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IMF Working Paper Summaries (WP/95/1 - WP/95/61)
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Summary of WP/95/9: “The Pattern of International Trade Between Japan and the Pacific Basin Countries: A Comparison Between 1975 and 1985”

Author(s):
International Monetary Fund
Published Date:
August 1995
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In recent years, so-called new theories of international trade have been rapidly developed to provide better explanations of actual trading patterns. These new trade theories, which are based on the concepts of product differentiation, imperfect competition, and economies of scale, seek to explain why trade takes place even when countries do not differ much in relative factor endowments or labor productivity. The theories seem to explain the pattern of trade between Japan and the five Pacific Basin countries (Indonesia, Korea, Malaysia, Singapore, and Thailand) that initiated industrialization in the postwar period--patterns that led to strong economic growth in the 1980s.

The purpose of this paper is to analyze the patterns of trade between Japan and these five Asian countries in the light of insights provided by the new trade theories. In particular, the paper attempts to examine the pattern of trade in 1975 and to determine how it had shifted by 1985. In doing so, we examine the deepening economic linkages in the Pacific Basin region, using data on intermediate inputs, final products, and sellers and buyers by country and industry from the international input-output tables for the available years, 1975 and 1985.

This paper shows first that Japan has remained a substantial net exporter of manufactured or capital-intensive products and a large net importer of primary, or natural-resource, labor-intensive products. It also shows, however, that Japan’s intra-industry trade in manufactured products with the five Asian countries has increased, although inter-industry trade remained dominant with those countries, such as Indonesia and Malaysia, that are rich in natural resources. The increase in intra-industry trade was more actively observed in manufactured intermediate inputs (such as chemicals, machinery, and metals) than in final products. The rapid growth reflected Japan’s increasing dependence on these manufactured products and the expanding intra-industry import/export markets in its Asian partners. In particular, Japanese industries imported more manufactured intermediate inputs from parallel industries in its Asian partners than they obtained from counterpart industries in Japan. As manufacturing firms subdivided the production process of intermediate inputs and shifted their production locations to different countries, the division of labor between Japan and the five Asian countries changed substantially. The largest increase in imports was observed for machinery products and can be attributed to an expansion of intra-firm trade as a result of Japan’s foreign direct investment (FDI) in these countries.

Although the paper does not cover the large-scale structural change in trade that took place after the yen began to appreciate in 1985, the deepening of economic linkages between Japan and the five Asian countries was observed before 1985. Thus, we believe a detailed analysis of the structural changes before 1985 is important in understanding the growing international division of labor taking place in the Pacific Basin countries.

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