Insertion of the Pacific Asian Countries into International Trade: Key Features

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Insertion of the Pacific Asian Countries into International Trade:
Key Features
Young Jo Lee
Graduate School of Pan-Pacific International Studies
Kyung Hee University
Korea
April 30, 2004
Prepared for presentation at Seminar on Korean-Latin American Trade Relations, organized
by the Secretariat of the ALADI, Montevideo, Uruguay, May 13-14, 2004.
Note: Rough first draft. No quotation or citation without author’s permission. Comments
are welcome (yjlee@khu.ac.kr)

Insertion of the Pacific Asian Countries into International Trade:
Key Features
Introduction
For the past few decades, rapid growth has become a hallmark of economic
performance in Pacific Asia. Led by Japan, which recovered from war devastation to
become one of the richest countries in the world in a few decades, the countries of East and
Southeast Asia have set standards of rapid growth that have become the envy of other
developing countries.
Without exception this growth process has been characterized by openness to trade
and rapid industrialization. Saving and investment rates have risen along with economic
growth and there has been a general improvement in living standards and a reduction in
poverty. Asian economies’ opening to international trade had much to do with their
industrialization strategy. For poor endowments, small domestic market, and abundant labor,
Japan relied on the “processing trade,” exporting goods manufactured of imported materials.
Emulating the Japanese example, the “four tigers” embarked on export-led industrialization.
Later the Southeast Asian followed suit.
Avid exporters as they were, they also gradually opened their market to foreign
imports. Hong Kong and Singapore have always been open by their nature as entrepot
trading centers. On the basis of tariff rates, non-tariff barriers, and currency convertibility,
Sachs and Warner (1995) suggest that Japan, Korea, and Taiwan lowered trade barriers and
opened foreign exchange markets in the 1960s, as did Malaysia and Thailand, followed by
Indonesia in the 1970s and the Philippines in the 1980s.
The timing of the industrial take-off varied significantly within the region. In the
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Philippines, Korea, and Taiwan the industrial expansion began even earlier, in the early 1960s.
The Philippines, after a period of rapid industrial growth in the 1970s, experienced a decade
of low growth starting with the decline and fall of the Marcos regime in the early 1980s. In
Malaysia, Singapore, and Thailand the reform process and industrial expansion began in the
1970s and accelerated in the 1970s and 1980s. In the case of Indonesia, a number of new
reforms and initiatives were taken after the ouster of President Sukharno in the mid-1960s.
They continued in the next decade and a half before accelerating since 1983.
Recently, however, the region has suffered serious setbacks as the financial and
economic crisis has swept through the region. Growth has slowed following a round of
currency devaluations, capital flight, and disclosures of financial mismanagement. At the
behest of the IMF, Korea, Thailand, and Indonesia have begun reforms in the financial and
industrial sectors. There also are ongoing reviews of exchange rate regimes and regulatory
mechanism for monitoring the flow of external capital for foreign direct investment and
portfolio investment in several countries.
Although there was a debate on how appropriate the IMF conditionality was for these
countries, it had one clear consequence: The already open economies of the region have
become even more open. What little barriers there were against foreign imports and
investment were almost completely removed. Indeed, the Christian Science Monitor
(December 3, 1997) reported that the economic crisis achieved in so short a time what the
trade negotiators have failed for many years.
This paper will present some salient features of the way the Pacific Asia has been
inserted into the international trade regime.
Export-Led Industrialization and Insertion into International Trade
The Pacific Asian countries are avid traders. Since it is a common knowledge, it
would suffice here to show their high trade ratio, which is defined by the sum of exports and
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imports divided by the GDP and multiplied by a factor of 100. It is true that the trade ratio
has certain limits as a measure of trade openness, because size and development level of the
economy affect it. Other things being equal, the smaller and the less developed a country is,
the higher the trade dependency ratio tends to be. Even considering the size and economic
development factors, we may conclude that the Pacific Asian countries are highly open to
international trade, much more than Latin American countries for example (See Table 1).
