Does East Asian Integration Keep Up with the European Pattern? Empirical Evidence from Intra-Industry Trade in Europe and East Asia

By Kang, Yoo-Duk | Asian Development Review, July 1, 2011 | Go to article overview

Does East Asian Integration Keep Up with the European Pattern? Empirical Evidence from Intra-Industry Trade in Europe and East Asia


Kang, Yoo-Duk, Asian Development Review


This paper examines development of inter/intra-industry trade in Europe and East Asia. In order to quantify the level of intra-industry trade (IIT), a biascorrected Grubel and Lloyd index is used. The finding is that IIT is more evident in intra-European trade than in intra-East Asian trade, while dynamics toward IIT have been increasingly more important in trade between East Asian economies. Vertical intra-industry trade and horizontal intra-industry trade are compared, and their share in intraregional trade in both regions is measured. The paper finds that IIT in East Asia is characterized by vertical intra-industry trade. In order to identify determinants of IIT in Europe and East Asia, a regression analysis is used, which finds that conventional determinants of IIT explain a large part of IIT in Europe, while they do not for East Asian countries. In East Asia, IIT takes place between developed countries in the region.

JEL classification: F 14, F15

(ProQuest: ... denotes formulae omitted.)

I. INTRODUCTION

European integration has provided a reference for successful economic integration, not only from an institutional perspective - regionalism - but also in terms of actual market integration termed as "regionalization". European economic integration has been the subject of numerous analyses and has provided broad fields for the experimentation of economic integration theory. In East Asia, economic integration took place much later than it did in Europe. East Asian economies have been increasingly interdependent through regional trade and investment. They constitute one of three major economic poles in international trade, together with Europe and North America.1 Increasing awareness of regional trade development in the East Asia prompts an attempt to compare economic integration in East Asia with that seen in Europe. Economic integration models of these two regions are considerably different in several aspects. One of the most fundamental differences is that trade relations among East Asian economies have not been based on a preferential trade regime, while trade among European countries has taken place within the framework of such regime, the European Union (EU). In this regard, it is noteworthy that a considerable part of East Asian countries' trade is now conducted among them. The emergence of trade regionalization in East Asia has led economists to conduct empirical studies based on quantifying intraregional trade share, and European integration has provided a benchmark for these comparative analyses.

In fact, intraregional trade share is a direct raw indicator that allows for comparing different levels of economic integration among regions. However, while this measure allows a simple and direct comparison on regionalization, it does not provide information on trade structure and sectoral evolution. Its shortcomings as an analytical measure are mainly due to its aggregation feature. Two supplementary methods can be proposed. The first one consists of sectoral analyses such as revealed comparative advantage (RCA). RCA is based on the popular assumption that international trade flows are determined by differences in factor endowments among countries in the Heckscher-Ohlin-Samuelson (HOS) framework.

The second method - which will be the subject of research in this paper - stems from empirical observations from the 1 960s in which trade has occurred increasingly within the same industries. This intra-industry trade (IIT) based on product differentiation has characterized trade between developed countries. The theoretical arguments from the HOS framework do not provide a proper explanation on this new type of trade. From the late 1 970s onward, new trade theories appeared, which were based on economies of scale and monopolistic competition to explain HT. Drawing a distinction between interindustry trade and IIT gives a more detailed analytical tool for comparative analysis on regionalization. …

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