilled labor and its absorption of a huge amount of foreign direct investment (FDI). Whereas China’s rise in the 1990’s caused a great deal of concern among the ASEAN countries, China’s further rise during the first decade of the 21st Century seems to have instead generated confidence among them. The cornerstone of the shift is a framework agreement on comprehensive economic cooperation between ASEAN and China, including the establishment of an ASEAN-China FTA by 2010 for the original ASEAN members, and 2015 for the new members.

Expanding Chinese economy is now regarded more as an opportunity than as a threat.

Regional integration among developing countries often fails to materialize expected benefits. This is partly because there is little scope either for inter-industry or intra-industry specialization among countries in the scheme, as they tend to possess comparative advantage in the same product. Exactly for this reason, the swift shift in the policy stance of ASEAN presents an intellectual puzzle and a policy question.

We will compare the economic performance of ASEAN, China and India in the world economy and then, calculates the indexes of revealed comparative advantage (RCA) for ASEAN, China, and India, respectively, and observes whether there is room for gain through inter-industry specialization.

China is considered to be particularly promising and influential country in the world, both economically and politically in the 21st Century. It is thus interesting to examine to what extent China is gaining an importance in the global economy relative to ASEAN.

ASEAN, China and India are compared in terms of production and trade (Table 1). The date in the table shows the remarkable rise of China as an economic power in all aspects. Because of the rapid growth in China over the past decade, the share of China including Hong Kong will soon reach 5% in global GDP at the current exchange rate vis-à-vis US dollar. If the Chinese currency is revalued, its share increases sharply.

Table 1. Shares of ASEAN, China and India in the world economy

1990
1995
2000
2008
GDP
China
1.6
2.4
3.4
3.9
(US $)
(w/Hong Kong)
2.0
2.9
3.9
4.3

India
1.5
1.2
1.4
1.5

ASEAN
1.5
2.1
1.7
1.7

Merchandize exports
China
1.8
2.9
3.5
5.5
(US $)
(w/Hong Kong)
4.1
3.0
3.9
4.4

India
0.5
0.6
0.7
0.7

ASEAN
4.0
6.0
6.3
5.4

Merchandize imports
China
1.5
2.5
3.4
5.3
(US $)
(w/Hong Kong)
3.9
5.2
6.5
6.9

India
0.7
0.7
0.8
0.9

ASEAN
4.4
6.5
5.2
4.5

Commercial Service exports
China
0.9
1.6
2.9
3.7
(US $)
India
0.5
0.6
1.2
1.4

ASEAN
3.8
6.0
6.4
8.8

Commercial Service imports
China
0.5
2.1
2.5
3.3
(US $)
India
0.5
0.9
1.3
1.3

ASEAN
3.6
6.8
5.5
5.1
Source: World Bank, World Document Indicator Online

The actual economic power of China may be better reflected in the trade data, since the real economic value of non-tradable goods which is included in GDP is difficult to measure. According to the data, the share of China including Hong Kong in merchandise trade will reach almost 9% in terms of exports and imports, an almost doubling of these shares from the past decade or so. The share of China also increased rapidly in services trade. Although China continues to run trade deficits in services, its share pf global services export (including those from Hong Kong) increased from 1% to 4%.

Balassa (1998) was the first to develop an empirical approach to investigating the changing pattern of comparative advantage in goods and services or what we refer to today as an index of revealed comparative advantage (RCA). ?? The index is calculated as follows:

RCA ij = (Xij / ∑X ij) / (X iw / ∑X iw)

where Xij is the export value of product group i of country j , ∑Xij is the total export value of country j , Xiw is the world export value of product group i , and ∑Xiw is the total world export value. An RCA ij exceeding 1 indicates that country j has a comparative advantage in the production of product i in the global economy. An RCA ij less than 1 indicates the opposite. The RCA indexes are calculated for each ASEAN member (Indonesia, Malaysia, Philippines, Singapore and Thailand) as well as for China and India at the two-digit level of SITC R1.