Table1: Trade in Goods as % of GDP of Pacific Asian Countries and Select Latin
American Countries
Country 1988 1998
China 40.8 49.8
Hong Kong 713.7 1121.7
Indonesia 62.8 134.9
Japan 141.7 195.3
Korea 112.5 146.7
Malaysia 192.1 307.6
Philippines 69.2 186.9
Singapore 839.5 690.8
Thailand 107.5 153.2
Argentina 23.3 48.4
Brazil 127.3 178.6
Chile 91.1 83.5
Mexico 71.5 153.9
Peru 74.4 50.6
Uruguay 69.1 97.1
Venezuela 79.2 81.2
Source: World Bank, 2000 World Development Indicators.
The high trade dependence of the Pacific Asian countries was largely the result of the
industrialization strategy they adopted: the export-led industrialization (ELI). They
consciously promoted the exports of manufactured goods in the world market which in turn
increased imports of materials and intermediate and capital goods.
The turn to ELI can be attributed to two factors. The first was poor natural
endowment. This is particularly true for Japan and the four tigers of Korea, Taiwan, Hong
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Kong, and Singapore. By hindsight, lack of natural resources was a mixed curse for these
countries.
China, Malaysia, Thailand, Indonesia, and the Philippines were more richly endowed.
ELI in these countries accelerated in the second half of 1980s as the early industrializers
began to invest in these countries.
Second, these countries had domestic markets too small for industrialization or
industrial recovery. Judging by population alone, Japan and Korea were not small. At the
end of the World War II, Japan had a population of over 100 million; Korea over 20 million.
But because of low per capital income the market was small to give sufficient size economy.
In 1961, even after several years of recovery from the wartime devastation, Korea’s per capita
income was 65 dollars, which ranked it among the poorest countries in the world.
Structure of Exports and the Trade Regime
Over the past few decades there has been a dramatic shift toward manufactured
goods and away from primary products. Some countries, such as Indonesia, lagged behind,
but all countries in the region moved into manufactured exports very quickly.
These movements are consistent with the revealed comparative advantage (RCA),
which is defined as a country’s share in the exports of a given commodity divided by its share
in the combined exports of all goods. For example, an RCA ratio of 1.1 means that the
country’s share in this commodity’s exports is 10% higher than the country’s share in total
exports. RCAs for each country and commodity category are shown as the last line of each
country summary in Table 2. By the 1990s, all of the countries in the region had shares of
manufactured goods in excess of 80% of total exports with few exceptions.
The structure of tariffs has adjusted rapidly, supporting the shift toward manufactured
products. This has been especially noticeable, comparing the 1980s with the 1990s.
Selected evidence from the last 15 years is shown in Table 3. The average applied tariff rate
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fell throughout the region while the incidence of non-tariff barriers (NTBs) fell even more
dramatically.
Table 2: Pacific Asian Exports: Changing Structure and Specialization
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Source: Dowling and Ray (2000): 304-5.
However, these tariff rates are still higher than those in developed countries (Table 3).
Furthermore, although tariffs have fallen, there has been an increase in the variance of
protection in the last decade. This is particularly true among the NICs, who have been keen
to protect their domestic food growers and food processors through the increased use of
NTBs (See Table 3).
Table 3: Applied Tariff Rates for All Goods and NTBs
Scaling Up: Structural Change and Innovation
Another feature of Asian export drive was the continued scaling up of the products.
First, Asian countries have not only penetrated further into existing markets for manufactured
products, but they have also moved into new markets where demand was growing rapidly.
Second, in the process, they have shifted toward more technology and knowledge intensive
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industries. This took place within and among the countries. As the leading economies
scaled up the technology ladder, the following ones took over the rungs left behind by the
former. Thus, a region-wide sequential catch-up took place. This continued scaling up
may explain the meteoric rise in the region’s share of manufactured exports.
The penetration into the growing product market can be measured on the basis of the
growth intensity index developed by Ray (1997) and Dowling and Ray (2000). To
determine how much growth in existing markets and shifts to more rapidly growing markets
respectively have contributed to the export push, they carried out analysis for three-digit
industrial categories for the period 1980 to 1995 using an index of growth intensity (GI) that
measures growth orientation for a complete set of exports. A country’s exports by industry
and/or commodity classification are weighted by the average growth in world exports.1
An index value for GI greater than 1 indicates that a country’s exports are
concentrated in industries with a rapid growth in world demand. Increases in the index over
time show that a country is changing its export structure in favor of high-export growth
industries. An upward-sloping index would indicate that a country is changing its export
structure in favor of higher-growth industries. If, on the other hand, the export structure
remained constant or moved in favor of lower-growing industries, the index would remain
1
Where X is exports; G is the rate of growth in world demand (average yearly rate from 1980 to 1994)
for the specific industry, product, or product group; i is the country; j is the industry; and n is the total
number of industries included. G0 is the average growth rate across all n industries.
