East Asia in World Trade:
The Decoupling Fallacy, Crisis, and Policy
Challenges
Prema-chandra Athukorala
Australian National University
Prema-chandra.athukorala@anu.edu.au
Structure
 Purpose/scope and preview
 Pre-crisis trade patterns
- East Asia’s’ especial position in global
production sharing and network trade
- The decoupling fallacy
 Trade performance in the aftermath of the crisis
 Policy options
 Concluding remarks
ANU COLLEGE OF2ASIA & THE PACIFIC
Purpose/scope
Examine export performance of East Asia countries in the
aftermaths of the global financial crisis against the
backdrop of pre-crisis export patterns
and
Consider lessons for growth strategies after the crisis
Point of departure: Decoupling thesis
‘East Asia has become a self-contained economic entity
with potential for maintaining its own growth dynamism
independent of extra-regional economic conditions’
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 The decoupling thesis is based on the traditional notion of
horizontal specialization:
international trade is an exchange of goods that are produced
from start to finish in just one country.
 It ignores the growing importance of global production sharing in
world trade and East Asia’s especial role in this new form of
international exchange.
Global production sharing
‘splitting of the production process into discrete activities which
are then allocated across countries’
Alternative terms: international production fragmentation;
vertical specialisation, slicing of the value chain, outsourcing,
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Key Message

Given East Asia’s unique role in global production sharing,
failure to distinguish between trade in parts and components
(middle product) and trade in final goods leads to misleading
inferences as to the nature and extent of intra-regional trade
integration.
Why?
1.
P&C trade and trade in related final goods (‘final trade’) are
unlikely to follow the same geographic pattern.
2.
The intra-regional trade ratio estimated by lumping together
imports exports tends to hides a significant asymmetry in
regional trade patterns on import and export sides
3.
Parts and components (P&C) are double-counted in the
‘standard’ trade data because goods in process cross
multiple international borders before getting embodied in the
final product.
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Country coverage
East Asia: Japan + Developing East Asia
Developing East Asia: South Korea, Taiwan (Taipei,
China), Peoples’s Republic of China (PRC), Hong
Kong, ASEAN
ASEAN: Indonesia, Malaysia, Philippines, Singapore,
Thailand, Vietnam
(Brunei, Cambodia, Myanmar, Lao PDR are not
covered separately)
Comparators:
NAFTA
EU15
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Data
Focus on manufacturing trade - SITC 5 though 8 net
of SITC 68
Parts & components (P&C) are separated total trade at
the 5-digit level
The list of P&C is not complete, so the estimates are
an indictor of a reliable lower minimum
For details see Athukorala 2009c
Data source:
UN Comtrade database, based on SITC, Rev 3
Trade database of the Council of Economic Planning, Taipei
(for Taiwan)
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Pre-crisis trade patterns
 A three-fold increase in East Asia’s share in world non-oil exports,
from 11% to 33%, between 1969/70 to 2005/06.
 A sharp decline in the share of Japan.
 Within Developing East Asia, market share gains are not limited
only to China.
 A profound shift in the export structure away from primary products
and towards manufacturing across all countries.
 Within manufacturing, growth is heavily concentrated in machinery
and transport equipment (SITC 7), particularly in information and
communications technology (ITC) products and consumer
electronics in which global production sharing is concentrated
(Network products )
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 Faster growth of trade in parts and components in
East Asia:
Share of parts and components world manufacturing
trade
East Asia
World
Exports
34.1
27.1
Imports
42.1
23.7
East Asia’s share in world trade in parts and
components has increased much faster (Figure 1)
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Geographic composition of world
exports of parts and components
50
East Asia
45
Developing East Asia
AFTA
NAFTA
EU
40
35
25
20
15
10
5
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0
1988
Export share (%)
30
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ASIA & THE PACIFIC
 Component intensity of intra-regional trade is much
higher in East Asian (reflects cross border trade
within regional production networks):
Share of parts and components in intra-regional trade
East Asia
NAFTA
EU15
Exports
47.6
28.8
22.0
Imports
51.7
36.3
22.1
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China in East Asia Trade
 A rapid increase in parts and component imports by
China from the rest of East Asia
But
 The share of final goods exports to East Asia in total
manufacturing exports from China has declined
sharply
(Table 4, Figure 2a & b)
China’s intra-regional trade is heavily concentrated in
trade with Japan, Korea and Taiwan (Table 5)
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Figure 2a: Parts and components in
China’s
Manufacturing exports, 1992 -2007
70
60
Share (%)
50
40
P&C share in total total exports
P&c share in exports to East Asia
30
East Asian share in total P&C exports
20
10
0
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
19
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
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Figure 2b: Parts and components in China’s
Manufacturing imports, 1992 -2007
50
45
40
30
25
20
P&C share in total imports
15
P&c share in imports from East Asia
10
East Asian share in total P&C imports
5
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
0
19
92
share ( %)
35
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Intra-regional trade patterns
 Intra-regional trade shares based on total trade (the
conventional measure of trade integration) are
generally consistent with the view that East Asia has
become increasingly integrated through
merchandise trade.