The indexes are then ranked for each country and Spearman’s rank correlation coefficients between the rankings of RCA indexes are calculated between ASEAN and China, and between ASEAN and India, respectively. If the coefficient is positive and statistically significant, the trade structures of the two country groups are very similar and they are competitive with one another. This implies that there may not be much room for ASEAN and China or ASEAN and India to gain through inter-industry specialization. On the other hand, if the coefficient is negative and statistically significant, their trade structures are very different and complementary to one another. In the latter case, the formation of a FTA could bring about substantial gains through inter-industry specialization.

Findings:

Table 2 shows the results of the exercise above. First, both Thailand and the Philippines possess high Spearman’s rank correlation coefficients with both China and India and in most years, the coefficients are statistically significant. This means that both Thailand and the Philippines have trade structures which are quite similar to that of China and India. These statistical results imply that the inter-industry specialization may not develop between the former (the Philippines and Thailand) and the latter (China and India), even if the closer economic cooperation is promoted between the two. Spearman’s rank correlation coefficients are, on the other hand, low or even negative between these two Asian economics (China and India) and the other three ASEAN countries (Indonesia, Malaysia and Singapore). Moreover, none of the coefficients are statistically significant. This suggests that it is indeterminate as to whether both groups are more competitive or complementary to each other. In other words, in some respects their trade structures may be very similar and competitive, and in other respects, they may be very dissimilar and complementary to one another.

Table 2. Spearman’s Rank Correlation Coefficients of the Rankings of the RCA Indexes between ASEAN, India and China
ASEAN
Year
China
India
ASEAN
Year
China
India
Indonesia
1990
-2.17
1.15
Singapore
1990
0.02
1.05

1991
-1.15
1.15

1991
-0.02
1.05
1992
-1.04
1.22
1992
0.04
1.06
1993
1.00
1.20
1993
0.00
1.04
1994
1.00
1.28
1994
0.00
1.05
1995
1.00
1.32
1995
-0.04
1.05
1996
1.01
2.10
1996
-0.11
1.05
1997
1.04
1.04
1997
-0.12
1.10
1998
-1.08
1.07
1998
-0.04
1.14
1999
-1.00
1.09
1999
-0.11
1.10
2000
-3.00
1.09
2000
-0.06
1.15
2001
1.07
1.09
2001
-0.03
1.12
2002
-1.04
1.08
2002
-0.05
1.15
2003
-1.04
1.12
2003
-0.09
1.11
Malaysia
1990
-1.17
-1.04
Thailand
1990
0.31
0.44

1991
-1.16
-1.05

1991
0.41
0.47
1992
-1.11
-1.03
1992
0.50
0.43
1993
-1.09
1.01
1993
0.49
0.53
1994
-1.12
-1.04
1994
0.41
0.40
1995
-1.10
-1.05
1995
0.32
0.44
1996
-1.00
-1.01
1996
0.31
0.27
1997
1.04
-1.15
1997
0.30
0.33
1998
1.04
-1.07
1998
0.34
0.54
1999
-1.05
-1.12
1999
0.51
0.55
2000
-1.04
-104.00
2000
0.29
0.52
2001
-1.03
-1.09
2001
0.27
0.31
2002
-1.05
-1.09
2002
1.14
1.14
2003
-1.70
-1.09
2003
0.37
0.30
Philippines
1990
1.15
1.21

1991
1.17
1.21

1992
1.14
1.25

1993
1.16
1.30

1994
1.54
1.31

1995
1.17
1.31

1996
1.21
1.31

1997
1.24
1.27

1998
1.30
1.23

1999
1.38
1.25

2000
1.29
1.15

2001
1.27
1.23

2002
1.26
1.15

2003
1.27
1.05

Source: Marcus Noland, “Implications of Asian Economic Growth,” Asia Pacific Economic Cooperation Working Paper Series Number 94-5, Washington: Institute for International Economics.