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flat or fall.
GI they calculated for different Asian countries are shown in Fig. 1. These figures
show that Asian countries all have been shifting their export focus from low-growth toward
higher-growth industries. Even Indonesia, the lowest country on the scale, caught up and
was close to 1 in 1995 after starting at a much lower level.
According to Ray (1997), the growth in world import demand is strongly correlated
with product innovation and knowledge intensity. Aside from aerospace, world demand
growth in the very high knowledge-intensity category is in double digits and these industries
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are the most rapidly growing in the world. In the next category, high knowledge intensity,
growth rates are somewhat lower but these industries are still near the top both in terms of
growth in world demand and in an expanding share of OECD imports. Asian countries’
penetration into the rapidly growing market means that they succeeded in industrial
upgrading. Indeed, histories of industrial development in Asian countries are full of stories
of such upgrading (See, for example, Amsden, 1989).
Intra-Regional FDI and the “Flying Geese”
The discussion in the preceding sections show that Pacific Asia as a whole was
successful in exporting manufactured products and in upgrading the composition of the
exports toward more knowledge intensive ones. What is behind this regional export growth
and industrial upscaling? I believe that with the possible exception of Korea, FDI,
especially the intra-regional FDI played not a small part, helping build regional production
networks.
FDI has been drawn to the region by the abundance of labor that can be used as a
platform for exports. Primary exports played a role in attracting FDI, but only in a few
countries with abundant natural resources, such as China and Indonesia, and to a lesser extent,
Malaysia. Liberalization of regulation relating to the inflow of foreign capital, along with
the strength of these Asian economies, resulted in a rapid acceleration of foreign inflows.
According to Asian Development Bank (1999), there was a significant improvement
in the level of global financial integration between the mid-1980s and the early 1990s. This
is further reflected by figures that show that net private capital increased as a percentage of
GDP from the range of 1 to 2% of GDP in the early 1980 to reach nearly 7% of GDP in
Southeast Asia by 1995. Moreover, the share of FDI and portfolio bonds and equity flows
has increased dramatically, compared with the early 1980s, when the majority of private
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flows were bank- and trade-related inflows.
The main source of FDI in East and Southeast Asia has been the region itself. The
four NICs were the largest single source of FDI for the PRC, Indonesia and Malaysia
between 1986 and 1992. In Thailand the NICs were a close second to Japan. Only in the
Philippines, which has a special relationship with the United States, did the NICs play a
relatively minor role. Still they accounted for nearly 20% of FDI during this period. (World
Bank, 1998)
FDI growth has played a much more significant role in Southeast Asia and China
than it did in the NICs. FDI in the NICs (Korea and Singapore) grew from 1.14% of GDP
in 1985 to 1.84% in 1995. In Southeast Asia/China, the figures were from 0.63/0.49% to
2.27/4.28%, respectively (See Table 4).
Table 4: Private Capital Flows as a Percentage of GDP
The flow of FDI from Japan and the NICs to Southeast Asia and China was further
stimulated by the rearrangement of exchange rates following the Plaza Accord in 1985.
Over the subsequent decade, appreciation of the Japanese Yen, New Taiwan Dollar, and the
Korean Won provided additional incentives to move labor-intensive industries offshore.
This was done through joint ventures and the formation of wholly owned subsidiaries in these
countries.
The expansion of economic dynamism from Japan to the Asian NICs and then
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further to ASEAN countries and China has come to be known as the flying-geese pattern.
Countries specialize in the export of products in which they enjoy a comparative advantage
commensurate with their levels of development, and at the same time they seek to upgrade
their industrial structures through augmenting their endowment of capital and technology.
Foreign direct investment from the more advanced countries to the less developed ones,
through relocating industries from the former to the latter, plays a dominant role in sustaining
this process.