(Figure 3)
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Figure 3: Intra-regional trade share in East
Asia (total non-oil trade)
55.0
45.0
40.0
35.0
30.0
25.0
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
20.0
1986
Intra-regional trade share (%)
50.0
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ASIA & THE PACIFIC
 BUT
The increase in intra-regional trade ratio has emanated
largely from rapid increase in intra-regional imports;
intra-regional exports have persistently lagged behind
intra-regional imports (Figure 4).
Reflects the fact that goods assembled within
regional production networks are disproportionately
destined to extra-regional markets.
See the East Asia – EU15 contrast, Figure 5
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Figure 4: Intra-regional trade share in East
Asia: Non-oil, Exports, Imports and trade
(Exports + Imports)
60
50
40
30
Exports
Imports
Total trade
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
20
1986
Intra-regional trdae share (%)
70
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ASIA & THE PACIFIC
Figure 5: Intra-regional trade share in
EU15: Non-oil, Exports, Imports and trade
(Exports + Imports)
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Exports
Imports
Trade
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 Intra-regional trade shares become smaller and
the asymmetry in intra-regional shares between
imports and exports is much sharper when reported
trade data are adjusted for trade in parts and
components.
Clearly, the region’s dependence of the rest of the
world for its trade expansion has increased over the
time.
Table 6, Figure 6)
(Here the focus is on manufacturing trade which
account for over 90% of total East Asian non-oil
trade)
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ASIA & THE PACIFIC
Figure 6: Intra-regional share in East
Asian manufacturing trade:
Final (total – parts and components)
65
55
50
45
40
35
Exports + imports
Exports
Imports
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
30
19
Intra regional trade (%)
60
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ASIA & THE PACIFIC
Determinants of East Asia’s
especial role in network trade
What explains East Asia’s ‘especial’ role in network
trade?
(1) Relatively low wages in latecomers to export-oriented
industrialization in East Asia and
significant wage differentials among countries in the
region (Table 4) (China’s hourly production wage is jut
3% of that of USA!)
(2) Favourable business climate (trade and investment policy
regimes, infrastructure provision etc.) that has
contributed to lower cost of maintaining ‘services links’
within production networks
(3) ‘First-comer’ advantages: the tendency of MNEs to
become embodied in host countries over time
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 ‘market thickness’ and ‘agglomeration’ benefits: success
breeds success
 The emergence of China as the premier low-cost assembly
centre that has boosted components production/assembly
in other countries in the region
Econometric evidence: Athukorala 2009c
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Trade performance in the aftermath
of the global financial crisis
 A sharp contraction in world trade following the
onset of the global financial crisis (at a faster rate
than in the Great Depression) (Figure 7)
 Trade contraction experienced by the East Asian
countries has been even faster (Figure 8, Table 9)
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Figure 7: Volume of world trade:
The Great Depression vs Current Crisis
(Source Eichengreen and O’Rourke 2009)
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Figure 8: Growth of merchandise trade,
January 2008 – Nov 2009 (Y-O-Y, %)
(a) Exports
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0
-40.0
-50.0
East Asia
Developing East Asia
ASEAN
China
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Figure 8: Growth of merchandise trade, January 2008
– Nov 2009 (Y-O-Y, %)Import growth, January 2008 –
July 2009 (Y(b) Imports
50.0
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0
-40.0
-50.0
East Asia
Developing East Asia
ASEAN
China
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 Trade contraction is remarkably synchroniised among countries
in East Asia, on both import and export sides
 China has failed to provide a cushion giants this export
contraction as postulated by the decoupling thesis.
- China’s imports from countries in the region have contracted
at a much faster rate compared to exports, an indication of
destocking of imported parts and components by assembly
firms in China
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 Taiwan and Korea and Japan (the major parts and
component suppliers to Chaina) have suffered the
highest rates of contraction in exports to China
compared to the other countries in the region
 Trade in product categories with high concentration
of global production sharing has contracted at a
faster rate (Chinese data)
 In sum, trade performance during the crisis runs
counter to the so-called ‘decoupling’ hypothesis.
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 Has global production sharing played a role?
The evidence (summarised above) suggests so,
but, as yet data are not available to systematically
delineate the impact while controlling for the other
factors at work:
 Contraction of trade credit
 Greater share of consumer durables in contemporary
world trade
 Advances in communication technology operating
though inventory adjustment and just-in-time
production/procurement practice.
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Policy options
 Rebalancing growth
- engineering a structural shift in aggregate demand
away from exports and towards domestic demand
 Devising strategies to fight new protectionism
 A region wide FTA (proposed by some ADB
economists)
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Conclusions
 The degree and intensity of participation of East Asian economies in
global production sharing is much greater compared to countries in
other parts of the world
 China has integrated into regional/global production networks as the
premier centre of final assembly
 Consequently, the regions dependence on the rest of the world for its
trade expansion has increased over time
- remarkably synchronized nature of trade contraction following the
onset of the GFC
- China’s failure to act as a cushion for the rest against global trade
contraction
(Decoupling or globalization, but not both)
 The rise of global production sharing has strengthened the case for a
global, rather than a regional approach to trade policy making (to be
discussed in Session II)
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