The products imported by and exported from ASEAN changed over time as the member countries’ economies developed; from once being heavily dependent on raw materials and natural resources such as wood, rubber and fish, the majority of ASEAN’s exports are now in manufactured goods such as electrical equipment and computers and machinery—Singapore, in particular, has become a major high-tech hub. While trading partnerships with some smaller trading partners such as India and Russia are still formed on the traditional basis of comparative advantage and involve cross-sectoral inter-industry trade, many of ASEAN’s trading relationships are now characterized by intra-industry trade. Though counter to the most basic economic theories, this fact is far from a surprise: recent developments in the theory of international trade under the auspices of MIT economist Paul Krugman and others’ ‘New Trade Theory’ have suggested that as much as 70% of world trade is intra-industry and, rather than being based on comparative advantage, is motivated by economies of scope and scale as well as by product differentiation. This phenomenon can be seen clearly in several ASEAN trading partnerships, particularly that with China, a country with a level of economic development similar to many ASEAN nations. As intra-industry trade characterizes the majority of trading relationships between the world’s developed countries, it is likely that this trend of increased intra-industry trade, particularly in the manufactured goods sectors, will continue over the coming years as China develop and become further integrated.

Most of the trade between ASEAN and China is intra-industry trade–four of the top five import sectors are also top export sectors.

Australia-China bilateral trade has grown rapidly during the past three decades. According to statistics from the UN (2007), the total merchandise trade between the two countries increased from US$100 million in 1972, when the two countries first established diplomatic relations, to US$32.9 billion in 2006, with an average annual growth rate of 18.5% (year-on-year), which is around twice that for total world trade (around 9.8%) over this period. Based on Australian statistics, Australia’s total merchandise exports to China have risen from US$46.4 million to US$19.3 billion representing a more than four hundred-fold increase, while Australia’s merchandise imports from China have increased from US$53.7 million to US$13.6 billion increasing by over 250-fold over the same period (see Table 3). The bilateral balance of payments for Australia with China changed from around a 10% surplus to about a 10% deficit between 1972 and 2006.

TABLE 3 ANNUAL GROWTH RATE OF AUSTRALIA-CHINA TRADE IN DIFFERENT TIME

PERIODS (%)

                          1972-1992 *  1992-2000  2000-2006  1972-2006

With Australian reported

data

Export (Australia-China)     17.22       10.35      35.46      17.67

Import (Australia-China)     18.81       18.58      19.62      18.86

Total Trade                  18.22       17.93      29.52      18.36

With Chinese reported

data

Export (Australia-China)      8.11       14.75      25.17      14.29

Import (Australia-China)     14.77       22.85      25.85      19.66

Total Trade                   9.66       17.47      25.45      15.86

Note: * The growth rates of imports, exports and total trade using

Chinese reported data are calculated over the period 1984-1992.

Source: UN (2007).

First, bilateral exports and imports on average kept increasing at a similar pace. The average annual growth rate of exports and imports during the period was 17.7 % and 18.9 % respectively, which is similar to that of total trade at 18.4 per cent. Second, inter-industry trade has been predominant in Australia-China bilateral trade in terms of both quantity and growth. There is a strong evidence that trade between the two countries is complementary. On average inter-industry trade as a proportion of total trade between Australia and China over the period 1988-2005 was 88.5%. Australia’s main exports to China are agricultural, mineral, and energy products while China’s main exports to Australia are chiefly labor intensive goods, including textile and clothing and footwear products, as well as machinery and electronics. Third, trade dependency (defined as the shares of bilateral imports, exports and total trade in each country’s total imports, exports and total trade) between Australia and China has increased significantly over time. For example the import and export dependency of Australia on China increased from 0.74% and 1.18% to 9.85% and 13.77% respectively over the period 1972-2006, indicating that the Australian economy has become increasingly dependent on the Chinese economy (especially for its exports). On the other hand, the import dependency of China on Australia increased from 0.84 to 1.99% while its export dependency on Australia has been falling during the period 1972-2006. These characteristics show that economic integration between the two countries has been driven by their underlying comparative advantage.