The flying-geese model was first used to describe the life cycles of industries in the
course of economic development (Akamatsu, 1962), with the focus on specific industries in
specific countries. Subsequently, it has been extended to study the dynamic changes in the
industrial structure (that is, the rise and fall of different industries) in specific countries, and
further to the shift of industries from one country to another.2
The life cycle of a specific industry can be traced by following the time path of an
indicator of competitiveness. This usually takes the form of an inverted V-shaped curve,
showing that competitiveness first improves and then deteriorates over time (Figure 2).
Capital accumulation (including the inflow of foreign direct investment) and forward
and backward linkages with other industries has the effect of changing the comparative
advantage of the country concerned and usually leads to an upgrading of the industrial
structure. This can be represented by a series of V-shaped curves depicting the
competitiveness of emerging industries, which are usually more technology-intensive than
the preceding ones. A typical sequence seen among Asian countries is the shift from the
textiles industry to the chemicals industry, and then further to the steel industry, the
automobile industry, and the electronics/electrical industry.
2 The Flying Geese Model resembled Raymon Vernon’s product cycle theories, but was formulated a
few decades earlier (in the early 1930s). While Vernon’s theory focused on the behavior of
individual firms, Akamatsu was concerned with leading sectors (Bernard and Ravenhill, 1995: 173).
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When extended to the context of an open economy, the flying-geese model is used to
describe the shifting of industries from more advanced countries to countries catching up
from behind. This is shown in Part b of Figure 2, with the inverted V-shaped curves now
representing the same industry in different countries (instead of different industries in the
same country). A typical example is the shifting of textile production from Japan to the Asian
NICs and further to the ASEAN countries and China.
Figure 2: Asia’s Flying Geese Pattern of Economic Development
No Regional PTA
Another salient feature of the Pacific Asian trade regime is that there is no regional
preferential trade agreement (PTA), although there is a dense net of “invisible linkages” of
regional production networks, ethnic Chinese networks, and subregional economic zones
(Peng 2002). The Northeast Asian countries did not participate even in bilateral PTAs with
regional partners, if we exclude the recently concluded Japan-Singapore FTA. At the end of
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2001, among the WTO’s 144 member economies only China, Hong Kong, Japan, Korea,
Mongolia, and Taiwan were not parties to a discriminatory trade agreement. The lack of the
PTA is not because Asian countries have little to gain from economic integration. Nor is it
because no efforts have been made. Regional cooperation is seen as necessary if the region
is to benefit from the current forces of liberalization and globalization. The financial crisis
of the 1997 brought home the need for regional responses to globalization. Asian leaders
recognized that Asia as a whole, and East Asia in particular, must integrate economically in
order to face the challenges and pressures of economic globalization and seize upon the
opportunities.
Why is there no region-wide trading bloc in the Pacific Asia? The reasons are
manifold. First, unlike the EU and the NAFTA regions, there is an extremely wide
divergence among the economies in East Asia.3 Although a number of EU members still lag
behind such key states as Germany, France, and the UK and much of Mexico’s southern
region lives under Third World conditions, the disparities in East Asia are much more
pronounced. For example, the per capita income of China is one-thirtieth of that of Japan.
Vast regions of inland China are still underdeveloped, with local inhabitants, on average,
earning only one-third the salary of those in the booming coastal zone.
Second, historical rivalries and antagonisms prevent key countries from exercising
leadership. Japan, the largest economy in the region, is hampered due to historical legacies
of imperialist expansionism in the first half of the last century. Asian countries of the west
Pacific are still wary of Japan, because it has barely tried to absolve itself of past crimes.
Instead, it more often than not arouses neighbors’ suspicion by distorting history books,
3 This fact may explain why the Western Pacific Asian countries eschewed PTAs before the Asian
crisis. Their preferred form of trade liberalization was unilateral action on a non-discriminatory
basis, which is also the original modus operandi of the APEC.
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paying homage to the war criminals, and denying responsibility for atrocities and plunders
committed during the occupation and the Pacific War. Yet Japan has no intention of giving
up its potential leadership position in favor of China. And China on its part appears more
comfortable with the bilateral approach than the plurilateral or multilateral approach. In
Europe it was the political will and the vision of integration of the French and German
leaders that laid foundation for integration. Such will and vision are still lacking in Asia.
Last but not in the least, unlike Europe Asia faces external opposition. The US
promoted European integration during the cold war as a countervailing force to the then
USSR. In contrast, in Asia the United States has been consistently opposed to any regional
economic body that includes Japan but excludes the USA. Thus, the East Asia Economic
Caucus (EAEC) proposed by the Malaysian Prime Minister Mahatir Mohamed in the early
1990s was knocked down and literally “killed” almost immediately.4 In its place, the US
promoted the Asia Pacific Economic Cooperation (APEC), which is hardly a regional
grouping but rather “an interregional organization, expressing the US hegemonic interest.”5
Even this loose amalgamation of diverse countries has been kept in benign neglect. The
Asian Monetary Fund (AMF), proposed as a regional lender of the last resort by several
Asian countries at the height of the Asian financial crises, faced a similar fate. Given the
fact that the financial crises hit the region which as a whole was a net creditor, the idea
merited a serious consideration. But it was never given a chance because of the US
opposition.6
4 In his book, The Politics of Diplomacy, the then US Secretary of State James Baker III even boasted,
“I did my best to kill it.”
5 Chu Guangyou, Vice President of Foreign Affairs College, China, quoted in “Globalisation Calls for
Regional Responses,” Business Times, June 11, 2001.
6 China was also opposed to the AMF which would be led by Japan.
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Table 5: Participation of Western Pacific Asian Countries in Negotiation on PTA
Country Partners Status of Agreement, April, 2004
ASEAN Under negotiation
Chile Under negotiation
Hong Kong Agreement signed
China
Macau Agreement signed
China Agreement signed
Macau Under negotiation
Hong Kong
New Zealand Under negotiation
ASEAN Framework partnership agreed
Canada Proposed
Chile Under study
Korea Under negotiation
Mexico Agreement signed
Singapore Agreement signed
Japan
Thailand Under negotiation
ASEAN Under study
Australia Under study
Chile Agreement signed
Japan Under negotiation
Mexico Under negotiation
New Zealand Under study
Thailand Under study
Korea
USA Under study
Australia Agreement signed
Canada Under negotiation
Bahrain Proposed
Chile Under negotiation
EFTA Agreement signed
EU Proposed (Rejected by EU)
Egypt Proposed
India Under negotiation
Japan Agreement signed
Mexico Under negotiation
Jordan Proposed
New Zealand Under negotiation
Panama Under negotiation
Singapore
USA Agreement signed
Australia Agreement signed
Canada Proposed
Japan Under negotiation
Korea Under study
New Zealand Under study
Thailand
USA Under study
Note: ‘Proposed’ refers to agreements that have been officially proposed with varying degrees of
formality by one government to another. Most proposals are then referred for study to either national
think-tanks or to consultants and/or to joint working parties from the partners. Negotiations usually
do not begin until governments have received these studies.
Source: Government and WTO websites and various newspapers.
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Mushrooming Bilateral FTAs
In place of the region-wide PTA, the Western Pacific Asian countries have recently
turned their attention to bilateral free trade agreements (FTAs). In the past four years, more
than 20 preferential trade schemes involving Western Pacific Asian countries have burst up
“like bamboo shoots after rain” (See Table 5).
The new interest in bilateralism is explained by: an increasing awareness of the
weakness of existing regional institutions (APEC and ASEAN); perceptions of positive
demonstration effects from regional arrangements elsewhere; and changing configurations of
domestic economic interests (Ravenhill 2003: 300-304). Contrary to arguments that
emphasize a new sense of collective identity in the Western Pacific Asia after the crises of the
late 1990s, as many agreements have been proposed with prospective partners outside the
region with other countries in the region (See Table 5).
Economic Effect of “Liberalization without Political Pain”
What impact will these bilateral trade arrangements have on trade and welfare? To
conclude first, the economic gains will not be large. First, a striking characteristic of the
new preferential arrangements is that they involve countries that are relatively insignificant
trading partners for one another (with the exception of the Singapore-USA FTA). Table 6
lists the share of proposed partners in the total exports of various Western Pacific countries.