China’s bilateral IIT calculated and indices with Japan and the US for all traded commodities and manufacturing products as a whole for the period between 1980 and 2004. Table 4 reports the indexes for selected years, in 1980, intra-industry trade between China and Japan accounted for merely 5.6%, and between China and the US, 4%. China’s intra-industry trade in manufacturing with both countries was relative high, but still lower than 10%. The extremely low level of intra-industry activities suggest that the bilateral trade between China and its major trading partners was mainly in the form of exchanging different products. The trade patterns were largely determined by comparative advantages determined by the differences in factor endowments and technology gaps.

In 2004, the IIT between China and US accounted for merely 9% of the overall trade, and 15% of trade in manufacturing products. The US has run a trade deficit with China since 1983. The trade deficit reached 162 billion USD in 2004. Generally trade deficit causes biases in the calculation of IIT indexes and tends to inflate the indexes. Given the huge trade deficit between China and the US, the actual intra-industry trade might be even lower than showed by the estimated indexes. The small proportion of IIT in Sino-US trade implies that the trade pattern between China and the US is mainly dominated by inter-industry trade. Most of the growth in trade between the two economies during the last two and half decades was attributed to the growth of inter-industry trade. The economic integration between the two economies actually intensified the specializations between the two economies. Differences in resource endowments and technology still perform a fundamental role in shaping trade patterns between the two countries.

Table 4. China’s bilateral intra-industry trade with Japan and the US

Traded commodities
Manufacturing products

Sector
Japan
US
Japan
US

1980
5.6
4.0
8.2
8.3

1992
18.0
9.9
22.3
9.7

2004
34.2
9.7
36.2
15.5

Source: Foreign direct investment and China’s bilateral intra-industry trade with Japan and the US by Yuqing Xing, BOFIT Discussion Paper, January 2007

Since the beginning of the 80s, China and CEECs foreign trade have displayed diverging trends. In 1988, the CEECs taken together had about the same weight in international trade as China and in 1994 China’s foreign trade was about twice as important as the CEECs trade. But to a large extent this gap results from the collapse of intra-CMEA trade and in both cases the trade with the OECD has increased rapidly. Nevertheless, the engine of the export drive to the OECD has been different: in China, it has been supported by a high rate of economic growth, whereas in the CEECs, the export capacities have been reoriented towards new markets while the production has been falling, up to 1993. China has sustained this export drive during fifteen years, and the times series are still too short to draw a definite assessment of the CEECs export performance that will now depend on the supply side. The economic recovery that has spread to all the CEECs since 1994 and has been associated with sustained export performance gives ground for considering that in the years to come most CEECs are going to keep a dynamic part in international trade.

In both the CEECs and China, the development of export was accompanied by substantial changes in their commodity composition. The pace of these structural changes has not been faster in China than in the CEE, and this tends to confirm that export and industrial restructuring takes time in any reform strategy. A major difference lies in the relative importance of intra versus inter industry trade: China’s trade with OECD is still based on inter-sectoral complementarities, while intra-industry trade prevails in the case of the Central European Countries (Hungary, Poland, and former CSFR).

Sources:

1.     Comparative advantage and Australia-China bilateral trade, Economic Papers (Economic Society of Australia) ,  March, 2008   by Yu Sheng, Ligang Song

2.     External Finance and Investment Climate in East Asia and Other Emerging Markets: What Really Matters? Shoko Negishi, Asian Economic Papers Winter 2007, Vol. 6, No. 1

3.     Trade Policy and Trade Patterns During Transition: a Comparison Between China and the CEECs by Françoise Lemoine #1996 – 02 February.

4.     IMF Policy Discussion Paper, Intraregional Trade in Emerging Asia, Prepared by Harm Zebregs, April 2004

5.     China’s Rise Challenges and Opportunities, September 2008

6.

 

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Inter-industry trade. (2016, Oct 23). Retrieved from https://graduateway.com/inter-industry-trade/

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