Many of the arrangements involve countries that account for less than 5% of one another’s
exports: close to one-third of the proposals involve parties that constitute markets for less
than 1% of total exports. The likely welfare effects on the participants, consequently, are in
most instances very small.
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Table 6: Percentage Share of PTA Partners in Countries’ Total Exports (2000)
Country Partners Percentage of Total
Canada 1.7
Chile 0.2
Korea 6.9
Mexico 1.2
Singapore 4.7
Japan
Thailand 1.2
Australia 1.6
Chile 0.2
Japan 12.5
Mexico 1.5
New Zealand 0.2
Thailand 0.03
Korea
USA 23.0
Australia 2.5
Canada 0.4
EFTA 0.5
EU 14.1
Japan 8.0
Mexico 0.6
New Zealand 0.3
Singapore
USA 18.4
Australia 2.5
Japan 15.6
Korea 1.9
Thailand
New Zealand 0.3
Note: Figure in bold for agreements already signed.
Source: Adapted from Ravenhill (2003), 310, Table 2.
Second, the FTAs are mostly between complimentary economies, while an
FTA between competing economies can maximize welfare. Trade is created when an
inefficient domestic producer is replaced by a more efficient one in the partner country.
This indicates that the booming bilateral FTAs involving Asian countries are more politically
conditioned than economically motivated. Countries, especially Japan and Korea, are
choosing FTA partners that would cause the least domestic political outcry. Japan chose
Singapore as its first FTA partner because the latter produces few ‘sensitive’ products.
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Korea chose Chile as its first FTA partner because it hoped and believed Chilean agriculture
would not alarm the recalcitrant Korean farmers owing to the different seasonal cycles.7
Third, in the course of negotiation some politically ‘sensitive’ (read protected)
products and sectors are often excluded unequally or reciprocally. An example is the Japan
Singapore Economic Partnership Agreement, which the few products Singapore exports that
faced political opposition in Japan were excluded. Another good example is Korea-Chile
FTA, in which the agricultural products were largely excluded from coverage.
Summary and Conclusion
The Pacific Asian economies, from developed to newly industrialized to developing,
could achieve rapid economic growth by actively participating in international trade with
manufactured goods. In the process, they succeeded in upgrading their industrial structure.
This region-wide sequential catch-up was made possible by the intra-regional FDI and the
regional production networks.
Thus seen, much of “Asian Miracle” can be explained by the existence of technology
gaps between developed (OECD) and developing countries (East Asia), and the opportunities
this represents for rapid catch-up growth in the latter. Follower countries can catch up with
the advanced industrial countries by making use of the technological advances pioneered by
those countries.
The catch-up process, however, is self-limiting in that as the productivity gap
between followers and leaders narrows, so too does the scope for easy growth generated by
the imitation of lead country technology. In the Pacific Asian context, complicating the
matter is that now the rather orderly pattern of sequential catch-up appears collapsing.
Many authors (Rose 1997; METI 2001; Ahearne 2003) argue that the geese are no longer
7 But later developments proved the government was miserably miscalculating.
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flying in neat formation owing to the emergence of China. Some (Kenney et al 2002) go as
far as saying the geese are now scattered. They argue that, through receiving direct foreign
investment, China has been gaining competitiveness not only in labor-intensive products, but
also IT and other technology-intensive products. As a result, the complementary
international division of labor according to the level of economic development has given way
to stiffer competition, including in high-tech industries.
This begs a fundamental question if Pacific Asia can grow as before by relying
complacently on “export as usual.” If technological catch-up was indeed the key to Asian
success stories, these countries need to have the necessary technological capabilities as well
as the appropriate incentive and institutional structures to facilitate the use of advanced
country technologies. They need to use a variety of well-defined channels to acquire new
technologies (such as FDI, machinery imports, subcontracting, licensing, reverse engineering,
etc.). Technological capabilities (skills, education, R&D) and incentive structures (stable
macroeconomic conditions, competition, open trade regime) to ensure the effective use,
integration, and development of those technologies are also needed. With regard to the
trade regime, they will need authentic free trade agreements, not the politically safe titular
ones. They may use such external pressures as a leverage to dislodge the entrenched special
interests.
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